SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED] For the Fiscal
Year Ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transaction period from to
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Commission File Number: 0-29040
FIDELITY BANKSHARES, INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 65-0717085
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(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification Number)
218 Datura Street, West Palm Beach, Florida 33401
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(Address of Principal Executive Offices) (Zip Code)
(561) 659-9900
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(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding twelve months (or for such
shorter period that the Registrant was required to file reports) and (2)
has been subject to such requirements for the past 90 days.
YES NO
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Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendments to this Form 10-K. [ ]
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As of February 28, 1997, there were issued and outstanding
6,755,491 shares of the Registrant's Common Stock. The aggregate value
of the voting stock held by non-affiliates of the Registrant, computed
by reference to the average bid and asked prices of the Common Stock as
of February 28, 1997 ($18.56) was $48,702,925.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year
ended December 31, 1996 (Parts II and IV).
2. Proxy Statement for the 1997 Annual Meeting of Stockholders
(Parts I and III).
PART I
ITEM 1. BUSINESS
General
Fidelity Bankshares, Inc.
Fidelity Bankshares, Inc. (the "Company") is a Delaware corporation
which was organized in May 1996. The only significant asset of the
Company is its investment in Fidelity Federal Savings Bank of Florida
(the "Bank"). The Company is majority owned by Fidelity Bankshares,
M.H.C., a federally-chartered mutual holding company (the "MHC"). On
January 29, 1997 the Company acquired all of the issued and outstanding
common stock of the Bank in connection with the Bank's reorganization
into the two-tier form of mutual holding company ownership. At that
time, each share of Bank common stock was automatically converted into
one share of Company common stock, par value $.l0 per share (the "Common
Stock"). 3,542,000 shares of Common Stock were issued to the MHC and
3,206,625 shares of Common Stock were issued to the Bank's public
stockholders.
Fidelity Federal Savings Bank of Florida
The Bank is a federally chartered savings bank headquartered in
West Palm Beach, Florida. The Bank's deposits are insured by the
Federal Deposit Insurance Corporation ("FDIC"). The Bank was chartered
originally as a federal mutual savings and loan association in 1952, and
in 1983, amended its charter to become a federally chartered mutual
savings bank. On January 7, 1994, the Bank completed a reorganization
into a federally chartered mutual holding company. As part of the
reorganization, the Bank organized a new federally chartered stock
savings bank and transferred substantially all of its assets and
liabilities to the stock savings bank in exchange for a majority of the
common stock of the stock savings bank. The Bank is a member of the
Federal Home Loan Bank ("FHLB") System. At December 31, 1996, the Bank
had total assets of $873.6 million, total deposits of $694.7 million,
and stockholders' equity of $81.7 million.
The Bank is primarily engaged in the business of attracting
deposits from the general public in the Bank's market area, and
investing such deposits, together with other sources of funds, in loans
secured by one- to four-family residential real estate. To a lesser
extent, the Bank also originates construction loans and land loans for
single-family properties and invests in mortgage-backed securities
issued or guaranteed by the United States Government or agencies
thereof. In addition, the Bank invests a portion of its assets in
securities issued by the United States Government, cash and cash
equivalents including deposits in other financial institutions, and FHLB
stock. The Bank's principal sources of funds are deposits and principal
and interest payments on loans. Principal sources of income are
interest received from loans and investment securities. The Bank's
principal expense is interest paid on deposits and employee compensation
and benefits.
The Company's and the Bank's principal executive office is located
at 218 Datura Street, West Palm Beach, Florida, and its telephone number
at that address is (561) 659-9900.
Market Area
The Bank is headquartered in West Palm Beach, Florida, and operates
in Palm Beach and Martin Counties in Florida. The Bank has 20 offices
in its market area, three of which are located in Martin County, and 17
of which are located in Palm Beach County. Palm Beach and Martin
Counties, located in Southeastern Florida, have experienced considerable
growth and development since the 1960s, and had a total population of
approximately one million as of 1990 and 1.1 million as of 1995. Due to
significant growth controls established at the state and local
governmental levels, as well as a moderation of economic
growth and migration in the Bank's market area, management believes
growth of the local market area may be more moderate in the future.
The Bank's business and operating results are significantly
affected by the general economic conditions prevalent in its market
areas. The southeast Florida economy is significantly dependent upon
government, foreign trade, tourism, and its attraction as a retirement
area. Unemployment in Palm Beach County is higher than the national and
State of Florida averages. Major employers in the Bank's market area
include Pratt & Whitney, Motorola, St. Mary's Medical Center, Florida
Power and Light, Bell South and the Palm Beach County School Board.
Lending Activities
General. Historically, the principal lending activity of the Bank
has been the origination of fixed and adjustable rate mortgage loans
collateralized by one- to four-family residential properties located in
its market area. The Bank currently originates adjustable rate mortgage
(ARM) loans for retention in its portfolio, and fixed rate loans, the
majority of which are eligible for sale in the secondary mortgage
market. To a lesser extent, the Bank also originates loans secured by
commercial real estate and multi-family residential real estate,
construction loans, commercial business loans and consumer loans.
In an effort to manage interest rate risk, the Bank has sought to
make its interest-earning assets more interest rate sensitive by
originating adjustable rate loans, such as ARM loans, home equity loans,
and short- and medium-term consumer loans. The Bank also purchases
mortgage-backed securities which generally are secured by ARM loans. At
December 31, 1996, approximately $365.7 million, or 52.2%, of the Bank's
total gross loan portfolio, and $47.4 million, or 38.4%, of the Bank's
mortgage-backed securities portfolio, consisted of loans or securities
with adjustable interest rates. The Bank originates fixed rate mortgage
loans generally with 15- to 30-year terms to maturity, collateralized by
one- to four-family residential properties. One- to four-family fixed
rate residential mortgage loans generally are originated and
underwritten according to standards that allow the Bank to resell such
loans in the secondary mortgage market for purposes of managing interest
rate risk and liquidity. The Bank periodically sells a portion of its
fixed-rate loans which have terms to maturity exceeding fifteen years.
The Bank retains in its portfolio all consumer, commercial real estate
and multi-family residential real estate loans.
Analysis of Loan Portfolio. Set forth below are selected data
relating to the composition of the Bank's loan portfolio by type of loan
as of the dates indicated. Also set forth below is the aggregate amount
of the Bank's investment in mortgage-backed securities at the dates
indicated.
At December 31,
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1992 1993 1994 1995 1996
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Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Real estate loans:
One- to four-family (1) $364,741 83.4% $363,229 83.5% $373,407 81.8% $432,387 81.2% $528,689 79.9%
Construction loans 13,272 3.0 14,678 3.4 24,086 5.3 40,522 7.6 58,493 8.8
Land loans 10,295 2.4 8,202 1.9 10,865 2.4 10,769 2.0 11,875 1.8
Commercial 34,292 7.8 34,091 7.8 32,773 7.2 31,359 5.9 29,030 4.4
Multi-family 11,579 2.6 12,300 2.8 13,081 2.8 13,748 2.6 13,781 2.1
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate loans 434,179 99.2 432,500 99.4 454,212 99.5 528,785 99.3 641,868 97.0
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Non-real estate loans:
Consumer (2) 12,448 2.8 13,085 3.0 18,343 4.0 26,855 5.0 39,478 6.0
Commercial business 2,531 0.6 2,621 0.6 2,776 0.6 5,834 1.1 18,585 2.8
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total non-real estate loans 14,979 3.4 15,706 3.6 21,119 4.6 32,689 6.1 58,063 8.8
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans receivable 449,158 102.6 448,206 103.0 475,331 104.1 561,474 105.4 699,931 105.8
Less:
Undisbursed loan proceeds 8,399 1.9 9,314 2.1 15,463 3.4 27,261 5.1 37,575 5.7
Unearned discount and
net deferred fees 1,371 0.3 1,060 0.2 759 0.2 (385) (0.1) (1,607) (0.2)
Allowance for loan losses 1,824 0.4 2,865 0.7 2,566 0.5 2,265 0.4 2,263 0.3
-------- ---- -------- ----- -------- ----- -------- ----- -------- -----
Total loans receivable-net $437,564 100.0% $434,967 100.0% $456,543 100.0% $532,333 100.0% $661,700 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Mortgage-backed securities $ 64,558 $ 75,199 $126,807 $159,761 $123,599
======== ======== ======== ======== ========
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(1) Includes participations of $13.4 million, $8.9 million, $6.6
million, $5.6 million, and $4.3 million at December 31, 1992, 1993,
1994, 1995, and 1996, respectively.
(2) Includes primarily home equity lines of credit, automobile
loans, boat loans and passbook loans. At December 31, 1996, the
disbursed portion of equity lines of credit totalled $13.7 million.
Loan and Mortgage-Backed Securities Maturity Schedule. The
following table sets forth certain information as of December 31, 1996,
regarding the dollar amount of loans and mortgage-backed securities
maturing in the Bank's portfolio based on their contractual terms to
maturity. The amounts shown represent outstanding principal balances
less loans in process and are not adjusted for premiums, discounts,
reserves, and unearned fees. Demand loans, loans having no stated
schedule of repayments and no stated maturity, and overdrafts are
reported as due in one year or less. Adjustable and floating rate loans
are included in the period in which interest rates are next scheduled to
adjust rather than in which they contractually mature, and fixed rate
loans and mortgage-backed securities are included in the period in which
the final contractual repayment is due. Fixed rate mortgage-backed
securities are assumed to mature in the period in which the final
contractual payment is due on the underlying mortgage.
Over 1 Over 3 Over 5 Over 10 Beyond
Within Year to 3 Years to 5 Years to 10 Years to 20 20
1 Year Years Years Years Years Years Total
-------- ------- ------- ------- -------- -------- --------
(In Thousands)
Real estate loans:
One- to four-family residential (1) $145,662 $74,152 $36,511 $55,645 $129,101 $109,151 $550,222
Commercial, multi-family and land 31,298 13,580 4,976 2,033 1,173 1,676 54,736
Consumer loans (2) 23,338 7,362 24,239 1,900 551 8 57,398
-------- ------- ------- ------- -------- -------- --------
Total loans receivable $200,298 $95,094 $65,726 $59,578 $130,825 $110,835 $662,356
======== ======= ======= ======= ======== ======== ========
Mortgage-backed securities $ 46,808 $ 2,783 $ - $ 18 $ 42,485 $ 30,012 $122,106
======== ======= ======= ======= ======== ======== ========
(1) Includes construction loans.
(2) Includes commercial business loans of $18.5 million.
The following table sets forth at December 31, 1996, the
dollar amount of all fixed rate and adjustable rate loans due
or repricing after December 31, 1997.
Fixed Adjustable Total
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(In Thousands)
Real estate loans:
One- to four-family residential $271,809 $132,751 $404,560
Commercial, multi-family and land 6,046 17,392 23,438
Consumer loans (1) 26,441 7,619 34,060
-------- -------- --------
Total $304,296 $157,762 $462,058
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Mortgage-backed securities $ 75,298 $ - $ 75,298
======== ======== ========
(1) Includes commercial business loans of $11.0 million.
One- to Four-Family Residential Real Estate Loans. The Bank's
primary lending activity consists of the origination of one- to four-
family, owner-occupied, residential mortgage loans secured by properties
located in the Bank's market area. During 1995, the Bank began to
originate one- to four-family residential loans on properties outside of
its market area. These loans which were originated through a network of
brokers throughout Florida, are subject to internal controls established
by the Bank, as well as the Bank's customary underwriting standards. At
December 31, 1996, $587.2 million, or 83.9%, of the Bank's total gross
loan portfolio consisted of one- to four-family residential mortgage
loans, including residential construction loans of which $26.0 million
were originated outside the Bank's market area.
The Bank currently offers one- to four-family residential mortgage
loans with terms typically ranging from 15 to 30 years, and with
adjustable or fixed interest rates. Originations of fixed rate mortgage
loans versus ARM loans are monitored on an ongoing basis and are
affected significantly by the level of market interest rates, customer
preference, the Bank's interest rate gap position, and loan products
offered by the Bank's competitors. ARM loan originations totalled
$107.5 million during the year ended December 31, 1996. Therefore, even
if management's strategy is to emphasize ARM loans, market conditions
may be such that there is greater demand for fixed rate mortgage loans.
The Bank's fixed rate loans generally are originated and
underwritten according to standards that permit sale in the secondary
mortgage market. Whether the Bank can or will sell fixed rate loans
into the secondary market, however, depends on a number of factors
including the yield and the term of the loan, market conditions, and the
Bank's current gap position. The Bank's fixed rate mortgage loans are
amortized on a monthly basis with principal and interest due each month.
One- to four-family residential real estate loans often remain
outstanding for significantly shorter periods than their contractual
terms because borrowers may refinance or prepay loans at their option.
The Bank currently offers ARM loans with initial interest rate
adjustment periods of one, five and seven years, based on changes in a
designated market index. After the initial interest rate adjustment,
each one year ARM loan adjusts annually with an annual interest rate
adjustment limitation of 200 basis points and with a maximum interest
rate of 11.5%, or 600 basis points above the initial rate, whichever is
greater. Interest rates on the Bank's ARM loans originated prior to
December 31, 1993 currently adjust with changes in the FHLB's Fourth
District Cost of Funds Index. ARM loans, through December 31, 1993,
were priced at 275 basis points above the Fourth District Cost of Funds
Index for owner-occupied one- to four-family mortgage loans. Higher
interest margins may be required on loans in excess of $500,000. The
interest rate on all non-owner-occupied one- to four-family mortgage
loans is 300 basis points above the Fourth District Cost of Funds Index.
Subsequent to December 31, 1993, the Bank began to use U.S. Treasury
securities for indices on newly originated ARMs. The Bank originates
ARM loans with initially discounted rates, which vary depending upon
whether the initial interest rate adjustment period is one, three, five
or seven years. The Bank determines whether a borrower qualifies for an
ARM loan based on the fully indexed rate of the ARM loan at the time the
loan is originated. One- to four-family residential ARM loans totalled
$281.9 million, or 40.2%, of the Bank's total gross loan portfolio at
December 31, 1996.
The primary purpose of offering ARM loans is to make the Bank's
loan portfolio more interest rate sensitive. However, as the interest
income earned on ARM loans varies with prevailing interest rates, such
loans may not offer the Bank as predictable cash flows as long-term,
fixed rate loans. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Asset and Liability
Management-Interest Rate Sensitivity Analysis" contained in the Bank's
1996 Annual Report to Stockholders (the "Annual Report"). ARM loans
carry increased credit risk associated with potentially higher monthly
payments by borrowers as general market interest rates increase. It is
possible, therefore, that during periods of rising interest rates, the
risk of default on ARM loans may increase due to the upward adjustment
of interest costs to the borrower.
The Bank's one- to four-family residential first mortgage loans
customarily include due-on-sale clauses, which are provisions giving the
Bank the right to declare a loan immediately due and payable in the
event, among other things, that the borrower sells or otherwise disposes
of the underlying real property serving as security for the loan. Due-
on-sale clauses are an important means of adjusting the rates on the
Bank's fixed rate mortgage loan portfolio, and the Bank has generally
exercised its rights under these clauses.
Regulations limit the amount that a savings association may lend
relative to the appraised value of the real estate securing the loan, as
determined by an appraisal at the time of loan origination. Appraisals
are generally performed by the Bank's service corporation subsidiary.
Such regulations permit a maximum loan-to-value ratio of 97% for
residential property and 85% for all other real estate loans. The
Bank's lending policies generally limit the maximum loan-to-value ratio
on both fixed rate and ARM loans without private mortgage insurance to
80% of the lesser of the appraised value or the purchase price of the
property to serve as collateral for the loan.
The Bank makes one- to four-family real estate loans with loan-to-
value ratios in excess of 80%. For one- to four-family real estate
loans with loan-to-value ratios of between 80% and 90%, the Bank
generally requires the borrower to obtain private mortgage insurance.
For loans in excess of 90% the Bank requires the borrower to obtain
private mortgage insurance. The Bank requires fire and casualty
insurance, as well as a title guaranty regarding good title, on all
properties securing real estate loans made by the Bank.
In the past, the Bank has entered into loan participations secured
by one- to four-family residences. At December 31, 1996, the Bank's
loan portfolio included $4.3 million of loan participations.
Construction and Land Loans. The Bank currently offers fixed rate
and adjustable rate residential construction loans primarily for the
construction of owner-occupied single-family residences to builders who
have a contract for sale of the property or owners who have a contract
for construction. In addition, the Bank makes construction loans to
builders for homes held for sale which totalled $17.2 million at
December 31, 1996. Construction loans are generally structured to
become permanent loans, and are originated with terms of up to 30 years
with an allowance of up to one year for construction. During the
construction phase the loans made prior to December 31, 1996
predominately had an adjustable interest rate that adjusted annually and
converted into either a fixed rate or remained an adjustable rate
mortgage loan at the end of the construction period. Subsequent to
December 31, 1996, the Bank began making construction loans with fixed
rates of interest. Such loans become permanent one- to four-family
loans upon completion of construction. Advances are made as
construction is completed.
In addition, the Bank originates loans which are secured by
individual unimproved or improved lots. At December 31, 1996, $58.5
million, or 8.4%, and $11.9 million, or 1.7%, of the Bank's total loan
portfolio consisted of construction loans and land loans, respectively.
Land loans are currently offered with one-year adjustable rates for
terms of up to 15 years. The maximum loan-to-value ratio for the Bank's
land loans is 75%. Through December 31, 1993, land loans were offered
at 300 to 350 basis points over the Fourth District Cost of Funds Index
with an annual interest rate cap of 200 basis points and a lifetime
interest rate cap of the greater of 600 basis points over the initial
interest rate, or 6%. Subsequent to December 31, 1993 the Bank began
using the applicable U.S. Treasury securities as its index on newly
originated loans. Initial interest rates may be below the fully indexed
rate.
Construction lending generally involves a greater degree of credit
risk than one- to four-family residential mortgage lending. The
repayment of the construction loan is often dependent upon the
successful completion of the construction project. Construction delays
or the inability of the borrower to sell the property once construction
is completed may impair the borrower's ability to repay the loan.
Multi-Family Residential Real Estate Loans. Loans securing multi-
family real estate constituted approximately $13.8 million, or 2.0%, of
the Bank's total loan portfolio at December 31, 1996. At December 31,
1996, the Bank had a total of 77 loans secured by multi-family
properties. The Bank's multi-family real estate loans are secured by
multi-family residences, such as rental properties. At December 31,
1996, substantially all of the Bank's multi-family loans were secured by
properties located within the Bank's market area. At December 31, 1996,
the Bank's multi-family real estate loans had an average principal
balance of $179,000 and the largest multi-family real estate loan had a
principal balance of $1.5 million. Multi-family real estate loans
currently are offered with adjustable interest rates, although in the
past the Bank originated fixed rate multi-family real estate loans. The
terms of each multi-family loan are negotiated on a case-by- case basis.
Such loans typically have adjustable interest rates tied to a market
index with a 600 basis point lifetime interest rate cap and an interest
rate floor equal the initial rate, and amortize over 15 to 25 years. An
origination fee of 1 to 2% is usually charged on multi-family loans.
The Bank generally makes multi-family mortgage loans up to 80% of the
appraised value of the property securing the loan. The Bank may choose
to offer initial discount rates depending on market conditions, but
generally the initial interest rate on multi-family real estate loans
has been priced at the applicable U.S. Treasury securities as its index
on newly originated loans. The Bank's originations of multi-family
loans have been limited in recent years.
Loans secured by multi-family real estate generally involve a
greater degree of credit risk than one- to four-family residential
mortgage loans and carry larger loan balances. This increased credit
risk is a result of several factors, including the concentration of
principal in a limited number of loans and borrowers, the effects of
general economic conditions on income producing properties, and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by multi-family and
commercial real estate is typically dependent upon the successful
operation of the related real estate property. If the cash flow from
the project is reduced, the borrower's ability to repay the loan may be
impaired.
Commercial Real Estate Loans. Loans secured by commercial real
estate constituted approximately $29.0 million, or 4.1%, of the Bank's
total loan portfolio at December 31, 1996. The Bank's commercial real
estate loans are secured by improved property such as offices, small
business facilities, strip shopping centers, warehouses and other non-
residential buildings. At December 31, 1996, substantially all of the
Bank's commercial real estate loans were secured by properties located
within the Bank's market area. At December 31, 1996, the Bank's
commercial real estate loans had an average principal balance of
$196,000. At that date, the largest commercial real estate loan had a
principal balance of $2.5 million, secured by an office and retail
building located in Palm Beach, Florida and was currently performing.
This was the largest commercial real estate lending relationship at the
Bank and was within the current loans-to-one borrower limits.
Commercial real estate loans currently are offered with adjustable
rates, although in the past the Bank has originated fixed rate
commercial real estate loans. The terms of each commercial real estate
loan are negotiated on a case-by-case basis, although such loans
typically have adjustable interest rates tied to a market index, with a
600 basis point lifetime interest rate cap, and a 200 basis point
interest rate floor below the initial interest rate. The Bank may
choose to offer initial discount rates depending on market conditions.
Through December 31, 1993, commercial real estate loans generally have
been priced at the Fourth District Cost of Funds Index plus 325 basis
points. Subsequent to December 31, 1993, the Bank began using the
applicable U.S. Treasuries as its index on newly originated loans. An
origination fee of up to 1 to 2% of the principal balance of the loan is
typically charged on commercial real estate loans. Commercial real
estate loans originated by the Bank generally amortize over 15 to 25
years.
The Bank's policy is generally to limit commercial real estate
loans to principal balances not exceeding $5.0 million, subject to
limited exceptions.
Loans secured by commercial real estate generally involve a greater
degree of risk than one- to four-family residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of
several factors, including the concentration of principal in a limited
number of loans and borrowers, the effects of general economic
conditions on income producing properties, and the increased difficulty
of evaluating and monitoring these types of loans. Furthermore, the
repayment of loans secured by commercial real estate is typically
dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced, the borrower's
ability to repay the loan may be impaired.
Consumer Loans. As of December 31, 1996, consumer loans totalled
$39.5 million, or 5.6%, of the Bank's total gross loan portfolio. The
principal types of consumer loans offered by the Bank are home equity
lines of credit, adjustable and fixed rate second mortgage loans,
automobile loans, unsecured personal loans, and loans secured by deposit
accounts. Consumer loans are offered on a fixed rate and adjustable
rate basis with maturities generally of less than ten years. The Bank's
home equity lines of credit are secured by the borrower's principal
residence with a maximum loan-to-value ratio, including the principal
balances of both the first and second mortgage loans, of 80% or less (up
to 90% if the Bank has a first mortgage on the property). Such loans
are offered on an adjustable rate basis with terms of up to ten years.
At December 31, 1996, the disbursed portion of home equity lines of
credit totalled $13.7 million, or 34.7% of consumer loans. During 1996
the Bank sought to increase its consumer loan portfolio primarily by
emphasizing the origination of automobile loans.
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's credit history and an
assessment of ability to meet existing obligations and payments on the
proposed loan. The stability of the applicant's monthly income may be
determined by verification of gross monthly income from primary
employment, and additionally from any verifiable secondary income.
Creditworthiness of the applicant is of primary consideration; however,
the underwriting process also includes a comparison of the value of the
collateral in relation to the proposed loan amount, and in the case of
home equity lines of credit, the Bank obtains a title guarantee or an
opinion as to the validity of title.
Consumer loans entail greater credit risk than do residential
mortgage loans, particularly in the case of consumer loans that are
unsecured or secured by assets that depreciate rapidly, such as
automobiles, mobile homes, boats, and recreational vehicles. In such
cases, repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment for the outstanding loan and the
remaining deficiency often does not warrant further substantial
collection efforts against the borrower. In particular, amounts
realizable on the sale of repossessed automobiles may be significantly
reduced based upon the condition of the automobiles and the lack of
demand for used automobiles. The Bank adds a general provision on a
regular basis to its consumer loan loss allowance, based on general
economic conditions and prior loss experience. See "-Delinquencies and
Classified Assets-Non-Performing Assets," and "Delinquent Loans and Non-
Performing Assets-Classification of Assets" for information regarding
the Bank's loan loss experience and reserve policy.
Commercial Business Loans. The Bank currently offers commercial
business loans to finance small businesses in its market area.
Historically, the Bank offered commercial business loans as a customer
service to business account holders. At December 31, 1996, the Bank had
293 commercial business loans outstanding with an aggregate balance of
$18.5 million. The average commercial business loan balance was
approximately $63,000. Commercial business loans are generally offered
with adjustable interest rates only, which are tied to The Wall Street
Journal prime rate, plus up to 300 basis points. The loans are offered
with prevailing terms of five years but which may range up to 15 years.
In addition, the Bank offers Small Business Administration loans.
Underwriting standards employed by the Bank for commercial business
loans include a determination of the applicant's ability to meet
existing obligations and payments on the proposed loan for normal cash
flows generated by the applicant's business. The financial strength of
each applicant also is assessed through a review of financial statements
provided by the applicant.
Commercial business loans generally bear higher interest rates than
residential loans, but they also may involve a higher risk of default
since their repayment is generally dependent on the successful operation
of the borrower's business. The Bank generally obtains personal
guarantees from the borrower or a third party as a condition to
originating its commercial business loans.
Loan Originations, Solicitation, Processing, and Commitments. Loan
originations are derived from a number of sources such as real estate
broker referrals, existing customers, borrowers, builders, attorneys,
and walk-in customers. Upon receiving a loan application, the Bank
obtains a credit report and employment verification to verify specific
information relating to the applicant's employment, income, and credit
standing. In the case of a real estate loan, an appraiser approved by
the Bank appraises the real estate intended to secure the proposed loan.
A loan processor in the Bank's loan department checks the loan
application file for accuracy and completeness, and verifies the
information provided. All loans of up to $214,600 may be approved by
any one of the Bank's senior lending officers; loans between $214,600
and $400,000 must be approved by any one of the Bank's designated senior
officers; loans between $400,000 and $650,000 must be approved by at
least two of the Bank's designated senior officers which includes the
Chief Executive Officer; and loans in excess of $650,000 must be
approved by at least three members of the Board of Directors acting as a
loan committee. The loan committee meets as needed to review and verify
that management's approvals of loans are made within the scope of
management's authority. Fire and casualty insurance is required at the
time the loan is made and throughout the term of the loan, and upon
request of the Bank, flood insurance may be required. After the loan is
approved, a loan commitment letter is promptly issued to the borrower.
At December 31, 1996, the Bank had commitments to originate $21.8
million of loans.
If the loan is approved, the commitment letter specifies the terms
and conditions of the proposed loan including the amount of the loan,
interest rate, amortization term, a brief description of the required
collateral, and required insurance coverage. The borrower must provide
proof of fire and casualty insurance on the property (and, as required,
flood insurance) serving as collateral, which insurance must be
maintained during the full term of the loan. Title insurance or an
opinion of title, based on a title search of the property, is required
on all loans secured by real property.
Borrowers who refinance must satisfy the Bank's underwriting
criteria at the time they apply to refinance their loan and have been
current in their loan payments for a minimum of one year. Approximately
20% of the Bank's loan originations during the year ended December 31,
1996 represented the refinancing of the Bank's existing loans.
Refinancings have resulted in a decrease in the Bank's interest rate
spread. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the 1996 Annual Report to
Stockholders.
During 1996, the Bank in connection with local mortgage brokers
began a mortgage loan broker solicitation program to supplement the
Bank's internal originations of one- to four-family residential loans.
Under this program, which is limited to the origination of one- to four-
family residential loans, prospective borrowers complete loan
applications which are provided by mortgage brokers. The completed
applications are forwarded to the Bank. All loans obtained in this
manner are reviewed in accordance with the Bank's customary underwriting
standards. Total originations from all sources under the mortgage loan
broker solicitation program during 1996 were $87.0 million. The Bank
may expand this program in the future.
During 1994, the Bank entered into an agreement with the wholly-
owned mortgage subsidiary of a major South Florida builder-developer,
who has substantial operations in the Bank's local service area. Under
the terms of this agreement, the mortgage company originates, processes
and closes home mortgages resulting from the sale of the developer's
inventory of homes. The mortgage files are sent to the Bank by the
mortgage company for review and, if approved by the Bank, it issues a
commitment to purchase the loan from the mortgage company. Purchases
are accomplished by assignment of the mortgage from the mortgage company
to the Bank. The Bank purchased $20.8 million loans from this provider
in 1996.
The Bank's recently purchased loans are collateralized by
properties located primarily in Florida, although the Bank has in the
past purchased loans collateralized by properties located outside the
State of Florida. At December 31, 1996, $36.8 million, or 5.3%, of all
loans in the Bank's portfolio, were purchased from others. Of this
amount, $4.3 million represented the Bank's interest in purchased
participations. The Bank's largest loan participation was a $635,000
interest in a loan secured by one- to four-family residences. The
remaining loan participations consisted of loans secured by one- to
four-family residential properties with an average balance of $14,000.
Origination, Purchase and Sale of Loans. The table below shows the
Bank's loan origination, purchase and sales activity for the periods
indicated.
Year Ended December 31,
--------------------------------------------
1994 1995 1996
-------- -------- --------
(In Thousands)
Loan receivable-gross, beginning of period $448,206 $475,331 $561,474
Originations:
Real estate:
One- to four-family residential (1) 81,935 121,457 187,851
Land loans 2,896 3,096 3,207
Commercial 5,992 1,082 390
Multi-family 1,339 1,611 1,869
Non-real estate loans:
Consumer 12,674 19,185 23,761
Commercial Business 2,791 6,838 33,276
-------- -------- --------
Total originations 107,627 153,269 250,354
Transfer of mortgage loans to foreclosed real estate
and in-substance foreclosure (2,190) (1,318) (593)
Loan purchases 4,045 12,398 21,153
Repayments (79,545) (75,275) (115,440)
Loan sales (2,812) (2,931) (17,017)
-------- -------- --------
Net loan activity 27,125 86,143 138,457
-------- -------- --------
Total loans receivable-gross, end of period $475,331 $561,474 $699,931
======== ======== ========
- --------------------------------------
(1) Includes loans to finance the construction of one- to four-
family residential properties, and loans originated for sale in the
secondary market.
(2) This table is being presented on a gross loan receivable basis.
Loan Origination Fees and Other Income. In addition to interest
earned on loans, the Bank generally receives loan origination fees. To
the extent that loans are originated or acquired for the Bank's
portfolio, SFAS 91 requires that the Bank defer loan origination fees
and costs and amortize such amounts as an adjustment of yield over the
life of the loan by use of the level yield method. Fees and costs
deferred under SFAS 91 are recognized into income immediately upon
prepayment or the sale of the related loan. At December 31, 1996, the
Bank had $1.1 million of deferred loan origination fees and $2.7 million
of deferred loan origination costs. Such fees vary with the volume and
type of loans and commitments made and purchased, principal repayments,
and competitive conditions in the mortgage markets, which in turn
respond to the demand and availability of money.
The Bank also receives other fees, service charges, and other
income that consist primarily of deposit transaction account service
charges, late charges, credit card fees, and income from REO operations.
The Bank recognized fees and service charges of $2.2 million, $2.7
million and $3.2 million for the fiscal years ended December 31, 1994,
1995, and 1996, respectively.
Loans-to-One Borrower. Savings associations are subject to the
same loans-to-one borrower limits as those applicable to national banks,
which under current regulations restrict loans to one borrower to an
amount equal to 15% of unimpaired capital and unimpaired surplus on an
unsecured basis, and an additional amount equal to 10% of unimpaired
capital and unimpaired surplus if the loan is secured by readily
marketable collateral (generally, financial instruments and bullion, but
not real estate). At December 31, 1996, the Bank's largest outstanding
loan balance to one borrower totalled $4.3 million which was secured by
various residential properties located primarily in Broward County,
Florida. At that date, the Bank's second largest lending relationship
totalled $4.0 million and was secured by various residential properties.
The Bank's third largest lending relationship totalled $3.2 million and
was secured by various residential properties. The Bank's fourth
largest lending relationship totalled $3.0 million and was secured by
various residential properties. The Bank's fifth largest lending
relationship totalled $2.8 million and was secured by various commercial
properties. The Bank's regulatory limit on loans-to-one borrower was
$12.3 million at December 31, 1996.
Mortgage-Backed Securities
The Bank also invests in mortgage-backed securities issued or
guaranteed by the United States Government or agencies thereof. These
securities consist primarily of fixed-rate mortgage-backed securities
issued or guaranteed by the Federal National Mortgage Association
("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC").
Mortgage-backed securities totaled $122.3 million at December 31, 1996
and had a market value of $123.6 million. Effective December 31, 1993,
the Bank implemented SFAS 115, "Accounting for Certain Investments in
Debt and Equity Securities." As a result of the adoption of this
accounting principle, the Bank declared its investment in adjustable
rate, mortgage-backed securities as available for sale. In November
1995, FASB issued "A Guide to Implementation of SFAS 115 on Accounting
for Certain Investments in Debt and Equity Securities - Questions and
Answers" ("SFAS 115 Q & A Guide"). SFAS 115 Q & A Guide permits an
entity to conduct a one time reassessment of the classifications of all
securities held at that time. On November 28, 1995, in conformity with
the SFAS 115 Q & A Guide, management of the Bank classified all
securities as "Available for Sale". As a result, all such securities
are now presented at fair value, as determined by market quotations.
Since the SFAS 115 Q & A Guide cannot be retroactively applied, these
fixed-rate securities are presented at amortized cost for the year ended
1994.
The Bank's objectives in investing in mortgage-backed securities
varies from time to time depending upon market interest rates, local
mortgage loan demand, and the Bank's level of liquidity. The Bank's
mortgage-backed securities are more liquid than whole loans and can be
readily sold in response to market conditions and interest rates.
Mortgage-backed securities purchased by the Bank also have lower credit
risk than mortgage loans because principal and interest are either
insured or guaranteed by the United States Government or agencies
thereof.
Year Ended December 31,
------------------------------------------------
1994 1995 1996
-------- -------- --------
(In Thousands)
Mortgage-backed securities at beginning of period $ 75,199 $126,807 $159,761
Purchases 68,133 45,625 9,962
Sales -- -- (19,641)
Repayments (14,510) (17,796) (23,608)
Discount (premium) amortization (579) (79) 3
Increase (decrease) in market value of securities held for
sale in accordance with SFAS 115 (1,436) 5,204 (2,878)
-------- -------- --------
Mortgage-backed securities at end of period $126,807 $159,761 $123,599
======== ======== ========
The following table sets forth the allocation of fixed and
adjustable rate mortgage-backed securities for the periods indicated.
At December 31,
-----------------------------------------------------------
1994 1995 1996
---------------- ---------------- ----------------
$ % $ % $ %
--- --- --- --- --- ---
(Dollars In Thousands)
Mortgage-backed securities, net:
Adjustable:
FHLMC $ 15,799 12.38% $ 13,244 8.24% $ 15,900 12.78%
FNMA 35,533 27.84 31,250 19.43 29,576 23.76
GNMA -- -- -- -- 1,963 1.58
-------- -------- -------- -------- -------- --------
Total adjustable 51,332 40.22 44,494 27.67 47,439 38.12
-------- -------- -------- -------- -------- --------
Fixed:
FHLMC 32,546 25.50 74,052 46.04 56,245 45.20
FNMA 15,674 12.28 14,019 8.72 11,771 9.46
GNMA 27,255 21.35 27,196 16.91 8,144 6.54
-------- -------- -------- -------- -------- --------
Total fixed 75,475 59.13 115,267 71.67 76,160 61.20
-------- -------- -------- -------- -------- --------
Accrued interest 834 0.65 1,067 0.66 842 0.68
-------- ------- ------- ------- ------- -------
Total mortgage-backed securities, net $127,641 100.0% $160,828 100.00% $124,441 100.00%
======== ======== ======== ======== ======== ========
Delinquencies and Classified Assets
Delinquencies. The Bank's collection procedures provide that when
a loan is 15 days past due, a computer-generated late charge notice is
sent to the borrower requesting payment, plus a late charge. If
delinquency continues, at 30 days a delinquent notice is sent and
personal contact efforts are attempted, either in person or by
telephone, to strengthen the collection process and obtain reasons for
the delinquency. Also, plans to arrange a repayment plan are made. If
a loan becomes 60 days past due, a collection letter is sent, personal
contact is attempted, and the loan becomes subject to possible legal
action if suitable arrangements to repay have not been made. In
addition, the borrower is given information which provides access to
consumer counseling services, to the extent required by regulations of
the Department of Housing and Urban Development ("HUD"). When a loan
continues in a delinquent status for 90 days or more, and a repayment
schedule has not been made or kept by the borrower, generally a notice
of intent to foreclose is sent to the borrower, giving 30 days to cure
the delinquency. If not cured, foreclosure proceedings are initiated.
Impaired Loans. A loan is impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement.
Non-Performing Assets. Loans are reviewed on a regular basis and
are placed on a non-accrual status when, in the opinion of management,
the collection of additional interest is doubtful. Loans are placed on
non-accrual status when either principal or interest is 90 days or more
past due. Interest accrued and unpaid at the time a loan is placed on a
non-accrual status is charged against interest income. At December 31,
1996, the Bank had non-performing loans of $3.3 million, and a ratio of
non-performing loans to net loans receivable of .50%.
Real estate acquired by the Bank as a result of foreclosure or by
the deed in lieu of foreclosure is classified as real estate owned
("REO") until such time as it is sold. When real estate is acquired
through foreclosure or by deed in lieu of foreclosure, it is recorded at
its fair value, less estimated costs of disposal. If the value of the
property is less than the loan, less any related specific loan loss
provisions, the difference is charged against the Bank's earnings. Any
subsequent write-down of REO is also charged against earnings. At
December 31, 1996, the Bank had approximately $93,000 of property
acquired as the result of foreclosure and classified as REO. At
December 31, 1996, the Bank had non-performing assets of $3.4 million
and a ratio of non-performing assets to total assets of .39%.
Delinquent Loans and Non-Performing Assets
The following table sets forth information regarding the Bank's
non-accrual loans delinquent 90 days or more, and real estate acquired
or deemed acquired by foreclosure at the dates indicated. When a loan
is delinquent 90 days or more, the Bank fully reserves all accrued
interest thereon and ceases to accrue interest thereafter. For all the
dates indicated, the Bank did not have any material restructured loans
within the meaning of SFAS 15.
At December 31,
---------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(Dollars in Thousands)
Delinquent Loans:
One- to four-family residential (1) $1,966 $3,091 $1,299 $1,513 $2,637
Commercial and multi-family real estate 1,070 379 335 201 461
Land -- -- 159 10 84
Consumer and commercial business loans 263 347 135 140 108
-------- -------- -------- -------- --------
Total Delinquent loans 3,299 3,817 1,928 1,864 3,290
Total REO and loans foreclosed in-substance 3,226 463 608 643 93
-------- -------- -------- -------- --------
Total nonperforming assets (2) $6,525 $4,280 $2,536 $2,507 $3,383
======== ======== ======== ======== ========
Total loans delinquent 90 days or more to net
loans receivable 0.75% 0.88% 0.42% 0.35% 0.50%
Total loans delinquent 90 days or more to
total assets 0.52% 0.56% 0.27% 0.24% 0.38%
Total nonperforming loans, loans foreclosed
in substance and REO to total assets 1.02% 0.63% 0.36% 0.32% 0.39%
- ------------------------------------
(1) At December 31, 1996, the Bank had no delinquent or non-
performing construction loans.
(2) Net of specific valuation allowances.
During the year ended December 31, 1996, gross interest income of
approximately $192,000 would have been recorded on loans accounted for
on a non-accrual basis if the loans had been current throughout the
period. No interest income on non-accrual loans was included in income
during 1996.
The following table sets forth information with respect to loans
past due 60-89 days in the Bank's portfolio at the dates indicated.
At December 31,
--------------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
(Dollars in Thousands)
Loans past due 60-89 days:
One- to four-family residential (1) $ 4,496 $ 1,929 $ 1,554 $ 1,272 $ 2,038
Commercial real estate and multi-family 159 219 100 106 55
Consumer and commercial business loans 54 50 7 106 19
Land loans - 97 48 1 -
-------- -------- -------- -------- --------
Total past due 60-89 days $ 4,709 $ 2,295 $ 1,709 $ 1,485 $ 2,112
======== ======== ======== ======== ========
- -------------------------------------
(1) (Includes construction loans)
Classification of Assets. Federal regulations provide for the
classification of loans and other assets such as debt and equity
securities considered by the OTS to be of lesser quality as
"substandard," "doubtful," or "loss" assets. An asset is considered
"substandard" if it is inadequately protected by the current net worth
and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct
possibility" that the savings institution will sustain "some loss" if
the deficiencies are not corrected. Assets classified as "doubtful"
have all of the weaknesses inherent in those classified "substandard,"
with the added characteristic that these weaknesses make "collection or
liquidation in full," on the basis of currently existing facts,
conditions, and values, "highly questionable and improbable." Assets
classified as "loss" are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment
of a specific loss reserve is not warranted. Assets that do not expose
the savings institution to risk sufficient to warrant classification in
one of the aforementioned categories, but which possess some weaknesses,
are designated "special mention" by management.
When a savings institution classifies problem assets as either
substandard or doubtful, it is required to establish general allowances
for loan losses in an amount deemed prudent by management. General
allowances represent loss allowances that have been established to
recognize the inherent risk associated with lending activities, but
which, unlike specific allowances, have not been allocated to particular
problem assets. When a savings institution classifies problem assets as
"loss," it is required either to establish a specific allowance for
losses equal to 100% of the amount of the assets so classified, or to
charge off such amount. A savings institution's determination as to the
classification of its assets and the amount of its valuation allowances
is subject to review by the OTS, which can order the establishment of
additional general or specific loss allowances. The Bank regularly
reviews the problem loans in its portfolio to determine whether any
loans require classification in accordance with applicable regulations.
The following table sets forth the aggregate amount of the Bank's
classified assets at the dates indicated.
At December 31,
----------------------------------------
1994 1995 1996
------- ------- -------
(In Thousands)
Substandard assets (1)(2) $ 5,227 $ 5,106 $ 3,207
Doubtful assets (2) - - -
Loss assets (2) 24 58 -
-------- -------- --------
Total classified assets (2) $ 5,251 $ 5,164 $ 3,207
======== ======== ========
- ---------------------------------------------------
(1) Includes REO and in-substance foreclosures.
(2) Net of specific valuation allowances.
The following table sets forth information regarding the Bank's
delinquent loans, REO and loans foreclosed in-substance at
December 31, 1996.
Balance Number
------- ------
(Dollars In Thousands)
Residential real estate:
Loans 60 to 89 days delinquent $ 2,038 34
Loans more than 89 days delinquent 2,637 32
Commercial and multi-family real estate:
Loans 60 to 89 days delinquent 55 1
Loans more than 89 days delinquent 461 1
Land loans:
Loans 60 to 89 days delinquent - -
Loans more than 89 days delinquent 84 3
Consumer and commercial business loans
60 days or more delinquent 127 12
REO 93 3
------- -------
Total $ 5,495 86
======= =======
Allowance for Loan Losses. Management's policy is to provide for
estimated losses on the Bank's loan portfolio based on management's
evaluation of the potential losses that may be incurred. The Bank
regularly reviews its loan portfolio, including problem loans, to
determine whether any loans require classification or the establishment
of appropriate reserves or allowances for losses. Such evaluation,
which includes a review of all loans of which full collectibility of
interest and principal may not be reasonably assured, considers, among
other matters, the estimated net realizable value (or fair value, where
appropriate) of the underlying collateral. Other factors considered by
management include the size and risk exposure of each segment of the
loan portfolio, present indicators such as delinquency rates and the
borrower's current financial condition, and the potential for losses in
future periods. Management calculates the general allowance for loan
losses in part based on past experience, and in part based on specified
percentages of loan balances. While both general and specific loss
allowances are charged against earnings, general loan loss allowances
are added back to capital in computing risk-based capital under OTS
regulations.
Management will continue to review the entire loan portfolio to
determine the extent, if any, to which further additional loan loss
provisions may be deemed necessary. Management believes that the Bank's
current allowance for loan losses is adequate; however, there can be no
assurance that the allowance for loan losses will be adequate to cover
losses that may in fact be realized in the future or that additional
provisions for loan losses will not be required.
Analysis of the Allowance For Loan Losses. The following table
sets forth the analysis of the allowance for loan losses for the periods
indicated.
At December 31,
-----------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(Dollars in Thousands)
Total net loans receivable outstanding $ 437,564 $ 434,967 $ 456,543 $ 532,333 $ 661,700
========= ========= ========= ========= =========
Average net loans receivable outstanding $ 449,264 $ 434,522 $ 441,573 $ 490,088 $ 605,507
========= ========= ========= ========= =========
Allowance balance (at beginning of period) $ 1,600 $ 1,824 $ 2,865 $ 2,566 $ 2,265
Reclassification of valuation allowances
on in-substance foreclosure - 169 - - -
Provision for losses:
Real estate 299 1,201 73 (199) 133
Consumer and commercial business loans 31 35 39 (11) 31
Charge-offs:
Real estate (97) (362) (229) (89) (145)
Consumer and commercial business loans (9) (2) (182) (2) (21)
Recoveries:
Real estate - - - - -
Consumer and commercial business loans - - - - -
--------- --------- --------- --------- ---------
Allowance balance (at end of period) $ 1,824 $ 2,865 $ 2,566 $ 2,265 $ 2,263
========= ========= ========= ========= =========
Allowance for loan losses as a percent of net
loans receivable at end of period 0.42% 0.66% 0.56% 0.43% 0.34%
Net loans charged off as a percent of average
loans outstanding 0.02% 0.08% 0.10% 0.02% 0.03%
Ratio of allowance for loan losses to total
non-performing loans at end of period (1) 55.29% 75.06% 132.61% 121.51% 68.78%
Ratio of allowance for loan losses to total
non-performing loans, REO and in-substance
foreclosures at end of period (1) 27.95% 66.94% 100.90% 90.35% 66.89%
- ---------------------------------
(1) Net of specific reserves.
Allocation of Allowance for Loan Losses. The following table sets
forth the allocation of allowance for loan losses by loan category for
the periods indicated. Management believes that the allowance can be
allocated by category only on an approximate basis. The allocation of
the allowance by category is not necessarily indicative of future losses
and does not restrict the use of the allowance to absorb losses in any
category.
At December 31,
--------------------------------------------------------------
1994 1995 1996
-------------- -------------- --------------
% of Loans % of Loans % of Loans
In Each In Each In Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------- ----------
(Dollars in Thousands)
Balance at end of period applicable to:
One- to four-family residential mortgage $ 1,462 83.62% $ 1,351 84.23% $ 1,095 83.89%
Commercial real estate and
multi-family residential 860 9.65 574 8.03 596 6.12
Land loans 84 2.29 91 1.92 119 1.70
Other 160 4.44 249 5.82 453 8.29
------- ------- ------- ------- ------- -------
Total allowance for loan losses $ 2,566 100.00% $ 2,265 100.00% $ 2,263 100.00%
======= ======= ======= ======= ======= =======
Investment Activities
In prior years, the Bank had increased the percentage of its assets
held in its investment portfolio as part of its strategy of maintaining
higher levels of liquidity which improve the Bank's interest rate risk
position. During 1995, in a declining interest rate environment, the
Bank began using this excess liquidity to fund a portion of its loan
production. The Bank's investment portfolio comprises investment
securities, FHLB Stock and interest earning deposits. The carrying
value of the Bank's investment securities totaled $41.7 million at
December 31, 1996, compared to $43.1 million at December 31, 1995. The
Bank's interest-bearing deposits due from other financial institutions
with original maturities of three months or less, totaled $27.1 million
at December 31, 1996, compared to $10.0 million at December 31, 1995.
The Bank is required under federal regulations to maintain a
minimum amount of liquid assets that may be invested in specified short
term securities and certain other investments. See "Regulation-Federal
Regulations-Liquidity Requirements" below and "Management's Discussion
and Analysis of Financial Condition and Results of Operations-Liquidity
and Capital Resources" in the Annual Report. The Bank generally has
maintained a portfolio of liquid assets that exceeds regulatory
requirements. Liquidity levels may be increased or decreased depending
upon the yields on investment alternatives and upon management's
judgment as to the attractiveness of the yields then available in
relation to other opportunities and its expectation of the level of
yield that will be available in the future, as well as management's
projections as to the short term demand for funds to be used in the
Bank's loan origination and other activities.
Investment Portfolio. The following tables set forth the carrying
value of the Bank's investments at the dates indicated. At December 31,
1996, the market value of the Bank's investments was approximately $41.7
million. As allowed by SFAS 115, "Accounting for Certain Investments in
Debt and Equity Securities," the Bank declared its investment in U.S.
Government and agency obligations as available for sale. As a result,
such securities are now presented at fair value, as determined by market
quotations. The market value of investments includes interest-earning
deposits and FHLB stock at book value, which approximates market value.
At December 31,
---------------------------------------
1994 1995 1996
--------- --------- ---------
(In Thousands)
U.S. Government and agency obligations $ 50,777 $ 26,546 $ 8,035
Municipal bonds 422 440 430
Interest-earning deposits 25,063 9,974 27,127
FHLB stock 6,148 6,148 6,148
-------- -------- --------
Total investments $ 82,410 $ 43,108 $ 41,740
======== ======== ========
Investment Portfolio Maturities. The following table sets forth
the scheduled maturities, amortized cost, market values and average
yields for the Bank's investment securities at December 31, 1996. At
December 31, 1996, the Bank did not have any investment securities
maturing after three years.
At December 31, 1996
------------------------------------------------------------------------------------------
One Year or Less One to Three Years
---------------------- ----------------------
Annualized Annualized Annualized
Weighted Weighted Average Weighted
Amortized Average Amortized Average Amortized Market Life in Average
Cost Yield Cost Yield Cost Value Years (1) Yield
------- --------- ------- --------- --------- ------ ------- --------
(Dollars in Thousands)
Debt securities:
U.S. Government agency securities $ 2,000 5.82% $ 6,024 6.71% $ 8,024 $ 8,035 1.92 6.49%
Municipal bonds - - 419 5.49 419 430 2.66 5.49
FHLB stock 6,148 7.25 - - 6,148 6,148 - 7.25
Interest-earning deposits 27,127 5.20 - - 27,127 27,127 - 5.20
--------- --------- --------- --------- --------- --------- ------ -------
Total $ 35,275 5.59% $ 6,443 6.63% $ 41,718 $ 41,740 1.96 5.75%
========= ========= ========= ========= ========= ======== ====== =======
- ----------------------------------------------------------------------
(1) Total weighted average life in years calculated only on United
States Government agency securities and municipal bonds.
Sources of Funds
General. Deposits are the major source of the Bank's funds for
lending and other investment purposes. In addition to deposits, the
Bank derives funds from the amortization and prepayment of loans and
mortgage-backed securities, the maturity of investment securities,
operations and, if needed, advances from the FHLB. Scheduled loan
principal repayments are a relatively stable source of funds, while
deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and market conditions.
Borrowings may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources or on a
longer term basis for general business purposes.
Deposits. Consumer and commercial deposits are attracted
principally from within the Bank's market area through the offering of a
broad selection of deposit instruments including non-interest-bearing
demand accounts, NOW accounts, passbook savings, money market deposits,
term certificate accounts and individual retirement accounts. Deposit
account terms vary according to the minimum balance required, the period
of time during which the funds must remain on deposit, and the interest
rate, among other factors. The Bank regularly evaluates its internal
cost of funds, surveys rates offered by competing institutions, reviews
the Bank's cash flow requirements for lending and liquidity, and
executes rate changes when deemed appropriate. The Bank does not obtain
funds through brokers.
Deposit Portfolio. The following table sets forth information
regarding interest rates, terms, minimum amounts and balances of the
Bank's deposit portfolio as of December 31, 1996.
Weighted Percentage
Average of Total
Interest Rate Minimum Term Checking and Savings Deposits Amount Balances Deposits
------------- ------------ ----------------------------- ------ -------- --------
(In Thousands)
0.00 % None Non-interest-bearing demand $1,000 $ 26,406 3.80%
1.01 None NOW accounts 100 70,558 10.16
2.00 None Passbooks 100 87,534 12.60
2.50 None Money market accounts 2,500 44,012 6.34
Certificates of Deposit
-----------------------
4.75 0 - 3 months Fixed term, fixed rate 1,000 140,670 20.25
5.15 3 - 6 months Fixed term, fixed rate 1,000 90,970 13.09
5.50 6 - 12 months Fixed term, fixed rate 1,000 127,272 18.32
5.81 12 - 36 months Fixed term, fixed rate 1,000 79,894 11.50
6.00 36 - 60 months Fixed term, fixed rate 1,000 27,323 3.93
6.10 Over 60 months Fixed term, fixed rate 1,000 79 .01
--------- ---------
$ 694,718 100.00%
========= =========
The following table sets forth the change in dollar amount of
savings deposits in the various types of savings accounts offered
by the Bank between the dates indicated.
Balance Balance Deposit Incr. Balance Deposit Incr.
12/31/92 12/31/93 % (Decr) 12/31/94 % (Decr)
-------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
Noninterest bearing demand
accounts $ 11,043 $ 14,630 2.5% $ 3,587 $ 19,551 3.6% $ 4,921
NOW, Super NOW and funds
transfer accounts 65,598 68,380 11.7 2,782 65,025 12.1 (3,355)
Passbook and statement accounts 101,684 128,530 21.9 26,846 99,198 18.4 (29,332)
Variable rate money market
accounts 68,107 67,661 11.5 (446) 55,516 10.3 (12,145)
Time Deposits:
Maturing within 12 months 279,895 256,560 43.7 (23,335) 243,557 45.3 (13,003)
Maturing within 12-36 months 47,290 23,388 4.0 (23,902) 34,405 6.4 11,017
Maturing beyond 36 months 6 27,378 4.7 27,372 20,983 3.9 (6,395)
--------- --------- --------- --------- --------- -------- ---------
Total $ 573,623 $ 586,527 100.00% $ 12,904 $ 538,235 100.00% $ (48,292)
========= ========= ========= ========= ========= ========= =========
Balance Deposit Incr. Balance Deposit Incr.
12/31/95 % (Decr) 12/31/96 % (Decr)
-------- -------- -------- -------- -------- --------
Noninterest bearing demand
accounts $ 21,430 3.6% $ 1,879 $ 26,406 3.8% $ 4,976
NOW, Super NOW and funds
transfer accounts 67,886 11.4 2,861 70,558 10.2 2,672
Passbook and statement accounts 86,471 14.5 (12,727) 87,534 12.6 1,063
Variable rate money market
accounts 44,677 7.5 (10,839) 44,012 6.3 (665)
Time Deposits:
Maturing within 12 months 294,202 47.4 38,676 358,912 51.7 64,710
Maturing within 12-36 months 57,236 12.7 41,018 79,894 11.5 22,658
Maturing beyond 36 months 23,278 2.9 (3,923) 27,402 3.9 4,124
--------- --------- --------- --------- --------- ---------
Total $ 595,180 100.00% $ 56,945 $ 694,718 100.00% $ 99,538
========= ========= ========= ========= ========= =========
The following table sets forth the certificates of deposit in the
Bank classified by rates as of the dates indicated.
At December 31,
----------------------------------------
1994 1995 1996
--------- --------- ---------
Rate (In Thousands)
- ----
1.01 - 2.00% $ 1,590 $ 834 $ 949
2.01 - 3.00% 1,699 2 2
3.01 - 4.00% 62,823 1,198 20
4.01 - 5.00% 137,818 49,308 34,308
5.01 - 6.00% 63,804 205,595 333,998
6.01 - 7.00% 24,998 109,737 93,788
7.00 - 8.00% 6,141 8,025 3,079
8.01 - 9.00% 72 17 64
--------- --------- ---------
$ 298,945 $ 374,716 $ 466,208
========= ========= =========
The following table sets forth the amount and maturities of
certificates of deposit at December 31, 1996.
Amount Due
-------------------------------------------------------------------------
Less Than 1-2 2-3 3-4 4-5 After 5
One Year Years Years Years Years Years Total
-------- -------- -------- -------- -------- -------- --------
(In Thousands)
Rate
1.01 - 2.00% $ 934 $ 15 $ - $ - $ - $ - $ 949
2.01 - 3.00% - 2 - - - - 2
3.01 - 4.00% 15 - 5 - - - 20
4.01 - 5.00% 32,673 610 945 48 - 32 34,308
5.01 - 6.00% 255,478 58,482 11,010 3,888 4,247 893 333,998
6.01 - 7.00% 30,047 15,739 16,643 13,095 17,620 644 93,788
7.01 - 8.00% 2,865 161 - - - 53 3,079
8.01 - 9.00% 30 34 - - - - 64
--------- --------- --------- -------- --------- --------- ---------
$ 322,042 $ 75,043 $ 28,603 $ 17,031 $ 21,867 $ 1,622 $ 466,208
========= ========= ========== ======== ========= ========= =========
The following table indicates the amount of the Bank's negotiable
certificates of deposit of $100,000 or more by time remaining until maturity as of December 31, 1996.
Remaining Maturity Amounts
------------------ --------------
(In Thousands)
Three months or less $ 12,849
Three through six months 8,871
Six through twelve months 12,720
Over twelve months 19,240
------------
Total $ 53,680
============
The following table sets forth the net changes in the deposit
activities of the Bank for the periods indicated.
Year Ended December 31,
--------------------------------------------------
1994 1995 1996
---------- ---------- ----------
(In Thousands)
Deposits $ 1,903,691 $ 2,114,143 $ 2,557,621
Withdrawals 1,966,162 2,076,361 2,480,059
----------- ------------ ------------
Net increase (decrease) before interest credited (62,471) 37,782 77,562
Interest credited 14,179 19,163 21,976
----------- ------------ ------------
Net increase (decrease) in deposits $ (48,292) $ 56,945 $ 99,538
=========== ============ ============
Borrowings
Savings deposits are the primary source of funds of the Bank's
lending and investment activities and for its general business purposes.
If the need arises, the Bank, may rely upon advances from the FHLB and
the Federal Reserve Bank discount window to supplement its supply of
lendable funds and to meet deposit withdrawal requirements. Advances
from the FHLB typically are collateralized by the Bank's stock in the
FHLB and a portion of the Bank's first mortgage loans. At December 31,
1996, the Bank had $82.5 million in FHLB advances outstanding.
The FHLB functions as a central reserve bank providing credit for
the Bank and other member savings institutions and financial
institutions. As a member, the Bank is required to own capital stock in
the FHLB and is authorized to apply for advances on the security of such
stock and certain of its home mortgages and other assets (principally,
securities that are obligations of, or guaranteed by, the United States)
provided certain standards related to creditworthiness have been met.
Advances are made pursuant to several different programs. Each credit
program has its own interest rate and range of maturities. Depending on
the program, limitations on the amount of advances are based either on a
fixed percentage of a member institution's net worth or on the FHLB's
assessment of the institution's creditworthiness. All FHLB advances
have fixed interest rates and mature between two and 10 years.
Year Ended December 31,
----------------------------------------------------
1994 1995 1996
---------- ---------- ----------
(Dollars in Thousands)
FHLB advances:
Maximum month-end balance $ 86,659 $ 86,168 $ 91,135
Balance at end of period 86,659 85,169 82,517
Average balance 28,259 78,368 84,351
Weighted average interest rate on:
Balance at end of period 6.94% 6.86% 6.74%
Average balance for period 6.54% 7.00% 6.79%
Competition
The Bank's market area in Southeast Florida has a large
concentration of financial institutions, many of which are significantly
larger and have greater financial resources than the Bank, and all of
which are competitors of the Bank to varying degrees. As a result, the
Bank encounters strong competition both in attracting deposits and in
originating real estate and other loans. Its most direct competition
for deposits has come historically from commercial banks, brokerage
houses, other savings associations, and credit unions in its market
area, and the Bank expects continued strong competition from such
financial institutions in the foreseeable future. The Bank's market
area includes branches of several commercial banks that are
substantially larger than the Bank in terms of state-wide deposits. The
Bank competes for savings by offering depositors a high level of
personal service and expertise together with a wide range of financial
services.
The competition for real estate and other loans comes principally
from commercial banks, mortgage banking companies, and other savings
associations. This competition for loans has increased substantially in
recent years as a result of the large number of institutions competing
in the Bank's market area as well as the increased efforts by commercial
banks to expand mortgage loan originations.
The Bank competes for loans primarily through the interest rates
and loan fees it charges and the efficiency and quality of services it
provides borrowers, real estate brokers, and builders. Factors that
affect competition include general and local economic conditions,
current interest rate levels, and volatility of the mortgage markets.
Based on total assets as of June 1996, the Bank was the second
largest savings institution headquartered in Palm Beach County, and the
Bank held approximately 3.5% of all financial institution deposits in
Palm Beach County.
Subsidiary Activities
The Bank has one active wholly owned subsidiary, Fidelity Realty
and Appraisal Service, Inc., a Florida corporation ("FRAS"). FRAS is
primarily engaged in providing appraisal services for the Bank and
selling the Bank's REO. At December 31, 1996, the Bank had an equity
investment in FRAS of $207,000. For the year ended December 31, 1996,
FRAS had a net loss of $8,000.
Under FIRREA, SAIF-insured institutions are required to provide 30
days advance notice to the OTS and FDIC before establishing or acquiring
a subsidiary or conducting a new activity in a subsidiary. The insured
institution must also provide the FDIC and the OTS such information as
may be required by applicable regulations and must conduct the activity
in accordance with the rules and orders of the OTS. In addition to
other enforcement and supervision powers, the OTS may determine after
notice and opportunity for a hearing that the continuation of a savings
association's ownership of or relation to a subsidiary (i) constitutes a
serious risk to the safety, soundness or stability of the savings
association, or (ii) is inconsistent with the purposes of FIRREA. Upon
the making of such a determination, the OTS may order the savings
association to divest the subsidiary or take other actions.
Personnel
As of December 31, 1996, the Bank had 267 full-time and 31 part-
time employees. None of the Bank's employees is represented by a
collective bargaining group. The Bank believes its relationship with
its employees to be good.
Regulation
As a federally chartered, SAIF-insured savings association the Bank
is subject to examination, supervision and extensive regulation by the
OTS, and the FDIC. The Bank is a member of and owns stock in the FHLB
of Atlanta, which is one of the twelve regional banks in the Federal
Home Loan Bank System. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage
and is intended primarily for the protection of the insurance fund and
depositors.
The Bank also is subject to regulation by the Board of Governors of
the Federal Reserve System (the "Federal Reserve Board") governing
reserves to be maintained against deposits and certain other matters.
The Holding Company will be subject to supervision and regulation by the
OTS.
The OTS regularly examines the Bank and prepares reports for the
consideration of the Bank's Board of Directors on any deficiencies that
they may find in the Bank's operations. The FDIC also examines the Bank
in its role as the administrator of the SAIF. The Bank's relationship
with its depositors and borrowers also is regulated to a great extent by
both federal and state laws especially in such matters as the ownership
of savings accounts and the form and content of the Bank's mortgage
documents. Any change in such regulation, whether by the FDIC, OTS, or
Congress, could have a material adverse impact on the Holding Company
and the Bank and their operations.
The Federal Deposit Insurance Corporation Improvement Act of 1991.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") primarily addresses the recapitalization of the BIF, which
insures the deposits of commercial banks and savings banks. In
addition, FDICIA established a number of new mandatory supervisory
measures for savings associations and banks.
Standards for Safety and Soundness. FDICIA requires the federal
bank regulatory agencies to prescribe regulatory standards for all
insured depository institutions and depository institution holding
companies relating to: (i) internal controls, information systems and
audit systems; (ii) loan documentation; (iii) credit underwriting; (iv)
interest rate risk exposure; (v) asset growth; and (vi) compensation,
fees and benefits. The compensation standards would prohibit employment
contracts, compensation or benefit arrangements, stock option plans, fee
arrangements or other compensatory arrangements that provide excessive
compensation, fees or benefits or could lead to material financial loss.
In addition the federal banking regulatory agencies are required to
prescribe by regulation standards specifying: (i) maximum classified
assets to capital ratios; (ii) minimum earnings sufficient to absorb
losses without impairing capital; and (iii) to the extent feasible, a
minimum ratio of market value to book value for publicly traded shares
of depository institutions and depository institution holding companies.
Financial Management Requirements. Pursuant to FDICIA, in May
1993, the FDIC adopted rules establishing annual independent audits and
financial reporting requirements for all depository institutions with
assets of more than $500 million, their management and their independent
auditors. The rules also establish new requirements for the
composition, duties, and authority of such institutions' audit
committees and boards of directors, effective in fiscal years beginning
after December 31, 1992. Among other things, all depository
institutions with assets in excess of $500 million are required to
prepare and make available to the public annual reports on their
financial condition and management, including statements of management's
responsibility under regulations relating to safety and soundness, and
an assessment of the institution's compliance with internal controls,
laws and regulations. The institution's independent auditors are
required to attest to these management assessments. Each such
institution also is required to have an audit committee composed of
independent directors. Audit Committees of large institutions
(institutions with assets exceeding $3.0 billion) must: (i) include
members with banking or related financial management experience; (ii)
have the ability to engage their own independent legal counsel; and
(iii) must not include any large customers (as defined) of the
institution.
Prompt Corrective Action Regulation. FDICIA establishes a system
of prompt corrective action to resolve the problems of undercapitalized
institutions. Under this system, the OTS and the other banking
regulators are required to establish five capital categories ("well-
capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized") and
to take certain mandatory supervisory actions (and are authorized to
take other discretionary actions) with respect to institutions in the
three undercapitalized categories, the severity of which will depend
upon the capital category in which the institution is placed.
Generally, FDICIA requires the requisite banking regulator to appoint a
receiver or conservator for an institution that is critically
undercapitalized.
Under the OTS rule implementing the prompt corrective action
provisions, a savings institution that: (i) has a total risk-based
capital ratio of 10.0% or greater, a Tier I (core) risk-based capital
ratio of 6.0% or greater and a leverage ratio of 5.0% or greater; and
(ii) is not subject to any written agreement, order, capital directive
or prompt corrective action directive issued by the OTS, is deemed to be
well-capitalized. An institution with a total risk-based capital ratio
of 8.0% or greater, a Tier I risk-based capital ratio of 4.0% or greater
and a leverage ratio of 4.0% or greater, is considered to be adequately
capitalized. A savings institution that has a total risk-based capital
ratio of less than 8.0%, a Tier I risk-based capital ratio of less than
4.0%, or a leverage ratio that is less than 4.0% is considered to be
undercapitalized. A savings institution that has a total risk-based
capital ratio of less than 6.0%, a Tier I risk-based capital ratio of
less than 3.0% or a leverage ratio that is less than 3.0%, is considered
to be significantly undercapitalized. A savings institution that has a
tangible equity capital to assets ratio equal to or less than 2.0% is
deemed to be critically undercapitalized. For purposes of the
regulation, the term "tangible equity" includes core capital elements
counted as Tier I capital for purposes of the risk-based capital
standards plus the amount of outstanding cumulative perpetual preferred
stock (including related surplus), minus all intangible assets except
certain purchased mortgage servicing rights and qualifying supervisory
goodwill.
FDICIA authorizes the appropriate federal banking agency, after
notice and an opportunity for a hearing, to treat a well-capitalized,
adequately capitalized or undercapitalized insured depository
institution as if it had a lower capital classification if it is in an
unsafe or unsound condition or is engaging in an unsafe or unsound
practice. Thus, an adequately capitalized institution can be subjected
to the restrictions on undercapitalized institutions (provided that a
capital restoration plan cannot be required of the institution)
described below and an undercapitalized institution can be subjected to
the restrictions applicable to significantly undercapitalized
institutions described below.
Under FDICIA, an insured depository institution cannot make a
capital distribution (as broadly defined to include, among other things,
dividends, redemptions and other repurchases of stock) or pay management
fees to any person that controls the institution if thereafter it would
be undercapitalized. The appropriate federal banking agency, however,
may (after consultation with the FDIC) permit an insured depository
institution to repurchase, redeem, retire or otherwise acquire its
shares if such action: (i) is taken in connection with the issuance of
additional shares or obligations in at least an equivalent amount; and
(ii) will reduce the institution's financial obligations or otherwise
improve its financial condition. An undercapitalized institution
generally is prohibited form increasing its average total assets. An
undercapitalized institution also generally is prohibited from making
acquisitions, establishing any branches or engaging in any new line of
business except in accordance with an accepted capital restoration plan
or with the approval of the FDIC. In addition, the appropriate federal
banking agency is given authority with respect to any undercapitalized
depository institution to take any of the actions it is required to or
may take with respect to a significantly undercapitalized institution as
described below if it determines that such actions are necessary to
carry out the purpose of FDICIA.
Federal Regulations
Regulatory Capital. The capital requirements consist of a
"tangible capital requirement," a "leverage limit" and a "risk-based
capital requirement."
Under the tangible capital requirement, a savings association must
maintain tangible capital in an amount equal to at least 1.5% of
adjusted total assets. Tangible capital is defined as core capital less
all intangible assets (including supervisory goodwill), plus a specified
amount of purchased mortgage servicing rights. Further, the valuation
allowance applicable to the write-down of investments and mortgage-
backed securities in accordance with SFAS 115 is excluded from the
regulatory capital calculation.
The leverage limit adopted by the OTS requires that savings
associations maintain "core capital" in an amount equal to at least 3%
of adjusted total assets. The OTS, however, has proposed an amendment
to this requirement that would increase core capital requirements for
nearly all savings associations, as discussed below. Core capital is
defined as common stockholders' equity (including retained earnings),
non-cumulative perpetual preferred stock, and minority interests in the
equity accounts of consolidated subsidiaries, plus purchased mortgage
servicing rights valued at the lower of 90% of fair market value, 90% of
original cost or the current amortized book value as determined under
generally accepted accounting principles ("GAAP"), and "qualifying
supervisory goodwill," less non-qualifying intangible assets.
In addition, the OTS has proposed a rule that would limit the
amount of purchased mortgage servicing rights includable as core capital
to 50% of such capital. No assurance can be given as to the final form
of such regulation, the date of its effectiveness, or whether it will
differ materially from the proposal. The proposal, if adopted as
proposed, is not anticipated to have any immediate effect on the Bank.
In April 1991, the OTS published a proposed amendment to the
regulatory capital requirements applicable to all savings associations
to conform to Office of the Comptroller of the Currency ("OCC") capital
regulations applicable to national banks. Under the OTS proposal, those
savings associations receiving a CAMEL rating of "1", the best possible
rating on a scale of 1 to 5, will be required to maintain a ratio of
core capital to adjusted total assets of 3%. All other savings
associations will be required to maintain minimum core capital of 4% to
5% of total adjusted assets. In determining the required minimum core
capital ratio, the OTS will assess the quality of risk management and
the level of risk in each savings association on a case-by-case basis.
The OTS did not indicate in the proposed regulation the standards it
will use in establishing the appropriate core capital requirement for
savings associations not rated "1" under the CAMEL rating system. At
December 31, 1996, the Bank's ratio of core capital to total adjusted
assets was 9.2%. The OTS prohibits savings associations from disclosing
their CAMEL ratings.
A savings association that does not meet the minimum regulatory
capital requirements because of the new core capital requirement will be
required to submit a capital restoration plan to the OTS that sets forth
in reasonable detail the steps the association will take to be in
compliance. The capital plans will be required to be filed within 60
days of the effective date of the new regulation. If the OTS rejects a
savings association's capital plan, the OTS may require an amended
capital plan to be filed, or the OTS can take supervisory action against
the association. The Bank is unable to predict when such regulation
will be adopted, or, if adopted, the final form that such regulation
will take.
Under the risk-based capital requirement, a savings association
must maintain total capital (which is defined as core capital plus
supplementary capital) equal to at least 8.0% of risk-weighted assets.
A savings association must calculate its risk-weighted assets by
multiplying each asset and off-balance sheet item by various risk
factors, which range from 0% for cash and securities issued by the
United States Government or its agencies to 100% for repossessed assets
or loans more than 90 days past due. Supplementary capital may include,
among other items, cumulative perpetual preferred stock, perpetual
subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock, and general allowances for loan
losses. The allowance for loan losses includable in supplementary
capital is limited to 1.25% of risk-weighted assets. Supplementary
capital is limited to 100% of core capital.
Effective January 1, 1994, the OTS has amended its risk-based
capital requirements to require institutions with an "above normal"
level of interest rate risk to exclude certain amounts of capital to
take account of such risk in determining compliance with the risk-based
requirements. A savings institution will be considered to have a
"normal" level of interest rate risk if the decline in the market value
of its portfolio equity after an immediate 200 basis point increase or
decrease in market interest rates (whichever leads to the greater
decline) is less than two percent of the current estimated market value
of its assets. The market value of portfolio equity is defined as the
net present value of expected cash inflows and outflows from an
institution's assets, liabilities and off-balance sheet items. The
amount of additional capital that an institution with an above normal
interest rate risk would be required to maintain (the "interest rate
risk component") would equal one-half of the dollar amount by which its
measured interest rate risk exceeds the normal level of interest rate
risk. The interest rate risk component would be in addition to the
capital otherwise required to satisfy the risk-based capital
requirement. At December 31, 1996, the OTS had not implemented the
interest rate risk component. Had the interest rate risk component been
implemented as originally proposed, the Bank would not have been
required to allocate any of its excess risk-based capital for interest
rate risk purposes at December 31, 1996.
Certain exclusions from capital and assets are required to be made
for the purpose of calculating total capital, in addition to the
adjustments required for calculating core capital. Such exclusions
consist of equity investments (as defined by regulation) and that
portion of land loans and non-residential construction loans in excess
of an 80% loan-to-value ratio (these items are excluded on a sliding
scale through December 31, 1996, after which they must be excluded in
their entirety) and reciprocal holdings of qualifying capital
instruments.
The OTS and the FDIC generally are authorized to take enforcement
action against a savings association that fails to meet its capital
requirements, which action may include restrictions on operations and
banking activities, the imposition of a capital directive, a cease-and-
desist order, civil money penalties or harsher measures such as the
appointment of a receiver or conservator or a forced merger into another
institution. In addition, under current regulatory policy, a savings
association that fails to meet its capital requirements is prohibited
from paying any dividends. Except under certain circumstances, further
disclosure of final enforcement actions by the OTS is required.
Federal Home Loan Bank System. The Bank is a member of the Federal
Home Loan Bank ("FHLB") of Atlanta, which is one of the 12 regional
FHLBs. As a member of the FHLB, the Bank is required to purchase and
maintain stock in the FHLB of Atlanta in an amount equal to the greater
of 1% of its aggregate unpaid residential mortgage loans, home purchase
contracts or similar obligations at the beginning of each year, or 1/20
(or such greater fraction as established by the FHLB) of outstanding
FHLB advances. At December 31, 1996 the Bank had $6.1 million in FHLB
of Atlanta stock, which was in compliance with this requirement. In
past years the Bank has received dividends on its FHLB stock. Over the
past five years such dividends have averaged 6.50%, and was 7.25% for
the year ended December 31, 1996. Certain provisions of FIRREA require
all 12 FHLBs to provide financial assistance for the resolution of
troubled savings associations and to contribute to affordable housing
programs through direct loans or interest subsidies on advances targeted
for community investment and low- and moderate-income housing projects.
These contributions could cause rates on the FHLB advances to increase
and could affect adversely the level of FHLB dividends paid and the
value of FHLB stock in the future.
Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System.
It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the board of directors of the FHLB. These
policies and procedures are subject to the regulation and oversight of
the Federal Housing Finance Board (the "FHFB").
FHLB advances must be fully secured by sufficient collateral as
determined by the FHLB. Eligible collateral consists of mortgage loans
less than 90 days delinquent or securities evidencing interests therein,
securities (including mortgage-backed securities) issued, insured, or
guaranteed by the federal government or any agency thereof, FHLB
deposits, and to a limited extent, real estate with readily
ascertainable value in which a perfected security interest may be
obtained. Other forms of collateral may be accepted as
collateralization under certain circumstances. All long-term advances
are required to be used to provide funds for residential home financing.
In addition, the FHFB has established standards of community service
that members must meet to maintain access to long-term advances. FHLBs
are authorized to make short-term liquidity advances to solvent
associations in poor financial condition but with prospects of
improving, upon the request of the OTS. In addition, pursuant to FHLB
regulations, each FHLB is required to establish programs for affordable
housing that involve interest subsidies from the FHLBs on advances to
members engaged in lending at subsidized interest rates for low- and
moderate-income, owner-occupied housing and affordable housing, and
certain other community purposes.
Qualified Thrift Lender Test. The qualified thrift lender ("QTL")
test requires that a savings institution maintain at least 65% of its
total portfolio assets in "qualified thrift investments" on an average
basis in nine out of every twelve months. For purposes of the test,
portfolio assets are defined as the total assets of the savings
institution minus: goodwill and other intangible assets, the value of
property used by the savings institution to conduct its business and
liquid assets not to exceed 20% of the savings institution's total
assets.
Under the QTL's statutory and regulatory provisions, all forms of
home mortgages, home improvement loans, home equity loans and loans on
the security of other residential real estate and mobile homes as well
as a designated percentage of consumer loans are "qualified thrift
investments," as are shares of stock of the FHLB, investments or
deposits in other insured institutions, securities issued by the FNMA,
FHLMC, GNMA or the RTC Financing Corporation and other mortgage-related
securities. Investments in nonsubsidiary corporations or partnerships
whose activities include servicing mortgages or real estate development
are also considered qualified thrift investments in proportion to the
amount of primary revenue such entities derive from housing-related
activities. Also included in qualified thrift investments are mortgage
servicing rights, whether such rights are purchased by the insured
institution or created when the institution sells loans and retains the
right to service such loans.
A savings institution that fails to become, or maintain its status
as, a qualified thrift lender must either become a bank (other than a
savings bank) or be subject to certain restrictions. A savings
institution that fails to meet the QTL test and does not convert to a
bank will be: (i) prohibited from making an investment or engaging in
activities that would not be permissible for national banks; (ii)
prohibited from establishing any new branch office where a national bank
located in the savings institution's home state would not be able to
establish a branch office; (iii) ineligible to obtain new advances from
any Federal Home Loan Bank; and (iv) subject to limitations on the
payment of dividends comparable to the statutory and regulatory dividend
restrictions applicable to national banks. Also, beginning three years
after the date on which the savings institution ceases to be a qualified
thrift lender, the savings institution would be prohibited from
retaining any investment or engaging in any activity not permissible for
a national bank and would be required to repay any outstanding advances
to any FHLB. A savings institution may requalify as a qualified thrift
lender if it thereafter complies with the QTL test.
As of December 31, 1996, the Bank was in compliance with the QTL
requirement. At December 31, 1996, 90.6% of the Bank's assets were
"qualified thrift investments."
Liquidity Requirements. Federally insured savings associations are
required to maintain an average daily balance of liquid assets equal to
a certain percentage of the sum of average daily balances of net
withdrawable deposit accounts and borrowings payable in one year or
less. The liquidity requirement may vary from time to time (between
4.0% and 10.0%) depending upon economic conditions and savings flows of
all savings associations. At the present time, the required liquid
asset ratio is 5.0%.
For purposes of this ratio, liquid assets include specified short-
term assets (such as cash, certain time deposits, certain bankers'
acceptances and short-term United States Treasury obligations), and
long-term assets such as United States Treasury obligations of more than
one and less than five years and federal agency obligations with a
minimum term of 18 months. The regulations governing liquidity
requirements include as liquid assets debt securities hedged with
forward commitments obtained from dealers in United States Government
securities or Associations whose accounts are insured by the FDIC, debt
securities directly hedged with a short financial futures position, and
debt securities that provide the holder with a right to redeem the
security at par value, regardless of the stated maturities of such
securities. FIRREA also authorizes the OTS to designate as liquid
assets certain mortgage-related securities and certain mortgage loans
(qualifying as backing for certain mortgage-backed securities) with less
than one year to maturity. Short-term liquid assets currently must
constitute at least 1% of an association's average daily balance of net
withdrawable deposit accounts and current borrowings. Penalties may be
imposed upon associations for violations of the liquidity requirements.
The monthly average liquidity ratio of the Bank for December 1996 was
6.15% and exceeded the then applicable requirement of 5.0%.
Insurance of Accounts and Regulation by the FDIC. The Bank's
deposits are insured up to $100,000 per insured member (as defined by
law and regulation) by the SAIF. This insurance is backed by the full
faith and credit of the United States Government. The SAIF is
administered and managed by the FDIC. As insurer, the FDIC is
authorized to conduct examinations of and to require reporting by SAIF-
insured associations. It also may prohibit any SAIF-insured association
from engaging in any activity the FDIC determines by regulation or order
to pose a serious threat to the SAIF. The FDIC also has the authority
to initiate enforcement actions against savings associations, after
first giving the OTS an opportunity to take such action.
The minimum annual deposit insurance premiums are currently
assessed at the rate of .065% of deposits for all SAIF-insured members.
The FDIC, however, is authorized to raise premiums in certain
circumstances related to fund losses and severe economic circumstances
and has exercised this authority several times with respect to premiums
paid to the BIF by commercial banks and BIF-member savings associations.
In September 1996, Congress enacted legislation to recapitalize the
SAIF by a one-time assessment on all SAIF-insured deposits held as of
March 31, 1995. The assessment was 65.7 basis points per $100 in
deposits, payable on November 27, 1996. In addition, beginning January
1, 1997, pursuant to the legislation, interest payments on FICO bonds
issued in the late 1980's by the Financing Corporation to recapitalize
the now defunct Federal Savings and Loan Insurance Corporation will be
paid jointly by BIF-insured institutions and SAIF-insured institutions.
The FICO assessment will be 1.29 basis points per $100 in BIF deposits
and 6.44 basis points per $100 in SAIF deposits. Beginning January 1,
2000, the FICO interest payments will be paid pro rata by banks and
thrifts based on deposits (approximately 2.4 basis points per $100 in
deposits).
The legislation also provides for the merger of the BIF and SAIF on
January 1, 1999 if there are no more savings associations as of that
date. Several bills have been introduced in the current Congress that
would eliminate the federal thrift charter and OTS. The bills would
require that all federal savings associations convert to national banks
or state depository institutions by no later than January 1, 1998 in one
bill and June 30, 1998 in the other and would treat all state savings
associations as state banks for purposes of federal banking laws.
Subject to a narrow grandfathering, all savings and loan holding
companies would become subject to the same regulation as bank holding
companies under the pending legislative proposals. Under such
proposals, any lawful activity in which a savings association would be
permitted for up to two years following the effective date of its
conversion to the new charter, with two additional one-year extension
which may be granted at the discretion of the regulator. Additionally,
such proposals would grandfather existing thrift intrastate and
interstate branches which were operated as branches or in the process of
being established on January 1, 1997 or January 7, 1997, respectively.
The legislative proposals would also abolish the OTS and transfer its
functions to the federal bank regulators with respect to the
institutions and to the Federal Reserve Board with respect to the
regulation of holding companies. The Company is unable to predict
whether the legislation will be enacted or, given such uncertainty,
determine the extent to which the legislation, if enacted, would affect
its business. The Company is also unable to predict whether the SAIF
and BIF funds will eventually be merged.
Limitations on Capital Distributions. OTS regulations impose
limitations on all capital distributions by savings institutions.
Capital distributions include cash dividends, payments to repurchase or
otherwise acquire the savings association's shares, payments to
stockholders of another institution in a cash-out merger, and other
distributions charged against capital. The rule establishes three tiers
of institutions. An institution that exceeds all fully phased-in
capital requirements before and after a proposed capital distribution
("Tier 1 Association") may, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year up to (i)
100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its surplus capital at the beginning of
the calendar year or (ii) 75% of its net income over the most recent
four-quarter period. Any additional capital distributions would require
prior regulatory approval. An institution that meets its regulatory
capital requirement, but not its fully phased-in capital requirement
before or after its capital distribution ("Tier 2 Association") may,
after prior notice but without the approval of the OTS, make capital
distributions of: up to 75% of its net income over the most recent four
quarter period if it satisfies the risk-based capital requirement that
would be applicable to it on January 1, 1993, computed based on its
current portfolio; up to 50% of its net income over the most recent four
quarter period if it satisfies the risk based capital standard that was
applicable to it on January 1, 1991, computed based on its current
portfolio; and up to 25% of its net income over the most recent four
quarter period if it satisfies its current risk-based capital
requirement. In computing the institution's permissible percentage of
capital distributions, previous distributions made during the prior four
quarter period must be included. A savings institution that does not
meet its current regulatory capital requirement before or after payment
of a proposed capital distribution ("Tier 3 Association") may not make
any capital distributions without the prior approval of the OTS. In
addition, the OTS would prohibit a proposed capital distribution by any
institution, which would otherwise be permitted by the regulation, if
the OTS determines that such distribution would constitute an unsafe or
unsound practice. In addition, FDICIA provides that, as a general rule,
a financial institution may not make a capital distribution if it would
be undercapitalized after making the capital distribution. Also, an
institution meeting the Tier 1 capital criteria which has been notified
that it needs more than normal supervision will be treated as a Tier 2
or Tier 3 Association unless the OTS deems otherwise. A recently
proposed OTS rule would amend the capital distribution regulation to
provide that a Tier 1 Association would be permitted to make capital
distributions under the Tier 1 standard or, consistent with the highest
Tier 2 standard, at 75% of its net income to date over the most recent
four quarter period. As of December 31, 1996, the Bank was a Tier 1
Association.
Investment Limitations. FIRREA generally provides that state-
chartered savings associations may not engage as principal in any type
of activity, or in any activity in any amount not permitted for
federally-chartered associations, or directly acquire or retain any
equity investment of a type or amount not permitted for federally-
chartered associations. The FDIC has authority to grant exceptions from
these prohibitions (other than with respect to non-service corporation
equity investments) if it determines no significant risk to the
insurance fund is posed by the amount of the investment or the activity
to be engaged in if the Bank is and continues to be in compliance with
fully phased-in standards. Among activity restrictions applicable to
federally-chartered institutions that are also applicable to the Bank is
the prohibition on investing directly in equity securities or real
estate (other than that used for offices and related facilities or
acquired through, or in lieu of, foreclosure). In addition, the Bank is
authorized to invest directly in service corporation to a maximum of 2%
of the Bank's assets, plus an additional 1% of assets if the amount over
2% is used for specified community or intercity development purposes.
Federal laws and regulations also impose certain limitations on
operations, including restrictions on loans to one borrower,
transactions with affiliates and affiliated persons and liability
growth.
FIRREA also imposed investment and lending restrictions that are
applicable to all federally- or state-chartered associations. FIRREA
provides that no savings association may invest in corporate debt
securities not rated in one of the four highest rating categories by a
nationally recognized rating organization. FIRREA and FDICIA amend the
authority of savings associations to engage in transactions with
affiliates or to make loans to certain insiders, by making such
transactions subject to Sections 23A, 23B, 22(g) and 22(h) of the
Federal Reserve Act. Among other things, these provisions generally
require that these transactions with affiliates be on terms and
conditions comparable to those for similar transactions with non-
affiliates. In addition, these affiliate transactions may be regulated
further by the OTS to address safety and soundness concerns.
Holding Company Regulation. The Company and the MHC are holding
companies within the meaning of the Home Owners' Loan Act of 1933, as
amended ("HOLA"). As such, the Company and the MHC are registered with
and is subject to OTS examination and supervision as well as certain
reporting requirements. In addition, the operations of the Company and
the MHC are subject to the Regulations as well as other regulations
promulgated by the OTS from time to time. As a SAIF-insured subsidiary
of a savings and loan holding company, the Bank is subject to certain
restrictions in dealing with the Company and MHC and with other persons
affiliated with the Company and the MHC and will continue to be subject
to examination and supervision by the OTS and the FDIC.
Transactions with Affiliates. Section 11 of HOLA provides that
transactions between an insured subsidiary of a holding company and an
affiliate thereof will be subject to the restrictions that apply to
transactions between banks that are members of the Federal Reserve
System and their affiliates pursuant to Sections 23A and 23B of the
Federal Reserve Act. Generally, Sections 23A and 23B: (i) limit the
extent to which a financial institution or its subsidiaries may engage
in "covered transactions" with an "affiliate," to an amount equal to 10%
of the institution's capital and surplus, and limit all "covered
transactions" in the aggregate with all affiliates to an amount equal
to 20% of such capital and surplus; and (ii) require that all
transactions with an affiliate, whether or not "covered transactions,"
be on terms substantially the same, or at least as favorable to the
institution or subsidiary as those provided to a non-affiliate. The
term "covered transaction" includes the making of loans, purchase of
assets, issuance of a guarantee and similar types of transactions.
Management believes that the Bank is in compliance with the requirements
of Sections 23A and 23B. In addition to the restrictions that apply to
financial institutions generally under Sections 23A and 23B, Section 11
of the HOLA places three other restrictions on savings associations,
including those that are part of a holding company organization. First,
savings associations may not make any loan or extension of credit to an
affiliate unless that affiliate is engaged only in activities
permissible for bank holding companies. Second, savings associations
may not purchase or invest in affiliate securities except for those of a
subsidiary. Finally, the Director is granted authority to impose more
stringent restrictions when justifiable for reasons of safety and
soundness.
Extensions of credit by the Bank to executive officers, directors,
and principal stockholders and related interests of such persons are
subject to Sections 22 (g) and 22(h) of the Federal Reserve Act and
Subpart A of the Federal Reserve Board's Regulation O. These rules
prohibit loans to any such individual where the aggregate amount exceeds
an amount equal to 15% of an institution's unimpaired capital and
surplus plus an additional 10% of unimpaired capital and surplus in the
case of loans that are fully secured by readily marketable collateral,
and/or when the aggregate amount outstanding to all such individuals
exceeds the institution's unimpaired capital and unimpaired surplus.
These rules also provide that no institution shall make any loan or
extension of credit in any manner to any of its executive officers or
directors, or to any person who directly or indirectly, or acting
through or in concert with one or more persons, owns, controls, or has
the power to vote more than 10% of any class of voting securities of
such institution ("Principal Stockholder"), or to a related interest
(i.e., any company controlled by such executive officer, director, or
Principal Stockholder), or to any political or campaign committee the
funds or services of which will benefit such executive officer,
director, or Principal Stockholder or which is controlled by such
executive officer, director, or Principal Stockholder, unless such loan
or extension of credit is made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons, does not involve more
than the normal risk of repayment or present other unfavorable features,
and the institution follows underwriting procedures that are not less
stringent than those applicable to comparable transactions by the
institution with persons who are not executive officers, directors,
Principal Stockholders, or employees of the institution. A savings
association is therefore prohibited from making any new loans or
extensions or credit to the savings association's executive officers,
directors, and 10% stockholders at different rates or terms than those
offered to employees of the Bank generally. The rules identify limited
circumstances in which an institution is permitted to extend credit to
executive officers. Management believes that the Bank is in compliance
with Sections 22(g) and 22(h) of the Federal Reserve Act and Subpart A
of the Federal Reserve Board's Regulation O.
The Federal Reserve System. Federal Reserve Board regulations
require all depository institutions to maintain non-interest earning
reserves against their transaction accounts (primarily NOW and Super NOW
checking accounts) and non-personal time deposits. Reserves of 3% must
be maintained against total transaction accounts of $54.0 million or
less (after a $4.0 million exemption), and an initial reserve of 10%
(subject to adjustment by the Federal Reserve Board to a level between
8% and 14%) must be maintained against that portion of total transaction
accounts in excess of such amount. At December 31, 1996, the Bank was
in compliance with these reserve requirements. The balances maintained
to meet the reserve requirements imposed by the Federal Reserve Board
may be used to satisfy liquidity requirements that may be imposed by the
OTS. See "-Federal Regulations-Liquidity Requirements."
Savings associations are authorized to borrow from the Federal
Reserve Bank "discount window," but Federal Reserve Board regulations
require savings associations to exhaust other reasonable alternative
sources of funds, including FHLB advances, before borrowing from the
Federal Reserve Bank.
Federal and State Taxation
Federal Taxation. For federal income tax purposes, the Company
files a federal income tax return on a calendar year basis. Because the
Mutual Holding Company owns less than 80% of the outstanding common
stock of the Bank, it is not permitted to file a consolidated federal
income tax return with the Bank. Because the Mutual Holding Company has
nominal assets other than the stock of the Bank, it will initially have
no material federal income tax liability.
Under recently enacted legislation, the percentage of taxable
income method has been repealed for years beginning after December 31,
1995, and "large" associations, i.e., the quarterly average of the
association's total assets or of the consolidated group of which it is a
member, exceeds $500 million for the year, may no longer be entitled to
use the experience method of computing additions to their bad debt
reserve. A "large" association must use the direct write-off method for
deducting bad debts, under which charge-offs are deducted and recoveries
are taken into taxable income as incurred. If the Bank is not a "large"
association, the Bank will continue to be permitted to use the
experience method. The Bank will be required to recapture (i.e., take
into income) over a six-year period its applicable excess reserves, i.e,
the balance of its reserves for losses on qualifying loans and
nonqualifying loans, as of the close of the last tax year beginning
before January 1, 1996, over the greater of (a) the balance of such
reserves as of December 31, 1987 (pre-1988 reserves) or (b) in the case
of a bank which is not a "large" association, an amount that would have
been the balance of such reserves as of the close of the last tax year
beginning before January 1, 1996, had the Bank always computed the
additions to its reserves using the experience method. Postponement of
the recapture is possible for a two-year period if an association meets
a minimum level of mortgage lending for 1996 and 1997.
If an association ceases to qualify as a "bank" (as defined in Code
Section 581) or converts to a credit union, the pre-1988 reserves and
the supplemental reserve are restored to income ratably over a six-year
period, beginning in the tax year the association no longer qualifies as
a bank. The balance of the pre-1988 reserves are also subject to
recapture in the case of certain excess distributions to (including
distributions on liquidation and dissolution), or redemptions of,
shareholders.
Delaware Taxation. As a Delaware holding company doing business in
another state, the Company is exempted from Delaware corporate income
tax but is required to file an annual report with and pay an annual fee
to the State of Delaware. The Company is also subject to an annual
franchise tax imposed by the State of Delaware.
Florida Taxation. Foreign corporations, like the Company, pay a
5_% tax on the portion of their net taxable income which is allocable to
the State of Florida.
The Company has not been audited by the Internal Revenue Service,
the State of Delaware or the State of Florida within the past five
years. See Notes 1 and 13 to the Financial Statements.
Executive Officers of the Registrant
Listed below is information, as of December 31, 1996, concerning
the Registrant's executive officers. There are no arrangements or
understandings between the Registrant and any of persons named below
with respect to which he or she was or is to be selected as an officer.
Name Age Position and Term
---- --- --------------------------------------
Vince A. Elhilow 57 President since 1987 and Chief
Executive Officer since 1992; Director
of the Bank since 1984
J. Robert McDonald 66 Executive Vice President of the Bank
as of December; 31, 1994; Manager of
the Appraisal Department since 1972;
President of Fidelity Realty &
Appraisal Service, Inc. since 1982
Richard D. Aldred 52 Executive Vice President as of
December 31, 1994; Treasurer and Chief
Financial Officer since 1985
Joseph C. Bova 52 Executive Vice President as of
December 31, 1994; Lending Operations
Manager
Robert L. Fugate 48 Executive Vice President as of
December 31, 1994; Banking Operations
Manager since 1982
Christopher H. Cook 53 Executive Vice President as of
December 31, 1996; Corporate Counsel
since 1996; Director of the Bank since
1993
David R. Hochstetler 52 Senior Vice President since 1984;
Director of Marketing since 1980; CRA
Officer since 1989
Janice R. Newlands 48 Senior Vice President since 1989;
Director of Human Resources Director
since 1986
Kenneth B. Stone, Jr. 46 Senior Vice President since 1989; Loan
Production Manager since 1984
Daniel F. Turk 42 Senior Vice President since 1991;
Property and Risk Manager since 1983
Patricia C. Clager 61 Vice President since 1990; Corporate
Secretary since 1987; Assistant to the
Chairman of the Board
Flora R. Schmidt 41 Senior Vice President since 1995;
Banking Administration Manager since
1984
Joseph B. Shearouse III 39 Senior Vice President since 1995;
Commercial Loan Manager since 1995
Brian C. Mahoney 36 Senior Vice President since December
31, 1995; Controller since 1988
ITEM 2. PROPERTIES
The Bank conducts its business through its main office located in
West Palm Beach, Florida, and 19 additional full service branch offices
located in Palm Beach and Martin counties. The following table sets
forth certain information concerning the main office and each branch
office of the Bank at December 31, 1996. The aggregate net book value
of the Bank's premises and equipment was $18.1 million at December 31,
1996.
LOCATION OPENING DATE OWNERSHIP ANNUAL RENT
- -------- ------------ --------- -----------
Main Office 12/22/52 Fee Simple/ $ 7,420
218 Datura St. Ground Lease
West Palm Beach, Florida
45th St. 10/23/60 Fee Simple -
4520 45th St.
West Palm Beach, Florida
Northlake 11/15/65 Fee Simple -
950 Northlake Blvd
Lake Park, Florida
Forest Hill 4/05/71 Fee Simple -
399 Forest Hill Blvd
West Palm Beach, Florida
Palm Beach 6/18/73 Fee Simple -
245 Royal Poinciana
Palm Beach, Florida
Century Corners 6/25/73 Fee Simple -
4835 Okeechobee Blvd
West Palm Beach, Florida
Singer Island 2/04/74 Fee Simple -
1200 E. Blue Heron
Riviera Beach, Florida
Jupiter/Tequesta 1/26/76 Ground Lease $ 13,250
171 Tequesta Dr
Tequesta, Florida
Royal Palm Beach 3/15/76 Fee Simple -
100 Royal Palm Beach Blvd
Royal Palm Beach, Florida
Boynton Beach 12/19/77 Lease $ 120,458
1501 Corporate Dr
Boynton Beach, Florida
West Lake Worth 12/03/79 Fee Simple -
6535 Lake Worth Rd
Lake Worth, Florida
Wellington 6/02/80 Fee Simple -
12000 W. Forest Hill Blvd
Wellington, Florida
Delray Beach 10/20/80 Ground Lease $ 68,916.
5017 W. Atlantic Ave
Delray Beach, Florida
Jensen Beach 9/14/81 Fee Simple -
1021 NE Jensen Beach Blvd
Jensen Beach, Florida
Bear Lakes 5/15/89 Lease $ 192,286
701 Village Blvd
West Palm Beach, Florida
Palm Beach Gardens 5/20/91 Lease $ 143,523
10973 N. Military Tr
Palm Beach Gardens, Florida
Kanner/Monterey 7/06/93 Fee Simple -
2401 S. Kanner Highway
Stuart, Florida
Stuart 12/13/93 Fee Simple -
2980 South Federal Highway
Stuart, Florida
West Forest Hill 9/30/96 Fee Simple -
3989 Forest Hill Blvd.
West Palm Beach, Florida
The Bank's accounting and record keeping activities are maintained
on the Florida Informanagement Services, Inc. (FIS) service bureau
system. FIS is owned by its participating members, of which the Bank is
one. The Bank's investment in FIS at December 31, 1996 was $96,000,
which represented a 9.88% interest in the Company. The Bank also owns
data processing equipment it uses for its internal processing needs. The
net book value of such data processing equipment and related software at
December 31, 1996, was approximately $950,000.
ITEM 3. LEGAL PROCEEDINGS
- -----------------------------
There are various claims and lawsuits in which the Bank is
periodically involved incident to the Bank's business. In the opinion
of management, no material loss is expected from any of such pending
claims or lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ---------------------------------------------------------------
No matters were submitted during the fourth quarter of the year
ended December 31, 1996 to a vote of security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
- ------------------------------------------------------------
For information concerning the market for the Registrant's common
stock, the section captioned "Stockholder Information" of the
Registrant's Annual Report to Stockholders for the Year Ended December
31, 1996 (the "Annual Report to Stockholders") is incorporated herein by
reference.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
- ----------------------------------------------------------
The "Selected Consolidated Financial and Other Data" section of the
Registrant's Annual Report to Stockholders is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------
The "Management's Discussion and Analysis of Financial Condition
and Results of Operations" section of the Registrant's Annual Report to
Stockholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS
- --------------------------------
The financial statements identified in Item 14(a)(1) hereof are
incorporated by reference hereunder.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
- ------------------------------------------------------------
There were no changes in or disagreements with accountants in the
Registrant's accounting and financial disclosure during 1996.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
- -----------------------------------------------------
Information concerning Directors of the Registrant is incorporated
herein by reference from the Registrant's definitive Proxy Statement
dated March 15, 1997 (the "Proxy Statement"), specifically the section
captioned "Proposal I-Election of Directors." In addition, see Item 1.
"Executive Officers of the Registrant" for information concerning the
Company's executive officers.
ITEM 11. EXECUTIVE COMPENSATION
- -----------------------------------
Information concerning executive compensation is incorporated
herein by reference from the Registrant's Proxy Statement, specifically
the sections captioned "Proposal I-Election of Directors-Executive
Compensation," "-Directors' Compensation," and "-Benefits."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
- ------------------------------------------------------------
Information concerning security ownership of certain owners and
management is incorporated herein by reference from the Registrant's
Proxy Statement.
ITEM 13. CERTAIN TRANSACTIONS
- ---------------------------------
Information concerning relationships and transactions is
incorporated herein by reference from the Registrant's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
- --------------------------------------------------------
The exhibits and financial statement schedules filed as a
part of this Form 10-K are as follows:
(a)(1) Financial Statements
--------------------
* Independent Auditors' Report
* Consolidated Statements of Financial Condition,
December 31, 1995 and 1996
* Consolidated Statements of Operations,
Years Ended December 31, 1994, 1995 and 1996
* Consolidated Statements of Changes in Stockholders'
equity, Years Ended December 31, 1994, 1995 and 1996
* Consolidated Statements of Cash Flows,
Years Ended December 31, 1994, 1995 and 1996
* Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
-----------------------------
No financial statement schedules are filed because the
required information is not applicable or is included in
the consolidated financial statements or related notes.
(a)(3) Exhibits
--------
3.1 Federal Stock Charter of Fidelity Federal Savings Bank
of Florida (Incorporated by reference to Exhibit
2(C)(5) of the Bank's Form MHC-1, as amended)
3.2 Bylaws of Fidelity Federal Savings Bank of Florida
(Incorporated by reference to Exhibit 2(C)(6) of the
Bank's Form MHC-1, as amended)
4 Common Stock Certificate of the Bank (Incorporated
by reference to Exhibit 2(B)(1) of the Bank's Form
MHC-1, as amended)
10.1 Incentive Stock Option Plan (Incorporated by
reference to Exhibit 2(D)(6) of the Bank's Form
MHC-1, as amended)
10.2 Stock Option Plan for Outside Directors
(Incorporated by reference to Exhibit 2(D)(7) of the
Bank's Form MHC-1, as amended)
10.3 Employment Agreement with Vince A. Elhilow,
President and Chief Executive Officer (Incorporated
by reference to Exhibit 2(D)(1) of the Bank's Form
10-K filed on March 29, 1994)
10.4 Recognition and Retention Plan for Employees
(Incorporated by reference to Exhibit 2(D)(4) of the
Bank's Form MHC-1, as amended)
10.5 Recognition and Retention Plan for Outside Directors
(Incorporated by reference to Exhibit 2(D)(5) of the
Bank's Form MHC-1, as amended)
10.6 Employee Severance Compensation Plan (Incorporated
by reference to Exhibit 2(D)(2) of the Bank's Form
MHC-1, as amended)
10.6.A Severance Agreement between the Bank and Richard D.
Aldred, Executive Vice President (Incorporated by
reference to Exhibit 10.6A of the Bank's Form 10-K
filed on March 29, 1994)
10.6.B Severance Agreement between the Bank and Joseph C.
Bova, Executive Vice President
10.6.C Severance Agreement between the Bank and Robert L.
Fugate, Executive Vice President
10.7 Employee Stock Ownership Plan (Incorporated by
reference to Exhibit 2(D)(3) of the Bank's Form
MHC-1, as amended)
10.8 Fidelity Federal Savings Bank of Florida Senior
Management Performance Incentive Award Plan
(Incorporated by reference to Exhibit 2(D)(8) of the
Bank's Form MHC-1, as amended)
13 1996 Annual Report to Stockholders
21 Subsidiaries of the Registrant
99.1 Proxy Statement for Annual Meeting of Stockholders
(b) Reports on Form 8-K:
-------------------
The Registrant filed no Current Report on Form 8-K
during the fourth quarter of fiscal 1996.
(c) The exhibits listed under (a)(3) above are filed
herewith.
(d) Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIDELITY BANKSHARES, INC.
Date: March 25, 1997 By: /s/ Vince A. Elhilow
-- ---------------------------------
Vince A. Elhilow
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
By: /s/ Vince A. Elhilow By: /s/ Richard D. Aldred
----------------------------- ---------------------------------
Vince A. Elhilow President Richard D. Aldred, Executive Vice
and Chief Executive Officer President, Chief Financial
Officer and Treasurer
(Principal Executive Officer) (Principal Financial and
Accounting Officer)
Date: March 25, 1997 Date: March 25, 1997
-- --
By: /s/ Joseph B. Shearouse By: /s/ Keith D. Beaty
----------------------------- ---------------------------------
Joseph B. Shearouse, Jr., Keith D. Beaty, Director
Chairman of the Board
Date: March 25, 1997 Date: March 25, 1997
-- --
By: /s/ F. Ted Brown By: /s/ Christopher H. Cook
----------------------------- ---------------------------------
F. Ted Brown, Jr., Director Christopher H. Cook, Director
Date: March 25, 1997 Date: March 25, 1997
-- --
By: /s/ Donald E. Warren
-----------------------------
Donald E. Warren, Director
Date: March 25, 1997
--