FFLC BANCORP, INC.
2003 ANNUAL REPORT
OUR MISSION
Our mission is to operate First Federal Savings Bank as a community bank, in a
manner consistent with the high expectations of our shareholders, customers and
employees. We will achieve attractive financial results for our stockholders,
provide quality financial services and products to our customers, and offer
rewarding careers to our employees, while maintaining a high level of personal
service and integrity. The Company's primary goals are to: provide an attractive
return to its shareholders, as measured by long-term capital appreciation and
the continued payment of reasonable dividends; provide a competitive,
progressive and profitable array of financial services and products in a manner
focused on excellent customer service; attract and retain highly-motivated,
top-quality employees; and make a positive impact on the communities that we
serve.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 evidences Congress'
determination that the disclosure of forward-looking information is desirable
for investors and encourages such disclosure by providing a safe harbor for
forward-looking statements by corporate management. This Annual Report,
including the Letter to Stockholders and the Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains
forward-looking statements that involve risk and uncertainty. In order to comply
with the terms of the safe harbor, the Company notes that a variety of factors
could cause the Company's actual results and experience to differ materially
from the anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development, growth projections and results of the
Company's business include, but are not limited to, the growth of the economy,
interest rate movements, timely development by the Company of technology
enhancements for its products and operating systems, the impact of competitive
products, services and pricing, customer business requirements, Congressional
legislation and similar matters. Readers of this report are cautioned not to
place undue reliance on forward-looking statements which are subject to
influence by the named risk factors and unanticipated future events. Actual
results, accordingly, may differ materially from management expectations.
CONTENTS
Page
Corporate Profile, Corporate Organization and General Information .............1
Office Locations and Common Stock Prices and Dividends ........................2
Consolidated Financial Highlights .............................................3
Letter to Stockholders ......................................................4-5
First Federal Website and Online Banking.....................................6-7
Selected Consolidated Financial Data and Financial Ratios....................8-9
Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................................10-20
Consolidated Financial Statements .........................................21-53
Independent Auditors' Report..................................................54
Directors and Officers of FFLC Bancorp, Inc. .................................55
Directors and Officers of First Federal Savings Bank of Lake County...........56
First Federal Employees ......................................................57
Inside Cover
CORPORATE PROFILE
FFLC Bancorp, Inc. ("FFLC" or the "Holding Company") was incorporated in
Delaware on September 16, 1993, and acquired First Federal Savings Bank of Lake
County (the "Bank") (together, the "Company") in connection with the Bank's
conversion to stock form on January 4, 1994. The Holding Company is a savings
and loan holding company subject to regulation by the Office of Thrift
Supervision ("OTS") which transacts its business through its subsidiary, the
Bank. The Bank is a community-oriented savings institution, chartered in 1934,
which offers a variety of financial services to individuals and businesses
primarily located in Lake County, Sumter County, Citrus County and Marion
County, Florida. The deposits of the Bank are insured by the Federal Deposit
Insurance Corporation ("FDIC") through the Savings Association Insurance Fund
("SAIF").
CORPORATE ORGANIZATION
Holding Company
FFLC Bancorp, Inc.
Subsidiaries
First Federal Savings Bank of Lake County
First Alliance Title, LLC
Bank's Subsidiary
Lake County Service Corporation
GENERAL INFORMATION
Corporate Headquarters
800 North Boulevard West, Post Office Box 490420, Leesburg,
Florida 34749-0420
Telephone: Local (352) 787-3311
Toll Free (877) 955-2265
Annual Meeting
The Annual Meeting of the Stockholders will be held at the Leesburg
Community Building located at 109 East Dixie Avenue in Leesburg at 2:00
p.m. on May 13, 2004.
Form 10-K
A copy of the Form 10-K, as filed with the Securities and Exchange
Commission, and the Holding Company's Code of Ethics and Business
Conduct may be obtained by stockholders without charge upon written
request to Sandra L. Rutschow, Vice President - Secretary, FFLC Bancorp,
Inc., Post Office Box 490420, Leesburg, Florida 34749-0420. The Company's
SEC filings, annual and quarterly reports and press releases are also
available at our Website, http://www.1stfederal.com/fflc.htm., in the
"FFLC Bancorp" section.
Stockholder Assistance
Stockholders requiring a change of address, records or information about
lost certificates, dividend checks or dividend reinvestment should
contact:
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
800-368-5948
Website: http://www.rtco.com
Corporate Counsel
George W. Murphy, Jr.
Muldoon, Murphy & Faucette LLP
5101 Wisconsin Avenue
Washington, D.C. 20016
Independent Auditors
Hacker, Johnson & Smith PA
Certified Public Accountants
930 Woodcock Road, Suite 211
Orlando, Florida 32803
1
FIRST FEDERAL LOGO HERE
OFFICE LOCATIONS
MAP INSERT MAP - HALF PAGE
COMMON STOCK PRICES AND DIVIDENDS
FFLC's common stock is listed on the National Association of Securities Dealers
Automated Quotation ("NASDAQ") under the symbol FFLC. The following table sets
forth market price information, based on closing prices, as reported by the
NASDAQ for the common stock high and low closing sales prices and the amount of
dividends paid on the common stock for the periods indicated (adjusted for the
three-for-two stock split in February 2003). See Note 22 of the Consolidated
Financial Statements for a summary of quarterly financial data.
Cash
Dividends
Paid
High Low Per Share
---- --- ---------
Quarter Ended:
March 31, 2002........................ 16.90 13.53 .09
June 30, 2002......................... 18.90 16.53 .09
September 30, 2002.................... 19.77 17.83 .09
December 31, 2002..................... 19.71 17.83 .09
March 31, 2003........................ 25.82 19.38 .10
June 30, 2003......................... 28.90 18.67 .10
September 30, 2003.................... 30.95 25.08 .13
December 31, 2003..................... 30.47 26.50 .13
As of January 31, 2004, the Company had 1,752 holders of record of common stock
(includes shares held by brokers in street name).
2
CONSOLIDATED FINANCIAL HIGHLIGHTS
($ in thousands, except per share amounts)
AT YEAR END: 2003 2002 2001
- ------------ ---- ---- ----
Total assets ................................................. $ 947,914 915,976 823,151
Loans, net ................................................... $ 767,987 735,338 685,935
Securities ................................................... $ 82,137 77,324 59,503
Deposits ..................................................... $ 705,589 668,058 585,128
Equity ....................................................... $ 77,356 71,062 64,068
Book value per share (1) ..................................... $ 14.33 13.22 11.99
Shares outstanding (1) ....................................... 5,397,154 5,374,913 5,345,898
Equity-to-assets ratio ....................................... 8.16% 7.76% 7.78%
Nonperforming assets to total assets ......................... .65% .35% .28%
FOR THE YEAR:
Interest income .............................................. $ 52,840 56,533 56,485
Net interest income after provision for loan losses .......... $ 26,719 25,205 20,054
Net income ................................................... $ 9,148 8,836 6,289
Basic income per share (1) ................................... $ 1.70 1.65 1.18
Diluted income per share (1) ................................. $ 1.67 1.61 1.15
Loan originations ............................................ $ 406,510 323,728 257,862
Return on average assets ..................................... .98% 1.00% .82%
Return on average equity ..................................... 12.23% 13.05% 10.20%
Average equity to average assets ratio ....................... 8.02% 7.67% 8.05%
Noninterest expense to average assets ........................ 1.86% 1.68% 1.68%
YIELDS AND RATES:
Weighted Average
Rate or Yield Average Rate or Yield During
at December 31, Year Ended December 31,
---------------- ----------------------------
2003 2002 2003 2002 2001
---- ---- ---- ---- ----
Loans .................................................... 6.45% 7.10% 6.71% 7.28% 7.99%
Securities ............................................... 3.24% 4.45% 2.48% 3.76% 5.84%
All interest-earning assets .............................. 5.96% 6.52% 6.02% 6.73% 7.71%
Interest-bearing deposits ................................ 2.22% 2.84% 2.48% 3.27% 4.95%
All interest-bearing liabilities ......................... 2.70% 3.29% 2.99% 3.72% 5.15%
Interest-rate spread (2) ................................. 3.26% 3.23% 3.03% 3.01% 2.56%
Net yield on average interest-earning assets (3) ......... N/A N/A 3.22% 3.22% 2.89%
(1) Adjusted for the three-for-two stock split declared on February 14, 2003
(2) Average yield on all interest-earning assets less average rate paid on all
interest-bearing liabilities.
(3) Net interest income divided by average interest-earning assets.
3
LOGO HERE
Dear Stockholders:
I am pleased to report to our stockholders that 2003 was another solidly
profitable year for your Company. In spite of a tentative economy, continued
media coverage of corporate scandals and the uncertainty in world affairs, First
Federal, your Hometown Bank, enjoyed a successful year both in terms of the
growth of the Bank and in operating earnings. During 2003, we again experienced
record net income from operations. In addition, we significantly increased the
quarterly cash dividends on our common stock. First Federal, the Company's
subsidiary, set a new record for total assets during 2003, and ended the year
with total assets in excess of $946 million. Our success results from a team
effort, and I want to take this opportunity to thank all of you - our
stockholders, our directors, our employees, our customers, and our communities -
for your efforts and support as we moved through 2003 and into 2004.
The Company's net income from operations increased 3.5%, from $8.8 million in
2002 to $9.1 million in 2003. On a diluted per share basis, net income per share
increased 3.7% from $1.61 in 2002 to $1.67 in 2003. The increase in net income
from operations was primarily due to the increase in net interest income. That
increase occurred because of a significant decrease in the cost of funds that
the Bank experienced as a result of the continued reductions in market interest
rates that began in 2001. The decrease in the cost of funds was partially offset
by a reduction in interest income on loans. In addition, the Bank experienced a
significant increase in net gain on sales of loans sold from the favorable
mortgage banking environment that existed during the first three-quarters of
2003.
In February 2003, the Board approved a 3-for-2 split of our common stock.
Stockholders received one additional share of common stock for every two shares
held as of the close of business on February 28, 2003, the record date of the
split. Because of increased profitability and the change in the Federal tax
treatment of dividends, your Board of Directors approved a 30% increase in the
quarterly cash dividend in July 2003. The quarterly dividend was increased from
$.10 per common share to $.13. That increase continues the practice of periodic
increases in the dividends paid since 1994, when the quarterly cash dividend was
$.02 per common share (adjusted for stock splits in 1997 and 2003).
It is gratifying to note that our stock price rose over 45% during 2003, from
$19.71 to $28.75. Since our initial public offering in 1994, your stock has
yielded an average annual return, including dividends, of 23.2%. We remain
convinced that our best strategy for creating long-term value to our
stockholders is to focus on profitability and excellence in customer service.
Asset growth continues to be a focal point for the Company. The Company's total
assets grew 3.5%, from $916 million at December 31, 2002 to $948 million at
December 31, 2003. During 2003, loans receivable grew 4.4%, from $735 million to
$768 million. During 2003, the Bank's loan originations totaled $406.5 million,
compared to $323.7 million in 2002. The Bank originated $191.0 million in
residential loans, $118.6 million in commercial loans and $96.7 million in
consumer loans in 2003. As reflected in our financial statements, those volume
levels, as well as the increases in our cash and investment securities, reflect
significant increases over our results from 2002. In reviewing our financial
statements, you will see that the Company's asset growth was funded primarily by
an increase in the Bank's deposits. We are particularly pleased that, during
2003, the Bank's deposits grew 5.6% with a substantial portion of that growth in
checking and other non-certificate of deposit accounts.
The Company's continued success and growth is designed to keep pace with the
growth of our communities and the increasing competition in the financial
services sector. In order to ensure that our customers have sufficient physical
locations at which to conduct banking transactions, we continue to expand our
branch structure. During 2003, we opened a branch in Crystal River, Florida, and
acquired land and began construction for another branch located in The Villages
area. We expect to open that branch in the second quarter of 2004.
4
As you know, more and more banking transactions are conducted electronically,
and I am very pleased to report that First Federal Online Banking, our Internet
banking solution, continues to enjoy support from both our retail and commercial
customers. We currently have over 4,485 registered users of our online banking
service, representing an increase over last year of approximately 54.7%.
If you have not had a chance to check out First Federal Online Banking, I
encourage you to visit our website, www.1stfederal.com, and click the "Test
Drive" button. I believe you will be pleased at how easily and completely you
can obtain account balances, transfer funds, pay bills, and access cash
management services (for commercial customers) on a 24-hours-a-day,
7-days-a-week basis. While you are at our website, I also encourage you to note
all the other useful information, including our loan and deposit products, links
to our press releases and financial reports, local weather, and links to some
other "local-interest" websites.
Our customers have welcomed our efforts to provide other financial services. We
have been pleased with the positive feedback and customer acceptance of the
program offering various investment products (which include mutual funds,
annuities, discount brokerage services and financial planning). The Financial
Network Investment Corporation, a securities broker-dealer firm and member of
the NASD and SIPC, offers those investment services at First Federal offices. We
began offering these services in 2001, and have been pleased with the growth in
that area. We also continue to offer trust services to our customers, provided
by the Trust Department of the First National Bank of Mount Dora, under a
referral agreement. At December 31, 2003, the market valuation of trust accounts
serviced was $42 million.
As I did last year, I want to renew our commitment to honesty and integrity. In
light of the disturbing examples of poor corporate governance so widely reported
in the national press, I want you to know of our unrelenting commitment to the
highest standards of ethics, fair and honest reporting, and sound corporate
oversight on which this Company was founded and on which we continue to operate.
We continue to carefully monitor those stories, and the resulting laws and
regulations that have been issued, and believe we are in compliance with all of
those guidelines. We appreciate the trust that you have placed in us over the
past years, and will strive to continue to be worthy of that trust. We have
recently reviewed and updated our Company's Ethics policy, and are implementing
a system by which any employee may anonymously report unethical behavior within
our company either by use of a toll-free telephone number or a dedicated
website.
Community banking very much remains a "people" business. We are blessed to have
a number of directors and staff members who have been with the Bank for many
years. Also, many new employees have joined the Bank with extensive banking
experience in our market area. It is my belief that our team is second to none
in terms of providing our customers with quality customer service.
We remain committed to increasing the long-term value of our Company. That
commitment includes meeting the investment needs of our stockholders, the
financial needs of our customers, the personal growth needs of our employees and
the needs of the communities in which we have the privilege to serve. We believe
that FFLC Bancorp, Inc., is well positioned to meet those needs, and we look
forward to the challenges of the future.
Cordially yours,
Stephen T. Kurtz
President and Chief Executive Officer
5
First Federal New Logo Here
Insert by Ford Press (www.1stfederal.com)
Insert by Ford Press (First Federal Online)
[GRAPHIC OMITTED]
Visit First Federal's website at http://www.1stfederal.com. This site serves as
a portal for First Federal banking services, local news, and information
regarding our communities. From this site, customers can gain access to First
Federal Online Banking, our fully interactive banking system, that allows bill
payments, account inquiries, transfer of funds and more. In addition, commercial
customers can access cash management tools, make tax payments and make payroll
direct deposit payments through First Federal Online Banking. You'll also find
current information about the Bank's locations, products and services at our
website.
Investors can also get the latest information regarding FFLC, including stock
quotes, press releases, SEC filings, beneficial ownership reports, and other
supplemental data, in the "FFLC Bancorp" section of our website.
www.1stfederal.com
6
First Federal online logo
[GRAPHIC OMITTED]
First Federal introduced First Federal Online Banking in July 2000 through the
Bank's website at http://www.1stfederal.com. First Federal customers can now
access practically their entire First Federal relationship through the website,
24 hours a day, 7 days a week. From the First Federal website, customers can
view our online banking product and may enroll online. After receiving their
user ID and password, customers may log-on to check balances, pay their bills
online, reconcile their account statements, transfer funds from one account to
another, review account histories, reorder checks and more. First Federal Online
Banking is just one more added convenience to banking with First Federal.
First Federal new logo here
7
SELECTED CONSOLIDATED FINANCIAL DATA
($ in thousands, except per share amounts)
At December 31,
---------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Total assets ............................................ $ 947,914 915,976 823,151 711,493 590,432
Loans, net .............................................. 767,987 735,338 685,935 615,484 500,901
Cash and cash equivalents ............................... 62,160 69,394 49,792 30,481 34,339
Securities .............................................. 82,137 77,324 59,503 42,717 36,909
Deposits ................................................ 705,589 668,058 585,128 518,885 429,274
Borrowed funds .......................................... 155,941 168,458 167,327 129,376 102,914
Stockholders' equity .................................... 77,356 71,062 64,068 59,283 55,637
For the Year Ended December 31,
---------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Interest income ......................................... $ 52,840 56,533 56,485 49,128 38,383
Interest expense ........................................ 24,607 29,483 35,316 30,065 21,214
Net interest income ..................................... 28,233 27,050 21,169 19,063 17,169
Provision for loan losses ............................... 1,514 1,845 1,115 880 719
Net interest income after provision for loan losses ..... 26,719 25,205 20,054 18,183 16,450
Noninterest income (1) .................................. 5,364 3,776 2,773 1,904 1,675
Noninterest expense ..................................... 17,355 14,868 12,841 11,414 10,313
Income before income taxes (1) .......................... 14,728 14,113 9,986 8,673 7,812
Income taxes (1) ........................................ 5,580 5,277 3,697 3,364 2,962
Net income (1) .......................................... 9,148 8,836 6,289 5,309 4,850
Basic income per share (1) (2) .......................... $ 1.70 1.65 1.18 1.00 .91
Weighted average number of common
shares outstanding for basic (2) .................. 5,385,199 5,360,498 5,321,646 5,312,100 5,322,852
Diluted income per share (1) (2) ........................ $ 1.67 1.61 1.15 .97 .88
Weighted average number of common shares
outstanding for diluted (2) ....................... 5,456,896 5,466,880 5,444,148 5,423,610 5,515,557
- ----------
(1) Excludes gain on sale of real estate held for development in 1999 of $886
($552 net of tax).
(2) Adjusted for the three-for-two stock split declared on February 14, 2003.
8
SELECTED CONSOLIDATED FINANCIAL RATIOS
AND OTHER DATA:
At or For the Year Ended December 31,
-----------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Return on average assets (1)................................. .98% 1.00% 0.82% 0.82% 0.93%
Return on average equity (1)................................. 12.23% 13.05% 10.20% 9.24% 8.88%
Dividend payout ratio ....................................... 27.18% 22.66% 29.35% 32.32% 28.95%
Average equity to average assets............................. 8.02% 7.67% 8.05% 8.88% 10.45%
Total equity to total assets................................. 8.16% 7.76% 7.78% 8.33% 9.42%
Interest rate spread during year(2).......................... 3.03% 3.01% 2.56% 2.66% 2.98%
Net interest margin (3)...................................... 3.22% 3.22% 2.89% 3.08% 3.44%
Nonperforming assets to total assets (4)..................... 0.65% 0.35% 0.28% 0.39% 0.47%
Nonperforming loans to total loans (5)....................... 0.66% 0.34% 0.27% 0.40% 0.46%
Allowance for loan losses to nonperforming loans............. 103.84% 199.88% 224.20% 141.51% 119.01%
Allowance for loan losses to nonperforming assets............ 89.01% 161.00% 187.62% 127.49% 101.77%
Allowance for loan losses to gross loans..................... 0.69% 0.68% 0.61% 0.56% 0.54%
Noninterest expenses to average assets....................... 1.86% 1.68% 1.68% 1.76% 1.97%
Operating efficiency ratio (1)............................... 51.66% 48.23% 53.63% 54.44% 54.73%
Average interest-earning assets to
average interest-bearing liabilities................... 1.07 1.06 1.07 1.09 1.11
Net interest income to noninterest expenses.................. 1.63 1.82 1.69 1.69 1.69
Total shares outstanding (6)................................. 5,397,154 5,374,913 5,345,898 5,298,842 5,375,907
Book value per common share outstanding (6).................. $ 14.33 13.22 11.99 11.19 10.35
Number of banking offices (all full-service)................. 15 14 12 12 12
- ----------
(1) Excludes gain on sale of real estate held for development in 1999 of
$886,000 ($552,000 net of tax).
(2) Difference between weighted average yield on all interest-earning assets
and weighted average rate on all interest-bearing liabilities.
(3) Based upon net interest income before provision for loan losses divided by
average interest-earning assets.
(4) Nonperforming assets consist of nonperforming loans and foreclosed assets.
(5) Nonperforming loans consist of loans 90 days or more delinquent.
(6) Adjusted for the three-for-two stock split declared on February 14, 2003.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
First Federal Savings Bank of Lake County, the subsidiary of FFLC, was organized
in 1934 as a federally chartered savings and loan association and converted to a
federally chartered stock savings bank on January 4, 1994. The Bank's principal
business continues to be attracting retail deposits from the general public and
investing those deposits, together with principal repayments on loans and
investments and funds generated from operations, primarily in mortgage loans
secured by one-to-four-family, owner-occupied homes, commercial loans, consumer
loans and, to a lesser extent, construction loans and other loans, and
multi-family residential mortgage loans. In addition, the Bank holds investments
permitted by federal laws and regulations including securities issued by the
U.S. Government and agencies thereof. The Bank's revenues are derived
principally from interest on its loan and mortgage-backed securities portfolios
and interest and dividends on its investment securities.
The Bank is a community-oriented savings institution offering a variety of
financial services to meet the needs of the communities it serves. The Bank's
deposit gathering and lending markets are primarily concentrated in the
communities surrounding its full service offices located in Lake, Sumter, Citrus
and Marion counties in central Florida. Management believes that its offices are
located in communities that generally can be characterized as rural service and
retirement communities with residential neighborhoods comprised predominately of
one-to-four-family residences. The Bank is the largest (by asset size)
locally-based financial institution in Lake County, and serves its market area
with a wide selection of residential mortgage loans and other retail financial
services. Management considers the Bank's reputation for financial strength and
customer service as a major advantage in attracting and retaining customers in
its market area and believes it benefits from its community orientation as well
as its established deposit base and level of core deposits.
The Company's net income from operations increased 3.5% to $9.1 million for the
year ended December 31, 2003 from $8.8 million for the year 2002. The Company's
total assets increased 3.5% to $947.9 million at December 31, 2003 from $916.0
million at December 31, 2002. That increase resulted primarily from a 4.4%
increase in net loans to $768.0 million at December 31, 2003 from $735.3 million
at December 31, 2002, reflecting increased local loan demand. Securities
increased 6.2% or $4.8 million during 2003. Deposits increased 5.6% to $705.6
million at December 31, 2003 from $668.1 million at December 31, 2002. Advances
from the Federal Home Loan Bank decreased $16.0 million, to $133.0 million at
December 31, 2003 from $149.0 million at December 31, 2002.
CRITICAL ACCOUNTING POLICIES
Our financial condition and results of operations are sensitive to accounting
measurements and estimates of matters that are inherently uncertain. When
applying accounting policies in areas that are subjective in nature, we use our
best judgment to arrive at the carrying value of certain assets. The most
critical accounting policy we applied is related to the valuation of the loan
portfolio.
A variety of factors impact the carrying value of the loan portfolio including
the calculation of the allowance for loan losses, the valuation of underlying
collateral, the timing of loan charge-offs and the amount and amortization of
loan fees and deferred origination costs.
We believe that the determination of the allowance for loan losses represents a
critical accounting policy. The allowance for loan losses is maintained at a
level management considers to be adequate to absorb probable loan losses
inherent in the portfolio, based on evaluations of the collectibility and
historical loss experience of loans. Credit losses are charged and recoveries
are credited to the allowance. Provisions for loan losses are based on our
review of the historical loan loss experience and such factors which, in
management's judgment, deserve consideration under existing economic conditions
in estimating probable credit losses. The allowance is based on ongoing
assessments of the probable estimated losses inherent in the loan portfolio. Our
methodology for assessing the appropriate allowance level consists of several
key elements described below.
10
Larger commercial loans that exhibit probable or observed credit weaknesses are
subject to individual review. Where appropriate, reserves are allocated to
individual loans based on our estimate of the borrower's ability to repay the
loan given the availability of collateral, other sources of cash flows, and
available legal options. Included in the review of individual loans are those
that are impaired as provided in Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan" as amended. Any specific
reserves for impaired loans are measured based on the fair market value of the
underlying collateral. We evaluate the collectibility of both principal and
interest when assessing the need for a special reserve. Historical loss rates
are applied to other commercial loans not subject to specific reserve
allocations.
Homogenous loans, such as installment and residential mortgage loans, are not
individually reviewed by management. Reserves are established for each pool of
loans based on the expected net charge-offs. Loss rates are based on the average
net charge-off history by loan category.
Historical loss rates for commercial and consumer loans may be adjusted for
significant factors that, in management's judgment, reflect the impact of any
current conditions or loss recognition. Factors which management considers in
the analysis include the effects of the local economy, trends in the nature and
volume of loans (delinquencies, charge-offs, nonaccrual and problem loans),
changes in the internal lending policies and credit standards, collection
practices, and examination results from bank regulatory agencies and our
internal credit review function. An unallocated reserve is maintained to
recognize the imprecision in estimating and measuring loss when evaluating
reserves for individual loans or pools of loans. Specific reserves on individual
loans and historical loss rates are reviewed throughout the year and adjusted as
necessary based on changing borrower and collateral conditions and actual
collection and charge-off experience.
Based on the procedures discussed above, management believes that allowance for
loan losses were adequate to absorb estimated loan losses associated with the
loan portfolio at December 31, 2003. Actual results could differ from these
estimates. However, since the allowance is affected by management's judgment and
uncertainties, there is the likelihood that materially different amounts would
be reported under different conditions or assumptions. To the extent that the
economy, collateral values, reserve factors, or the nature and volume of problem
loans change, we may need to adjust the provision for loan losses. Material
additions to our provision for loan losses would result in a decrease in net
income and capital.
The allowance for loan losses is also discussed as part of "Results of
Operations" and in Note 3 to the consolidated financial statements. The
significant accounting policies are discussed in Note 1 to the consolidated
financial statements.
REGULATION AND LEGISLATION
General
The operating results of the Bank are affected by Federal laws and regulations
and the Bank is subject to extensive regulation, examination and supervision by
the Office of Thrift Supervision ("OTS") as its chartering agency, and the
Federal Deposit Insurance Corporation ("FDIC") as the deposit insurer. The Bank
is a member of the Federal Home Loan Bank ("FHLB") System and its deposit
accounts are insured up to applicable limits by the FDIC under the SAIF
("Savings Association Insurance Fund"). The Bank must file reports with the OTS
and the FDIC concerning its activities and financial condition in addition to
obtaining regulatory approvals prior to entering into certain transactions such
as mergers with, or acquisitions of, other financial institutions. The OTS and
the FDIC conduct periodic examinations to test the Bank's compliance with
various regulatory requirements. The activities of the Company and the Bank are
governed by the Home Owner's Loan Act, as amended (the "HOLA"), and, in certain
respects, the Federal Deposit Insurance Act (the "FDIA"). A more complete
description of the HOLA and FDIA is included in the Form 10-K.
Capital Requirements
The capital regulations of the OTS require savings institutions to meet three
capital standards: a 1.5% tangible capital standard; a 3% leverage (core
capital) ratio; and an 8% risk-based capital standard. Under the OTS final rule
implementing the Federal Deposit Insurance Corporation Improvement Act
("FDICIA'), generally, a well-capitalized institution is defined as one that
meets the following capital standards: a 5% tangible capital standard; a 6%
leverage (core capital) ratio; and a
11
10% risk-based capital standard, and has not been notified by the OTS that it is
in a "troubled condition." At December 31, 2003, the Bank met each of its
capital requirements and met the criteria of a "well-capitalized" institution as
defined above.
Insurance of Deposit Accounts
The FDIC has adopted a risk-based deposit insurance system that assesses deposit
insurance premiums according to the level of risk involved in an institution's
activities. An institution's risk category is based upon whether the institution
is classified as "well capitalized," "adequately capitalized" or "less than
adequately capitalized" and one of three supervisory subcategories within each
capital group. The supervisory subgroup to which an institution is assigned is
based on a supervisory evaluation and information which the FDIC determines to
be relevant to the institution's financial condition and the risk posed to the
deposit insurance fund. The FDIC has authority to raise premiums if deemed
necessary. If such action is taken, it could have an adverse effect on the
earnings of the institution.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
CREDIT RISK
The Bank's primary business is lending on residential real estate, commercial
real estate and consumer financing, activities with the inherent risk of
generating potential loan losses the magnitude of which depend on a variety of
factors affecting borrowers which are beyond the control of the Bank. The Bank
has underwriting guidelines and credit review procedures designed to minimize
such credit losses.
RESULTS OF OPERATIONS
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the income earned on its
interest-earning assets, primarily its loans, mortgage-backed securities and
investment securities, and its interest-bearing liabilities, consisting of
deposits and borrowings. The operating expenses of the Company principally
consist of employee compensation, occupancy expenses and other general and
administrative expenses. The Company's results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income depends
upon the volume of interest-earning assets and interest-bearing liabilities and
the interest rates earned or paid on them.
12
The following table sets forth, for the periods indicated, information regarding
(i) the total dollar amount of interest and dividend income of the Company from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average costs; (iii) net interest/dividend income; (iv) interest-rate spread;
(v) net interest margin; and (vi) weighted average yields and rates at December
31, 2003. Yields and costs were derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods shown.
The average balance of loans includes loans on which the Company has
discontinued accruing interest. The yields and costs include fees which are
considered to constitute adjustments to yields.
Year Ended December 31,
-------------------------------------------------------------------
2003 2002
------------------------------- -------------------------------
Yield At Interest Average Interest Average
December 31, Average and Yield/ Average and Yield/
2003 Balance Dividends Cost Balance Dividends Cost
---- ------- --------- ---- ------- --------- ----
($ in thousands)
Interest-earning assets:
Loans ................................ 6.45% $742,461 49,844 6.71% $721,521 52,496 7.28%
Securities ........................... 3.24 89,536 2,218 2.48 79,757 3,002 3.76
Other interest-earning assets (1) .... 1.45 45,209 778 1.72 38,186 1,035 2.71
-------- ------- -------- -------
Total interest-earning assets ... 5.96 877,206 52,840 6.02 839,464 56,533 6.73
------ ------
Noninterest-earning assets ............... 55,385 43,409
-------- --------
Total assets .................... $932,591 $882,873
======== ========
Interest-bearing liabilities:
NOW and money market
accounts .......................... .40 149,486 778 .52 131,538 1,449 1.10
Passbook and statement savings
accounts .......................... .55 25,886 154 .59 23,501 216 .92
Certificates ......................... 2.96 484,379 15,443 3.19 460,206 18,461 4.01
FHLB advances ........................ 5.40 139,372 7,740 5.55 160,235 8,999 5.62
Other borrowings ..................... 2.04 22,654 492 2.17 16,915 358 2.12
-------- ------- -------- -------
Total interest-bearing
liabilities ................... 2.70 821,777 24,607 2.99 792,395 29,483 3.72
------- -------
Noninterest-bearing deposits ............. 25,296 13,655
Noninterest-bearing liabilities .......... 10,731 9,122
Stockholders' equity ..................... 74,787 67,701
-------- --------
Total liabilities and equity .... $932,591 $882,873
======== ========
Net interest-earning assets and
interest-rate spread (2) ............. 3.26% $ 55,429 3.03% $ 47,069 3.01%
==== ======== ==== ======== ====
Net interest income and net
margin (3) ........................... $ 28,233 3.22% $ 27,050 3.22%
======== ==== ======== ====
Ratio of interest-earning assets
to interest-bearing liabilities ...... 1.07 1.06
==== ====
Year Ended December 31,
------------------------------
2001
------------------------------
Interest Average
Average and Yield/
Balance Dividends Cost
------- --------- ----
($ in thousands)
Interest-earning assets:
Loans ................................. $655,306 52,384 7.99%
Securities ............................ 49,709 2,901 5.84
Other interest-earning assets (1) ..... 27,837 1,200 4.31
-------- -------
Total interest-earning assets .... 732,852 56,485 7.71
------
Noninterest-earning assets ................ 32,885
--------
Total assets ..................... $765,737
========
Interest-bearing liabilities:
NOW and money market
accounts ........................... 97,574 2,278 2.33
Passbook and statement savings
accounts ........................... 20,121 359 1.78
Certificates .......................... 419,923 23,959 5.71
FHLB advances ......................... 136,041 8,257 6.07
Other borrowings ...................... 11,842 463 3.91
-------- -------
Total interest-bearing
liabilities .................... 685,501 35,316 5.15
-------
Noninterest-bearing deposits .............. 13,683
Noninterest-bearing liabilities ........... 4,911
Stockholders' equity ...................... 61,642
--------
Total liabilities and equity ..... $765,737
========
Net interest-earning assets and
interest-rate spread (2) .............. $ 47,351 2.56%
======== ====
Net interest income and net
margin (3) ............................ $ 21,169 2.89%
======== ====
Ratio of interest-earning assets
to interest-bearing liabilities ....... 1.07
====
- ----------
(1) Includes interest-earning deposits and FHLB Stock.
(2) Interest-rate spread represents the difference between the average yield
on interest-earning assets and the average cost of
interest bearing liabilities.
(3) Net interest margin is net interest income divided by average
interest-earning assets.
13
The following table discloses the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume) and (iii) changes attributable to changes in
rate/volume (changes in rate multiplied by changes in volume).
Year Ended December 31, Year Ended December 31,
2003 vs. 2002 2002 vs. 2001
Increase (Decrease) Increase (Decrease)
---------------------------------------- ---------------------------------------
Due to Due to
---------------------------------------- ---------------------------------------
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
---- ------ ------ --- ---- ------ ------ ---
($ in thousands)
Interest-earning assets:
Loans, net .............................. $(4,058) 1,524 (118) (2,652) (4,706) 5,293 (475) 112
Securities .............................. (1,026) 368 (126) (784) (1,030) 1,754 (623) 101
Other interest-earning (1) .............. (378) 190 (69) (257) (445) 446 (166) (165)
------- ------- ------- ------- ------- ------- ------- -------
Total ............................ (5,462) 2,082 (313) (3,693) (6,181) 7,493 (1,264) 48
------- ------- ------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
NOW and money market accounts ........... (765) 198 (104) (671) (1,203) 793 (419) (829)
Passbook and statement savings
accounts ............................ (76) 22 (8) (62) (174) 60 (29) (143)
Certificates ............................ (3,789) 970 (199) (3,018) (7,114) 2,298 (682) (5,498)
FHLB advances ........................... (100) (1,172) 13 (1,259) (617) 1,469 (110) 742
Other borrowings ........................ 9 121 4 134 (212) 198 (91) (105)
------- ------- ------- ------- ------- ------- ------- -------
Total ............................ (4,721) 139 (294) (4,876) (9,320) 4,818 (1,331) (5,833)
------- ------- ------- ------- ------- ------- ------- -------
Net change in net interest
income .................................. $ (741) 1,943 (19) 1,183 3,139 2,675 67 5,881
======= ======= ======= ======= ======= ======= ======= =======
- ----------
(1) Includes interest-earning deposits and FHLB Stock.
14
CAPITAL RESOURCES
The Bank's sources of funds include proceeds from payments and prepayments on
mortgage loans and mortgage-backed securities, proceeds from the maturities of
investment securities and deposits. While maturities and scheduled amortization
of loans and investment securities are predictable sources of funds, deposit
inflows and mortgage prepayments are greatly influenced by local conditions,
general interest rates, and regulatory changes.
At December 31, 2003, the Bank had outstanding commitments to originate $12.7
million of loans, to fund unused lines of credit of $75.5 million, to fund the
undisbursed portion of loans in process of $24.6 million and $3.4 million in
outstanding standby letters of credit. The Bank believes that it will have
sufficient funds available to meet its commitments. At December 31, 2003,
certificates of deposit which were scheduled to mature in one year or less
totaled $281.6 million. Management believes, based on past experience, that a
significant portion of those funds will remain with the Bank.
REGULATORY CAPITAL REQUIREMENTS
As a federally-chartered financial institution, the Bank is required to maintain
certain minimum amounts of regulatory capital. Regulatory capital is not a
valuation allowance and has not been created by charges against earnings. The
following table provides a summary of the capital requirements, the Bank's
regulatory capital and the amounts in excess at December 31, 2003:
Tangible Core Risk-Based
------------------- -------------------- ---------------------
% of % of % of Risk-
Adjusted Adjusted Weighted
Amount Assets Amount Assets Amount Assets
------ ------ ------ ------ ------ ------
($ in thousands)
Regulatory capital .......................... $78,482 8.28% $78,482 8.28% $83,908 13.17%
Requirement ................................. 14,217 1.50 28,435 3.00 50,961 8.00
------- ----- ------- ----- ------- -----
Excess ...................................... $64,265 6.78% $50,047 5.28% $32,947 5.17%
======= ===== ======= ===== ======= =====
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk arises primarily from interest-rate risk inherent in
its lending and deposit taking activities. The Company has little or no risk
related to trading accounts, commodities or foreign exchange.
Management actively monitors and manages its interest rate risk exposure. The
primary objective in managing interest-rate risk is to limit, within established
guidelines, 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. Management
relies primarily on its asset-liability structure to control interest rate risk.
However, a sudden and substantial increase in interest rates could adversely
impact the Company's earnings, to the extent that the interest rates borne by
assets and liabilities do not change at the same speed, to the same extent, or
on the same basis.
Disclosure about the fair value of financial instruments, which reflect changes
in market prices and rates, can be found in Note 9 of the notes to the
consolidated financial statements.
15
ASSET /LIABILITY MANAGEMENT
The Bank's primary mission is to provide financing by offering permanent and
construction residential mortgage loans, commercial real estate loans and
consumer and commercial loans and by providing conveniently located depository
facilities with transaction, savings and certificate accounts. The Bank's goal
is to continue to be a well-capitalized and profitable operation that provides
service that is professional, efficient and courteous. The Bank seeks to fulfill
its mission and accomplish its goals by pursuing the following strategies: (i)
emphasizing lending in the one-to-four-family residential mortgage, commercial
real estate and consumer lending markets; (ii) controlling interest-rate risk;
(iii) managing deposit pricing and asset growth; (iv) emphasizing cost control;
and (v) maintaining asset quality by investing in U.S. government and agency
securities which, in management's judgment, provide a balance between yield and
safety. It is management's intention to continue to employ these strategies over
the foreseeable future.
The Bank's profitability, like that of most financial institutions, is dependent
to a large extent upon its net interest income, which is the difference between
its interest income on interest-earning assets, such as loans, mortgage-backed
securities and investment securities, and its interest expense on
interest-bearing liabilities, such as deposits and other borrowings. Financial
institutions continue to be affected by general changes in levels of interest
rates and other economic factors beyond their control. At December 31, 2003, the
Bank's one-year interest sensitivity gap (the difference between the amount of
interest-earning assets anticipated by the Bank to mature or reprice within one
year and the amount of interest-bearing liabilities anticipated by the Bank to
mature or reprice within one year) as a percentage of total assets was a
positive .78% Generally, an institution with a positive gap would experience an
increase in net interest income in a period of rising interest rates or a
decrease in net interest income in a period of declining interest rates.
However, certain shortcomings are inherent in the sensitivity analysis presented
above. For example, although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in different manners to
changes in market interest rates. Therefore, no assurance can be given that the
Bank will be able to maintain its net interest-rate spread as market interest
rates fluctuate.
The Bank monitors its interest-rate risk through the Asset/Liability Committee
which meets monthly and reports the results of such monitoring quarterly to the
Board of Directors. The Bank's policy is to seek to maintain a balance between
interest-earning assets and interest-bearing liabilities so that the Bank's
cumulative one-year gap is within a range established by the Board of Directors
and which management believes is conducive to maintaining profitability without
incurring undue risk. The Bank has increased its investment in adjustable-rate
and shorter average life, mortgage-related securities in order to position
itself against the consequences of rising interest rates. The Bank also
maintains liquid assets in an amount which allows for the possibility of
disintermediation when interest rates fluctuate. The Bank's liquidity ratio was
17.4% at December 31, 2003. In addition, the Bank's large, stable, core deposit
base resulting from its continuing commitment to quality customer service has
historically provided it with a steady source of funds.
16
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 2003 that are expected
to reprice, based upon certain assumptions and contractual maturities, in each
of the future periods shown.
More More More More More
than than than than than
Three Six One Three Five More
Three Months Months Year Years Years than
Months to Six to 12 to 3 to 5 to 10 Ten
or Less Months Months Years Years Years Years Total
------- ------ ------ ----- ----- ----- ----- -----
($ in thousands)
Rate-sensitive assets:
Mortgage loans, net of LIP ........ $ 150,654 70,595 117,030 180,290 52,345 10,958 1,478 583,350
Commercial and consumer
loans, net of LIP ................ 76,800 13,101 22,574 42,588 23,815 8,465 2,085 189,428
Mortgage-backed
securities ....................... 4,440 3,685 6,036 8,598 5,427 353 -- 28,539
Interest-earning deposits ......... 27,088 -- -- -- -- -- -- 27,088
Investment securities ............. 5,948 2,049 9,197 20,363 -- -- 7,025 44,582
Mutual funds ...................... 9,016 -- -- -- -- -- -- 9,016
FHLB stock ........................ 6,900 -- -- -- -- -- -- 6,900
--------- -------- ------- ------- -------- ------- ------- -------
Total interest-earning
assets ...................... 280,846 89,430 154,837 251,839 81,587 19,776 10,588 888,903
--------- -------- ------- ------- -------- ------- ------- -------
Rate-sensitive liabilities:
Deposits:
Savings accounts ................. 26,636 -- -- -- -- -- -- 26,636
NOW and money
market accounts ............... 161,527 -- -- -- -- -- -- 161,527
Certificates ..................... 92,598 73,924 115,081 133,083 71,259 -- -- 485,945
Borrowed funds .................... 22,941 15,000 10,000 74,000 15,000 19,000 -- 155,941
--------- -------- ------- ------- -------- ------- ------- -------
Total interest-bearing
liabilities ................. 303,702 88,924 125,081 207,083 86,259 19,000 -- 830,049
--------- -------- ------- ------- -------- ------- ------- -------
Interest-sensitivity gap ............. $ (22,856) 506 29,756 44,756 (4,672) 776 10,588 58,854
========= ======== ======= ======= ======== ======= ======= =======
Cumulative interest-
sensitivity gap .................. $ (22,856) (22,350) 7,406 52,162 47,490 48,266 58,854
========= ======== ======= ======= ======== ======= =======
Cumulative interest-earning
assets ........................... $ 280,846 370,276 525,113 776,952 858,539 878,315 888,903
========= ======== ======= ======= ======== ======= =======
Cumulative interest-bearing
liabilities ...................... $ 303,702 392,626 517,707 724,790 811,049 830,049 830,049
========= ======== ======= ======= ======== ======= =======
Cumulative interest-sensitivity
gap as a percentage of
total assets ..................... (2.41)% (2.36)% 0.78% 5.50% 5.01% 5.09% 6.21%
========= ======== ======= ======= ======== ======= =======
Cumulative interest-earning
assets as a percentage of
cumulative interest-bearing
liabilities ...................... 92.47% 94.31% 101.43% 107.20% 105.86% 105.81% 107.09%
========= ======== ======= ======= ======== ======= =======
17
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2003 TO THE YEAR ENDED DECEMBER 31,
2002
General Operating Results. Net income for the year ended December 31, 2003 was
$9.1 million, or $1.70 per basic share and $1.67 per diluted share, compared
to $8.8 million, or $1.65 per basic share and $1.61 per diluted share, for the
year ended December 31, 2002. All per share information has been adjusted to
reflect the three-for-two stock split in 2003. The increase in net income was
primarily due to increases in net interest income of $1.2 million and
noninterest income of $1.6 million, partially offset by a $2.5 million
increase in noninterest expense.
Interest Income. Interest income decreased $3.7 to $52.8 million for the year
ended December 31, 2003. The decrease resulted from a decrease in the average
yield earned on interest-earning assets from 6.73% for the year ended December
31, 2002 to 6.02% for the year ended December 31, 2003, partially offset by a
$37.7 million or 4.5% increase in average interest-earning assets outstanding
for the year ended December 31, 2003 compared to 2002.
Interest Expense. Interest expense decreased $4.9 million or 16.5%, from $29.5
million for the year ended December 31, 2002 to $24.6 million for the year
ended December 31, 2003. The decrease was due primarily to a decrease in the
average cost of interest-bearing liabilities from 3.72% for the year ended
December 31, 2002 to 2.99% for 2003, partially offset by an increase of $29.4
million in average interest-bearing liabilities outstanding. Average
interest-bearing deposits increased from $615.2 million outstanding during the
year ended December 31, 2002 to $659.8 million outstanding during 2003.
Average borrowings decreased from $177.2 million outstanding during the year
ended December 31, 2002 to $162.0 million in 2003.
Provision for Loan Losses. The provision for loan losses is charged to income to
increase the allowance for loan losses to the level deemed appropriate by
management. The provision is based upon the volume and type of lending
conducted by the Company, charge-off experience, industry standards, the
amount of nonperforming loans, general economic conditions, particularly as
they relate to the Company's market area, and other factors related to the
collectibility of the Company's loan portfolio. The Company recorded
provisions for loan losses for the years ended December 31, 2003 and 2002 of
$1.5 million and $1.8 million, respectively. Net loans charged off for the
years ended December 31, 2003 and 2002 were $1,205,000 and $953,000,
respectively. Management believes that the allowance for loan losses, which
was $5.5 million or .69% of gross loans at December 31, 2003 is adequate.
Noninterest Income. Noninterest income increased $1.6 million, or 42.1% from
$3.8 million for the year ended December 31, 2002 to $5.4 million for 2003.
That increase was primarily due to increases of $475,000 in other service
charges and fees and $775,000 in net gain on sales of loans held for sale. The
increase in gain on sales of loans held for sale was due to an increase in the
amount of residential mortgage loans originated and sold in the secondary
market due to the low interest-rate environment.
Noninterest Expense. Noninterest expense increased by $2.5 million or 16.7%,
from $14.9 million for the year ended December 31, 2002 to $17.4 million for
the year ended December 31, 2003. The increase was primarily due to increases
in salaries and employee benefits of $1.4 million, occupancy expense of
$367,000 and $279,000 in data processing expenses related to the overall
growth of the Company.
Income Taxes. Income taxes were $5.6 million for the year ended December 31,
2003 (an effective tax rate of 37.9%) compared to $5.3 million (an effective
tax rate of 37.4%) for the year ended December 31, 2002.
18
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2002 TO THE YEAR ENDED DECEMBER 31,
2001
General Operating Results. Net income for the year ended December 31, 2002 was
$8.8 million, or $1.65 per basic share and $1.61 per diluted share, compared
to $6.3 million, or $1.18 per basic share and $1.15 per diluted share, for the
year ended December 31, 2001. All per share information has been adjusted to
reflect the three-for-two stock split in 2003. The increase in net income was
primarily due to an increase in net interest income of $5.9 million, partially
offset by a $2.0 million increase in noninterest expense.
Interest Income. Interest income increased $48,000 to $56.5 million for the year
ended December 31, 2002. The increase resulted from a $106.6 million or 14.5%
increase in average interest-earning assets outstanding for the year ended
December 31, 2002 compared to 2001, offset by a decrease in the average yield
earned on interest-earning assets from 7.71% for the year ended December 31,
2001 to 6.73% for the year ended December 31, 2002.
Interest Expense. Interest expense decreased $5.8 million or 16.5%, from $35.3
million for the year ended December 31, 2001 to $29.5 million for the year
ended December 31, 2002. The decrease was due primarily to a decrease in the
average cost of interest-bearing liabilities from 5.15% for the year ended
December 31, 2001 to 3.72% for 2002, partially offset by increases of $77.6
million and $29.3 million in average interest-bearing deposits and borrowings
outstanding, respectively. Average interest-bearing deposits increased from
$537.6 million outstanding during the year ended December 31, 2001 to $615.2
million outstanding during 2002. Average borrowings increased from $147.9
million outstanding during the year ended December 31, 2001 to $177.2 million
in 2002.
Provision for Loan Losses. The provision for loan losses is charged to income to
increase the allowance for loan losses to the level deemed appropriate by
management. The provision is based upon the volume and type of lending
conducted by the Company, charge-off experience, industry standards, the
amount of nonperforming loans, general economic conditions, particularly as
they relate to the Company's market area, and other factors related to the
collectibility of the Company's loan portfolio. The Company recorded
provisions for loan losses for the years ended December 31, 2002 and 2001 of
$1.8 million and $1.1 million, respectively. Net loans charged off for the
years ended December 31, 2002 and 2001 were $953,000 and $378,000,
respectively. Management believes that the allowance for loan losses, which
was $5.2 million or .68% of gross loans at December 31, 2002 is adequate.
Noninterest Income. Noninterest income increased $1.0 million, or 36.2% from
$2.8 million for the year ended December 31, 2001 to $3.8 million for 2002.
That increase was primarily due to increases of $321,000 in other service
charges and fees and $360,000 in net gain on sales of loans held for sale. The
increase in gain on sales of loans held for sale was due to an increase in the
amount of residential mortgage loans originated to be sold in the secondary
market.
Noninterest Expense. Noninterest expense increased by $2.0 million or 15.8%,
from $12.8 million for the year ended December 31, 2001 to $14.9 million for
the year ended December 31, 2002. The increase was primarily due to increases
in salaries and employee benefits of $1.3 million and occupancy expense of
$404,000 related to the overall growth of the Company.
Income Tax Provision. The income tax provision was $5.3 million for the year
ended December 31, 2002 (an effective tax rate of 37.4%) compared to $3.7
million (an effective tax rate of 37.0%) for the year ended December 31, 2001.
19
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein have
been prepared in accordance with GAAP, which requires the measurement of
financial position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of the
Company's operations. Unlike most industrial companies, nearly all the assets
and liabilities of the Bank are monetary in nature. As a result, interest rates
have a greater impact on the Company's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.
20
FFLC BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
($ in thousands, except per share amounts)
At December 31,
----------------------------
2003 2002
---- ----
Assets
Cash and due from banks ................................................... $ 35,072 20,157
Interest-earning deposits ................................................. 27,088 49,237
--------- ---------
Cash and cash equivalents ..................................... 62,160 69,394
Securities available for sale ............................................. 82,137 77,324
Loans, net of allowance for loan losses of $5,490 in 2003
and $5,181 in 2002 .................................................... 767,987 735,338
Accrued interest receivable:
Securities ............................................................ 660 811
Loans ................................................................. 3,189 3,370
Premises and equipment, net ............................................... 21,448 19,369
Foreclosed assets ......................................................... 881 626
Federal Home Loan Bank stock, at cost ..................................... 6,900 7,700
Deferred income taxes ..................................................... 1,134 487
Other assets .............................................................. 1,418 1,557
--------- ---------
Total ......................................................... $ 947,914 915,976
--------- =========
Liabilities and Stockholders' Equity
Liabilities:
Noninterest-bearing demand deposits ................................... 31,481 18,867
NOW and money market accounts ......................................... 161,527 137,858
Savings accounts ...................................................... 26,636 25,403
Certificates .......................................................... 485,945 485,930
--------- ---------
Total deposits ................................................ 705,589 668,058
Advances from Federal Home Loan Bank ...................................... 133,000 149,000
Other borrowed funds ...................................................... 17,786 14,303
Junior subordinated debentures ............................................ 5,155 5,155
Accrued expenses and other liabilities .................................... 9,028 8,398
--------- ---------
Total liabilities ............................................. 870,558 844,914
--------- ---------
Commitments and contingencies (Notes 4, 9 and 12)
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized,
none outstanding .................................................. -- --
Common stock, $.01 par value, 15,000,000 shares authorized,
6,397,202 in 2003 and 4,574,944 in 2002 shares issued ............. 64 46
Additional paid-in-capital ............................................ 31,837 31,638
Retained income ....................................................... 65,071 58,409
Accumulated other comprehensive income ................................ 297 636
Treasury stock, at cost (1,000,048 shares in 2003 and
991,669 shares in 2002) ........................................... (19,913) (19,667)
--------- ---------
Total stockholders' equity .................................... 77,356 71,062
--------- ---------
Total ......................................................... $ 947,914 915,976
========= =========
See accompanying Notes to Consolidated Financial Statements.
21
FFLC BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
($ in thousands, except per share amounts)
Year Ended December 31,
----------------------------------------------
2003 2002 2001
Interest income:
Loans ................................................................. $ 49,844 52,496 52,384
Securities ............................................................ 2,218 3,002 2,901
Other ................................................................. 778 1,035 1,200
---------- ---------- ----------
Total interest income ............................................. 52,840 56,533 56,485
---------- ---------- ----------
Interest expense:
Deposits .............................................................. 16,375 20,126 26,596
Borrowed funds ........................................................ 8,232 9,357 8,720
---------- ---------- ----------
Total interest expense ............................................ 24,607 29,483 35,316
---------- ---------- ----------
Net interest income ............................................... 28,233 27,050 21,169
Provision for loan losses ................................................. 1,514 1,845 1,115
---------- ---------- ----------
Net interest income after provision for loan losses ............... 26,719 25,205 20,054
---------- ---------- ----------
Noninterest income:
Deposit account fees .................................................. 1,036 953 835
Other service charges and fees ........................................ 2,375 1,900 1,579
Net gain on sales of loans held for sale .............................. 1,178 403 43
Other ................................................................. 775 520 316
---------- ---------- ----------
Total noninterest income .......................................... 5,364 3,776 2,773
---------- ---------- ----------
Noninterest expense:
Salaries and employee benefits ........................................ 10,196 8,814 7,554
Occupancy expense ..................................................... 2,787 2,420 2,016
Data processing expense ............................................... 1,270 991 990
Advertising and promotion ............................................. 507 492 410
Professional services ................................................. 480 432 386
Other ................................................................. 2,115 1,719 1,485
---------- ---------- ----------
Total noninterest expense ......................................... 17,355 14,868 12,841
---------- ---------- ----------
Income before income taxes ................................................ 14,728 14,113 9,986
Income taxes ...................................................... 5,580 5,277 3,697
---------- ---------- ----------
Net income ................................................................ $ 9,148 8,836 6,289
========== ========== ==========
Basic income per share .................................................... $ 1.70 1.65 1.18
========== ========== ==========
Weighted-average number of shares outstanding for basic ................... 5,385,199 5,360,498 5,321,646
========== ========== ==========
Diluted income per share .................................................. $ 1.67 1.61 1.15
========== ========== ==========
Weighted-average number of shares outstanding for diluted ................. 5,456,896 5,466,880 5,444,148
========== ========== ==========
See accompanying Notes to Consolidated Financial Statements.
22
FFLC BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 2003, 2002 and 2001
($ in thousands, except per share amounts)
Common Stock Accumulated
------------------- Additional Other Total
Number of Paid-In Treasury Retained Comprehensive Stockholders'
Shares Amount Capital Stock Income Income Equity
------ ------ ------- ----- ------ ------ ------
Balance at December 31, 2000 ............. 4,491,646 $45 31,010 (18,985) 47,132 81 59,283
-------
Comprehensive income:
Net income .......................... -- -- -- -- 6,289 -- 6,289
Change in unrealized gains on
securities available for sale, net
of income taxes of $217 ........... -- -- -- -- -- 359 359
-------
Comprehensive income ..................... 6,648
-------
Net proceeds from the issuance of
common stock, stock options
exercised ........................... 51,307 -- 345 -- -- -- 345
Dividends paid ($.35 per share -
adjusted) ........................... -- -- -- -- (1,846) -- (1,846)
Purchase of treasury stock, 19,936
shares .............................. -- -- -- (362) -- -- (362)
--------- --- ------ ------- ------- --- -------
Balance at December 31, 2001 ............. 4,542,953 $45 31,355 (19,347) 51,575 440 64,068
========= === ====== ======= ======= === =======
(continued)
23
FFLC BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity, Continued
Years Ended December 31, 2003, 2002 and 2001
($ in thousands, except per share amounts)
Common Stock Accumulated
-------------------- Additional Other Total
Number of Paid-In Treasury Retained Comprehensive Stockholders'
Shares Amount Capital Stock Income Income Equity
------ ------ ------- ----- ------ ------ ------
Balance at December 31, 2001 ............. 4,542,953 $45 31,355 (19,347) 51,575 440 64,068
-------
Comprehensive income:
Net income .......................... -- -- -- -- 8,836 -- 8,836
Change in unrealized gains on
securities available for sale, net
of income taxes of $163 ........... -- -- -- -- -- 271 271
-------
Change in unrealized loss on
derivative instrument, net of
income tax benefit of $45 ......... -- -- -- -- -- (75) (75)
-------
Comprehensive income ..................... 9,032
-------
Net proceeds from the issuance of
common stock, stock options
exercised ........................... 31,991 1 283 -- -- -- 284
Dividends paid ($.37 per share -
adjusted) ........................... -- -- -- -- (2,002) -- (2,002)
Purchase of treasury stock, 12,648
shares .............................. -- -- -- (320) -- -- (320)
--------- --- ------ ------- ------- ---- -------
Balance at December 31, 2002 ............. 4,574,944 $46 31,638 (19,667) 58,409 636 71,062
========= === ====== ======= ======= ==== =======
(continued)
24
FFLC BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity, Continued
Years Ended December 31, 2003, 2002 and 2001
($ in thousands, except per share amounts)
Common Stock Accumulated
------------------- Additional Other Total
Number of Paid-In Treasury Retained Comprehensive Stockholders'
Shares Amount Capital Stock Income Income Equity
------ ------ ------- ----- ------ ------ ------
Balance at December 31, 2002 ............... 4,574,944 $46 31,638 (19,667) 58,409 636 71,062
-------
Comprehensive income:
Net income ............................ -- -- -- -- 9,148 -- 9,148
Change in unrealized gains on
securities available for sale, net
of income tax benefit of $217 ....... -- -- -- -- -- (362) (362)
-------
Change in unrealized loss on
derivative instrument, net of
income taxes of $14 ................. -- -- -- -- -- 23 23
-------
Comprehensive income ....................... 8,809
-------
Net proceeds from the issuance of
common stock, stock options
exercised ............................. 29,989 -- 217 -- -- -- 217
Dividends paid ($.46 per share) ............ -- -- -- -- (2,486) -- (2,486)
Purchase of treasury stock, 8,379
shares ................................ -- -- -- (246) -- -- (246)
Three-for-two stock split .................. 1,792,269 18 (18) -- -- -- --
--------- --- ------- ------- ------- ---- -------
Balance at December 31, 2003 ............... 6,397,202 $64 31,837 (19,913) 65,071 297 77,356
========= === ======= ======= ======= ==== =======
See accompanying Notes to Consolidated Financial Statements.
25
FFLC BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31,
-------------------------------------
2003 2002 2001
---- ---- ----
Cash flows from operating activities:
Net income ........................................................... $ 9,148 8,836 6,289
Adjustments to reconcile net income
to net cash provided by operations:
Provision for loan losses .................................... 1,514 1,845 1,115
Depreciation and amortization ................................ 1,351 1,062 852
Deferred income tax benefit .................................. (444) (331) (251)
Net amortization of premiums and discounts on securities ..... 1,064 297 (52)
Net amortization of deferred loan fees and costs ............. 258 (142) 134
Net gain on sales of loans held for sale ..................... (1,178) (403) (43)
Loan originated for sale ..................................... (77,670) (44,207) (10,323)
Proceeds from sales of loans held for sale ................... 77,704 37,289 5,191
Decrease (increase) in accrued interest receivable ........... 332 12 (443)
Decrease (increase) in other assets .......................... 139 (514) (138)
Increase in accrued expenses and other liabilities ........... 667 1,650 2,679
--------- -------- --------
Net cash provided by operating activities ............ 12,885 5,394 5,010
--------- -------- --------
Cash flows from investing activities:
Purchase of securities available for sale ............................ (42,139) (41,433) (30,751)
Proceeds from principal repayments and maturities of securities
available for sale ............................................... 35,683 23,749 14,593
Loan disbursements ................................................... (251,919) (209,046) (188,618)
Principal repayments on loans ........................................ 216,960 163,820 121,526
Purchase of premises and equipment, net .............................. (3,430) (6,093) (3,700)
Redemption (purchase) of Federal Home Loan Bank stock ................ 800 -- (1,550)
Net proceeds from sales of foreclosed assets ......................... 1,427 1,188 470
--------- -------- --------
Net cash used in investing activities ................ (42,618) (67,815) (88,030)
--------- -------- --------
(continued)
26
FFLC BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
(In thousands)
Year Ended December 31,
----------------------------------------
2003 2002 2001
---- ---- ----
Cash flows from financing activities:
Net increase in deposits ....................................................... $ 37,531 82,930 66,243
Net (decrease) increase in Federal Home Loan Bank advances ..................... (16,000) (5,000) 31,000
Net increase in other borrowed funds ........................................... 3,483 976 6,951
Increase in junior subordinated debentures ..................................... -- 5,155 --
Issuance of common stock ....................................................... 217 284 345
Purchase of treasury stock ..................................................... (246) (320) (362)
Cash dividends paid ............................................................ (2,486) (2,002) (1,846)
-------- -------- --------
Net cash provided by financing activities .......................... 22,499 82,023 102,331
-------- -------- --------
Net (decrease) increase in cash and cash equivalents ............................... (7,234) 19,602 19,311
Cash and cash equivalents at beginning of year ..................................... 69,394 49,792 30,481
-------- -------- --------
Cash and cash equivalents at end of year ........................................... $ 62,160 69,394 49,792
======== ======== ========
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest ................................................................... $ 24,772 29,690 35,217
======== ======== ========
Income taxes ............................................................... $ 6,208 5,458 3,821
======== ======== ========
Noncash investing and financing activities:
Accumulated other comprehensive income:
Net change in unrealized gain on securities available for
sale, net of tax ................................................... $ (362) 271 359
======== ======== ========
Net change in unrealized loss on derivative investment,
net of tax ......................................................... $ 23 (75) --
======== ======== ========
Transfers from loans to foreclosed assets .................................. $ 1,951 1,679 656
======== ======== ========
Loans originated on sales of foreclosed assets ............................. $ 269 238 89
======== ======== ========
Loans funded by and sold to correspondent .................................. $ 14,383 20,541 14,926
======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
27
FFLC BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and For Each of the Three Years in the
Period Ended December 31, 2003
(1) Summary of Significant Accounting Policies
FFLC Bancorp, Inc. (the "Holding Company") was incorporated in Delaware on
September 16, 1993, and acquired First Federal Savings Bank of Lake
County (the "Bank") in connection with the Bank's conversion to stock
form on January 4, 1994. The Holding Company is a savings and loan
holding company subject to regulation by the Office of Thrift
Supervision ("OTS") which mainly transacts its business through its
subsidiary, the Bank. The Bank is a community-oriented savings
institution, chartered in 1934, which offers a variety of financial
services to individuals and businesses primarily located in Lake
County, Sumter County, Citrus County and Marion County, Florida. The
Bank's deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC") through the Savings Association Insurance Fund
("SAIF").
During 2001, First Alliance Title, LLC ("First Alliance"), a 90% owned
subsidiary of the Holding Company was formed to operate as a title
agency. First Alliance ceased operations in November 2003. During 2002,
FFLC Statutory Trust I (the "Trust") was formed for the sole purpose of
issuing $5,000,000 of trust preferred securities as more fully
described in Note 7. In 2003, the Company adopted Financial Accounting
Standards Board Interpretation No. 46, "Consolidation of Variable
Interest Entities" as revised in December 2003. In accordance with
Interpretation No. 46, the Trust is not consolidated in the financial
statements of the Company, but rather accounted for under the equity
method of accounting. The Company has elected to apply Interpretation
No. 46 on a retroactive basis and therefore has restated its 2002
consolidated financial statements. The effect to the 2002 consolidated
balance sheet was to record junior subordinated debentures of
$5,155,000, eliminate the guaranteed beneficial interest in junior
subordinated debentures of $5,000,000 and record the Company's
investment in the Trust of $155,000 in other assets. Interpretation No.
46 had no effect on the 2002 consolidated statement of income.
Principles of Consolidation. The consolidated financial statements include
the accounts of the Holding Company and its two subsidiaries, the Bank
and First Alliance and the Bank's wholly-owned subsidiary, Lake County
Service Corporation (the "Service Corporation") (all together, the
"Company"). All significant intercompany transactions and balances have
been eliminated in consolidation.
General. The accounting and reporting policies of the Company conform to
accounting principles generally accepted in the United States of
America and to general practices within the banking industry. The
following summarizes the significant accounting policies of the
Company:
Use of Estimates. In preparing consolidated financial statements in
conformity with accounting principles generally accepted in the United
States of America, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities
as of the date of the balance sheet and reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to the
determination of the allowance for loan losses and foreclosed assets.
Cash and Cash Equivalents. For purposes of the consolidated statements of
cash flows, cash and cash equivalents include cash and balances due
from banks and interest-earning deposits.
The Bank is required to maintain certain cash reserve balances pursuant
to regulations of the Federal Reserve Board. These balances must be
maintained in the form of vault cash or noninterest-earning deposits at
other banks. The reserve balances at December 31, 2003 and 2002 were
approximately $9.0 million and $8.7 million, respectively.
28
Securities. The Company may classify its securities as either trading,
held to maturity or available for sale. Trading securities are held
principally for resale and recorded at their fair values. Unrealized
gains and losses on trading securities are included immediately in
earnings. Held-to-maturity securities are those which the Company has
the positive intent and ability to hold to maturity and are reported at
amortized cost. Available-for-sale securities consist of securities not
classified as trading securities nor as held-to-maturity securities.
Unrealized holding gains and losses, net of tax, on available-for-sale
securities are excluded from income and reported in other comprehensive
income. Gains and losses on the sale of available-for-sale securities
are recorded on the trade date and determined using the
specific-identification method. Premiums and discounts on securities
available for sale are recognized in interest income using the interest
method over the period to maturity.
Loans Held For Sale. Loans originated and held for sale by the Company are
carried at the lower of cost or fair value using the specific
identification method. At December 31, 2003 and 2002, the aggregate
fair value of loans held for sale exceeded the carrying value. Gains
and losses on the sales of such loans are recognized using the specific
identification method. The Company held $15.6 million and $14.4 million
of loans held for sale at December 31, 2003 and 2002, respectively,
which are included in loans on the accompanying consolidated balance
sheets.
Loans. Loans that management has the intent and the Company has the
ability to hold for the foreseeable future or until maturity or pay-off
are reported at their outstanding principal adjusted for any
charge-offs, the allowance for loan losses, and any deferred fees or
costs on originated loans.
Loan origination fees are deferred and certain direct origination costs
are capitalized. Both are recognized as an adjustment of the yield of
the related loan.
The accrual of interest on loans is discontinued at the time the loan
is ninety days delinquent unless the loan is well collateralized and in
process of collection. In all cases, loans are placed on nonaccrual or
charged-off at an earlier date if collection of principal or interest
is considered doubtful.
All interest accrued but not collected for loans that are placed on
nonaccrual or charged-off is reversed against interest income. The
interest on these loans is accounted for on the cash-basis or
cost-recovery method, until qualifying for return to accrual. Loans are
returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are
reasonably assured.
Allowance for Loan Losses. The allowance for loan losses is established as
losses are estimated to have occurred through a provision for loan
losses charged to earnings. Loan losses are charged against the
allowance when management believes the uncollectibility of a loan
balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, the
nature and volume of the loan portfolio, adverse situations that may
affect the borrower's ability to repay, estimated value of any
underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes
available.
29
A loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status, collateral
value, and the probability of collecting scheduled principal and
interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower's prior
payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan by loan
basis for commercial loans by either the present value of expected
future cash flows discounted at the loan's effective interest rate, the
loan's obtainable market price, or the fair value of the collateral if
the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Company does not separately
identify individual consumer and residential loans for impairment
disclosures.
Foreclosed Assets. Assets acquired through, or in lieu of, loan
foreclosure are held for sale and are initially recorded at the lower
of fair value or the loan balance at the date of foreclosure.
Subsequent to foreclosure, valuations are periodically performed by
management and the assets are carried at the lower of carrying amount
or fair value less cost to sell. Revenues and expenses from operations
and changes in the valuation allowance are included in earnings.
Premises and Equipment. Land is carried at cost. The Company's premises,
furniture and equipment and leasehold improvements are carried at cost,
less accumulated depreciation and amortization computed principally
using the straight-line method.
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.
Income Taxes. Deferred income tax assets and liabilities are recorded to
reflect the tax consequences on future years of temporary differences
between revenues and expenses reported for financial statement and
those reported for income tax purposes. Deferred tax assets and
liabilities are measured using the enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be realized or settled. Valuation allowances are provided
against assets which are not likely to be realized.
30
Stock Compensation Plans. Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, as amended by
SFAS No. 148, Accounting for Stock-Based Compensation Transition and
Disclosure (collectively, "SFAS 123") 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 (APB No. 25), 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. The Company accounts for its stock option plans under the
recognition and measurement principles of APB No. 25. No stock-based
employee compensation cost is reflected in net income as all options
granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and income per
share if the Company had applied the fair value recognition provisions
of SFAS 123 to stock-based employee compensation ($ in thousands,
except per share data).
Years Ended December 31,
--------------------------------
2003 2002 2001
---- ---- ----
Net income, as reported ............................................... $ 9,148 8,836 6,289
Deduct: Total stock-based employee compensation
determined under the fair value based method for all
awards, net of related tax effect ................................. (59) (7) (39)
-------- -------- --------
Proforma net income ................................................... $ 9,089 8,829 6,250
======== ======== ========
Basic income per share, as reported ................................... $ 1.70 1.65 1.18
======== ======== ========
Proforma basic income per share ....................................... $ 1.69 1.65 1.17
======== ======== ========
Diluted income per share, as reported ................................. $ 1.67 1.61 1.15
======== ======== ========
Proforma diluted income per share ..................................... $ 1.67 1.61 1.15
======== ======== ========
In order to calculate the fair value of the options granted using the
Black-Scholes model, it was assumed that the risk-free interest rate
for 2003 was 4.73%, the annualized dividend yield was 2.0%, the
expected life of the options would be the entire exercise period and
stock volatility was 37%. For purposes of pro forma disclosures, the
estimated fair value is included in expense during the vesting period.
Years Ended December 31,
--------------------------
2003 2002 2001
---- ---- ----
Grant-date fair value per option of options issued during the year .... $11.44 N/A N/A
====== === ===
Derivative Financial Instruments. The Company has one derivative
instrument which is used to hedge its interest rate exposure by
modifying the characteristics of the related balance sheet instrument.
This derivative instrument qualifies as a cash flow hedge under the
provisions of Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). Changes in the fair value of a derivative that is highly
effective, and that is designated and qualifies as a cash flow hedge,
are recorded in other comprehensive income, net of tax.
31
Off-Balance-Sheet Instruments. In the ordinary course of business, the
Company has entered into off-balance-sheet instruments consisting of
commitments to extend credit, unused lines of credit, undisbursed loans
in process and standby letters of credit. Such financial instruments
are recorded in the financial statements when they are funded.
Fair Values of Financial Instruments. The fair value of a financial
instrument is the current amount that would be exchanged between
willing parties, other than in a forced liquidation. Fair value is best
determined based upon quoted market prices. However, in many instances,
there are no quoted market prices for the Company's various financial
instruments. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of
future cash flows. Accordingly, the fair value estimates may not be
realized in an immediate settlement of the instrument or may not
necessarily represent the underlying fair value of the instrument to
the Company. The following methods and assumptions were used by the
Company in estimating fair values of financial instruments:
Cash and Cash Equivalents. The carrying amounts of cash and cash
equivalents approximate their fair value.
Securities. Fair values for securities available for sale are based
on quoted market prices, where available. If quoted market prices
are not available, fair values are based on quoted market prices of
comparable instruments.
Federal Home Loan Bank Stock. Fair value of the Company's investment
in Federal Home Loan Bank stock is based on its redemption value,
which is its cost of $100 per share.
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 fixed-rate loans are estimated using
discounted cash flow analyses, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality.
Deposit Liabilities. The fair values disclosed for demand, NOW,
money market and savings deposits are, by definition, equal to the
amount payable on demand at the reporting date (that is, their
carrying amounts). Fair values for fixed-rate certificates of
deposit are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities of certificates
of deposit.
Borrowed Funds. The carrying amounts of borrowings under repurchase
agreements approximate their fair values. Fair values of Federal
Home Loan Bank advances and junior subordinated debentures are
estimated using discounted cash flow analysis based on the Company's
current incremental borrowing rates for similar types of borrowing
arrangements.
Derivative Instruments. Fair value for the derivative instrument
(interest-rate swap) is based on current settlement value.
Accrued Interest. The carrying amounts of accrued interest
approximate their fair values.
Off-Balance-Sheet Instruments. Fair values for off-balance-sheet
lending commitments are based on fees currently charged to enter
into similar agreements, taking into account the remaining terms of
the agreements and the counterparties' credit standing.
32
Income Per Share of Common Stock. The Company follows the provisions of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No.
128). SFAS No. 128 provides accounting and reporting standards for
calculating income per share. Basic income per share of common stock
has been computed by dividing the net income for the year by the
weighted-average number of shares outstanding. Shares of common stock
purchased by the Retention and Recognition Plan ("RRP") (see Note 17)
are only considered outstanding when the shares are released or
committed to be released for allocation to participants. As of December
31, 2001, 2002 and 2003, 4,102, 4,102 and 3,020 shares remain
uncommitted under the RRP plan, respectively, and are not considered
outstanding for purposes of the computation of net income per share of
common stock. Diluted income per share is computed by dividing net
income by the weighted-average number of shares outstanding including
the dilutive effect of stock options (see Note 17) computed using the
treasury stock method. All per share amounts reflect the three-for-two
stock split declared on February 14, 2003. The following table presents
the calculation of basic and dilutive income per share of common stock:
Year Ended December 31,
----------------------------------------
2003 2002 2001
---- ---- ----
Weighted-average shares of common stock issued
and outstanding before adjustments for RRP
and common stock options .................................. 5,389,219 5,364,600 5,325,748
Adjustment to reflect the effect of unallocated
RRP average shares ........................................ (4,020) (4,102) (4,102)
---------- ---------- ----------
Weighted-average shares for basic income per share ............ 5,385,199 5,360,498 5,321,646
========== ========== ==========
Basic income per share ........................................ $ 1.70 1.65 1.18
========== ========== ==========
Total weighted-average common shares and equivalents
outstanding for basic income per share
computation ............................................... 5,385,199 5,360,498 5,321,646
Additional dilutive shares using the average market value
for the period utilizing the treasury stock method
regarding stock options ................................... 71,697 106,382 122,502
---------- ---------- ----------
Weighted-average common shares and equivalents
outstanding for diluted income per share .................. 5,456,896 5,466,880 5,444,148
========== ========== ==========
Diluted income per share ...................................... $ 1.67 1.61 1.15
========== ========== ==========
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 balance
sheet, such items, along with net income, are components of
comprehensive income. The components of other comprehensive income were
unrealized holding gains and losses on securities available for sale
and an unrealized loss on a derivative instrument.
33
Other 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
effect on the consolidated financial statements of the Company.
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.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." This Statement
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging
activities under FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement is effective for
contracts entered into or modified after June 30, 2003. The adoption of
this Statement had no effect on the Company's consolidated financial
statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. This Statement is
effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of this
Statement had no effect on the Company's consolidated financial
statements.
Reclassifications. Certain immaterial amounts in the 2001 and 2002
consolidated financial statements have been reclassified to conform to
the presentation for 2003.
34
(2) Securities
All securities have been classified as available for sale by management.
The carrying amounts of securities available for sale and their
approximate fair values were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
(In thousands)
Securities available for sale:
At December 31, 2003:
Mutual funds .................................... $ 9,146 -- (130) 9,016
U.S. Government and agency securities ........... 36,298 342 (1) 36,639
Mortgage-backed securities ...................... 28,229 317 (7) 28,539
Other investment securities ..................... 7,904 39 -- 7,943
------- ------- ------- -------
Total ....................................... $81,577 698 (138) 82,137
======= ======= ======= =======
At December 31, 2002:
Mutual funds .................................... 9,433 -- (59) 9,374
U.S. Government and agency securities ........... 36,801 853 (5) 37,649
Mortgage-backed securities ...................... 21,961 335 -- 22,296
Other investment securities ..................... 7,990 22 (7) 8,005
------- ------- ------- -------
Total ....................................... $76,185 1,210 (71) 77,324
======= ======= ======= =======
The scheduled maturities of securities available for sale at December 31,
2003 were as follows:
Amortized Fair
Cost Value
--------- -------
(In thousands)
Due in less than one year ........................................ $16,067 16,276
Due from one year to five years .................................. 20,231 20,363
Due after ten years .............................................. 7,904 7,943
Mortgage-backed securities ....................................... 28,229 28,539
Mutual funds ..................................................... 9,146 9,016
------- -------
Total ........................................................ $81,577 82,137
======= =======
Securities with a carrying value of approximately $13.5 million and $16.4
million at December 31, 2003 and 2002, respectively, were pledged to
secure public funds and tax deposits. The Company has also pledged
securities with a carrying value of $22.5 million and $18.7 million for
borrowings under retail repurchase agreements with customers at
December 31, 2003 and 2002, respectively (See Note 6).
There were no sales of securities during the years ended December 31,
2003, 2002 or 2001.
35
(3) Loans
The components of loans were as follows:
At December 31,
----------------------
2003 2002
---- ----
(In thousands)
First mortgage loans secured by:
One-to-four-family residential *........................................... $ 384,514 395,116
Construction and land...................................................... 43,575 30,792
Multi-family units......................................................... 12,453 22,796
Commercial real estate, churches and other................................. 167,381 140,770
Consumer loans................................................................. 155,438 138,202
Commercial loans............................................................... 33,990 28,879
--------- -------
Subtotal (1)........................................................... 797,351 756,555
Undisbursed portion of loans in process........................................ (24,573) (16,770)
Net deferred loan costs........................................................ 699 734
Allowance for loan losses (2).................................................. (5,490) (5,181)
--------- -------
Loans, net............................................................. $ 767,987 735,338
========= =======
* Includes $15.6 million and $14.4 million of loans held for sale at
December 31, 2003 and 2002, respectively.
(1) Total loans outstanding by department consists of the following (in
thousands):
At December 31,
-----------------------------------------------
2003 2002
---------------------- -------------------
% of % of
Amount Total Amount Total
------ ----- ------ -----
Residential......................................... $ 372,551 46.72% $ 385,711 50.98%
Commercial.......................................... 265,655 33.32 229,930 30.39
Consumer............................................ 159,145 19.96 140,914 18.63
--------- ------ --------- ------
$ 797,351 100.00% $ 756,555 100.00%
========= ====== ========= ======
36
(2) Total allowance for loan losses by department consists of the following
(in thousands):
At December 31,
--------------------------------------------------
2003 2002
-------------------- --------------------
% to % to
Gross Gross
Amount Loans Amount Loans
------ ----- ------ -----
Residential .......................................... $ 911 .24% $1,175 .30%
Commercial ........................................... 3,371 1.27 2,949 1.28
Consumer ............................................. 1,208 .76 1,057 .75
------ ---- ------ ----
$5,490 .69% $5,181 .68%
====== ==== ====== ====
Total gross loans originated by department, including unfunded
construction and line of credit loans, consist of the following (in
thousands):
Year Ended
December 31,
--------------------
2003 2002
---- ----
Residential ............................................ $191,048 148,271
Commercial ............................................. 118,633 95,160
Consumer ............................................... 96,829 80,297
-------- --------
$406,510 323,728
======== ========
An analysis of the change in the allowance for loan losses follows:
Year Ended December 31,
---------------------------------
2003 2002 2001
---- ---- ----
(In thousands)
Balance at January 1 .............................. $ 5,181 4,289 3,552
Provision for loan losses ......................... 1,514 1,845 1,115
Net loans charged-off ............................. (1,205) (953) (378)
------- ------- -------
Balance at December 31 ............................ $ 5,490 5,181 4,289
======= ======= =======
The following summarizes the amount of impaired loans at December 31, 2003
and 2002, all of which are collateral dependent:
At December 31,
-------------------
2003 2002
---- ----
(In thousands)
Loans identified as impaired:
Gross loans with no related allowance for losses ......................... $ 2,971 --
Gross loans with related allowance for losses recorded ................... 400 400
Less: Allowances on these loans .......................................... (50) (50)
------- -------
Net investment in impaired loans ............................................. $ 3,321 350
======= =======
37
The average net investment in impaired loans and interest income
recognized and received on impaired loans during the years ended
December 31, 2003, 2002 and 2001 was as follows:
Year Ended December 31,
-------------------------------
2003 2002 2001
(In thousands)
Average net investment in impaired loans ................... $1,920 184 581
====== ====== ======
Interest income recognized on impaired loans ............... $ 143 35 81
====== ====== ======
Interest income received on impaired loans ................. $ 143 35 81
====== ====== ======
The increase in impaired loans during 2003 mainly resulted from two loans
to an agricultural borrower being identified as impaired and placed on
nonaccrual status. Management estimates that equity in the related
collateral is sufficient and no loss is anticipated on these two loans.
The Company originates or purchases nonresidential real property loans.
These loans are considered by management to be of somewhat greater risk
of uncollectibility due to the dependency on income production or
future development of the real estate. Nearly all of the Company's real
property loans were collateralized by real property in Lake, Sumter,
Citrus and Marion Counties, Florida.
Nonaccrual loans at December 31, 2003 and 2002 totaled $5.3 million and
$2.6 million, respectively. There were no loans past due ninety days or
more and still accruing interest income at December 31, 2003 or 2002.
For the years ended December 31, 2003, 2002 and 2001, interest income
on loans would have been increased approximately $83,000, $106,000 and
$116,000, respectively, if the interest on nonaccrual loans had been
recorded under the original terms of such loans.
(4) Premises and Equipment
Components of premises and equipment were as follows:
At December 31,
---------------------
2003 2002
---- ----
(In thousands)
Cost:
Land ............................................................. $ 5,794 4,924
Building and leasehold improvements .............................. 18,292 15,553
Furniture and equipment .......................................... 4,045 3,539
Construction in progress ......................................... 131 816
-------- --------
Total cost ................................................... 28,262 24,832
Less accumulated depreciation and amortization ....................... (6,814) (5,463)
-------- --------
Net book value ................................................... $ 21,448 19,369
======== ========
38
Certain Company facilities are leased under operating leases. Rental
expense was approximately $63,000, $70,000 and $118,000 in 2003, 2002
and 2001, respectively. At December 31, 2003, future minimum rental
commitments under noncancellable leases were as follows (in thousands):
Year Ending
December 31, Amount
------------ ------
2004....................................... $ 66
2005....................................... 69
2006....................................... 72
2007....................................... 75
2008....................................... 78
Thereafter................................. 81
-----
$ 441
=====
(5) Deposits
The aggregate amount of short-term jumbo time deposits, each with a
minimum denomination of $100,000, was approximately $147.4 million and
$140.6 million at December 31, 2003 and 2002, respectively.
At December 31, 2003, the scheduled maturities of time deposits were as
follows (in thousands):
Year Ending
2004....................................... $ 281,603
2005....................................... 95,183
2006....................................... 37,900
2007....................................... 58,359
2008....................................... 12,900
---------
$ 485,945
=========
39
(6) Advances from Federal Home Loan Bank and Other Borrowings
As of December 31, 2003, the Bank had $133.0 million in Federal Home Loan
Bank of Atlanta ("FHLB") advances outstanding. These advances had a
weighted-average interest rate of 5.40% and interest rates and
maturities as follows ($ in thousands):
At December 31,
Interest ---------------
Year Ending December 31, Rate 2003 2002
------------------------ -------- ---- ----
2003 ........................................ 4.90% $ -- 10,000
2003 ........................................ 4.91% -- 6,000
2003 ........................................ 4.53% -- 5,000
2003 ........................................ 3.77% -- 5,000
2003 ........................................ 1.86%(A) -- 5,000
2004 ........................................ 6.05% 10,000 10,000
2004 ........................................ 3.76% 10,000 10,000
2004 ........................................ 3.39% 5,000 5,000
2005 ........................................ 6.39%(B) 20,000 20,000
2005 ........................................ 6.60% 13,500 13,500
2005 ........................................ 6.68%(B) 12,500 12,500
2005 ........................................ 6.31%(B) 7,000 7,000
2005 ........................................ 6.04% 10,000 10,000
2005 ........................................ 6.00% 6,000 6,000
2006 ........................................ 1.23%(A) 5,000 5,000
2008 ........................................ 2.98%(B) 15,000 --
2009 ........................................ 6.39%(B) 14,000 14,000
2011 ........................................ 4.44%(B) 5,000 5,000
-------- --------
Total .................................. $133,000 149,000
======== ========
(A) Adjustable Rate, this is rate at year-end.
(B) The FHLB has the option to convert to an adjustable rate in future
years, at which time the Company has the option to prepay the
advance without penalty.
The security agreement with FHLB includes a blanket floating lien
requiring the Bank to maintain first mortgage loans as pledged
collateral in an amount equal to at least, when discounted at 75% of
the unpaid principal balances, 100% of these advances. The FHLB stock
is also pledged as collateral for these advances. At December 31, 2003,
the Bank could borrow up to $116.9 million under the FHLB security
agreement.
The Bank has an $8.0 million line of credit facility with one of its
correspondent banks under which the Bank may draw funds for daily
liquidity. Borrowings under this line of credit must be repaid within
five days. The line of credit bears a floating interest rate equal to
the average federal funds rate and expires on June 30, 2004. As of
December 31, 2003, the Bank has not used this line of credit.
Other borrowed funds were composed of retail repurchase agreements with
customers. The Company enters into retail repurchase agreements with
customers in which the funds received are accounted for as borrowings
to the Company. The total amount outstanding under these agreements at
December 31, 2003 and 2002 were $17.8 million and $14.3 million,
respectively. The Company pledged securities with a carrying value of
$22.5 million and $18.7 million, respectively as collateral for these
agreements at December 31, 2003 and 2002.
40
(7) Junior Subordinated Debentures
On September 26, 2002, the Trust sold adjustable-rate Trust Preferred
Securities due September 26, 2032 in the aggregate principal amount of
$5,000,000 (the "Capital Securities") in a pooled trust preferred
securities offering. The interest rate on the Capital Securities
adjusts quarterly, to a rate equal to the then current three-month
London Interchange Bank Offering Rate ("LIBOR"), plus 340 basis points.
In addition, the Holding Company contributed capital of $155,000 to the
Trust for the purchase of the common securities of the Trust. The
proceeds from these sales were paid to the Holding Company in exchange
for $5,155,000 of its adjustable-rate Junior Subordinated Debentures
(the "Debentures") due September 26, 2032. The Debentures have the same
terms as the Capital Securities. The Holding Company then invested
$3,000,000 as a capital contribution in the Bank. The sole asset of the
Trust, the obligor on the Capital Securities, is the Debentures.
The Holding Company has guaranteed the Trust's payment of distributions
on, payments on any redemptions of, and any liquidation distribution
with respect to, the Capital Securities. Cash distributions on both the
Capital Securities and the Debentures are payable quarterly in arrears
on March 26, June 26, September 26 and December 26 of each year.
The Capital Securities are subject to mandatory redemption (i) in whole,
but not in part, upon repayment of the Debentures at stated maturity
or, at the option of the Holding Company, their earlier redemption in
whole upon the occurrence of certain changes in the tax treatment or
capital treatment of the Capital Securities, or a change in the law
such that the Trust would be considered an Investment Company and (ii)
in whole or in part at any time on or after September 26, 2007
contemporaneously with the optional redemption by the Holding Company
of the Debentures in whole or in part. The Debentures are redeemable
prior to maturity at the option of the Holding Company (i) on or after
September 26, 2007, in whole at any time or in part from time to time,
or (ii) in whole, but not in part, at any time within 90 days following
the occurrence and continuation of certain changes in the tax treatment
or capital treatment of the Capital Securities, or a change in law such
that the Trust would be considered an Investment Company, required to
be registered under the Investment Company Act of 1940.
The Company has entered into a five year interest rate swap agreement that
effectively converted the floating interest rate of these junior
subordinated debentures into a fixed interest rate of 6.85%, thus
reducing the impact of interest rate changes on future interest expense
for the five year period. In accordance with SFAS 133, this interest
rate swap qualifies as a cash flow hedge. The fair value of this
interest rate swap is recorded as an asset or liability on the
consolidated balance sheet with an offsetting entry recorded in other
comprehensive income, net of the income tax effect. At December 31,
2003 and 2002, the unrealized loss on the derivative instrument was
$83,000 ($52,000 net of tax) and $120,000 ($75,000 net of tax),
respectively.
(8) Income Taxes
The Holding Company files consolidated Federal and state income tax
returns with the Bank and the Service Corporation. Income taxes are
allocated proportionally to the Holding Company and each of the
subsidiaries as though separate income tax returns were filed. First
Alliance and the Trust file separate income tax returns.
Income taxes are summarized as follows:
Year Ended December 31,
--------------------------------
2003 2002 2001
---- ---- ----
(In thousands)
Current ............................ $ 6,024 5,608 3,948
Deferred ........................... (444) (331) (251)
------- ------- -------
$ 5,580 5,277 3,697
======= ======= =======
41
The effective tax rate on income before income taxes differs from the U.S.
statutory rate of 35% for 2003 and 2002 and 34% for 2001. The following
summary reconciles taxes at the U.S. statutory rate with the effective
rates:
Year Ended December 31,
-----------------------------------------------------------------
2003 2002 2001
----------------- ----------------- -----------------
Amount % Amount % Amount %
------- ---- ------- ---- ------- ----
($ in thousands)
Taxes on income at U.S.
statutory rate ................. $ 5,155 35.0% $ 4,940 35.0% $ 3,395 34.0%
State income taxes, net of
federal tax benefit ............ 527 3.6 477 3.4 341 3.4
Graduated tax rates ................ (100) (.7) (100) (.7) -- --
Other, net ......................... (2) -- (40) (.3) (39) (.4)
------- ---- ------- ---- ------- ----
Taxes on income at
effective rates ................ $ 5,580 37.9% $ 5,277 37.4% $ 3,697 37.0%
======= ==== ======= ==== ======= ====
Temporary differences between the financial statement carrying amounts and
tax bases of assets and liabilities that gave rise to significant
portions of the deferred tax asset relate to the following:
At December 31,
-------------------------
2003 2002
---- ----
(In thousands)
Deferred tax assets:
Allowance for loan losses ........................................ $ 2,100 1,825
Accrued interest ................................................. 55 27
RRP incentive plan ............................................... 61 68
Unrealized loss on derivative instrument ......................... 31 45
------- -------
Gross deferred tax assets ............................................ 2,247 1,965
------- -------
Deferred tax liabilities:
FHLB stock dividends ............................................. (286) (332)
Building and land ................................................ (342) (342)
Accumulated depreciation ......................................... (156) (363)
Unrealized gain on securities available for sale ................. (211) (428)
Deferred loan costs .............................................. (118) (13)
------- -------
Gross deferred tax liabilities ....................................... (1,113) (1,478)
------- -------
Net deferred tax asset ............................................... $ 1,134 487
======= =======
Retained earnings at December 31, 2003 and 2002 includes approximately
$5.8 million for which no deferred federal income tax liability has
been recognized. This amount represents an allocation of income to bad
debt deductions for tax purposes only. Reduction of amounts so
allocated for purposes other than tax bad debt losses or adjustments
arising from carryback of net operating losses would create income for
tax purposes only, which would be subject to the then current corporate
income tax rate. The unrecorded deferred income tax liability on the
above amount was approximately $2.2 million at December 31, 2003 and
2002.
42
(9) Financial Instruments
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers and to reduce its own exposure to fluctuations in
interest rates. These financial instruments are commitments to extend
credit, unused lines of credit, undisbursed loans in process and
standby letters of credit and may involve, to varying degrees, elements
of credit and interest-rate risk in excess of the amount recognized in
the consolidated balance sheet. The contract amounts of these
instruments reflect the extent of involvement the Company has in these
financial instruments.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit is represented by the contractual amount of those instruments.
The Company uses the same credit policies in making commitments as it
does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since some of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The
Company evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained if deemed necessary by the
Company upon extension of credit is based on management's credit
evaluation of the counterparty.
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.
43
The estimated fair values of the Company's financial instruments were as
follows:
At December 31, 2003 At December 31, 2002
-------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(In thousands)
Financial assets:
Cash and cash equivalents .............. $ 62,160 62,160 69,394 69,394
Securities available for sale .......... 82,137 82,137 77,324 77,324
Loans .................................. 767,987 771,028 735,338 739,329
Accrued interest receivable ............ 3,849 3,849 4,181 4,181
Federal Home Loan Bank stock ........... 6,900 6,900 7,700 7,700
Financial liabilities:
Deposit liabilities .................... 705,589 708,854 668,058 674,925
Advances from FHLB ..................... 133,000 140,331 149,000 156,891
Other borrowed funds ................... 17,786 17,786 14,303 14,303
Junior subordinated debentures ......... 5,155 5,155 5,155 5,155
Derivatives:
Interest rate swap (loss position) ..... (83) (83) (120) (120)
Commitments to extend credit typically result in loans with a market
interest rate when funded. A summary of the Company's financial
instruments with off-balance-sheet risk at December 31, 2003, follows:
Notional Carrying Fair
Amount Amount Value
(In thousands)
Commitments to extend credit................. $ 12,710 -- --
======== ======= ======
Unused lines of credit....................... $ 75,478 -- --
======== ======= ======
Undisbursed portion of loans in process ..... $ 24,573 -- --
======== ======= ======
Standby letters of credit.................... $ 3,382 -- --
======== ======= ======
(10) Significant Group Concentration of Credit Risk
The Company grants real estate, commercial and consumer loans to customers
primarily in the State of Florida with the majority of such loans in
the Lake, Sumter, Citrus and Marion County area. Therefore, the
Company's exposure to credit risk is significantly affected by changes
in the economy of the Lake, Sumter, Citrus and Marion County areas.
The contractual amounts of credit related financial instruments such as
commitments to extend credit represent the amounts of potential
accounting loss should the contract be fully drawn upon, the customer
default and the value of any existing collateral become worthless.
44
(11) Related Parties
Loans to directors and executive officers of the Company were made in the
ordinary course of business and did not involve more than normal risk
of collectibility or present other unfavorable features. Activity in
loans to directors and executive officers were as follows:
Year Ended
December 31,
---------------------
2003 2002
---- ----
(In thousands)
Beginning balance .................................... $ 8,307 6,785
Loans originated ..................................... 2,546 5,401
Principal repayments ................................. (385) (3,879)
-------- --------
Ending balance ................................... $ 10,468 8,307
======== ========
Other related party transactions which were made in the ordinary course of
business were are follows (in thousands):
Year Ended December 31,
-------------------------------
2003 2002 2001
---- ---- ----
Legal fees paid ................................ $ 137 103 56
====== ====== ======
Insurance premiums paid ........................ $ 205 282 128
====== ====== ======
Construction contracts paid .................... $1,518 1,098 --
====== ====== ======
(12) Legal Contingencies
Various legal claims also arise from time to time in the normal course of
business which, in the opinion of management, will not have a material
effect on the Company's consolidated financial statements.
(13) Restrictions on Retained Earnings
The Bank is subject to certain restrictions on the amount of dividends
that it may declare without prior regulatory approval. At December 31,
2003, approximately $28.6 million of retained earnings were available
for dividend declaration without prior regulatory approval.
(14) 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 Company's consolidated
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 judgements
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 (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined). Management believes, as of December
31, 2003, that the Bank meets all capital adequacy requirements to
which it is subject.
As of December 31, 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 tangible, tier I (core), tier I
(risk-based) and total risk-based capital ratios as set forth in the
table. There are no conditions or events since that notification that
management believes have changed the institution's category.
45
The Bank's actual capital amounts and percentages at December 31, 2003 and
2002 are also presented in the tables.
To Be Well
Minimum Capitalized
For Capital For Prompt
Adequacy Corrective Action
Actual Purposes Provisions
------------------ ------------------ -------------------
% Amount % Amount % Amount
--- --------- --- -------- --- --------
As of December 31, 2003: ($ in thousands)
Stockholders' equity, and
ratio to total assets..... 8.4% $ 79,165
Less: investment in
nonincludable
subsidiary................ (253)
Unrealized gain on
available-for-sale
securities................ (430)
---------
Tangible capital,
and ratio to adjusted
total assets.............. 8.3% $ 78,482 1.5% $ 14,217
========= ========
Tier 1 (core) capital, and
ratio to adjusted total
assets.................... 8.3% $ 78,482 3.0% $ 28,435 5.0% $ 47,391
========= ======== ========
Tier 1 capital, and ratio
to risk-weighted assets... 12.3% 78,482 4.0% $ 26,062 6.0% $ 39,094
======== ========
Less: nonincludable
investment in 80%
land loans................ --
Tier 2 capital (allowance for
loan losses).............. 5,426
---------
Total risk-based capital,
and ratio to risk-
weighted assets........... 13.2% $ 83,908 8.0% $ 50,961 10.0% $ 63,702
========= ======== ========
Total assets.................. $ 948,503
=========
Adjusted total assets......... $ 947,820
=========
Risk-weighted assets.......... $ 637,018
=========
46
To Be Well
Minimum Capitalized
For Capital For Prompt
Adequacy Corrective Action
Actual Purposes Provisions
------------------- ----------------- -----------------
% Amount % Amount % Amount
---- ---------- --- -------- --- --------
As of December 31, 2002: ($ in thousands)
Stockholders' equity, and
ratio to total assets..... 7.9% $ 72,404
Less: investment in
nonincludable
subsidiary................ (518)
Unrealized gain on
available-for-sale
securities................ (747)
----------
Tangible capital,
and ratio to adjusted
total assets.............. 7.8% $ 71,139 1.5% $ 13,719
========== ========
Tier 1 (core) capital, and
ratio to adjusted total
assets.................... 7.8% $ 71,139 3.0% $ 27,439 5.0% $ 45,731
========== ======== ========
Tier 1 capital, and ratio
to risk-weighted assets... 11.9% 71,139 4.0% $ 23,897 6.0% $ 35,846
======== ========
Less: nonincludable
investment in 80%
land loans................ (499)
Tier 2 capital (allowance for
loan losses).............. 5,005
----------
Total risk-based capital,
and ratio to risk-
weighted assets........... 12.7% $ 75,645 8.0% $ 47,794 10.0% $ 59,743
========== ======== ========
Total assets.................. $ 915,881
==========
Adjusted total assets......... $ 914,624
==========
Risk-weighted assets.......... $ 597,427
==========
47
(15) Conversion to Stock Savings Bank
The Bank successfully completed a conversion from a federally chartered
mutual savings association to a federally chartered stock savings bank
on January 4, 1994 pursuant to the Plan of Conversion. The Plan of
Conversion provided for the establishment of a Liquidation Account
equal to the retained income of the Bank as of September 30, 1993 (the
date of the most recent financial statement presented in the final
conversion prospectus). The Liquidation Account is established to
provide a limited priority claim to the assets of the Bank to
qualifying depositors as of September 30, 1992 (Eligible Account
Holders) who continue to maintain deposits in the Bank after
conversion. In the unlikely event of a complete liquidation of the
Bank, and only in such event, each Eligible Account Holder would
receive from the Liquidation Account a liquidation distribution based
on their proportionate share of the then total remaining qualifying
deposits.
Current regulations allow the Bank to pay dividends on its stock after the
conversion if its regulatory capital would not thereby be reduced below
the amount then required for the aforementioned Liquidation Account.
Also, capital distribution regulations limit the Bank's ability to make
capital distributions which include dividends, stock redemptions and
repurchases, cash-out mergers, interest payments on certain convertible
debt and other transactions charged to the capital account based on
their capital level and supervisory condition.
(16) 401(k) Plan
The Company has a single-employer 401(k) plan ("KSOP"). Under the KSOP,
participation is open to all employees the month after hire date (for
purposes of employer contributions, one year of service is required),
and participants have twelve investment options, plus a Company stock
fund. The Company makes a contribution of at least 3% of compensation
(for all participants who have met the one-year of service
requirement), which vests immediately. In addition, the Company will
make a discretionary matching contribution (for all participants who
have met the one-year of service requirement), which will vest after
five years of service. For 2003, 2002 and 2001, the Board approved a
matching contribution equal to 100% of employees' deferrals up to 3% of
compensation. The Company also makes quarterly profit sharing
contributions (more fully discussed below) in connection with the KSOP.
Total contribution expense recognized by the Company under the KSOP
during the years ended December 31, 2003, 2002 and 2001 were $765,000,
$642,000 and $513,000, respectively. The amounts of employee and
employer contributions under the KSOP, 401(k) and the ESOP are subject
to IRS limitations.
The Company makes quarterly profit-sharing contributions to the KSOP in
amounts approved by the Board, and those contributions are allocated to
the accounts of participating employees on a quarterly basis. Company
profit-sharing contributions vest after five years of service. For
2003, 2002 and 2001, the Board approved profit-sharing contributions
equal to four percent (4%) of the Bank's operating net income, which
were made after each quarter based on the actual results of the
preceding quarter. During the years ended December 31, 2003, 2002 and
2001, the Company made profit sharing contributions totaling $365,000,
$312,000 and $231,000, respectively, to the KSOP. The Plan allows the
Company to fund such KSOP contributions by either issuing shares, or
purchasing the required number of shares on the open market. As these
shares are allocated on a quarterly basis, the Company records
compensation expense, and either an offsetting credit to capital (in
the event that new shares are issued) or to cash (in the event that
shares are purchased on the open market), equal to the current market
price of the shares. The shares become outstanding for income per share
computations when allocated.
48
(17) Stock Benefit Plans
Stock Option Plan. During 2002, the Company adopted a new stock option
plan (the "2002 Plan") which authorizes the Company to issue up to
375,000 shares (adjusted) in connection with options granted to
directors, officers or employees of the Company. The terms and vesting
periods will be determined as each option is granted, but the option
price can not be less than the then current market value of the common
stock at the grant date. No options have been granted under the 2002
Plan.
The Company also has a 1993 stock option plan (the "1993 Plan") under
which 477,161 (adjusted) common shares were authorized to be issued in
connection with options granted to directors, officers and employees of
the Company. Options granted under the 1993 Plan are exercisable at the
market price of the common stock at the date of grant. Such incentive
stock options granted to officers and employees are exercisable in
three equal annual installments, with the first installment becoming
exercisable one year from the date of grant. Options granted to outside
directors are exercisable immediately, but any common shares obtained
from exercise of the options may not be sold prior to one year from the
date of grant. All options expire at the earlier of ten years for
officers and employees or twenty years for directors from the date of
grant or one year following the date which the outside director,
officer or employee ceases to serve in such capacity. During 2003, all
remaining available options under the 1993 were granted.
The following is a summary of option transactions (all options and
exercise price information has been adjusted to reflect the
three-for-two stock split in 2003): Weighted-
Range of Average
Number Exercise Exercise
of Options Prices Price
---------- ------ -----
Outstanding, December 31, 2000 ....................... 277,272 $ 4.00-14.17 5.66
Exercised ............................................ (76,960) 4.00-8.37 4.51
--------
Outstanding, December 31, 2001 ....................... 200,312 4.00-14.17 6.01
Exercised ............................................ (47,985) 4.00-10.83 4.69
--------
Outstanding, December 31, 2002 ....................... 152,327 4.00-14.17 6.61
Granted .............................................. 50,571 26.74 26.74
Exercised ............................................ (32,102) 4.00-14.17 5.56
--------
Outstanding, December 31, 2003 ....................... 170,796 $ 4.00-26.74 $ 12.61
======== ============ =======
The weighted-average remaining contractual life of the outstanding
stock options at December 31, 2003, 2002 and 2001 was 9.7, 8.3 and 7.7
years, respectively.
49
The Company's outstanding stock options at December 31, 2003 are
exercisable as follows:
Weighted-
Average
During the Year Ended Number of Exercise
December 31, Options Price
--------- ---------
Currently exercisable.......... 127,778 $ 6.50
2004........................... 14,339 26.74
2005........................... 14,339 26.74
2006........................... 14,340 26.74
-------
170,796 $ 12.61
======= =======
Recognition and Retention Plan. The Company also has a Recognition and
Retention Plan (the "RRP") under which 185,489 shares (adjusted) of the
Company's common stock were reserved for grants to directors, officers
and employees. The shares are granted in the form of restricted stock
to be earned in three equal annual installments. If a holder of
restricted stock under the RRP terminated employment for reasons other
than death, disability, retirement or change of control in the Company,
such employee forfeited all rights to any allocated shares which are
still restricted. If termination is caused by death, disability,
retirement or change in control of the Company, all allocated shares
become unrestricted. Forfeitures are reallocated to eligible
participants annually. At December 31, 2003, 3,020 (adjusted) shares
remain reserved for future directors.
(18) Stock Repurchase Program
The Company has a stock repurchase program which allows the Company to
acquire shares of the Company's common stock in the open market. The
Company's Board of Directors approves the maximum amount of shares that
can be acquired. During the years ended December 31, 2003, 2002 and
2001, the Company repurchased 8,379, 12,648 and 19,936 shares,
respectively under this program. At December 31, 2003, the Company
currently holds 1,000,048 shares as treasury stock and can still
repurchase an additional 232,673 under this program.
(19) Dividend Reinvestment Plan
The Company has a Dividend Reinvestment Plan (the "DRP"). The DRP provides
stockholders of record of at least 50 shares with a convenient and
economical way to automatically reinvest all or a portion of their cash
dividends and to invest optional cash payments, subject to minimum and
maximum purchase limitations, in additional shares of common stock.
Stockholders pay no service charges or brokerage commissions for common
stock purchased under the DRP. During the years ended December 31,
2003, 2002 and 2001, 10,288, 8,772 and 19,341 shares of common stock,
respectively, were purchased under the DRP, all of which were purchased
in the open market.
(20) Stock Split
On February 14, 2003, the Board of Directors declared a three-for-two
stock split on all outstanding common shares for shareholders of record
on February 28, 2003, which were distributed on March 14, 2003.
Stockholders received cash in lieu of fractional shares resulting from
the split based on the closing price on the record date.
50
(21) Parent Company Only Financial Statements
Condensed financial statements of the Holding Company are presented below.
Amounts shown as cash, investment in subsidiaries, loans to
subsidiaries and equity in earnings of subsidiaries are eliminated in
consolidation.
Condensed Balance Sheets
At December 31,
--------------------
2003 2002
---- ----
(In thousands)
Assets
Cash, deposited with subsidiary .......................................... $ 1,491 1,720
Investment in subsidiaries ............................................... 79,224 72,421
Loans to subsidiaries .................................................... 1,550 1,850
Other assets ............................................................. 352 372
------- -------
Total assets ..................................................... $82,617 76,363
======= =======
Liabilities and Stockholders' Equity
Junior subordinated debentures ........................................... 5,155 5,155
Other liabilities ........................................................ 106 146
Stockholders' equity ..................................................... 77,356 71,062
------- -------
Total liabilities and stockholders' equity ....................... $82,617 76,363
======= =======
Condensed Statements of Income
Year Ended December 31,
-----------------------------------
2003 2002 2001
---- ---- ----
(In thousands)
Revenues ................................................... $ 34 60 130
Expenses ................................................... (410) (205) (160)
------- ------- -------
Loss before earnings of subsidiaries ............... (376) (145) (30)
Earnings of subsidiaries ........................... 9,524 8,981 6,319
------- ------- -------
Net income ......................................... $ 9,148 8,836 6,289
======= ======= =======
51
Condensed Statements of Cash Flows
Year Ended December 31,
-------------------------------------
2003 2002 2001
---- ---- ----
(In thousands)
Cash flows from operating activities:
Net income ........................................................................ $ 9,148 8,836 6,289
Adjustments to reconcile net income to net cash used in
operating activities:
Equity in earnings of subsidiaries ............................................ (9,524) (8,981) (6,319)
Net (increase) decrease in other, net ......................................... (38) (376) 4
------- ------- -------
Net cash used in operating activities ..................................... (414) (521) (26)
------- ------- -------
Cash flows from investing activities:
Investment in subsidiaries .................................................... -- (3,000) (5)
Cash dividends received from subsidiaries ..................................... 2,400 -- 2,700
Repayment of loans to subsidiaries ............................................ 300 650 --
------- ------- -------
Net cash provided by (used in) investing activities ....................... 2,700 (2,350) 2,695
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of junior subordinated debentures ...................... -- 5,155 --
Purchase of treasury stock .................................................... (246) (320) (362)
Proceeds from issuance of stock ............................................... 217 284 345
Cash dividends paid ........................................................... (2,486) (2,002) (1,846)
------- ------- -------
Net cash (used in) provided by financing activities ....................... (2,515) 3,117 (1,863)
------- ------- -------
Net (decrease) increase in cash ....................................................... (229) 246 806
Cash at beginning of year ............................................................. 1,720 1,474 668
------- ------- -------
Cash at end of year ................................................................... $ 1,491 1,720 1,474
======= ======= =======
Noncash investing and financing activities- Accumulated other comprehensive
income:
Net change in investment in subsidiaries due to net change in unrealized
gain on securities available for sale, net of tax ......................... $ (362) 271 359
======= ======= =======
Net change in unrealized loss on derivative investment, net of tax ............ $ 23 (75) --
======= ======= =======
52
(22) Quarterly Financial Data (Unaudited)
The following tables present summarized quarterly data (in thousands,
except per share amounts):
Year Ended December 31, 2003
--------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------- -------- -------- -------- --------
Interest income ......................... $ 13,577 13,329 12,906 13,028 52,840
Interest expense ........................ 6,542 6,317 5,926 5,822 24,607
-------- -------- -------- -------- --------
Net interest income ..................... 7,035 7,012 6,980 7,206 28,233
Provision for loan losses ............... 406 388 330 390 1,514
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses ..................... 6,629 6,624 6,650 6,816 26,719
Noninterest income ...................... 1,283 1,432 1,465 1,184 5,364
Noninterest expense ..................... (4,122) (4,263) (4,435) (4,535) (17,355)
-------- -------- -------- -------- --------
Income before income taxes .............. 3,790 3,793 3,680 3,465 14,728
Income taxes ............................ 1,436 1,427 1,387 1,330 5,580
-------- -------- -------- -------- --------
Net income .............................. $ 2,354 2,366 2,293 2,135 9,148
======== ======== ======== ======== ========
Basic income per share .................. $ .44 .44 .42 .40 1.70
======== ======== ======== ======== ========
Diluted income per share ................ $ .43 .43 .42 .39 1.67
======== ======== ======== ======== ========
Year Ended December 31, 2002
--------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------- -------- -------- -------- --------
Interest income ......................... $ 13,868 14,143 14,434 14,088 56,533
Interest expense ........................ 7,491 7,284 7,577 7,131 29,483
-------- -------- -------- -------- --------
Net interest income ..................... 6,377 6,859 6,857 6,957 27,050
Provision for loan losses ............... 258 613 399 575 1,845
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses ..................... 6,119 6,246 6,458 6,382 25,205
Noninterest income ...................... 868 846 808 1,254 3,776
Noninterest expense ..................... (3,444) (3,597) (3,774) (4,053) (14,868)
-------- -------- -------- -------- --------
Income before income taxes .............. 3,543 3,495 3,492 3,583 14,113
Income taxes ............................ 1,335 1,282 1,315 1,345 5,277
-------- -------- -------- -------- --------
Net income .............................. $ 2,208 2,213 2,177 2,238 8,836
======== ======== ======== ======== ========
Basic income per share .................. $ .42 .41 .41 .41 1.65
======== ======== ======== ======== ========
Diluted income per share ................ $ .41 .40 .40 .40 1.61
======== ======== ======== ======== ========
53
Independent Auditors' Report
FFLC Bancorp, Inc.
Leesburg, Florida:
We have audited the accompanying consolidated balance sheets of FFLC
Bancorp, Inc. and Subsidiaries (the "Company") as of December 31, 2003 and 2002
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 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
as of December 31, 2003 and 2002, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2003 in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 1 to the accompanying consolidated financial
statements, in 2003, the Company adopted Financial Accounting Standards Board
Interpretation No. 46 "Consolidation of Variable Interest Entities" as revised
in December, 2003. In accordance with this Interpretation, FFLC Statutory Trust
I is not consolidated in the financial statements of the Company. The Company
has also elected to adopt this Interpretation on a retroactive basis and
therefore, has restated its 2002 consolidated financial statements.
HACKER, JOHNSON & SMITH PA
Orlando, Florida
January 16, 2004
54
FFLC BANCORP, INC.
DIRECTORS AND OFFICERS
Directors:
Claron D. Wagner
Chairman of the Board
James P. Logan
Vice Chairman
Joseph J. Junod
Ted R. Ostrander, Jr.
H.D. Robuck, Jr.
Howard H. Hewitt
Stephen T. Kurtz
Paul K. Mueller
Advisory Directors:
James R. Gregg
James H. Herlong
Horace D. Robuck
Officers:
Stephen T. Kurtz
President and Chief Executive Officer
Paul K. Mueller
Executive Vice President and Treasurer
Sandra L. Rutschow
Vice President and Secretary
Occupation
President, Woody Wagner, Inc.
President/Owner, Logan Sitework Contractors, Inc.
Retired, General Manager, Avesta Sheffield Pipe
President, Lassiter-Ware, Inc.
Attorney; CEO, Ro-Mac Lumber & Supply, Inc.
President/Owner, Hewitt Construction Company
President, FFLC Bancorp, Inc. & Subsidiaries
Executive Vice President, FFLC Bancorp, Inc. & Subsidiaries
President, Jarol Company
Retired
President, Ro-Mac Lumber & Supply, Inc.
55
FIRST FEDERAL SAVINGS BANK
OF LAKE COUNTY
DIRECTORS, OFFICERS AND MANAGERS
DIRECTORS
Claron D. Wagner
Chairman of the Board
James P. Logan
Vice Chairman
Joseph J. Junod
Ted R. Ostrander, Jr.
H.D. Robuck, Jr.
Howard H. Hewitt
Stephen T. Kurtz
Paul K. Mueller
Advisory Directors
James R. Gregg
James H. Herlong
Horace D. Robuck
OFFICERS
Stephen T. Kurtz
President and Chief Executive Officer
Paul K. Mueller
Executive Vice President and Chief Operations Officer
and Treasurer
Dwight L. Hart
Senior Vice President and Mortgage Lending Manager
Joseph D. Cioppa
Senior Vice President and Commercial Lending Manager
Paul S. Allen
Senior Vice President, Audit, Planning and Budget
Jay R. Bartholomew
Senior Vice President and Retail Banking Manager
Brenda M. Grubb
Senior Vice President and Human Resources Manager
Robert R. Wedlock
Senior Vice President, Information Technology & Operations
Kimberly R. Bailey
Vice President and Spruce Creek Branch Manager
John A. Beaulieu
Vice President and Investment Officer
Susan L. Berkebile
Vice President and Area Loan Manager
Victoria M. Boren
Vice President and Branch Operations Manager
Michael J. Cox
Vice President and Area Loan Manager
Carrie C. Cribb
Vice President and Loan Officer
Jankie Dhanpat
Vice President, SEC Reporting & Controller
James D. Haug
Vice President and Lady Lake Branch Manager
Lawrence E. Hoag
Vice President and Operations Dept. Manager
Brian R. Hofer
Vice President and Commercial Loan Officer
Karen L. Hollister
Vice President and Loan Operations Manager
Tara A. Keane
Vice President and Lake Square Branch Manager
Rhea Ann Kennedy
Vice President and Loan Officer
Stephen G. Knowles
Vice President and Main Office Branch Manager and Loan Officer
B. Stan McCullars, Jr.
Vice President Finance
Dennis R. Rogers
Vice President, Wildwood Branch Manager and Area Loan Manager
Natalie L. Rojas
Vice President and Commercial Loan Portfolio Manager
Sandra L. Rutschow
Vice President and Corporate Secretary
Sandra L. Seaton
Vice President and South Leesburg Branch Manager and Area Loan Originator
Leigh S. Skehan
Vice President and Marketing Officer
Raynard S. (Ray) Taylor
Vice President and Commercial Loan Officer
Phillip P. Tompetrini
Vice President and Inverness Branch Manager
Donald E. Turner
Vice President and Commercial Loan Officer
Tara H. Wainwright
Vice President and Kings Ridge Branch Manager
Lynda F. Wemple
Vice President and Accounting Dept. Manager
Vickie S. Baxter
Assistant Vice President and Loan Officer
Donna L. Boyett
Assistant Vice President and Branch
Operations Coordinator
Craig S. Cannon
Loan Officer
Norma J. Caron
Assistant Vice President and Checking Department Manager
James M. Combs
Assistant Vice President and Indirect Loan Manager
Amy S. Conner
Investment Officer
Ginger L. Devine
Assistant Vice President and Compliance Officer
Jeffrey R. Dwiggins
Assistant Vice President and Sales Manager
Lori M. Farfaglia
Assistant Vice President and Fruitland Park & Main Street Branch Manager
Janet B. Farrar
Assistant Vice President and Branch
Operations Coordinator
Penny M. Hollis
Assistant Vice President and Security Officer
Cynthia M. Lay
Assistant Vice President and Service Bureau Coordinator and
Data Department Manager
Marilyn A. Leugers
Assistant Vice President and IRA Coordinator
Annette McCullough
Assistant Vice President and Secondary Market Manager
Sandra A. Rowe
Assistant Vice President and Loan Servicing Manager
Pamela S. Self
Assistant Vice President and Training Manager
Catherine M. Wallin
Assistant Vice President and Loan Officer
Mary R. Asher
Inverness Branch Office Manager
Dawn R. Davison
Escrow Manager
Karen A. Dixon
Crystal River Loan Officer
Tammie C. Martin
Bushnell Branch Manager
Deedee A. Dye
Lady Lake Branch Office Manager
Cinda K. Franklin
Citrus Ridge Branch Manager
Amy L. Griffin
Business Development Officer
Pamela S. Green
Main Street Branch Office Manager
Suzzette Herman
Fruitland Park Branch Office Manager
Jennifer J. Long
Spruce Creek Branch Office Manager
Fay E. Phillips
Clermont Branch Manager
Leslie A. Rocha
Kings Ridge Branch Office Manager
Carol A. Sieder
South Leesburg Branch Office Manager
Elizabeth M. Shaw
Crystal River Branch Manager
Juanita L. Taylor
Eustis Branch Office Manager
Margaret R. White
Main Office Branch Office Manager
Betty L. Wolcott
Facilities Management Officer and Purchasing Manager
Sylvie M. Zimmerman
Wildwood Branch Office Manager
56
FIRST FEDERAL SAVINGS BANK OF LAKE COUNTY
is Proud of the Outstanding Service its
Employees Provide to the Community and the People it Serves
MAIN OFFICE & ADMINISTRATION:
Jamie L. Abbott
Paul S. Allen
Angela B. Allen
Emily C. Ashline
Jay R. Bartholomew
Kathy E. Bauer
Vickie S. Baxter
Charlotte Bennett
Beth A. Bennett
Victoria M. Boren
Barbara Boscana
Donna L. Boyett
Linda S. Brown
Deena M. Bryant
Janet R. Burgess
Tammy A. Calhoun
Janet M. Caloro
Norma J. Caron
Kim L. Chamblin
Dianna L. Christensen
Constance P. Christian
Joseph D. Cioppa
Ursula T. Colla
James M. Combs
Betty Jo Conklin
Amy S. Conner
Judith A. Cook
Diane S. Cook
Cheryl R. Coon
Carrie C. Cribb
Robert Cumm
James R. Cummings
Cheryl A. Davis
Dawn R. Davison
Lawashica M. Dawson
Ginger L. Devine
Carol A. Dewey
Jankie Dhanpat
Alma H. Dunbar
Mary A. Durre
Martha M. Duty
Jeffrey R. Dwiggins
Janet B. Farrar
Charlana M. Fenwick
Amanda M Forwerck
Terry J. French
Clifford H. Frizzell Jr.
June E. Gasbarra
Joan P. Gibson
Zoann Goodman
Dexter L. Graham
Amy L. Griffin
Brenda M. Grubb
Anna O. Harrop
Dwight L. Hart
Lynette N. Hipp
Lawrence E. Hoag
Carol B. Holley
Penny M. Hollis
Karen L. Hollister
Tonya Hudson
Cathy D. Hughes
James G. Humphrey
Janie W. Hunt
Mary C. Hurst
Doris E. Hyatt
Patricia B Inman
Bobby H. Inscoe
Jennifer D. Jennings
Sondra Jones
Mary T. King
Stephen G. Knowles
Connie Kolisnyk
Kenneth G. Kramer
Stephen T. Kurtz
Diane M. Lake
Nancy J. Lane
Cynthia M. Lay
Leslie A. Leach
Debra J. Lenhart
Marilyn A. Leugers
Angie R. Liston
Margaret H. Locke
Sharon R. Luke
Melissa Marsh
B. Stan McCullars, Jr.
Annette McCullough
Janet (Jaye) I. McIntosh
Tammy M. Mizell
Keri L. Morris
Tami Mosier
Paul K. Mueller
John R. Nelson
Shu Een Chen-Noble
Pamela A. O'Neal
Marquisa L. Parham
Tricka M. Parker
Tiffany L. Parks
Angela N. Phillips
Heather Ponsell
Linda L. Radtke
Shirley R. Randolph
Jonathan D. Reeder
Carla L. Rigdon
Natalie J. Rojas
Jennette L. Roode
Landa A. Rossman
Sandra A. Rowe
Marijulia Romero
Sandra L. Rutschow
James Schaeffer
Pamela S. Self
Chessa B. Shaw
Margaret Siegel
Traci A. Simanoski
Leigh S. Skehan
Claire M. Smith
Jill S. Spires
Lynn P. Stoffel
Raynard S. Taylor
Ernestine Thomas
Carolyn Torres
Danine M. Urban
Virginia D. Vann
Orpha M. Vogt
Catherine M. Wallin
Elena R. Webb
Robert R. Wedlock
Lynda F. Wemple
Margaret R. White
Sharon A.White
Rhonda L. Wilkerson
Joyce L. Williams
Catherine N. Williams
Betty L. Wolcott
Kristin L. Woods
Ryan M. Woods
Lisa K. Woolwine
Jeffrey W. Wright
Cathy J. Wrobleski
Lori R. Young
LADY LAKE OFFICE:
John A. Beaulieu
Karen L. Bednarik
Sonja K. Craig
Estelle E. Crawley
DeeDee A. Dye
James D. Haug
Constance L. Merrell-Kasch
Mindy L. Mueller
Terri L. Paquette
Brenda A. Simmons
Patricia L. Sizemore
Vanessa D. Wall
Betty T. Woods
MAIN STREET OFFICE:
Dawn C. Alexander
Janis L. Brown
Hilda A. Foster
Pamela S. Green
Brandy A. Harris
Susan J. Riggin
LAKE SQUARE MALL OFFICE:
Eileen M. Bitting
Tammy L. Dahl
Linda J. Giggey
Bethany A. Johnson
Tara A. Keane
Shannon J. Peters
Melissa M. White
CLERMONT OFFICE:
Dawn M. Ames
Susan Lynn Berkebile
Zaida I. Colon
Jessica L. Dixon
Birgit M. Fox
Donna L. Franklin
Linda C. Gallop
Judy L. Garafola
Brian R. Hofer
Sarah L. Liston
Susan M. Morin
Darcy R. Muniz
Fay E. Phillips
Anita Rodriguez
Melissa D. Schumm
Sharon M. Slack
EUSTIS OFFICE:
Dianne A. Allen
Monica E. Baron
Patricia L. Bartels
Amanda L. Collier
Michael J. Cox
Vivian R. Curry
Rhea Ann Kennedy
Lisa P. Lee
Brenda R. Mathews
Natasha L. Pender
Jeannine M. Rivera
Carolyn A. Rodgers
Tamika J. Rolle
Juanita L. Taylor
Karen E. Wright
WILDWOOD OFFICE:
Carla A. Benavidez
Susan C. Berry
Craig S. Cannon
Kathy A. Curtis
Dana L. Fields
Linda S. Finn
Latahna J. Green
Dennis R. Rogers
Holly D. Sanders
Wendy A. Then
Cathy H. Watson
Sylvie M. Zimmerman
SOUTH LEESBURG OFFICE:
Kari K. Caulk
Jennifer L. Grovesteen
Joanna L. Natal
Geraldine L. Burgio-Pilch
Sandra L. Seaton
Carol A. Sieder
Cristina P. Simmons
Tiffany C. Rodriguez
Rachel M. Smith
BUSHNELL OFFICE:
Dawn M. Greene
Betty J Hewett
Justin A. Holloway
Tammie C. Martin
Inge Pelfrey
Megan L. Sanders
FRUITLAND PARK OFFICE:
Lori M. Farfaglia
Cynthia M. Page
Suzzette Herman
Suzanne E. Shier
Jennifer A. Strow
Delphine C. Williams
INVERNESS OFFICE:
Mary R. Asher
Jamie R. Hemmendinger
Judith Lamontagne
Linda S. Rogers
Lillian G. Russo
Phil P. Tompetrini
Jolena Sanders
CITRUS RIDGE OFFICE:
Stephany M. Barr
Cinda K. Franklin
Christine M. Martinez
Barbara J. Reutter
Amanda N. Smeltzer
Sarah L. Williams
Melissa Ann Woodward
SPRUCE CREEK OFFICE:
Kimberly R. Bailey
Loretta A. Brown
Danielle L. Dilts
Sophia A. Hamilton
Crystal L. House
Jennifer J. Long
Connie J. Rhodes
KINGS RIDGE OFFICE:
Erma R. Moore
Detra M. Tracy
Leslie A. Rocha
Isabel Saldate
Tara H. Wainwright
CRYSTAL RIVER OFFICE:
Karen A. Dixon
Elaine Giammasi
Teresa A. Kuechle
Mitzi M. Parke
Elizabeth Shaw
Jaime D. Stewart
Donald E. Turner
Jeremy Wall
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