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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Annual report pursuant to Section 13 of the
Securities Exchange Act of 1934
For the fiscal year ended September 30, 1996
Commission File No.: 0-21942
FIRST PALM BEACH BANCORP, INC.
(exact name of registrant as specified in its charter)
DELAWARE 65-0418027
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
215 SOUTH OLIVE AVENUE, WEST PALM BEACH, FLORIDA 33401
(Address of principal executive offices)
Registrant's telephone number, including area code: (561) 655-8511
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK PAR VALUE $0.01 PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not considered herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K.
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The aggregate market value of the voting stock held by non-affiliates of
the registrant, i.e., persons other than directors and executive officers of
the registrant, is $115,599,474 and is based upon the last trade price as
reported by NASDAQ National Market System for December 5, 1996.
The Registrant had 5,069,097 shares outstanding as of November 25, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
THE PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON
JANUARY 21, 1997 IS INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K.
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INDEX
PART I
Item 1. Description of Business................................................................ 1
Safe Harbor Statement............................................................... 1
Business............................................................................ 1
Market Area and Competition......................................................... 2
Lending Activities.................................................................. 3
Asset Quality....................................................................... 12
Mortgage-Backed and Related Securities.............................................. 20
Investment Activities............................................................... 21
Sources of Funds.................................................................... 24
Borrowings.......................................................................... 28
Subsidiary Activities............................................................... 30
Personnel........................................................................... 30
Regulation and Supervision.......................................................... 31
Federal and State Taxation.......................................................... 46
Item 2. Description of Property................................................................ 49
Item 3. Legal Proceedings...................................................................... 55
Item 4. Submission of Matters to a Vote of Security Holders.................................... 55
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................. 55
Item 6. Selected Financial Data................................................................ 56
Item 7. Management's Discussion of Financial Condition and Results of Operations............... 58
Item 8. Financial Statements and Supplementary Data............................................ 74
Item 9. Change In and Disagreements with Accountants on Accounting
and Financial Disclosure...............................................................110
PART III
Item 10. Directors and Executive Officers of the Registrant.....................................111
Item 11. Executive Compensation.................................................................111
Item 12. Security Ownership of Certain Beneficial Owners and Management.........................111
Item 13. Certain Relationships and Related Transactions.........................................111
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................112
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 FOR FORWARD-LOOKING INFORMATION
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), the Bank is hereby filing
cautionary statements identifying important factors that could cause the Bank's
actual results to differ materially from those projected in "forward-looking
statements" (as such term is defined in the Reform Act) of the Bank made by or
on behalf of the Bank which are made orally, whether in presentations, in
response to questions or otherwise, or in writing in this report or any other
future filings by the Bank with the Securities and Exchange Commission, in the
Bank's press releases or other public or shareholder communications. Any
statements that express, or involve discussions as to, expectations, beliefs,
plans, objectives, assumptions or future events or performance (often, but not
always, through the use of words or phrases such as "will likely result," "are
expected to," "will continue," "is anticipated," "estimated," "projection,"
"outlook") are not historical facts and may be forward-looking and,
accordingly, such statements involve estimates, assumptions, and uncertainties
which could cause actual results to differ materially from those expressed in
the forward-looking statements. Accordingly, any such statements are qualified
in their entirety by reference to, and are accompanied by, the following
important factors that could cause the Bank's actual results to differ
materially from those contained in forward-looking statements of the Bank made
by or on behalf of the Bank.
The Bank cautions that the following important factors could cause actual
results or outcomes to differ materially from those expressed in any
forward-looking statements of the Bank made by or on behalf of the Bank. Any
forward-looking statement speaks only as of the date on which such statement is
made, and the Bank undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not possible for
management to predict all of such factors, nor can it assess the impact of each
such factor on the business or the extent to which any factor, or combination
of factors, may cause actual results to differ materially from those contained
in any forward-looking statements.
Some important factors that could cause actual results or outcomes to
differ materially from those discussed in the forward-looking statements
include those related to the national economic environment, particularly in the
region in which the Bank operates, competition, fiscal and monetary policies of
the U.S. government, changes in governmental legislation and regulations
affecting financial institutions, including regulatory fees and capital
requirements, changes in prevailing interest rates, credit risk management and
asset/liability management, the financial and securities markets, deposit
flows, changes in the quality or composition of the Bank's loan and investment
portfolios, and the availability of and costs associated with sources of
liquidity.
All such factors are difficult to predict, contain uncertainties which may
materially affect actual results and are beyond the control of the Bank.
BUSINESS
On September 29, 1993, the Registrant, First Palm Beach Bancorp, Inc.
(also referred to herein as the "Company"), closed its public offering for
5,284,775 shares of its Common Stock and acquired First Bank of Florida (the
"Bank"), formerly First Federal Savings and Loan Association of the Palm
Beaches (the "Association") as part of the Bank's conversion from a mutual to a
stock federally chartered savings association. Additionally, the Recognition
and Retention Plans ("RRPs") implemented during the conversion purchased
211,600 shares of the Company's Common Stock, making the total shares
outstanding equal 5,496,375. The Registrant was incorporated under
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Delaware law on May 27, 1993. The Registrant is a savings and loan holding
company subject to regulation by the Office of Thrift Supervision ("OTS"), the
Federal Deposit Insurance Corporation ("FDIC") and the Securities and Exchange
Commission ("SEC"). Currently, the Registrant does not transact any material
business other than through its subsidiary, the Bank. The net conversion
proceeds totalled $52.5 million of which $25.2 million was invested in the Bank
and $27.3 million was retained by the Registrant. The Registrant loaned $4.2
million to the Employee Stock Ownership Plan ("ESOP") of the Bank and the
remaining $23.1 million was loaned to the Bank. At September 30, 1996, the
loan to the ESOP had a balance of $1,769,000 and the loan to the Bank had a
balance of $7,364,000.
The Bank was established in 1934 as a mutual federally chartered and
insured savings and loan association. The Bank is a member of the Federal Home
Loan Bank ("FHLB") System, and its deposit accounts are insured to the maximum
amount allowed by the FDIC. At September 30, 1996, the Bank had total assets
of $1.487 billion and stockholders' equity of $91.1 million.
On December 8, 1995 (the "Effective Date"), the Company completed the
acquisition of PBS Financial Corp. ("PBS") by means of the merger (the
"Merger") of PBS with and into the Company, pursuant to an Agreement and Plan
of Merger between the Company and PBS dated as of May 31, 1995 (the
"Agreement"). Concurrently with the Merger, Palm Beach Savings and Loan,
F.S.A. ("Palm Beach Savings"), the savings and loan subsidiary of PBS, merged
with and into the Bank in accordance with the Plan of Merger and Combination
dated May 31, 1995 between Palm Beach Savings and the Bank. In conjunction
with and as a part of the Merger, each of the 283,700 shares of PBS Class A
common stock issued and outstanding and 419,300 shares of PBS Class B common
stock issued and outstanding as of the Effective Date was converted into (i)
.426 of a share of the Company's Common Stock and (ii) a cash payment of $0.75
per share of PBS common stock. Based on an aggregate of 703,000 shares of PBS
Class A and Class B common stock issued and outstanding, the Company issued in
the aggregate 299,478 shares of the Company's Common Stock and made $527,250 in
cash payments. Also in conjunction with the Merger, the Company paid $88,544
in exchange for all outstanding PBS options and $459,536 in exchange for all
outstanding PBS warrants.
The Bank's principal business is attracting retail deposits from the
general public and investing those deposits, together with funds generated from
operations and borrowings, primarily in one- to four- family, owner-occupied,
residential mortgage loans and, to a lesser extent, consumer loans and other
loans, construction loans, commercial real estate loans and multi-family
residential mortgage loans. In addition, the Bank invests in mortgage-backed
and related securities, securities issued by the U.S. Government and agencies
thereof, and other investments in which the Bank is permitted to invest under
federal laws and regulations. The Bank's revenues are derived principally from
interest on its portfolio of mortgage and consumer loans, mortgage-backed and
related securities, and interest and dividends on its investment securities and
securities available-for-sale portfolios. The Bank's primary sources of funds
are deposits, principal and interest payments on loans and mortgage-backed and
related securities and, to a much lesser extent, borrowings.
MARKET AREA AND COMPETITION
The Bank has been, and continues to be, a community-oriented savings
institution offering a variety of financial services to meet the needs of the
communities it serves. The Bank's deposit gathering and lending markets are
primarily concentrated in the communities surrounding its full service and
lending offices in Palm Beach, Martin, Broward and Dade Counties in southeast
Florida. Also, two full-service offices have been opened in Lee County in
southwest Florida. Management believes that its offices are located in
communities that generally can be characterized as residential neighborhoods of
predominately one- to four- family residences.
The economy of the Palm Beach County area has derived its strength
primarily from government, tourism, retirement communities, agriculture,
service industries and foreign trade. In addition, unemployment in Palm Beach
County is higher than the national and State of Florida
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averages. Major private employers in the Bank's market area include Pratt &
Whitney, Motorola, Good Samaritan and St. Mary's Medical Center, Florida Power
& Light Company and BellSouth.
The Bank is the oldest and largest (by asset size) locally-based financial
institution in Palm Beach County. The Bank's market area in southeast Florida
has a high density 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. The Bank's competition for loans
comes principally from savings and loan associations, savings banks, mortgage
banking companies and commercial banks. The Bank's most direct competition for
savings deposits has historically come from savings and loan associations,
savings banks, commercial banks, and credit unions. The Bank faces additional
competition for savings deposits from money market mutual funds and other
corporate and government securities funds. The Bank also faces increased
competition for deposits from other financial intermediaries such as brokerage
firms and insurance companies. Prospective competition for the Bank may
increase as a result of the Reigle-Neal Interstate Banking and Branching
Efficiency Act of 1994 and the Florida Interstate Banking Act which permit bank
holding companies to acquire control of banks in any state, and the Florida
Interstate Branching Act which permits out-of-state banks to acquire and
operate branches in Florida. See "Regulation and Supervision - Federal Savings
Institution Regulation - Interstate Banking; Branching."
The Bank serves its market area with a wide selection of residential loans
and other retail financial services. Management considers the Bank's
reputation for financial strength and customer service as its major competitive
advantage in attracting and retaining customers in its market area. The Bank
also believes it benefits from its community orientation as well as its
established deposit base and levels of core deposits.
LENDING ACTIVITIES
Loans and Mortgage-Backed and Related Securities Portfolio. The Bank's
loan portfolio consists primarily of conventional first mortgage loans secured
by one- to four- family residences. At September 30, 1996, the Bank's total
loans outstanding were $1,071.0 million, of which $652.6 million or 60.9% of
the Bank's total loan portfolio were one- to four- family residential first and
second mortgage loans. Of the one- to four- family residential mortgage loans
outstanding at that date, 35.0% were fixed-rate loans, and 65.0% were
adjustable rate mortgage ("ARM") loans as described on page 8. At the same
date, construction and land loans totaled $155.0 million or 14.5% of the Bank's
total loan portfolio; commercial real estate loans totaled $51.8 million or
4.8% of the Bank's total loan portfolio; and multi-family mortgage loans
totaled $17.6 million or 1.6% of the Bank's total loan portfolio. Consumer and
other loans held by the Bank, which principally consist of direct and indirect
automobile loans, home equity loans, and other consumer loans, totaled $194.1
million or 18.1% of the Bank's total loan portfolio at September 30, 1996. At
September 30, 1996, $148.2 million of consumer and other loans consisted of
indirect automobile loans. The Bank had $169.2 million of loans serviced for
others at September 30, 1996 which included $99.8 million of loans subserviced
on a short-term basis in connection with a sale of loans and servicing.
At September 30, 1996, $10.3 million or 1.0% of the Bank's total loan
portfolio consisted of purchased mortgage loans or loan participations, which
consisted primarily of one- to four- family residential mortgage loans.
At September 30, 1996, the Bank's mortgage-backed and related securities
held-to-maturity and available-for-sale, a vast majority of which were
collateralized mortgage obligations ("CMOs") or real estate mortgage investment
conduits ("REMICs"), aggregated $232.3 million or 15.6% of the Bank's total
assets. Mortgage-backed and related securities available-for-sale are
reflected at fair value in accordance with Statement of Financial Accounting
Standard No. 115 ("SFAS No. 115").
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The following table sets forth the composition of the Bank's loan and
mortgage-backed and related securities held-to-maturity and mortgage-backed and
related securities available-for-sale portfolios, in dollar amounts and in
percentages of the respective portfolios at the dates indicated:
At September 30,
---------------------------------------------------------------------------------
1992 1993 1994 1995
------------------ ------------------ ------------------- --------------------
Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total
-------- -------- -------- -------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
MORTGAGE LOANS:
One- to four- family.................. $351,208 74.66% $335,750 72.48% $436,135 68.88% $587,598 67.82%
Construction and land................. 45,784 9.73 61,233 13.22 104,324 16.47 118,799 13.71
Commercial real estate................ 39,732 8.45 29,930 6.46 30,802 4.86 35,610 4.11
Multi-family.......................... 6,085 1.29 11,720 2.53 11,515 1.82 11,837 1.37
-------- ------- -------- ------- -------- ------- -------- -------
Total mortgage loans................. 442,809 94.13 438,633 94.69 582,776 92.03 753,844 87.01
Consumer loans......................... 24,459 5.20 22,184 4.78 48,611 7.68 110,384 12.74
Other loans............................ 3,137 0.67 2,436 0.53 1,848 0.29 2,155 0.25
-------- ------- -------- ------- -------- ------- -------- -------
Total loans receivable............... 470,405 100.00% 463,253 100.00% 633,235 100.00% 866,383 100.00%
======= ======= ======= =======
LESS:
Loans in process...................... 20,516 31,320 54,856 43,967
Unearned discounts (premiums) and
deferred loan fees, net.............. 2,590 943 (308) (4,765)
Allowance for loan losses............. 2,334 1,886 1,956 2,157
-------- -------- -------- --------
Loans receivable, net................. $444,965 $429,104 $576,731 $825,024
======== ======== ======== ========
MORTGAGE-BACKED AND RELATED SECURITIES
HELD-TO-MATURITY AND MORTGAGE-BACKED
AND RELATED SECURITIES
AVAILABLE-FOR-SALE:
CMOs (includes REMICs)................ $184,404 $282,460 $258,166 $145,879
FHLMC................................. 8,670 -- 3,595 12,023
FNMA.................................. -- -- 34,025 49,837
GNMA.................................. 187 153 30,169 33,035
Net premiums and (discounts).......... 1,527 1,399 (1,911) (2,332)
-------- -------- -------- --------
Total mortgage-backed and related
securities held-to-maturity and
mortgage-backed and related
securities available-for-sale....... $194,788 $284,012 $324,044 $238,442
======== ======== ======== ========
At September 30,
--------------------
1996
--------------------
Percent
Amount of Total
---------- --------
(DOLLARS IN THOUSANDS)
MORTGAGE LOANS:
One- to four- family.................. $ 652,606 60.93%
Construction and land................. 154,988 14.47
Commercial real estate................ 51,754 4.83
Multi-family.......................... 17,564 1.64
---------- -------
Total mortgage loans................. 876,912 81.87
Consumer loans......................... 191,654 17.90
Other loans............................ 2,434 0.23
---------- -------
Total loans receivable............... 1,071,000 100.00%
=======
LESS:
Loans in process...................... 61,633
Unearned discounts (premiums) and
deferred loan fees, net.............. (10,369)
Allowance for loan losses............. 11,855
----------
Loans receivable, net................. $1,007,881
==========
MORTGAGE-BACKED AND RELATED SECURITIES
HELD-TO-MATURITY AND MORTGAGE-BACKED
AND RELATED SECURITIES
AVAILABLE-FOR-SALE:
CMOs (includes REMICs)................ $ 132,067
FHLMC................................. 23,739
FNMA.................................. 49,512
GNMA.................................. 29,222
Net premiums and (discounts).......... (2,267)
----------
Total mortgage-backed and related
securities held-to-maturity and
mortgage-backed and related
securities available-for-sale....... $ 232,273
==========
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The following table sets forth the Bank's loan originations and loan and
mortgage-backed and related securities purchases, sales and principal
repayments for the periods indicated:
Year ended September 30,
-------------------------------
1994 1995 1996
---- ---- ----
(In thousands)
MORTGAGE LOANS (GROSS):
At the beginning of period........................... $ 438,633 $582,776 $ 753,844
--------- -------- ---------
Mortgage loans originated:
One- to four- family.............................. 125,970 135,875 192,524
Construction and land............................. 88,945 120,234 163,097
Commercial real estate............................ 4,455 5,556 3,563
Multi-family...................................... 1,403 830 1,877
--------- -------- ---------
Total mortgage loans originated...................... 220,773 262,495 361,061
--------- -------- ---------
Mortgage loans purchased:
One- to four- family.............................. 6,639 5,450 47,854
Construction and land............................. -- -- 16,323
Commercial real estate............................ 20 237 19,519
Multi-family...................................... -- -- 5,626
--------- -------- ---------
Total mortgage loans purchased....................... 6,659 5,687 89,322
--------- -------- ---------
Total mortgage loans originated and purchased......... 227,432 268,182 450,383
Transfer of mortgage loans to real estate owned....... 1,595 1,057 961
Principal repayments.................................. 74,303 82,151 162,053
Sales of loans........................................ 7,391 13,906 164,301
--------- -------- ---------
At end of period...................................... $ 582,776 $753,844 $ 876,912
========= ======== =========
CONSUMER LOANS (GROSS):
At beginning of period............................... $ 22,184 $ 48,611 $ 110,384
Consumer loans originated............................ 49,233 99,251 177,466
Consumer loans purchased............................. -- -- 357
Transfer of loans to repossessed automobiles......... -- 765 21,122
Principal repayments................................. 22,806 36,713 75,431
--------- -------- ---------
At end of period..................................... $ 48,611 $110,384 $ 191,654
========= ======== =========
OTHER LOANS (GROSS):
At beginning of period............................... $ 2,436 $ 1,848 $ 2,155
Other loans originated............................... 1,907 2,457 1,056
Principal repayments................................. 2,495 2,150 777
--------- -------- ---------
At end of period..................................... $ 1,848 $ 2,155 $ 2,434
========= ======== =========
MORTGAGE-BACKED AND RELATED SECURITIES:(1)
At beginning of period............................... $ 284,012 $324,044 $ 238,442
Mortgage-backed and related securities
purchased........................................... 261,169 49,883 46,873
Mortgage-backed and related securities sold.......... 63,950 95,751 18,040
Increase (decrease) in unrealized loss on
available-for-sale securities....................... 8,043 (2,342) (2,178)
Amortization and repayments.......................... 149,144 42,076 37,180
--------- -------- ---------
At end of period..................................... $ 324,044 $238,442 $ 232,273
========= ======== =========
- ------------------------------------------------
(1) Consists of held-to-maturity and available-for-sale portfolios.
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Maturity of Loans and Mortgage-Backed and Related Securities. The
following table shows the maturity of the Bank's loan and mortgage-backed and
related securities, which includes mortgage-backed and related securities
held-to-maturity and available-for-sale, at September 30, 1996. Loans that
have adjustable rates are shown as amortizing to final maturity rather than
when the interest rates are next subject to change. The table does not include
prepayments or scheduled principal amortization. Prepayments and scheduled
principal amortization on the Bank's loans totaled $99.6 million, $121.0
million and $238.6 million for the years ended September 30, 1994, 1995 and
1996, respectively.
At September 30, 1996
----------------------------------------------------------------------------------------------
Mortgage Loans Totals
------------------ -----------------------
Mortgage- Mortgage-
Backed Backed
and Related and Related
One Total Securities Securities
to Four- Consumer Other Loans Held-to- Available-
Family Other Loans Loans Receivable Maturity for-Sale Total
-------- -------- -------- ------ ------------ ----------- ----------- --------
(In thousands)
AMOUNTS DUE:
Within 1 year $ 2,616 $ 33,470 $ 9,119 $1,421 $ 46,626 $ -- $ 484 $ 47,110
-------- -------- -------- ------ ------------ ----------- ----------- ----------
1 to 2 years 1,358 21,698 7,680 541 31,277 1,420 -- 32,697
2 to 3 years 3,780 9,352 22,901 261 36,294 1,764 -- 38,058
3 to 5 years 19,784 14,800 116,952 211 151,747 10,851 -- 162,598
5 to 10 years 28,494 19,306 34,904 -- 82,704 11,051 10,110 103,865
10 to 15 years 103,082 17,708 77 -- 120,867 34,335 54,067 209,269
Over 15 years 493,492 107,972 21 -- 601,485 68,639 41,819 711,943
-------- -------- -------- ------ ------------ ----------- ----------- ----------
Total due after 1 year 649,990 190,836 182,535 1,013 1,024,374 128,060 105,996 1,258,430
-------- -------- -------- ------ ------------ ----------- ----------- ----------
Total amounts due 652,606 224,306 191,654 2,434 1,071,000 128,060 106,480 1,305,540
LESS:
Loans in process 61,393 -- 240 -- 61,633 -- -- 61,633
Unearned discounts,
(premiums) and deferred
loan fees, net (3,022) -- (7,347) -- (10,369) 1,653 614 (8,102)
Allowance for loan losses 2,392 -- 9,463 -- 11,855 -- -- 11,855
-------- -------- -------- ------ ------------ ----------- ----------- ----------
Loans receivable and
mortgage-backed and
related securities, net $591,843 $224,306 $189,298 $2,434 $ 1,007,881 $ 126,407 $ 105,866 $1,240,154
======== ======== ======== ====== ============ =========== =========== ==========
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The following table sets forth at September 30, 1996, the dollar amount of
all loans and mortgage-backed and related securities held-to-maturity and
mortgage-backed securities available-for-sale due after September 30, 1997, and
whether such loans have fixed interest rates or adjustable interest rates:
Due after September 30, 1997
----------------------------------
Fixed Adjustable Total
---------- ---------- ----------
(In thousands)
MORTGAGE LOANS:
One- to four- family........................ $265,864 $384,126 $ 649,990
Construction and land....................... 100,634 27,421 128,055
Multi-family................................ 7,451 10,077 17,528
Commercial real estate...................... 8,654 36,599 45,253
CONSUMER LOANS..................................... 182,535 -- 182,535
OTHER LOANS........................................ 993 20 1,013
-------- -------- ----------
TOTAL LOANS RECEIVABLE............. 566,131 458,243 1,024,374
MORTGAGE-BACKED AND RELATED SECURITIES
HELD-TO-MATURITY AND AVAILABLE-FOR-SALE............ 131,270 102,786 234,056
-------- -------- ----------
TOTAL LOANS RECEIVABLE AND
MORTGAGE-BACKED AND RELATED
SECURITIES HELD-TO-MATURITY
AND AVAILABLE-FOR-SALE............. $697,401 $561,029 $1,258,430
======== ======== ==========
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One-to Four-Family Mortgage Lending. The Bank's primary lending
emphasis is on the origination of first mortgage loans secured by one-to four-
family residences in its primary lending area. Mainly, these residences are
single family homes (including condominiums and townhomes) that serve as the
primary residence of the owner. To a lesser degree, the Bank makes loans on
residences used as a second home or as an investment.
Loan originations are generally obtained from existing or past customers,
members of the local community and referrals from local real estate agents and
builders. One-to four-family residential mortgage loans are mainly originated
through the Bank's mortgage brokerage subsidiary, First Bank of Florida
Mortgage Corp. ("FBMC"), formerly First Federal Mortgage Corporation, by its
nine loan originators who are compensated on a commission basis. Loan
applications originated by the FBMC's independent loan originators are made in
compliance with the Bank's policies and procedures, underwritten by the Bank in
accordance with its standard underwriting guidelines and presented for approval
to the appropriate Bank personnel or committees.
For the year ended September 30, 1996, the Bank's mortgage loans
originated through all sources totaled $361.1 million. FBMC accounted for
$189.9 million in mortgage loans originated, or 52.6% of this total. The Bank
has expanded the mortgage lending activities in its branch network by training
branch personnel and placing FBMC loan officers within certain branch offices.
The Bank obtains first mortgage loans through wholesale brokers in Martin,
Palm Beach, and Broward Counties. Prior to the Bank's commitment to fund such
loans, the loans are reviewed for compliance with the Bank's normal
underwriting guidelines. The Bank established a goal of supplementing its
retail production with wholesale production not to exceed 30% to 40% of total
production. Wholesale loans comprised approximately 34% of the total new
mortgage loans originated by the Bank in fiscal year 1996.
At September 30, 1996, 60.9% of mortgage loans receivable consisted of
one-to four-family residential loans, of which 65.0% were ARM loans. The Bank
currently offers ARM loans which have an initial adjustment after one, three
and five years and adjust annually thereafter. These ARM loans may carry an
initial interest rate which is less than the fully indexed rate for the loan.
The initial discounted rate is determined by the Bank in accordance with market
and competitive factors. The Bank currently offers ARM loans which adjust by a
maximum of 2% per year with a lifetime cap on increases of 4% to 6%, depending
upon the program chosen. ARM loans which have an initial adjustment after
seven or ten years totaled $95.4 million at September 30, 1996.
Generally, ARM loans pose credit risks somewhat greater than the risks
inherent in fixed rate loans primarily because as interest rates rise, the
underlying payments of the borrower rise, thereby increasing the potential for
default. At the same time, the marketability of the underlying property may be
adversely affected by higher interest rates. In order to minimize these risks,
borrowers of ARM loans are qualified at the fully indexed rate. The Bank does
not originate ARM loans which provide for negative amortization of deferred
interest. An ARM loan portfolio generally reduces the Bank's exposure to
adverse interest rate fluctuations.
The Bank also offers fixed-rate loans for terms up to 30 years which are
priced in accordance with secondary market conditions. In the past, the Bank
sold most of its fixed rate loans. During fiscal years 1995 and 1996, to
increase its loans outstanding, the Bank retained most fixed rate loans in its
portfolio.
Except as to loan amount, one-to four-family residential mortgage loans
are generally underwritten according to the guidelines of the Federal Home Loan
Mortgage Corporation ("FHLMC") or the Federal National Mortgage Association
("FNMA"). Presently, FHLMC and FNMA do not purchase loans over approximately
$207,000. Loans in excess of the FHLMC/FNMA conforming loan limits are made on
an adjustable or fixed rate basis to be held in the Bank's portfolio.
8
11
The Bank's policy on one-to four-family residential mortgage loans
generally is to lend up to 80% of the appraised value of property securing the
loan or up to 95% if private mortgage insurance is obtained on the amount of
the loan which exceeds 80%. In recent years, to assist persons in
low-to-moderate income households to purchase homes, the Bank originated a
limited amount of one-to four-family loans with loan-to-value ratios above
90% without requiring private mortgage insurance. As of September 30, 1996,
the outstanding balance of such loans was $3.3 million. These loans may entail
more risk than loans with private mortgage insurance because if a borrower
defaults, the Bank would not be able to seek reimbursement for any portion of
the loan from a private mortgage insurer. As of September 30, 1996, the Bank
had not experienced any material difference between the delinquency rate for
those loans and the delinquency rate of the rest of its loan portfolio. The
Bank, however, has established a 0.50% allowance for possible loan losses
related to these loans due to the high level of their loan-to-value ratio.
Sale of Loans and Servicing Rights. During the fiscal year ended
September 30, 1996, the Bank sold approximately $164.3 million of mortgage
loans. In September 1996, the Bank entered into an agreement to sell loan
servicing rights in connection with a loan sale of $99.8 million of one-to-four
family loans. Also the Bank sold the servicing rights on approximately $40.0
million of mortgage loans. It is not anticipated that the Bank will adopt the
sale of servicing as an on-going operational strategy.
Commercial and Multi-Family Real Estate Lending. As of September 30,
1996, $51.8 million or 4.8% of the Bank's total loan portfolio consisted of
commercial loans, and $17.6 million or 1.6% of the Bank's total loan portfolio
consisted of multi-family loans. During the past few years, the Bank has
reduced the level of its lending in these areas as a percentage of total loan
portfolio due to deterioration of the market for these types of properties in
the Bank's market area. Presently, the Bank's activity in these lending areas
is generally limited to the refinancing or modification of existing commercial
loans and the origination of new loans to existing commercial customers.
During fiscal year 1996 commercial and multi-family loan balances increased
primarily due to the acquisition of PBS.
The commercial real estate loans in the Bank's portfolio consist of
fixed-rate, ARM and balloon loans which were originated at prevailing market
rates. Balloon loans generally are amortized over 25 years. The Bank's recent
policy has been to originate commercial or multi-family loans only in its
primary market area. All commercial and multi-family loans that are modified,
refinanced or made to facilitate the sale of real estate owned are ARM loans.
These loans are generally made in amounts not exceeding 75% of the appraised
value of the property. In making such loans, the Bank primarily considers the
net operating income generated by the real estate to support the debt service,
the financial resources, income level and managerial expertise of the borrower,
the marketability of the property and the Bank's lending experience with the
borrower. The Bank generally obtains personal guarantees from the principals
of the borrower on these loans.
Loans secured by commercial and multi-family real estate involve a greater
degree of risk than one-to four-family residential loans. This has been
particularly true for commercial real estate loans during recent years due to a
sharp increase in available space and a decrease in demand for commercial
properties in the Bank's market area.
Construction Loans. The Bank originates loans to finance the construction
of one-to four-family homes and, to a much lesser extent, multi-family and
commercial real estate properties. At September 30, 1996, construction loans
totaled $130.5 million, or 12.2% of the Bank's total loan portfolio.
The Bank's construction loans are principally made to finance the
construction of single-family, owner-occupied homes. Construction loans are
generally made on a "pre-sold" basis; however, contractors who have sufficient
financial strength and a proven track record are considered for loans for model
and speculative purposes, with preference given to contractors with whom the
Bank has had successful loan relationships. Construction loans generally
provide for interest-only payments at fixed rates of interest and have terms of
six to twelve months. At the end of the construction period, the loan
generally converts into a permanent loan with terms of up to 30 years
9
12
with an adjustable or fixed rate of interest. Construction loans typically
have a conversion option at the end of the construction term to allow the
permanent borrower to choose a fixed or ARM loan at the then prevailing market
rate. Construction loans to borrowers who will occupy the home will be
considered for loan-to-value ratios of up to 95%. Loans to builders who have
pre-sold the home will be considered for loan-to-value ratios up to 80%.
Construction loans for speculative purposes, models and commercial properties
may be considered for loan-to-value ratios generally up to 75%. Loan proceeds
are disbursed in increments as construction progresses and as inspections
warrant. The Bank primarily uses in-house inspectors for construction loan
disbursement purposes. Substantially all construction loans outstanding at
September 30, 1996 were for loans on single family dwellings.
During the fiscal year ended September 30, 1994, the Bank began offering
to selected builders a revolving commitment. These commitments are for
speculative, model, and contract construction loans, the collateral for which
is individually analyzed and approved prior to closing. The commitment is a
pre-approval of the builder on a credit basis only to determine the maximum
level of exposure the Bank wishes to have. Because the Bank will require the
placement of all permanent loans through it, it will grant preferential rates
to the builder through these commitments.
Land Loans. The Bank also originates loans for the acquisition and
development of land (either unimproved land or improved lots) on which the
purchaser can then build. At September 30, 1996, land loans totaled $24.5
million, or 2.3% of the Bank's total loan portfolio.
Land acquisition and development loans are considered on a very selective
basis for builders and developers who have a proven track record with the Bank.
Due to the increased risk associated with land loans, the Bank uses a 75%
loan-to-value ratio maximum and requires full personal guarantees of all loans.
The one exception to these rules is a loan made to a major area builder with
whom the Bank has had a relationship in excess of ten years, in which case only
a corporate guarantee was required. The lending relationship with this builder
is currently a $12.0 million line of credit provided adequate collateral is
pledged. At September 30, 1996, this loan had an outstanding balance of $7.9
million.
Consumer and Other Lending. At September 30, 1996, $194.1 million or
18.1% of the Bank's total loan portfolio consisted of consumer and other loans,
including automobile, home equity loans and lines of credit for consumer
purposes, and to a lesser extent, home improvement, marine, airplane, and
secured and unsecured personal loans.
Until September 30, 1996 the Bank generated automobile loans from factory
franchised automobile dealerships in its market area on a nonrecourse basis
after conducting its own underwriting. At September 30, 1996, the Bank had
$148.2 million in automobile loans which were originated through dealers and
$15.5 million in such loans which it originated. The increase in automobile
loans originated through dealers was attributable to an aggressive effort to
expand the Bank's indirect automobile lending in Martin, St. Lucie and Indian
River Counties. Indirect loans typically carry more credit risk which may
produce higher delinquency rates and increased loan loss provisions. Higher
than anticipated charge-offs were experienced in the indirect automobile
lending portfolio, primarily during the latter part of the fiscal year ended
September 30, 1996. As a result, a $16.4 million provision for loan losses
related to consumer lending was recorded during fiscal year 1996. Based upon
an analysis of the overall performance of the indirect lending program,
management determined that effective September 30, 1996 no new applications for
indirect loans would be accepted, thereby discontinuing the indirect lending
program.
Consumer loans are offered on a fixed and adjustable rate basis. The
underwriting standards employed by the Bank for consumer loans include a
determination of the applicant's payment history on other debts and an
assessment of the applicant's ability to make payments on the proposed loan and
other indebtedness. In addition to the creditworthiness of the applicant, the
underwriting process also includes a comparison of the value of the security,
if any, in relation to the proposed loan amount. The Bank's consumer loans
tend to have higher interest rates and shorter maturities than
10
13
one-to four-family mortgage loans, and involve a greater risk of default than
one-to four-family mortgage loans. See "Asset Quality - Allowance for Loan
Losses."
Credit Cards. In June 1996, the Bank entered into the second year of its
credit card program. The bank discontinued the MasterCard Program and now
offers Visa Classic, Visa Gold and Secured Visa Programs. The Bank also
introduced new credit card programs - among them, a Visa Classic card with an
introductory rate equal to the prime rate for the first six months and then
adjusted to a rate equal to "prime plus," and a Visa Gold Prime Option card
offering a rate guaranteed at prime with a $50 Annual Fee. The credit
applications for credit cards are underwritten and collected by the Bank, and
the payments and statement processing carried out by a third party.
As of September 30, 1996, the Bank had approved 2,704 credit card accounts
having an aggregate credit limit of $9.8 million. The outstanding balance on
these cards at September 30, 1996 was $4.1 million. The Bank also offers
unsecured personal lines of credit used in conjunction with customers' checking
accounts.
Home Equity. Home equity loans and credit lines are originated on one-to
four-family residences within our market area. These loans and credit lines
are limited to $25,000 for 100% loan-to-value ratio loans, and $500,000 for 80%
loan-to-value loans. Loans and credit lines with loan-to-value ratios of
between 80% and 100% are underwritten based on the creditworthiness of the
borrower and the amount of equity in the home. The interest rates on these
loans and credit lines are based on loan-to-value ratios and range from prime
plus 1% to prime plus 3%.
Loan Approval Procedures and Authority. Loan approval authority has been
granted by the Board of Directors to certain mortgage loan officers up to the
maximum amount allowed by FHLMC/FNMA on one-to four-family dwelling units and
lot loans to individuals. The Board has granted to certain officers the
authority to approve or disapprove mortgage loans up to $400,000. The approval
authority has been granted to certain members of senior management for loan
amounts up to $500,000. This loan approval authority excludes the authority to
approve employee and officer loans and loans to builders for residential units
not under contract with a buyer. All loans exceeding $500,000 must be approved
by either a majority of the Loan Committee or Commercial Loan Committee,
depending upon the collateral securing the loan. The Loan Committee, which
consists of members of senior management and other officers, regularly
considers for approval large one-to four-family residential loan applications.
The Commercial Loan Committee, which consists of all members of senior
management plus one additional officer of the Bank considers for approval
employee and officer loans, builder loans for residential units not under
contract with a buyer, and commercial loan applications. Loans that exceed $1
million must be authorized by the Bank's President or two Board members prior
to approval. All mortgage loan approvals are ratified by the Bank's Board of
Directors.
Upon receipt of a completed loan application from a prospective borrower,
the Bank orders a credit report, verifies income and other information and, if
necessary, obtains additional financial or credit-related information. An
appraisal of the real estate used for collateral is also obtained. All
appraisals are performed or reviewed by certified appraisers. Most appraisals
are performed by certified Bank appraisers. The Bank may utilize the services
of independent certified appraisers to perform certain real estate appraisals,
particularly those related to problem commercial loans, and the certified Bank
appraisers review such appraisals. The Bank's Board of Directors approves the
independent certified appraisers used by the Bank and reviews the Bank's
appraisal policy on an annual basis.
The Bank requires title and hazard insurance on all real estate loans. In
addition, borrowers generally are required to advance funds for such insurance,
and for real estate taxes and private mortgage insurance with each payment of
principal and interest to a mortgage impound account from which the Bank makes
disbursements for items such as real estate taxes, hazard insurance premiums
and private mortgage insurance premiums, as required.
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ASSET QUALITY
Loan Collection. When a borrower fails to make a required payment on a
loan, the Bank takes a number of steps to have the borrower cure the
delinquency and to restore the loan to current status. In the case of
residential mortgage loans and consumer loans, the Bank generally sends the
borrower a written notice of non-payment after the loan first becomes past due.
In the event payment is not received after the initial notice is sent,
additional letters and telephone calls generally are made. If the loan is
still not brought current and it becomes necessary for the Bank to take legal
action, which typically occurs after a loan is delinquent 90 days or more, the
Bank will commence foreclosure proceedings against the real property that
secures the loan and attempt to repossess the personal property, if any, that
secures a consumer loan. If a foreclosure action is instituted and the loan is
not brought current, paid in full or refinanced before the foreclosure sale,
the real property securing the loan generally is sold at foreclosure.
In the case of commercial real estate loans, construction loans and land
acquisition and development loans, the Bank generally attempts to contact the
borrower by telephone after a loan payment becomes 10 days past due. A senior
loan officer reviews all collection efforts made if payment is not received
after the loan is 30 days past due, and decisions as to when to commence
foreclosure actions for commercial real estate loans and construction loans are
made on a case-by-case basis. The Bank may consider loan work-out arrangements
with these types of borrowers in certain circumstances.
On mortgage loans or loan participations purchased by the Bank, the Bank
receives monthly reports from its loan servicers with which it monitors the
loan portfolio. Based upon servicing agreements with the servicers of the
loans, the Bank relies upon the servicer to contact delinquent borrowers,
collect delinquent amounts and to initiate foreclosure proceedings, when
necessary, all in accordance with applicable laws, regulations and the terms of
the servicing agreements between the Bank and its servicing agents.
Mortgage loan delinquencies of 90 days or more increased to $11.3 million
at September 30, 1996 from $1.8 million at September 30, 1995. The increase
was primarily the result of a $6.2 million loan relationship on a
marina/residential development in Charlotte County, Florida. See "Asset
Quality - Classified Assets." The increase was also caused by mortgage loans
acquired in the Palm Beach Savings acquisition on December 8, 1995. As of
September 30, 1996, the balance of mortgage loans acquired from Palm Beach
Savings, which are 90 days or more delinquent, totaled $2.4 million.
Defaults on closed-end consumer financing (auto loans) are pursued
aggressively after the grace period has expired. The Collections supervisor
may commence immediate repossession activities in the case of first payment
defaults or unresponsive borrowers. Upon repossession, the collateral is
evaluated to determine its condition. Repairs are made at the discretion of
the Collections supervisor. The Bank may attempt to sell the asset directly or
through an approved dealer or through various wholesale auctions held within
the state of Florida.
Accrual of Interest on Delinquent Loans. Generally, the Bank does not
accrue interest on loans past due 90 days or more. Loans also are placed on
non-accrual status when, in the judgment of the Bank's management, the
probability of collection of interest is deemed to be insufficient to warrant
further accrual. When a loan is placed on non-accrual status, previously
accrued but unpaid interest is deducted from interest income.
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15
At September 30, 1994, 1995 and 1996, delinquencies of 60 days or more in
the Bank's loan portfolio were as follows:
At September 30, 1994 At September 30, 1995
---------------------------------------- ----------------------------------------
60 - 89 Days 90 Days or More 60 - 89 Days 90 Days or More
------------------- ------------------- ------------------- -------------------
Principal Principal Principal Principal
Number Balance Number Balance Number Balance Number Balance
of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans
-------- --------- -------- --------- -------- --------- -------- ---------
Mortgage loans:
One- to four-family 42 $ 1,264 34 $ 1,772 10 $ 163 28 $ 1,172
Construction and land 4 332 2 122 -- -- 5 267
Commercial real estate -- -- -- -- -- -- 1 80
Multi-family 2 246 -- -- -- -- 2 243
-------- --------- -------- --------- -------- --------- -------- ---------
Total mortgage loans 48 1,842 36 1,894 10 163 36 1,762
Consumer and other loans 6 15 15 37 20 187 16 52
-------- --------- -------- --------- -------- --------- -------- ---------
Total loans 54 $ 1,857 51 $ 1,931 30 $ 350 52 $ 1,814
======== ========= ======== ========= ======== ========= ======== =========
Delinquent loans to total loans 0.29% 0.30% 0.04% 0.21%
At September 30, 1996
-----------------------------------------
60 - 89 Days 90 Days or More
------------------- --------------------
Principal Principal
Number Balance Number Balance
of Loans of Loans of Loans of Loans
-------- --------- -------- ---------
Mortgage Loans:
One- to four-family 19 $ 1,150 45 $ 2,621
Construction and land 3 742 13 8,658
Commercial real estate -- -- -- --
Multi-family -- -- -- --
-------- --------- -------- ---------
Total mortgage loans 22 1,892 58 11,279
Consumer and other loans 160 2,065 132 1,552
-------- --------- -------- ---------
Total loans 182 $ 3,957 190 $ 12,831
======== ========= ======== =========
Delinquent loans to total loans 0.37% 1.20%
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Loans Delinquent 90 Days or More, Real Estate Owned and In-Substance
Foreclosed Loans. The following table sets forth information regarding
non-accrual loans and loans delinquent 90 days or more and still accruing
interest, real estate owned and in-substance foreclosed loans. At September
30, 1996, there were no restructured loans within the meaning of Statement of
Financial Accounting Standard No. 15.
At September 30,
--------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- --------
(Dollars in thousands)
Non-Accrual mortgage loans (1)(2)........................... $ 3,064 $ 2,633 $ 1,451 $ 1,743 $ 11,269
Mortgage loans delinquent 90 days or more and still
accruing(2)................................................. 248 25 443 18 10
Non-accrual consumer loans and other loans(1)(2)............ 3 -- -- 8 1,390
Consumer and other loans delinquent 90 days or more
and still accruing (2)..................................... 27 20 37 45 162
------- ------- ------- ------- --------
Total non-performing loans................................. 3,342 2,678 1,931 1,814 12,831
Real estate owned and in-substance foreclosed loans......... 4,769 1,403 529 549 1,626
Repossessed automobiles..................................... 48 -- 13 371 1,602
------- ------- ------- ------- --------
Total non-performing assets................................. $ 8,159 $ 4,081 $ 2,473 $ 2,734 $ 16,059
======= ======= ======= ======= ========
Non-performing loans to total loans......................... 0.71% 0.58% 0.30% 0.21% 1.20%
Total non-performing assets to total assets................. 1.00% 0.48% 0.23% 0.23% 1.08%
- -----------------------------
(1) For the fiscal year ended September 30, 1996, $1,145,000 in gross
interest income would have been recorded if these loans had been current
in accordance with their original terms and had been outstanding
throughout the period or since origination, if held for part of the period
and $589,000 in interest income on these loans was included in net income.
(2) As to principal or interest.
Real estate acquired by the Bank as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as "real estate owned" until sold.
Automobiles acquired by the Bank as a result of repossession are classified as
"repossessed automobiles."
Non-accrual mortgage loans increased to $11.3 million at September 30,
1996 from $1.7 million at September 30, 1995. This increase was primarily the
result of a $6.2 million loan relationship on a marina/residential development
in Charlotte County, Florida. See "Asset Quality - Classified Assets." The
increase was also caused by mortgage loans acquired in the Palm Beach Savings
acquisition on December 8, 1995. As of September 30, 1996, the non-performing
mortgage loans acquired from Palm Beach Savings totaled $2.4 million.
Classified Assets. Federal regulations and the Bank's policy require the
classification of loans and other assets (such as debt and equity securities
considered to be of lesser quality) as "substandard," "doubtful" or "loss"
assets. An asset is considered "substandard" if it is inadequately protected
by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized
by the "distinct possibility" that the institution will sustain "some loss" if
the deficiencies are not corrected. Assets classified as "doubtful" have all
of the weaknesses inherent in those classified as "substandard" with the added
characteristic that the 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
which do not currently expose the
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Bank to sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are required to be designated "special
mention" by the Bank's management.
If an asset is classified, an estimated value of the property securing the
loan is determined and if the unpaid balance of the loan is greater than such
estimated value, the difference is established as a specific reserve. The Bank
also establishes general valuation allowances which, as understood in the
industry, represent loss allowances that have been established to recognize the
inherent risk associated with lending activities, but have not been allocated
to particular problem assets.
The OTS utilizes guidelines which provide guidance for OTS examiners in
determining whether the levels of general valuation allowances for savings
institutions are adequate. The OTS guidelines may cause savings institutions
to increase their levels of general valuation allowances, thereby reducing
their tangible capital, and also to increase their allowance for loan losses,
which would affect GAAP capital. The guidelines specify that if a savings
institution's general valuation allowance policies and procedures are
inadequate, the savings institution may be required to modify its general
valuation allowances based on a comparison of certain ranges of acceptable
general valuation allowances and the savings institution's level of classified
assets.
The Bank's Asset Classification Committee reviews and classifies the
Bank's assets on a monthly basis and reports the results of their reviews to
the Board of Directors on a monthly basis.
At September 30, 1996, the Bank had two classified assets or groups of
assets with carrying values in excess of $1.0 million. Set forth below is a
brief description of each classified asset or group of assets with a carrying
value of $1.0 million or more at September 30, 1996.
Marina/Residential Development, Charlotte County, Florida. At September
30, 1996, the Bank's classified assets included two loans to one borrower and a
speculative loan on two models to a party related to the borrower. The loans
totaled $6.2 million at September 30, 1996 and are secured by first mortgages
on a marina/residential development, a beach-front lot and two speculative
model residences. The Bank has personal guarantees on the notes.
Office Warehouse Facility, Palm Beach County, Florida. At September 30,
1996, the Bank's classified assets included a loan classified as substandard,
which is secured by a first mortgage on an office warehouse facility. The
carrying value of the loan at September 30, 1996 is $1.0 million. This loan
was acquired in the purchase of Palm Beach Savings on December 8, 1995. At
September 30, 1996 the office warehouse facility was approximately 80%
occupied.
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The following table sets forth at September 30, 1996, the Bank's aggregate
carrying value of the assets classified as substandard, doubtful, loss and
special mention as follows:
Substandard Doubtful Loss Special Mention
--------------- -------------- -------------- ------------------
Number Amount Number Amount Number Amount Number Amount
------ ------ ------- ------ ------ ------ ------ ------
(Dollars in thousands)
CLASSIFIED ASSETS:
Loans:
One- to four-family............................. 36 $ 2,634 -- $ -- -- $ -- 2 $ 80
Multi-family.................................... -- -- -- -- -- -- -- --
Commercial real estate.......................... 6 7,401 -- -- 1 400 -- --
Construction and land........................... 12 2,885 -- -- -- -- -- --
Consumer and other loans........................ 137 1,439 2 34 8 44 -- --
------ ------- ------- ------ ------ ------ ------ ------
Total....................................... 191 14,359 2 34 9 444 2 80
Repossessed automobiles.......................... 194 1,602 -- -- 194 1,208 -- --
Other assets..................................... 1 236 1 55 1 167 -- --
Real estate owned:
One-to four-family.............................. 8 898 -- -- 3 47 -- --
Multi-family.................................... -- -- -- -- -- -- -- --
Commercial real estate.......................... 1 222 -- -- 1 103 -- --
Land............................................ 8 506 -- -- 5 211 -- --
------ ------- ------- ------ ------ ------ ------ ------
Total real estate owned..................... 17 1,626 -- -- 9 361 -- --
------ ------- ------- ------ ------ ------ ------ ------
Total for all Classified Assets............. 403 $17,823 3 $ 89 213 $2,180 2 $ 80
====== ======= ======= ====== ====== ====== ====== ======
Allowance for Loan Losses. Provisions for loan losses, which increase the
allowance for loan losses, are established by charges to income. Such
allowance represents the amounts which, in management's judgment, are adequate
to absorb charge-offs of existing loans which may become uncollectible. The
adequacy of the allowance is determined by management's continuing evaluation
of the loan portfolio in light of past loss experience, present economic
conditions, and other factors considered relevant by management at the
financial statement date. Loan evaluation occurs on a monthly basis with loan
provisions adjusted quarterly. Anticipated changes in economic factors which
may influence the level of the allowance are considered in the evaluation by
management when the likelihood of the changes can be reasonably determined. In
estimating the allowance for losses, consideration is given to asset
performance, the financial condition of borrowers or guarantors, additional
collateral provided, current and anticipated economic conditions, appraisals,
cost of disposal, and holding costs. While management uses the best
information available to make such evaluations, future adjustments to the
allowance may be necessary, which may be material, if economic conditions
differ substantially from the assumptions used in making the evaluation. If
additions to the original estimate of the allowance for loan losses are deemed
necessary, they will be reported in earnings in the period in which they become
reasonably estimable.
Significant declines in non-performing assets during fiscal years 1993 and
1994 allowed the Bank to limit additions to the allowance for loan losses in
those years. From September 30, 1992
16
19
through September 30, 1993, the level of the Bank's consumer loans consistently
declined. During fiscal 1994, by using a more competitive pricing structure,
indirect lending, promotional activities, and cross selling consumer products
through its branch offices, the Bank increased its consumer lending without
incurring unacceptable credit risks or reducing the Bank's overall asset
quality. During fiscal 1995 and 1996, the Bank significantly increased its
level of indirect lending through automobile dealers. Indirect lending
represented 66% and 83% of consumer loan production in fiscal 1995 and 1996,
respectively. These types of indirect loans carry more credit risk, produce
higher charge off and delinquency rates and, therefore, the Bank increased loan
loss provisions so that at September 30, 1996, general reserves on indirect
loans equaled 6.1% of outstanding indirect loan balances. Higher than
anticipated charge-offs were experienced in the indirect automobile lending
portfolio, primarily during the latter part of the fiscal year ended September
30, 1996. As a result, a $16.4 million provision for loan losses related to
consumer lending was recorded during fiscal year 1996. Based upon an analysis
of the overall performance of the indirect lending program, management
determined that effective September 30, 1996 no new applications for indirect
loans would be accepted, thereby discontinuing the indirect lending program.
As a result of the declines in regional real estate market values and the
significant losses experienced by many other financial institutions, there has
been a greater level of scrutiny of the loan portfolios of financial
institutions by the FDIC, the OTS and other federal or state regulators as part
of their overall examination of these institutions. Results of recent
examinations indicate that these regulators may be applying more conservative
criteria in evaluating real estate market values, thus requiring lending
institutions to increase significantly provisions for potential loan losses.
While the Bank believes it has established an adequate allowance for loan
losses, there can be no assurance that the Bank will not have to increase its
level of loan loss allowance in the future or that regulators, in reviewing the
Bank's loan portfolio, will not request that the Bank significantly increase
its allowance for loan losses, thereby negatively affecting the Bank's
financial condition and earnings.
The preceding sentence is a "forward-looking statement" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Act")
which involves estimates, assumptions and uncertainties. The following
important factors, should they occur, could cause actual loan loss and reserve
experience as well as other related results to differ materially from the
expectations expressed in the forward-looking statement:
1. Unanticipated changes in general economic conditions, such
as unemployment and interest rates.
2. Unanticipated changes in the number of repossessions and
the loan balances outstanding at the time of repossession.
3. Unanticipated changes in the resale value of repossessed
automobiles.
4. Unanticipated changes in the ability of the borrowers to
maintain insurance on the collateral securing the Bank's
loan, the cost of such insurance, and the ability to
recover insurance proceeds.
This disclosure is intended to comply with the terms of the safe harbor for
forward-looking statements provided by the Act.
17
20
The following table sets forth the Bank's allowance for loan losses at the
dates indicated:
At or For the Fiscal Year Ended
-------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(Dollars in thousands)
Balance at beginning of period $ 2,521 $ 2,334 $ 1,886 $ 1,956 $ 2,157
Provision for loan losses....... 1,675 149 135 261 15,704
Increase in allowance due to
acquisition of PBS.............. -- -- -- -- 2,253
Less: Charge-offs:
One- to four-family........... 124 -- -- -- --
Construction and land......... -- -- -- -- --
Multi-family.................. 273 81 -- -- --
Commercial real estate........ 1,353 406 -- -- 668
Consumer loans................ 113 122 69 92 7,962
Other loans................... -- -- -- -- --
------- ------- ------- ------- -------
Total charge-offs.......... 1,863 609 69 92 8,630
Recoveries...................... 1 12 4 32 371
------- ------- ------- ------- -------
Balance at end of period........ $ 2,334 $ 1,886 $ 1,956 $ 2,157 $11,855
======= ======= ======= ======= =======
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21
The following table sets forth the Bank's allocation of its allowance for
loan losses by loan category and the percentage of loans in each category to
total loans receivable, at the dates indicated. The portion of the loan loss
allowance allocated to each loan category does not necessarily represent the
total allowance available for future losses in a given category because the
total loan loss allowance is valued based upon the entire loan portfolio, and
allocation to a given loan category is not fixed.
At September 30,
---------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
------------------ ------------------ ------------------ ------------------ -------------------
Amount Percentage Amount Percentage Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------- ----------
(Dollars in thousands)
At end of period allocated to:
One-to four-family........... $ 673 74.66% $ 589 72.48% $ 660 68.88% $ 556 67.82% $ 416 60.93%
Construction and land........ 1,016 9.73 876 13.22 1,000 16.47 490 13.71 768 14.47
Multi-family................. 7 1.29 8 2.53 8 1.82 12 1.37 24 4.83
Commercial real estate....... 538 8.45 320 6.46 35 4.86 472 4.11 1,163 1.64
Consumer loans............... 100 5.20 93 4.78 252 7.68 603 12.74 9,463 17.90
Other loans ................. -- 0.67 -- 0.53 1 0.29 24 0.25 21 0.23
------ ------ ------ ------ ------ ------ ------ ------ ------- ------
Total..................... $2,334 100.00% $1,886 100.00% $1,956 100.00% $2,157 100.00% $11,855 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======= ======
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22
The following table sets forth the Bank's charge-off ratios and allowance
for loan loss ratios at or during the dates and periods indicated:
At or During the Fiscal Year Ended September 30,
----------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Ratio of net charge-offs during the
period to average loans outstanding
during the period.......................... 0.38% 0.14% 0.01% 0.01% 0.81%
Ratio of allowance for loan losses to
total loans receivable, net, at the end
of period.................................. 0.52 0.44 0.34 0.26 1.18
Ratio of allowance for loan losses to
non-performing loans at end of
period..................................... 69.84 70.43 101.29 118.91 92.40
Ratio of allowance for loan losses to
total non-performing assets at end of
period..................................... 28.78 46.21 79.51 78.90 73.82
MORTGAGE-BACKED AND RELATED SECURITIES
The Bank invests in mortgage-related securities such as CMOs and REMICs.
At September 30, 1996, the Bank had $131.4 million in CMOs/REMICs, or 8.8% of
total assets. Of this amount, $49.6 million are CMOs/REMICs classified as
held-to-maturity with an approximate fair value of $49.2 million, and $81.8
million are CMOs/REMICs classified as available-for-sale and reported at fair
value. Of the $131.4 million of CMOs/REMICs, $54.8 million, or 41.7%, had
floating rates with caps ranging from 9% to 11.6%. Most of these
mortgage-related securities adjust on a monthly basis. The Bank's CMOs/REMICs
may be subject to volatile price movements which typically result from changes
in prepayments on the underlying mortgages. The Bank's CMOs/REMICs have coupon
rates ranging from 5.0% to 7.5% and had a weighted average yield of 6.10% at
September 30, 1996. The Bank's current policy is to purchase CMOs/REMICs rated
AA or better by nationally recognized rating services. Market quotes are
impacted by key assumptions made when estimating fair value, including
prepayment speeds, spreads to treasury securities and interest rate caps.
Changes in key market assumptions may result in material fluctuation in the
fair value of the CMO/REMICs, and accordingly in the unrealized gain or loss on
such securities. The majority of the CMOs/REMICs owned by the Bank are insured
or guaranteed either directly or indirectly through mortgage-backed securities
underlying the obligations by either the FNMA, FHLMC or Government National
Mortgage Association ("GNMA"). Depending on the amount of the Bank's
mortgage-backed and related securities available-for-sale, fluctuations in the
interest rate environment and other factors, the Bank may experience material
effects on its stockholders' equity from categorizing these securities as
available-for-sale.
CMOs and REMICs are typically issued by a special purpose entity, which
may be organized in a variety of legal forms such as a trust, a corporation or
a partnership. The entity aggregates pools of pass-through securities, which
are used to collateralize the mortgage-related securities. Once combined, the
cash flows can be divided into "tranches" or "classes" of individual
securities, thereby creating more predictable average lives for each security
than the underlying pass-through pools. Accordingly, under this security
structure all principal paydowns from the various mortgage pools are allocated
to a mortgage-related securities' class or classes structured to have priority
until the class is paid off. These securities are intended to alleviate the
reinvestment problems that arise because mortgage-backed security pass-throughs
pay off when interest rates fall. Management believes CMOs and REMICs
represent attractive alternatives relative to other investments because of the
wide variety of maturity and repayment options available through such
investments. The Bank utilizes these investments as part of its interest rate
risk management strategy.
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The Bank held mortgage-backed and related securities with a total carrying
value in excess of 10% of the Bank's stockholders' equity at September 30, 1996
issued by the following entities:
Issuer Book Value Fair Value
------ ---------- ----------
(Dollars in thousands)
1. FNMA $102,033 $101,597
2. G.E. Capital Mortgage Corporation $ 41,496 $ 40,019
3. FHLMC $ 31,767 $ 32,084
4. GNMA $ 28,269 $ 28,948
5. Prudential Home Mortgage
Securities Company, Inc. $ 26,017 $ 24,684
INVESTMENT ACTIVITIES
The investment policy of the Bank, which is established by the Board of
Directors and implemented by the Asset Liability Committee, is designed
primarily to provide and maintain liquidity, to generate a favorable return on
investments without incurring undue interest rate and credit risk, and to
complement the Bank's lending activities. In establishing its investment
strategies, the Bank considers, among other factors, its business and growth
plans, the economic environment, and the types of securities to be held.
Federally-chartered savings institutions have the authority to invest in
various types of assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers acceptances, repurchase
agreements, loans on federal funds and, subject to certain limits, commercial
paper and mutual funds.
The Bank's Asset Liability Committee meets monthly to monitor the Bank's
securities transactions. The Asset Liability Committee also conducts a
quarterly review of the Bank's investment policies, strategies and accounting
guidelines relating to its investments. The Board of Directors reviews the
Bank's investment policy on an annual basis and the Bank's investment activity
on a monthly basis.
OTS guidelines regarding investment portfolio policy and accounting
require insured institutions to categorize securities as held-to-maturity,
available-for-sale or trading. The Bank's investment policy has policies and
strategies for each type of security. The portion of the investment securities
portfolio which is held-to-maturity is accounted for on an amortized cost
basis. At September 30, 1996, the Bank had $17.0 million in securities
held-to-maturity consisting of United States Government and agency obligations
and FHLB-Atlanta stock. Securities which are categorized as available-for-sale
are carried at fair value. At September 30, 1996, the Bank had $27.6 million
in securities available-for-sale consisting primarily of United States
Government and agency securities.
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The following table sets forth certain information regarding the carrying
and fair values of the Bank's investments at the dates indicated:
At September 30,
---------------------------------------------------------------------
1994 1995 1996
-------------------- --------------------- -------------------
Carrying Fair Carrying Fair Carrying Fair
Value Value Value Value Value Value
----- ----- ----- ----- ----- -----
(In thousands)
INTEREST-EARNING DEPOSITS $ 4,466 $ 4,466 $13,878 $13,878 $141,975 $141,975
======= ======= ======= ======= ======== ========
SECURITIES HELD-TO-MATURITY:
U.S. Government and
agency obligations 54,933 53,373 38,110 37,988 6,981 7,042
Municipal bonds -- -- 10,388 11,288 -- --
FHLB stock 8,610 8,610 8,558 8,558 10,053 10,053
------- ------- ------- ------- -------- --------
Total $63,543 $61,983 $57,056 $57,834 $ 17,034 $ 17,095
======= ======= ======= ======= ======== ========
SECURITIES AVAILABLE-FOR-SALE:
U.S. Government and
agency obligations $54,087 $54,087 $ 2,000 $ 2,000 $ 27,105 $ 27,105
Mutual funds 3,185 3,185 -- -- -- --
Securities purchased under
agreement to resell -- -- 30,443 30,443 -- --
Certificates of deposit
and other securities -- -- -- -- 446 446
------- ------- ------- ------- -------- --------
Total $57,272 $57,272 $32,443 $32,443 $ 27,551 $ 27,551
======= ======= ======= ======= ======== ========
TRADING SECURITIES:
U.S. Government and
agency obligations $ 4,917 $ 4,917 $ -- $ -- $ -- $ --
======= ======= ======= ======= ======== ========
22
25
The table below sets forth certain information regarding the carrying
value and weighted average yields of the Bank's investment securities at
September 30, 1996.
At September 30, 1996
---------------------------------------------------------------------------------
1 Year or Less After 1 Through 5 Years After 5 Through 10 Years
-------------------- -------------------------- -------------------------------
Annualized Annualized Annualized
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
-------- ----- ----- ----- ----- -----
(Dollars in thousands)
Securities held-to-maturity
U.S. Government and agency obligations $ 2,000 6.60% $ 4,981 6.75% $ -- --
Municipal bonds -- -- -- -- -- --
FHLB stock -- -- -- -- -- --
-------- ------- -----
Total securities held-to-maturity $ 2,000 6.60% $ 4,981 6.75% $ -- --
======== ======= =====
Securities available-for-sale (1,2):
U.S. Government and agency obligations $ 11,988 4.75% $15,117 7.48% $ -- --
Certificates of deposit and
other securities 396 6.50% 50 7.88% -- --
-------- ------- -----
Total securities available-for-sale $ 12,384 4.81% $15,167 7.48% $ -- --
======== ======= =====
At September 30, 1996
-----------------------------------------------------
After 10 Years Total Securities
-------------------- -----------------------------
Annualized
Weighted Approximate
Carrying Average Carrying Fair
Value Yield Value Value
----- ----- ----- -----
(Dollars in thousands)
Securities held-to-maturity
U.S. Government and agency obligations $ -- -- $ 6,981 $ 7,042
Municipal bonds -- -- -- --
FHLB stock 10,053 7.25% 10,053 10,053
------- ------- -------
Total securities held-to-maturity $10,053 7.25% $17,034 $17,095
======= ======= =======
Securities available-for-sale (1,2):
U.S. Government and agency obligations $ -- -- $27,105 $27,105
Certificates of deposit and
other securities -- -- 446 446
------- ------- -------
Total securities available-for-sale $ -- -- $27,551 $27,551
======= ======= =======
- --------------------------
(1) Carrying value is fair value of securities.
(2) Annualized weighted average yield is calculated utilizing the book value
of the securities prior to adjustment for unrealized gain or loss on
available-for-sale and trading securities.
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SOURCES OF FUNDS
General. Deposits, loan repayments, borrowings, and cashflows generated
from operations are the primary sources of the Bank's funds for use in lending,
investing, and for other general purposes.
Deposits. The Bank offers a variety of deposit accounts having a range of
interest rates and terms. The Bank's deposits consist of regular savings,
non-interest bearing checking, NOW checking, money market, and certificate of
deposit accounts.
The Bank's flow of deposits is influenced significantly by general
economic conditions, changes in prevailing interest rates, pricing, and
competition. The Bank's deposits are primarily obtained from the market areas
surrounding its offices. New locations, pricing, and product-packaging are
used to attract new deposits. The Bank retains existing deposits through
maintaining long-standing customer relationships, emphasizing customer service,
developing convenience services and product enhancements. The Bank does not
currently use brokers to obtain deposits. During the past fiscal year, the
Bank's deposit accounts increased by 21,847 accounts or 25.8%. On December 8,
1995 the Bank acquired 8,764 accounts from Palm Beach Savings and Loan, F.S.A.
as part of the acquisition of PBS Financial Corp. by the Company.
Management considers local competition, U.S. Treasury security offerings,
and internal cashflows when setting the Bank's deposit rates. The Bank has
maintained a high percentage of core deposits (consisting of regular savings,
money market, non-interest bearing checking, and NOW checking) which has
contributed to lowering cost-of-funds. Core deposits represented 34.9% of
total deposits on September 30, 1994, 26.2% of total deposits on September 30,
1995 and 25.5% of total deposits on September 30, 1996. The decrease in core
deposits as a percentage of total deposits is primarily caused by an increase
in certificates of deposit. During fiscal years 1995 and 1996, the Bank became
more competitive in its pricing of certificates of deposit.
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27
The following table sets forth the distribution of the Bank's deposit
accounts at the dates indicated and the weighted average nominal interest rates
on each category of deposit presented. Management does not believe that the
use of year-end balances instead of average balances resulted in any material
difference in the information presented.
At September 30,
--------------------------------------------------------------------------------------
1994 1995 1996
---------------------------- --------------------------- --------------------------
Weighted Weighted Weighted
Percent Average Percent Average Percent Average
of Total Nominal of Total Nominal of Total Nominal
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
------ -------- ---- ------ -------- ---- ------ -------- ----
(Dollars in thousands)
Demand accounts:
Non-interest bearing checking $30,512 4.25% 0.00% $31,912 3.63% 0.00% $ 39,649 3.49% 0.00%
NOW checking 61,124 8.51 1.47 57,464 6.54 1.41 59,716 5.25 1.41
Passbook and statement savings 86,972 12.11 1.92 89,967 10.24 2.56 150,433 13.24 3.62
Money market 71,497 9.95 2.43 50,853 5.79 2.41 39,667 3.49 2.41
------ ------ ------- ----- --------- -----
Total 250,105 34.82 1.71 230,196 26.20 1.87 289,465 25.47 2.47
------- ------ ------- ----- --------- -----
Certificate accounts by original maturity:
7-31 days 587 0.08 2.97 437 0.05 4.24 672 0.06 2.83
91 days 8,820 1.23 4.05 8,265 0.94 4.85 6,925 0.61 4.91
6 months 51,279 7.14 3.69 44,314 5.04 5.08 39,459 3.47 4.76
9 months 58,956 8.21 4.75 95,435 10.86 5.86 144,293 12.69 5.45
9-18 months 3,052 0.42 4.88 1,727 0.20 5.18 451 0.04 5.33
1 year 87,114 12.13 3.62 126,694 14.42 5.64 171,201 15.06 5.42
1 1/2 years 40,040 5.57 5.21 79,983 9.10 5.73 124,665 10.97 5.92
2 years 57,311 7.98 4.40 58,335 6.64 5.42 93,988 8.27 6.04
2 1/2 years 5,249 0.73 5.97 10,708 1.22 6.10 30,060 2.64 5.98
3 years 30,147 4.20 5.72 23,984 2.73 5.52 26,921 2.37 5.78
4 years 6,644 0.92 5.88 7,007 0.80 5.84 7,596 0.67 5.78
5 years 79,345 11.05 6.61 92,722 10.55 6.68 101,065 8.89 6.40
Jumbo (1) 39,633 5.52 4.23 98,863 11.25 5.86 99,961 8.79 5.43
------- ------ ------- ----- --------- -----
Total 468,177 65.18 4.77 648,474 73.80 5.80 847,257 74.53 5.61%
------- ------ ------- ----- --------- -----
Total deposits $718,282 100.00% 3.70 $878,670 100.00% 4.77 $1,136,722 100.00% 4.87%
======== ====== ======== ====== ========== ======
- -------------------------
(1) Includes certificates of deposit of $50,000 and up which have negotiated
rates.
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28
The following table presents the deposit activity of the Bank for the
periods indicated:
Fiscal Year Ended September 30,
---------------------------------------
1994 1995 1996
----------- ----------- -----------
(In thousands)
Deposits........................... $1,318,083 $1,597,936 $2,095,914(1)
Withdrawals........................ 1,321,021 1,474,866 1,886,048
---------- ---------- ----------
Deposits greater (less) than
withdrawals....................... (2,938) 123,070 209,866
Interest credited on deposits...... 22,762 37,318 48,186
---------- ---------- ----------
Total increase (decrease)
in deposits........................ $ 19,824 $ 160,388 $ 258,052
========== ========== ==========
- --------------
(1) Deposits include $103.8 million of deposits acquired in the acquisition of
PBS.
At September 30, 1996, the Bank had outstanding $99.7 million in
certificate of deposit accounts of $50,000 or more which have negotiated rates
("Jumbo") maturing as follows:
Balance at September 30, 1996
----------------------------------------------
Origination Amount
----------------------------------
$50,000-$99,999 $100,000 and over Total
--------------- ----------------- ----------
(In thousands)
MATURING PERIOD:
One month through three months.. $ 34,280 $ 17,566 $ 51,846
Three through six months........ 12,978 7,798 20,776
Six through 12 months........... 13,272 3,915 17,187
Over 12 months.................. 5,887 3,980 9,867
--------------- ----------------- ----------
Total.......................... $ 66,417 $ 33,259 $ 99,676
=============== ================= ==========
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29
The following table presents, by various rate categories, the amount of
certificate of deposit accounts outstanding at September 30, 1994, 1995 and
1996 and the period to maturity of these accounts from September 30, 1996:
At September 30, Period to Maturity from September 30, 1996
-------------------------- --------------------------------------------------------
Within One One to Two to
1994 1995 1996 Year Two Years Three Years Thereafter Total
---- ---- ---- --- --------- ----------- ---------- -----
(In thousands)
Certificate accounts:
Less than 3.00% .......... $ 486 $ 326 $ 833 $ 833 $ -- $ -- $ -- $ 833
3.00% to 3.99% .......... 131.554 5,184 303 301 2 -- -- 303
4.00% to 4.99% .......... 180,505 98,532 86,471 82,084 2,073 2,314 -- 86,471
5.00% to 5.99% .......... 83,515 266,157 595,436 427,568 128,013 19,953 19,902 595,436
6.00% to 6.99% .......... 35,159 224,788 131,927 68,499 40,323 5,796 17,309 131,927
7.00% to 7.99% .......... 27,251 49,477 32,151 14,063 159 72 17,857 32,151
8.00% or greater.......... 9,707 4,010 136 -- -- -- 136 136
-------- -------- -------- -------- -------- ------- ------- --------
Total ................. $468,177 $648,474 $847,257 $593,348 $170,570 $28,135 $55,204 $847,257
======== ======== ======== ======== ======== ======== ======= ========
27
30
BORROWINGS
From time to time, the Bank obtains advances from the FHLB-Atlanta which
generally are secured by a blanket lien against the Bank's mortgage portfolio.
Such advances are made pursuant to several different credit programs, each of
which has its own interest rate and range of maturities. The maximum amount
that the FHLB-Atlanta will advance to member institutions, including the Bank,
for purposes other than meeting withdrawals, fluctuates from time to time in
accordance with the policies of the OTS and of the FHLB-Atlanta. As of
September 30, 1996, the Bank had a total credit availability with the
FHLB-Atlanta of $350.0 million. With $201.0 million currently advanced,
remaining credit availability equals $149.0 million.
The Bank executes sales of its securities under agreements to repurchase
("Reverse Repurchase Agreements"). During the fiscal year ended September 30,
1996, all of the Bank's transactions were fixed-coupon Reverse Repurchase
Agreements. The dollar amount of securities underlying the agreements, which
have a carrying value of $12.2 million, remained in the Bank's asset accounts.
The securities underlying the agreements were book entry securities. During
the period of such agreements, the securities are delivered by appropriate
entry into the counter parties' balances. Securities sold under Reverse
Repurchase Agreements averaged $38.0, $40.3 million and $11.9 million during
the fiscal years ended September 30, 1994, 1995 and 1996, respectively. The
maximum amounts outstanding at any month end under such agreements were $63.2
million and $76.9 million during 1994 and 1995 and $28.4 million during 1996.
The weighted average interest rate on the Reverse Repurchase Agreements at
September 30, 1996 was 5.92%.
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31
The following table sets forth certain information relating to the Bank's
borrowings at September 30, 1994, 1995 and 1996.
At or for the Fiscal Year Ended September 30,
-------------------------------------------------
1994 1995 1996
--------------- --------------- ---------------
(Dollars in thousands)
FHLB advances:
Average balance outstanding....................... $121,048 $141,837 $200,158
Maximum amount outstanding at any month
end during the period............................ 172,175 171,125 226,100
Balance outstanding at end of period.............. 172,175 171,125 201,025
Weighted average interest rate during
the period....................................... 4.44% 6.13% 5.98%
Weighted average interest rate at
end of period.................................... 5.22 6.28 5.88
Reverse repurchase agreements:
Average balance outstanding....................... $ 38,004 $ 40,321 $ 11,935
Maximum amount outstanding at any
month end during the period...................... 63,163 76,947 28,408
Balance outstanding at end of period.............. 57,717 18,427 10,000
Weighted average interest rate during the
period........................................... 4.06% 5.84% 5.97%
Weighted average interest rate at end
of the period.................................... 4.85% 6.19% 5.92%
Total borrowings:
Average balance outstanding....................... $159,052 $182,158 $212,093
Maximum amount outstanding at any
month end during the period...................... 235,338 248,072 254,508
Balance outstanding at end of period.............. 229,892 189,552 211,025
Weighted average interest rate during
the period....................................... 4.35% 6.07% 5.98%
Weighted average interest rate at end
of period........................................ 5.13% 6.27% 5.88%
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SUBSIDIARY ACTIVITIES
During fiscal year 1996, the Bank had three wholly-owned subsidiaries:
First Bank of Florida Mortgage Corporation ("FBMC"), formerly First Federal
Mortgage Corporation, The Big First, Inc. and First Corporate Center, Inc.
First Bank of Florida Mortgage Corporation is a wholly-owned subsidiary
of the Bank which solicits and processes mortgage loans which it then sells
only to the Bank. At September 30, 1996, the Bank's investment in FBMC was
$362,000 and its assets were $1,469,000. FBMC's earnings were $115,000 for the
fiscal year ended September 30, 1996.
The Big First, Inc. was formed in March 1981. The primary purpose of this
service corporation was the development of residential real estate. This
service corporation is currently inactive.
First Corporate Center, Inc. is a wholly-owned subsidiary of the Bank
established during fiscal year 1995 to engage in maintenance and management of
improved real estate. It currently manages the Reflections Office Centre owned
by the Company.
PERSONNEL
As of September 30, 1996, the Bank had 363 full-time employees and 39
part-time employees. The employees are not represented by a collective
bargaining unit, and the Bank considers its relationship with its employees to
be good.
30
33
REGULATION AND SUPERVISION
GENERAL
The Bank is subject to extensive regulation, examination and supervision
by the OTS as its chartering agency and the FDIC as the deposit insurer. The
Bank is a member of the FHLB System and its deposit accounts are insured up to
applicable limits by the FDIC under the Savings Association Insurance Fund
("SAIF"). The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with, or
acquisitions of, other financial institutions. There are periodic examinations
by the OTS and the FDIC to test the Bank's compliance with various regulatory
requirements. This regulation and supervision establishes a comprehensive
framework of activities in which an institution can engage and is intended
primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulation, whether by the OTS, the FDIC or the Congress, could
have a material adverse impact on the Company, the Bank and their operations.
The Company, as a savings and loan holding company, is also required to file
certain reports with and otherwise comply with the rules and regulations of the
OTS, and of the SEC under the federal securities laws. Certain of the
regulatory requirements applicable to the Bank and to the Company are referred
to below or elsewhere herein.
FEDERAL SAVINGS INSTITUTION REGULATION
Business Activities. The activities of savings institutions are governed
by the Home Owner's Loan Act, as amended (the "HOLA") and, in certain respects,
the Federal Deposit Insurance Corporation Act ("FDI Act"). The HOLA and the
FDI Act were amended by the Financial Institution Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") and the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). FIRREA was enacted for the
purpose of resolving problem savings institutions, establishing SAIF as a new
thrift insurance fund, reorganizing the regulatory structure applicable to
savings institutions and imposing bank-like standards on savings institutions.
FDICIA, among other things, requires that federal banking regulators intervene
promptly when a depository institution experiences financial difficulties,
mandates the establishment of a risk-based deposit insurance assessment system
and requires imposition of numerous additional safety and soundness operational
standards and restrictions. Both FIRREA and FDICIA contain provisions
affecting numerous aspects of the operations and regulations of
federally-insured savings associations and empower the OTS and the FDIC, among
other agencies, to promulgate regulations implementing its provisions. The
descriptions of statutory provisions and regulations applicable to savings
associations set forth in this document do not purport to be complete
descriptions of such statutes and regulations and their effects on the Bank.
Moreover, because some of the provisions of FDICIA are still being implemented
through the adoption of regulations by the various federal banking agencies,
the Bank cannot yet fully assess the impact of these provision on its
operations.
The federal banking statutes as amended by FIRREA and FDICIA (1) restrict
the use of brokered deposits by troubled savings institutions that are not
well-capitalized, (2) prohibit the acquisition of any corporate debt security
that is not rated in one of the four highest rating categories, (3) restrict
the aggregate amount of loans secured by non-residential real estate property
to 400% of capital, (4) permit savings and loan holding companies to acquire up
to 5% of the voting shares of non-subsidiary savings institutions or savings
and loan holding companies without prior approval, (5) permit bank holding
companies to acquire healthy savings institutions and (6) require the federal
banking agencies to establish by regulation loan-to-value limitations on real
estate lending. However, the Bank does have the authority under the HOLA to
make certain loans or investments not exceeding the greater of the Bank's
capital or 5% of its total assets on each of (i) non-conforming loans (loans in
excess of the specific limitations of the HOLA) and (ii) construction loans
without
31
34
security for the purpose of financing what is or is expected to be residential
property. To assure repayment of such loans, the Bank relies substantially on
the borrower's general credit standing, personal guarantees and projected
future income on the properties.
Capital Requirements. Both OTS and FDIC have promulgated regulations
setting forth capital requirements applicable to savings institutions. The OTS
capital regulations require savings institutions to meet three capital
standards: a 1.5% tangible capital ratio (defined as the ratio of tangible
capital to adjusted total assets), a 3% leverage (core capital) ratio (defined
as the ratio of core capital to adjusted total assets) and an 8% risk-based
capital standard as defined below. Core capital is defined as common
stockholder's equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, minority interests in equity
accounts of consolidated subsidiaries, certain goodwill and certain mortgage
servicing rights less certain intangible assets, mortgage servicing rights and
investments in nonincludable subsidiaries. Tangible capital is defined in the
same manner as core capital, except that all intangible assets (excluding
certain mortgage servicing rights) must be deducted. Adjusted total assets is
defined as GAAP total assets, minus intangible assets (except those included in
core capital). The OTS regulations also require that in calculating the
leverage ratio, tangible and risk-based capital standards, institutions must
deduct investments in and loans to subsidiaries engaged in activities not
permissible for a national bank. The Bank currently has no subsidiaries
engaged in such activities.
The OTS risk-based capital standard for savings institutions requires that
total capital (which is defined as core capital and supplementary capital less
reciprocal holdings of depository institution capital instruments, prescribed
percentages of equity investments and that portion of land loans and
non-residential construction loans in excess of 80% loan-to-value ratio minus
an interest rate risk component, if any) be at least 8% of risk-weighted
assets. In determining risk-weighted assets, all assets, including certain
off-balance sheet assets, are multiplied by a risk-weight of 0% to 100%, as
assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of asset. Generally, zero weight is assigned to risk-free
assets, such as cash and unconditionally guaranteed United States government
securities. A weight of 20% is assigned to, among other things, certain
obligations of United States government-sponsored agencies (such as the FNMA
and the FHLMC) and certain high quality mortgage-related securities. A weight
of 50% is assigned to qualifying mortgage loans and certain other
mortgage-related securities, and a weight of 100% is assigned to consumer,
commercial and other loans, repossessed assets and assets that are 90 days or
more past due. The components of core capital are equivalent to those
discussed above. The components of supplementary capital include permanent
capital instruments (such as cumulative perpetual preferred stock, mandatory
convertible subordinated debt and perpetual subordinated debt), maturing
capital instruments (such as mandatory convertible subordinated debt and
intermediate-term preferred stock) and the allowance for loan and lease losses.
Allowance for loan and lease losses includable in supplementary capital is
limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of
capital counted toward supplementary capital cannot exceed 100% of core
capital.
On August 31, 1995, the OTS issued an interim rule providing that the
amount of risk-based capital that may be required to be maintained by an
institution for recourse assets cannot be greater than the total of the
recourse liability. The interim rule provides that whenever the calculation of
risk-based assets (including assets sold with recourse) would result in a
capital charge greater than the institution's maximum recourse liability on the
assets sold, instead of including the assets sold in the institution's
risk-weighted assets, the institution may increase its risk-based capital by
its maximum recourse liability. In addition, qualified savings associations
may include in their risk-weighted assets for the purpose of capital standards
and other capital measures, only the amount of retained recourse of small
business obligation transfers multiplied by the appropriate risk weight
percentage. The interim rule sets reserve requirements and aggregate limits
for recourse held under the modified treatment. Only well-capitalized
institutions and adequately capitalized institutions with OTS permission may
use this reduced capital treatment.
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On August 16, 1996, the federal banking agencies jointly proposed to
revise their respective risk-based capital rules relating to treatment of
certain collateralized transactions. These types of transactions generally
include claims held by banks (such as loans and repurchase agreements) that are
collateralized by cash or securities issued by the U.S. Treasury or U.S.
Government agencies. If adopted, the proposal would permit certain partially
collateralized claims to qualify for the 0% risk category. To qualify for the
0% risk category, the portion of the claim that will be continuously
collateralized must be specified either in terms of dollar amount or percentage
of the claim. For off-balance-sheet derivative contracts, the collateralized
portion of the transaction could be specified by dollar amount or percentage of
the current or potential future exposure.
FDICIA required that the OTS (and other federal banking agencies) revise
risk-based capital standards with appropriate transition rules to ensure that
they take account of interest rate risk. OTS rules require savings
associations with greater than "normal" interest rate risk exposure to deduct
an interest rate risk component from total capital for purposes of calculating
their risk-based capital requirements. A savings association's interest rate
risk is measured by the decline in the net portfolio value of its assets (i.e.,
the difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200 basis point increase or decrease in market interest rates
(except when the 3-month Treasury bond equivalent yield falls below 4%, then
the decrease will be equal to one-half of that Treasury rate) divided by the
estimated economic value of the association's assets, as calculated in
accordance with guidelines set forth by the OTS. A savings association whose
measured interest rate risk exposure exceeds 2% must deduct an interest rate
component in calculating its total capital under the risk-based capital rule.
The interest rate risk component is an amount equal to one-half of the
difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Effective September 1,
1995, the interest rate risk rule was amended to include, in evaluating capital
adequacy, an assessment of the exposure to declines in the economic value of an
association's capital due to changes in interest rates.
Under the rule, there is a three quarter lag between the reporting date of
an institution's financial data and the effective date for the new capital
requirement based on that data. Each quarter, the OTS calculates an
institution's interest rate risk exposure and advises each institution of any
interest rate risk capital component resulting from greater than "normal"
exposure. The rule also provides that the Director of the OTS may waive or
defer an association's interest rate risk component on a case-by-case basis.
Based upon calculations performed by the OTS concerning the Bank, the
Bank's interest rate risk exposure has been determined to be not greater than
"normal" exposure as of June 30, 1996.
On June 26, 1996, the Office of the Comptroller of the Currency, the
Federal Reserve Board and the FDIC issued a joint agency policy statement that
provides the standards that the federal banking agencies will use to evaluate
the adequacy and effectiveness of an institution's interest rate risk
management. The joint policy addresses fundamental elements for sound interest
rate risk management, including appropriate board and senior management
oversight and the need for a comprehensive risk management process that
identifies, measures, monitors and controls risk. An institution with material
weaknesses in its risk management process or high levels of exposure relative
to its capital will be directed to take corrective action, including raising
additional capital, strengthening management expertise, improving management
information and measurement systems, reducing levels of exposure, or some
combination of these actions, depending on the facts and circumstances of the
individual institution.
The OTS issued a Thrift Bulletin in August 1995 that describes how and
under what circumstances an institution may (1) appeal its interest rate risk
component by requesting an adjustment to the interest rate risk component
generated by the OTS model or (2) seek approval to use its own internal
interest rate risk model to calculate the interest rate risk component. The
Thrift
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Bulletin provides that to be eligible to seek an adjustment to the interest
rate risk component, an institution must show that its interest rate risk
component, as calculated by the OTS, would cause the institution to move to a
lower prompt corrective action category and that the accuracy of the OTS'
estimate of interest rate risk exposure can be materially improved through the
use of more refined data or more appropriate assumptions tailored to the
specific institution. The Thrift Bulletin also outlines the circumstances
under which well-capitalized institutions may request to use their own internal
interest rate risk model in place of the OTS model in calculating interest rate
risk capital requirements. The internal model must meet certain OTS standards,
including reasonable assumptions about future interest rates, prepayment rates
for assets and attrition rates for liabilities.
The FDICIA also required that the OTS (and other federal banking agencies)
revise the risk-based capital standards with appropriate transition rules to
take into account concentration of credit risks and risks of nontraditional
activities. Effective January 17, 1995, the OTS (along with the other federal
banking agencies) issued final regulations which explicitly identify
concentration of credit risk and other risks from nontraditional activities, as
well as an institution's ability to manage these risks, as important factors in
assessing an institution's overall capital adequacy. These final regulations
do not contain any specific mathematical formulas or capital requirements.
At September 30, 1996, the Bank met each of its capital requirements, in
each case on a fully phased-in basis. The following table sets forth the
regulatory capital calculations of the Bank at September 30, 1996:
Excess
Regulatory Required (Deficiency) Actual Required
Capital Capital Amount Percent Percent
------- ------- ------ ------- -------
(Dollars in thousands)
Tangible $ 92,244 $22,413 $69,831 6.17% 1.50%
Leverage (Core) $ 92,244 $44,826 $47,418 6.17% 3.00%
Risk-based $103,668 $67,518 $36,150 12.28% 8.00%
The FDIC capital regulations defining capital for leverage purposes and
establishing minimum leverage capital ratios provides that any insured
depository institution with a "Tier 1" (core) capital to total assets ratio of
less than 2% will be deemed to be in an "unsafe and unsound condition" and is
subject to termination of its deposit insurance by FDIC. At September 30,
1996, the Bank's core capital ratio was 6.17%.
Prompt Corrective Regulatory Action. The FDICIA established a system of
prompt corrective action to resolve the problems of undercapitalized
institutions. Under this system, the banking regulators are required to take
prompt supervisory and corrective actions against undercapitalized
institutions. The scope of mandatory and permissive restrictions becomes
increasingly severe as an institution's capital declines. The FDICIA
established five categories that measure the capital of depository institutions
(well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized). The FDICIA requires that
the federal banking agencies, including the OTS, assign specific criteria to
each of these classifications, within parameters prescribed by the FDICIA
including, among others, that an institution becomes "critically
undercapitalized" when the ratio of tangible equity to total assets is equal to
or less than 2% of assets. The FDICIA also requires the banking regulators to
review their capital standards every two years so that these standards require
sufficient capital to facilitate prompt corrective action and to minimize loss
to the SAIF and the Bank Insurance Fund ("BIF").
Under the OTS prompt corrective action rules, a "well capitalized"
institution generally must have a total risk-based capital ratio of 10% or
more, a leverage ratio of 5% or more, and a Tier 1 risk-based capital ratio
(based on the ratio of core capital to risk-weighted assets) of 6% or more, and
may not be subject to any written agreement, order, capital directive or prompt
corrective action directive issued by the OTS. The Bank is a "well
capitalized" institution under the definitions. An institution will be
categorized as "adequately capitalized" if it has a total risk-based capital
ratio of 8% or more, a leverage ratio of 4% or more, and a Tier 1 risk-based
capital ratio of 4% or more. A savings institution that has a total risk-based
capital ratio of less than 8%, a Tier 1 risk-based capital
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ratio of less than 4%, or a leverage ratio that is less than 4% is considered
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a Tier 1 risk-based capital ratio of less than 3% or a
leverage ratio that is less than 3% is considered to be "significantly
undercapitalized" and a savings institution that has a tangible capital to
assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." Under the FDICIA as implemented by OTS regulations, an
insured depository institution cannot make a capital distribution (broadly
defined to include, among other things, dividends, redemptions and other
purchases of stock), or pay management fees to any person having control of
that institution if, after doing so, it would be "undercapitalized."
Generally, a capital restoration plan must be filed with the OTS within 45
days after the date an institution receives notice that it is
"undercapitalized", "significantly undercapitalized" or "critically
undercapitalized." Any company having control of an undercapitalized
institution must guarantee the institution's compliance with its capital
restoration plan until the institution has remained adequately capitalized
during each of four consecutive calendar quarters. The aggregate liability of
the controlling company under its guarantee is limited to the lesser of 5% of
the institution's total assets at the time the institution was notified that it
was undercapitalized or the amount necessary to restore the institution to
"adequate capitalization." In addition to submitting a capital restoration
plan, numerous mandatory supervisory actions become immediately applicable to
an "undercapitalized", "significantly undercapitalized" or "critically
undercapitalized" institution, including (but not limited to) restrictions on
growth of the institution's assets, investment activities, capital
distributions, and affiliate transactions. The OTS could also take any one of
a number of discretionary supervisory actions, including the issuance of a
capital directive and the replacement of senior executive officers and
directors. Generally, subject to a narrow exception, the FDICIA requires the
banking regulator to appoint a receiver or conservator for an institution that
is "critically undercapitalized."
Insurance of Deposit Accounts. The FDIC is the federal deposit insurance
administrator for both banks and savings associations. Currently, the FDIC
administers separate insurance funds, the SAIF for thrifts and the BIF for
banks, independently setting insurance premiums for each fund. The FDIC is
authorized to adjust assessment rates. The Bank, along with all federally
insured depository institutions, is required to pay premiums for this deposit
insurance.
Under the FDI Act, the FDIC is required to increase the reserves of both
the BIF and the SAIF to 1.25% of total insured deposits over a reasonable
period of time and thereafter to maintain these reserves at not less than this
level. Under the Deposit Insurance Funds Act of 1996 ("DIFA"), which was signed
into legislation on September 30, 1996, all depository institutions insured by
the SAIF were required to pay a one-time special assessment (the "Special
Assessment") of 65.7 basis points (subject to certain adjustments) on
SAIF-insured deposits that were held at March 31, 1995 to recapitalize the
SAIF. The Special Assessment is intended to bring the SAIF's reserve ratios
to a level comparable to the BIF at 1.25% of total insured deposits. The
Bank's pre-tax share of the Special Assessment was $6.6 million.
The FDICIA required the FDIC to establish a risk-based assessment system
for calculating each insured institution's deposit insurance premiums to take
into account that institution's regulatory capital level and the level of risk
associated with its activities. Under the system, for each semi-annual
assessment period, an insured institution's assessment rate will be based on
whether the institution is "well capitalized," "adequately capitalized" or
"undercapitalized" based on criteria consistent with those established pursuant
to the prompt corrective action regulations of the FDICIA. See "Prompt
Corrective Regulatory Action" above. Additionally, each of these groups is
divided into three "supervisory subgroups" which reflect the degree of
"supervisory risk" that the institution poses to the insurance fund. Each
institution is assigned to a subgroup based on the FDIC's consideration of
supervisory evaluations provided by the institution's primary federal
regulator, as well as other information that the FDIC determines to be relevant
to the institution's financial condition and the risk posed to the insurance
fund. The FDIC adopted revisions to the risk-based assessment system effective
April 1, 1995 which implement a quarterly collection of assessments
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by means of an FDIC-originated direct debit from an account designated by the
insured institution. The rules also shift to the FDIC responsibility for
computing each institution assessment and establish a procedure for resolving
disagreements between the FDIC and the institutions regarding assessment
computations.
For the semiannual assessment period beginning July 1, 1996, SAIF
insurance premiums ranged from 0.23% to 0.31% of insured deposits, with well
capitalized institutions in the highest supervisory subgroup paying 0.23% of
insured deposits and undercapitalized institutions in the lowest supervisory
group paying 0.31% of insured deposits. The Bank's assessment rate for the
fiscal years ended September 30, 1995 and 1996 was 0.23% of insured deposits.
During the fiscal year ended September 30, 1996, the Bank paid insurance
premiums totaling $8.8 million, which included a one-time special assessment of
$6.6 million discussed above.
The FDIC in early December, 1996 adopted a rule that would reduce regular
semi-annual SAIF assessments from the current range of 0.23% - 0.31% of
deposits to a range of 0% - 0.27% of deposits. The new rates will be effective
for SAIF-assessable institutions on January 1, 1997. From October 1, 1996
through December 31, 1996, SAIF-assessable institutions will be assessed at
rates ranging from 0.18% to 0.27% of deposits, which represents the amount the
FDIC calculates as necessary to cover the interest due for that period on
outstanding Financing Corporation ("FICO") Bonds discussed below. Because
SAIF-assessable institutions have already been assessed at current rates
(i.e., 0.23% - 0.31% of deposits) for the semi-annual period ending December
31, 1996, the FDIC will refund or credit with interest the amount collected
from such institutions for the period from October 1, 1996 through December 31,
1996 which exceeds the amount due for that period under the reduced assessment
schedule. Assuming the Bank retains its current risk classification under the
FDIC's risk-based assessment system, the deposit insurance assessments payable
by the Bank will be reduced significantly to the same level currently paid by
the Bank's BIF-member competitors. Effective October 1, 1996, the Bank's SAIF
insurance premiums were reduced from $0.23 per $100 to $0.064 per $100 of
insured deposits in January, 1997.
DIFA prohibits adoption of an assessment rate for a SAIF member between
September 30, 1996 and December 31, 1996 that is lower than the rate imposed on
a BIF member that poses a comparable risk to the relevant deposit insurance
fund. Therefore, if BIF assessments rise during this period, SAIF premiums may
be increased. DIFA also provides that, except for institutions that are not
well capitalized or exhibit financial, operational or compliance weaknesses
ranging from moderately severe to unsatisfactory, the FDIC may not set
semi-annual assessments at levels exceeding those required to maintain or bring
the relevant deposit insurance fund up to the designated reserve ratio.
DIFA requires federal banking agencies to take appropriate measures to
prevent insured depository institutions and insured depository holding
companies from facilitating or encouraging shifting from SAIF-assessable
deposits to BIF-assessable deposits to avoid assessments imposed on SAIF
members. These measures include enforcement actions, denial of applications,
and treating the transaction as a conversion by imposing exit fees and entrance
fees.
DIFA also reduced the burden on SAIF-insured institutions in paying bonds
(the "FICO Bonds") issued by the FICO, the entity created in 1987 to finance
the recapitalization of the Federal Savings and Loan Insurance Corporation, the
SAIF's predecessor insurance fund. Prior to the enactment of DIFA, a
substantial amount of the SAIF assessment revenue was used to pay the interest
due on the FICO Bonds. Beginning with the semi-annual periods after December
31, 1996, interest due on FICO Bonds will be covered by assessments against
both SAIF and BIF insured institutions. Between January 1, 1997 and December
31, 1999, BIF-assessable deposits will be assessed at a rate of 20% of the
assessment rate applicable to SAIF-assessable deposits. After December 31,
1999 or the date that the last savings association ceases to exist, FICO
assessments will be shared on a pro rata basis.
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Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution (1) has engaged in unsafe or unsound
practices, (2) is in an unsafe or unsound condition to continue operations, or
(3) has violated any applicable law, regulation, rule, order or condition
imposed by the FDIC or the OTS. The management of the Bank does not know of
any practice, condition or violation that might lead to termination of deposit
insurance. At September 30, 1996, the Bank's regulatory capital exceeded all
of the fully phased-in capital requirements.
DIFA also provides for the merger of the SAIF and the BIF into the
"Deposit Insurance Fund" on January 1, 1999 provided there are no state or
federally chartered FDIC-insured savings associations existing on that date.
To facilitate the merger of the BIF and SAIF, DIFA directs the Treasury
Department to conduct a study on the development of a common charter and to
submit a report, along with appropriate legislative recommendations, to
Congress by March 31, 1997. Immediately prior to merger of the SAIF and the
BIF, a Special Reserve of the Deposit Insurance Fund (the "DIF Special
Reserve") will be created that will consist of the excess amount in the SAIF
reserve ratio over the designated reserve ratio as of that date, if any. The
DIF Special Reserve would be available for emergency purposes if the reserve
ratio of the Deposit Insurance Fund is less than 50% of the designated reserve
ratio and the FDIC expects the reserve ratio to remain at less than 50% of the
designated reserve ratio for each of the next four calendar quarters.
If the SAIF and the BIF are not merged, DIFA provides for creation of a
SAIF Special Reserve if the reserve ratio of the SAIF exceeds the designated
reserve ratio. The amount by which the SAIF reserve ratio exceeds the
designated reserve ratio will be deposited into the SAIF Special Reserve. Like
the DIF Special Reserve, the SAIF Special Reserve would be available for
emergency purposes if the reserve ratio of the SAIF is less than 50% of the
designated reserve ratio and the FDIC expects the reserve ratio to remain at
less than 50% of the designated reserve ratio for each of the next four
calendar quarters.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limits on loans to one borrower. Generally, a
savings institution's total loans and extensions of credit to a single borrower
or related group of borrowers outstanding at one time and not secured by
readily marketable collateral (defined to include certain securities and
bullion, but generally not real estate) may not exceed 15% of the institution's
unimpaired capital and surplus. An additional amount equal to 10% of
unimpaired capital and surplus may be lent if the loan is fully secured by
readily marketable collateral.
A savings institution which meets its fully phased-in capital requirements
may make loans to one borrower to develop domestic residential housing units up
to the lesser of $30,000,000 or 30% of the savings institution's unimpaired
capital and surplus (including all amounts lent under the 10% and 15%
limitations described above) if certain other conditions are met.
At September 30, 1996, the Bank's largest aggregate amount of loans to one
borrower consisted of $12.0 million in lines of credit and the balance of
disbursed funds totaled $7.9. At September 30, 1996, the maximum amount that
the Bank was permitted by the regulations to lend to one borrower (or related
group of borrowers) outstanding at any time was approximately $14.3 million.
Real Estate Lending Standards. The OTS and the other federal banking
agencies have adopted regulations that require savings institutions to adopt
and annually review written real estate lending policies that reflect
consideration of guidelines adopted by the federal banking agencies. The
lending policies must include diversification standards, underwriting standards
(including loan-to-value limits), loan administration procedures, and
procedures for monitoring compliance with the policies. The guidelines adopted
by the federal banking agencies include maximum loan-to-value ratios for land
loans (65%), land development loans (75%), construction loans (80-85%), loans
on owner-occupied, one-to four-family property, including home equity loans (no
specific loan-to-value limit, but loans at or above 90% loan-to-value require
private mortgage insurance or readily marketable collateral), and loans on
other improved property (85%).
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The guidelines permit institutions to make loans in excess of the
supervisory loan-to-value limits if such loans are supported by other credit
factors. The aggregate amount of such nonconforming loans, however, should not
exceed the institution's total capital, and the aggregate amount of
nonconforming loans secured by real estate other than one-to four-family
residential property should not exceed 30% of total capital.
QTL Test. The Bank, like all savings associations, is required by HOLA to
meet a qualified thrift lender ("QTL") test in order to, among other things, be
eligible for future advances from the FHLB. Under the QTL test, as modified by
FDICIA, a savings association is required to maintain at least 65% of its
"portfolio assets" (total assets less (i) specified liquid assets up to 20% of
total assets; (ii) intangibles, including goodwill and (iii) the value of
property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed securities) on a monthly basis in 9 out of every 12 months.
A savings association that fails the QTL test must either convert to a
bank charter or be subject to prohibitions against (i) making any new
investment or engaging in any new activity not permissible for both a national
bank and a savings association, (ii) paying dividends not permissible under
national bank regulations, (iii) obtaining new advances from any FHLB, and (iv)
establishing any new branch office in a location not permissible for a national
bank in the association's home state. In addition, beginning three years after
an association fails the QTL test, the association would be prohibited from
retaining any investment or engaging in any activity not permissible for both a
national bank and a savings association and would have to repay all outstanding
advances from an FHLB as promptly as could be prudently done consistent with
the safe and sound operation of the savings association. If an association
that fails the QTL test is controlled by a holding company, then, within one
year after the failure, the holding company must register as a bank holding
company and will be subject to all restrictions on bank holding companies. As
of September 30, 1996, the Bank maintained 75.8% of its portfolio assets in
qualified thrift investments and therefore, met the QTL test.
Limitation on Capital Distributions. OTS regulations limit savings
institutions' ability to make capital distributions such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to
shareholders of another institution in a cash-out merger and other
distributions charged against capital. The regulations establish three
categories for classifying institutions, and these categories impose
increasingly severe restrictions on capital distributions. An institution will
be categorized based primarily upon its capital level.
A Tier 1 Bank is an institution that has capital, both immediately prior
to and after giving effect to a proposed capital distribution, that is equal to
or exceeds the amount of its fully phased-in capital requirements. A Tier 1
Bank that has not been advised by the OTS that it is in need of more than
normal supervision could (after giving prior notice to the OTS but without the
requirement of OTS approval) make capital distributions during a calendar year
up to the greater of (i) 100% of its net income to date during the calendar
year plus the amount that would reduce by one-half its "surplus capital ratio"
(the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year, or (ii) 75% of its net income for the most
recent four quarters. A Tier 2 Bank is an institution that has capital, both
immediately prior to and after giving effect to a proposed capital
distribution, that is equal to or exceeds its minimum regulatory capital
requirements but is less than the amount of its fully phased-in capital
requirements. A Tier 2 Bank may make capital distributions of between 25% and
75% of its net income over the most recent four-quarter period, depending on
its risk-based capital level. All distributions by a Tier 1 or Tier 2 bank in
excess of those described above would require the prior approval of the OTS. A
Tier 3 Bank is an institution that has capital, both immediately prior to and
after giving effect to a proposed capital distribution, that is less than the
amount of its minimum regulatory capital requirements. It may not make any
capital distributions without the prior approval of the OTS.
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In addition, the OTS may prohibit any proposed capital distribution by any
institution otherwise permitted by the regulations if the OTS determines that
such distribution would constitute an unsafe or unsound practice.
At September 30, 1996, the Bank was a Tier 1 Bank. If the Bank's capital
falls below its fully phased-in capital requirements or the OTS gives notice
that the Bank is in need of more than normal supervision, the Bank's ability to
make capital distributions could be restricted. Furthermore, under the OTS
prompt corrective action regulations, the Bank would be prohibited from making
any capital distributions if, after the distribution, the Bank would have (i) a
total risk-based capital ratio of less than 8%, (ii) a Tier 1 risk-based
capital ratio of less than 4% or (iii) a leverage ratio of less than 4% (see
"Prompt Corrective Regulatory Action" above.)
Liquidity. OTS regulations currently require a savings institution to
maintain each month an average daily balance of liquid assets (cash; certain
time deposits; bankers' acceptances; specified United States Government, state
or federal agency obligations; shares of certain mutual funds and certain
corporate debt securities and commercial paper) equal to at least 5% of the
average daily balance of the sum of its net withdrawable deposit accounts and
short-term borrowings during the preceding calendar month. This liquidity
requirement may be changed from time to time by the OTS to any amount within
the range of 4% to 10% depending upon economic conditions and the savings flows
of member institutions. OTS regulations also require each savings institution
to maintain each month an average daily balance of short-term liquid assets
(generally those having maturities of 12 months or less) equal to at least 1%
of the average daily balance of the sum of its net withdrawable deposit
accounts and short-term borrowings during the preceding calendar month.
Enforcement proceedings may be undertaken by the OTS for failure to meet these
liquidity requirements. The Bank's average daily liquidity and short-term
liquidity ratios at September 30, 1996 were 7.9% and 5.3%, respectively, which
exceeded the then applicable requirements. The Bank has never failed to meet
its liquidity requirements.
Assessments. Savings institutions are required by OTS regulation to pay
assessments to the OTS to fund its operations. The general assessment,
currently paid on a semi-annual basis, is computed upon the savings
institution's total assets, including consolidated subsidiaries, as reported in
the institution's latest quarterly thrift financial report. The assessments
paid by the Bank in fiscal 1996 totaled $255,000.
Community Reinvestment. Under the CRA, as implemented by OTS regulations,
a savings institution has a continuing and affirmative obligation consistent
with its safe and sound operation to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the OTS, in connection with its
examination of a savings institution, to assess the institution's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications by such institution. FIRREA amended
the CRA to require all institutions to make public disclosure of their CRA
performance using the ratings of "outstanding", "satisfactory", "needs to
improve", or "substantial noncompliance". The Bank received an "outstanding"
rating in its last CRA examination by the OTS of November, 1994.
On May 4, 1995, the bank regulatory agencies, including the OTS, adopted
new, uniform CRA regulations that provide guidance to financial institutions on
their CRA obligations and the methods by which those obligations would be
assessed and enforced. The regulations establish three tests applicable to the
Bank: (i) a lending test to evaluate direct lending in low-income areas and
indirect lending to groups that specialize in community lending; (ii) a service
test to evaluate an institution's delivery of services to such areas; and (iii)
an investment test to evaluate an institution's investment in programs
beneficial to such areas. The new CRA regulations became effective on July 1,
1995, but reporting requirements are not effective until January 1, 1997.
Evaluation under the regulations is not mandatory until July 1, 1997. The Bank
believes its current operations and
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policies substantially comply with the regulations, and therefore, no material
changes to operations or policies are expected.
Brokered Deposits. FDIC regulations implementing the FDICIA limitations
on brokered deposits provide that well-capitalized institutions are not subject
to limitations on brokered deposits. An adequately capitalized institution may
not accept, renew or roll over brokered deposits unless (i) it has been granted
a waiver from the FDIC of the regulation's restrictions and (ii) it does not
pay an effective yield on any brokered deposit which exceeds by more than (a)
75 basis points the effective yield paid on deposits of comparable size and
maturity in such institution's normal market area for deposits accepted from
its normal market area or (b) 120 basis points of the current yield on similar
maturity U.S. Treasury obligations and 130 basis points for any deposit at
least half of which is uninsured for deposits accepted outside the
institution's normal market area. An undercapitalized institution may not
accept, renew, or rollover brokered deposits and may not solicit deposits by
offering an effective yield that exceeds by more than 75 basis points the
prevailing effective yields on insured deposits of comparable maturity in the
institution's normal market area or in the market area in which such deposits
are being solicited. The FDIC regulation uses the same definitions as those
used in the prompt corrective action regulations (i.e. "well capitalized,
"adequately capitalized," etc.) See "Prompt Corrective Regulatory Action"
above. As of September 30, 1996, the Bank qualified as a "well capitalized"
institution and therefore, was not subject to FDICIA limits on brokered
deposits.
Financial Management Requirements. The FDIC has promulgated regulations
implementing the FDICIA financial reporting requirements. The regulations
govern all insured depository institutions with assets of more than $500
million, their management and their independent auditors and establish new
rules for the composition, duties and authority of such institutions' audit
committees. Among other things, applicable depository institutions are
required to prepare and make available to the public annual reports on their
financial condition and management, including statements of management's
responsibility for the financial statements, internal controls and compliance
with certain federal banking laws and regulations relating to safety and
soundness, and an assessment of the effectiveness of such controls, and the
institution's compliance with such internal controls, laws and regulations.
The institution's independent public accountants are required to attest to, and
report separately on, management assessments. The regulations also require
that the annual report contain financial statements audited by an independent
public accountant. Each such institution also is required to have an audit
committee composed of independent directors. Audit committees of institutions
with more than $3 billion in assets may engage their own independent legal
counsel. The regulations also require prompt notice to the FDIC and the OTS if
the institution's auditor resigns or is dismissed.
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with a savings institution, including the
Company and its non-savings institution subsidiaries) or to make loans to
certain insiders, is limited by Sections 23A and 23B of the Federal Reserve Act
("FRA"). Section 23A limits the aggregate amount of transactions with any
individual affiliate to 10% of the capital and surplus of the savings
institution and also limits the aggregate amount of transactions with all
affiliates to 20% of the savings institution's capital and surplus. Certain
transactions with affiliates are required to be secured by collateral in an
amount and of a type described in Section 23A and the purchase of low quality
assets from affiliates is generally prohibited. Section 23B provides that
certain transactions with affiliates, including loans and asset purchases, must
be on terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with nonaffiliated
companies. In the absence of comparable transactions, such transactions may
only occur under terms and circumstances, including credit standards, that in
good faith would be offered to or would apply to nonaffiliated companies.
Notwithstanding Sections 23A and 23B, savings institutions are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies under Section 4(c) of the Bank Holding Company Act
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("BHC Act"). Furthermore, no savings institution may purchase the securities
issued by any affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors and
10% shareholders, as well as entities controlled by such persons, is currently
governed by Sections 22(g) and 22(h) of the FRA, Regulation O thereunder (with
certain minor variances), and the OTS's Conflicts Rule at 12 CFR 563.43. Among
other things, these regulations require such loans to be made on terms
substantially similar to those offered to unaffiliated individuals, place
limits on the amount of loans the Bank may make to such persons based, in part,
on the Bank's capital position, and require certain approval procedures to be
followed.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-affiliated parties," including
stockholders and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on
an insured institution. Civil penalties cover a wide range of violations and
actions and range up to $25,000 per day unless a finding of reckless disregard
causing substantial loss to the savings institution or substantial pecuniary
benefit to the offending party is made, in which case penalties may be as high
as $1 million per day. Criminal penalties for most financial institution
crimes include fines of up to $1 million and imprisonment for up to five years.
In addition, regulators have substantial discretion to impose enforcement
action on an institution that fails to comply with its regulatory requirements,
particularly with respect to the capital requirements. Possible enforcement
action ranges from the imposition of a capital plan and capital directive to
receivership, conservatorship or the termination of deposit insurance. Under
the FDI Act, the FDIC has the authority to recommend to the Director of OTS
that enforcement action be taken with respect to a particular savings
institution. If action is not taken by the Director, the FDIC has authority to
take such action under certain circumstances.
Standards for Safety and Soundness. Under FDICIA, as amended by the
Riegle Community Development and Regulatory Improvement Act of 1994 ("CDRI
Act"), each federal banking agency was required to prescribe for all insured
depository institutions and their holding companies standards relating to
internal controls, information systems and audit systems, loan documentation,
credit underwriting, interest rate risk exposure, asset growth and
compensation, fees and benefits and such other operational and managerial
standards as the agency deems appropriate. On July 10, 1995, the federal
banking agencies, including the OTS, adopted a final rule establishing
deadlines for submission and review of safety and soundness compliance plans
and Interagency Guidelines Establishing Standards for Safety and Soundness.
The final rule and the guidelines went into effect on August 9, 1995. The
guidelines require savings institutions to maintain internal controls and
information systems and internal audit systems that are appropriate for the
size, nature and scope of the institution's business. The guidelines also
establish certain basic standards for loan documentation, credit underwriting,
interest rate risk exposure, and asset growth. The guidelines further provide
that savings institutions should maintain safeguards to prevent the payment of
compensation, fees and benefits that are excessive or that could lead to
material financial loss, and that they should take into account factors such as
compensation practices at comparable institutions. In October 1996, the
federal banking agencies jointly adopted asset quality and earning standards to
be added to the Interagency Guidelines.
If the OTS determines that a savings institution is not in compliance with
the safety and soundness guidelines, it may require the institution to submit
an acceptable plan to achieve compliance with the guidelines. A savings
institution must submit an acceptable compliance plan to the OTS within 30 days
after receipt of a request for such a plan. Failure to submit or implement a
compliance plan may subject the institution to regulatory sanctions.
Management believes that the Bank already meets substantially all the standards
adopted in the interagency guidelines, and therefore does not believe that
implementation of these regulatory standards will materially affect the Bank's
operations.
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The FDICIA, as amended by the CDRI Act, also requires the federal banking
agencies to establish standards relating to asset quality and earnings. The
federal banking agencies, including the OTS, issued guidelines effective
October 1, 1996 relating to asset quality and earnings. Under the guidelines,
a savings institution should maintain systems (commensurate with its size and
the nature and scope of its operations) to identify problem assets and prevent
deterioration in those assets as well as to evaluate and monitor earnings and
ensure that earnings are sufficient to maintain adequate capital and reserves.
Management believes that the asset quality and earnings standards, in the form
proposed by the banking agencies, would not have a material effect on the
Bank's operations.
Interstate Banking. In September 1994, Congress enacted the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act")
which became effective September 29, 1995. The Interstate Act eliminates many
existing restrictions on interstate banking by authorizing interstate
acquisitions of banks by bank holding companies without geographic limitations
and without regard to whether such acquisitions are permissible under state
law.
Florida enacted the Florida Interstate Banking Act (the "Florida Act")
which became effective May 16, 1996. The Florida Act permits acquisitions of
Florida banks in existence three years or more (or all Florida bank
subsidiaries in the case of Florida bank holding companies) by bank holding
companies based in other states.
Florida law has permitted interstate reciprocal acquisitions of and by
Florida savings institutions since 1986. The effect of the Interstate Act and
the Florida Act, which will expand the number of out-of-state bank holding
companies permitted to acquire Florida banks, on the Bank cannot be predicted
at this time. It is anticipated that these acts may facilitate further
consolidation in the banking industry and, by permitting out-of-state banks
nationwide to acquire Florida banks, may increase competition in the Bank's
market.
Branching. Pursuant to OTS regulations, a federal savings association has
the authority to branch throughout the state of its home office and
nationwide to the extent allowed by federal statute. Prior approval of the
OTS is required to establish branches, and the OTS is required to consider the
policies, condition and operation of the institution and its performance under
the Community Reinvestment Act ("CAR") in approving branch applications.
Beginning June 1, 1997, the Interstate Act will allow interstate branching
in states that have not passed legislation prohibiting interstate branching.
Prior to June 1, 1997, interstate branching will be possible in states that
pass laws affirmatively authorizing interstate branching. In 1996, Florida
enacted the Florida Interstate Branching Act (the "Branching Act") which, as
contemplated by the Interstate Act, allows Florida banks to establish
interstate branches through mergers with out-of-state banks. The Branching Act
also permits out-of-state banks to acquire Florida banks and such out-of-state
banks to operate and maintain the branches of the acquired Florida bank.
Transactions contemplated by the Branching Act will be permitted beginning
June 1, 1997.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FLAB System, which consists of 12 regional
Flubs which are governed and regulated by the Federal Housing Finance Board.
The FLAB provides a central credit facility primarily for member institutions.
The FHLB-Atlanta makes advances to members in accordance with policies and
procedures periodically established by the Federal Housing Finance Board and
the Board of Directors of FHLB-Atlanta. Long-term FHLB advances may be
obtained only for providing funds for residential housing finance. All
advances must be fully secured by specified types of collateral. Interest
rates charged for advances vary depending on maturity, the cost of funds to the
FHLB-Atlanta and the purpose of the borrowing. FIRREA restricts the amount of
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FHLB advances to a member institution, and in some circumstances, limits
advances to institutions that do not meet the QTL test. See "Federal Savings
Institution Regulation - QTL Test." At September 30, 1996, advances from the
FHLB-Atlanta to the Bank totaled $201.0 million. The weighted average interest
rate on those advances as of September 30, 1996 was 5.88%.
The Bank, as a member of the FHLB-Atlanta, is required to acquire and hold
shares of capital stock in that FHLB in an amount at least equal to 1% of the
aggregate principal amount of its unpaid home mortgage loans, home-purchase
contracts and similar obligations. The Bank was in compliance with this
requirement with an investment in FHLB-Atlanta stock at September 30, 1996 of
$10.1 million.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest
on advances to their members. For the years ended September 30, 1994, 1995 and
1996, dividends from the FHLB-Atlanta to the Bank amounted to $405,000,
$549,000 and $741,000, respectively. If dividends were reduced or interest on
future FHLB advances increased, the Bank's net interest income would likely
also be reduced. Further, there can be no assurance that the impact of FDICIA
and FIRREA on the FHLBs will not also cause a decrease in the value of the
FHLB-Atlanta stock held by the Bank.
FEDERAL RESERVE SYSTEM
Federal Reserve Board regulations require savings institutions to maintain
non-interest-earning reserves against certain of their transaction accounts
(primarily NOW and regular checking accounts). Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $52.0 million or
less (subject to adjustment by the Federal Reserve Board) the reserve
requirement is 3% of the amount of transaction accounts; for accounts greater
than $52.0 million, the reserve requirement is $1,560,000 plus 10% (subject to
adjustment by the Federal Reserve Board between 8% and 14%) of the amount of
transaction accounts in excess of $52.0 million. The first $4.3 million of
otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) are exempted from the reserve requirements. At September 30, 1996, the
Bank was in compliance with the foregoing requirements. The FRB has authority
to impose, in specified circumstances, emergency and supplemental reserves in
excess of the percentage limitations otherwise prescribed. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve
Board may be used to satisfy liquidity requirements imposed by the OTS.
Because required reserves must be maintained in the form of either vault cash,
a non-interest-bearing account at a Federal Reserve Bank or a pass-through
account as defined by the Federal Reserve Board, the effect of this reserve
requirement is to reduce the Bank's interest-earning assets. FHLB System
members are also authorized to borrow from the Federal Reserve "discount
window," but Federal Reserve Board regulations require institutions to exhaust
all FHLB sources before borrowing from a Federal Reserve Bank.
In addition, Federal Reserve Board regulations limit the periods within
which depository institutions must provide availability for, and pay interest
on, deposits to transaction accounts. Depository institutions are required to
disclose their check holding policies and all changes to those policies in
writing to customers.
HOLDING COMPANY REGULATION
The Company is a unitary savings and loan holding company within the
meaning of the HOLA, as amended. As such, the Company is required to register
with the OTS and is subject to OTS regulations, examinations, supervision and
reporting requirements. In addition, the OTS has enforcement authority over
the Company and its non-savings institution subsidiaries. Among other things,
this authority permits the OTS to restrict or prohibit activities that are
determined to be a
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serious risk to the subsidiary savings institution. The Bank must notify the
OTS 30 days before declaring any dividend to the Company.
The HOLA prohibits a savings and loan holding company, directly or
indirectly or through one or more subsidiaries or through one or more
transactions, from (1) acquiring either control of or substantially all of the
assets of another savings institution or holding company thereof without prior
written approval of the OTS; (2) acquiring or retaining, with certain
exceptions, 5% or more of the voting stock of a nonsubsidiary savings
institution, a nonsubsidiary holding company or a nonsubsidiary company engaged
in activities other than those permitted by the HOLA; or (3) acquiring or
retaining control of an institution that is not federally insured. In
evaluating applications by holding companies to acquire savings institutions,
the OTS must consider the financial and managerial resources and future
prospects of the holding company and savings institution involved, the effect
of the acquisition on the savings institution to be acquired, the risk of the
acquisition to the insurance funds, the convenience and needs of the community,
and competitive factors.
As a unitary savings and loan holding company, the Company generally is
not restricted under existing laws as to the types of business activities in
which it may engage, provided that the Bank continues to be a QTL. See
"Federal Savings Institution Regulation-QTL Test" for a discussion of the QTL
requirements. Upon any non-supervisory acquisition by the Company of another
savings association or savings bank that meets the QTL test and is deemed to be
a savings institution by OTS, the Company would become a multiple savings and
loan holding company (if the acquired institution is held as a separate
subsidiary) and would be subject to extensive limitations on the types of
business activities in which it could engage. The HOLA limits the activities
of a multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Holding Company ("BHC") Act, subject to the
prior approval of the OTS, and activities authorized by OTS regulation.
The OTS is prohibited from approving any acquisition that would result in
a multiple savings and loan holding company controlling savings institutions in
more than one state, unless: (i) the acquiring company or savings association
of such company is authorized to acquire control of an institution in the
additional state pursuant to the emergency acquisition provisions of the FDI
Act, (ii) the acquiring company controls a savings association subsidiary
which operated a home or branch office in the additional state as of March 5,
1987 or (iii) the statutes of the state of the target savings institution
specifically permit such acquisitions. Although the conditions imposed upon
acquisitions in those states which have enacted such legislation vary, most
such statutes are of the "regional reciprocity" type which require both that
the acquiring holding company be located (as defined by the location of its
subsidiary savings institutions) in a state within a defined geographic region
and that the state in which the acquiring holding company is located has
enacted reciprocal legislation allowing savings institutions in the target
state to purchase savings institutions in the acquiror's home state on terms no
more restrictive than those imposed by the target state on the acquiror. Some
states authorize acquisition by out-of-state holding companies only in
supervisory cases, and certain states do not authorize interstate acquisitions
under any circumstances. See "Interstate Banking."
Federal law generally provides that no "person" acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control" as that term is defined in OTS regulations of a federally-insured
savings institution without giving at least 60 days' written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among
other things, that (i) the acquisition would substantially lessen competition;
(ii) the financial condition of the acquiring person might jeopardize the
financial stability of the savings institution or prejudice the interests of
its depositors or (iii) the competence, experience or integrity of the
acquiring person or the proposed management personnel indicates that it would
not be in the interest of the depositors or the public to permit the
acquisition of control by such person.
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In addition, federal regulations governing conversions of mutual savings
institutions to the stock form of organization prohibit the direct or indirect
acquisition without prior OTS approval of more than 10% of any equity security
of a savings institution within three years after the savings institution's
conversion to stock form. This limitation applied to acquisitions of the stock
of the Company until September 29, 1996. Such an acquisition may be
disapproved if it is found, among other things, that the proposed acquisition
(a) would frustrate the purposes of the provisions of the regulations regarding
conversions; (b) would be manipulative or deceptive; (c) would subvert the
fairness of the conversion; (d) would be likely to result in injury to the
savings institution; (e) would not be consistent with economical home
financing; (f) would otherwise violate law or regulation; or (g) would not
contribute to the prudent deployment of the savings institution's conversion
proceeds.
In August of 1994, the OTS approved final regulations to implement
provisions of FIRREA which ease restrictions on mergers and combinations
involving federal stock associations. The regulations expressly authorize
federal stock associations to combine or merge with FDIC-insured depository
institutions, as well as to combine or merge with federal associations and
depository institutions that are not insured by the FDIC. The final
regulations also authorize federal stock savings associations to convert to
state or national banks. In addition, the final regulations ease application
requirements by allowing well-managed, well-capitalized federal thrifts to
simply notify the OTS of their intent to change charters. OTS approval of a
merger or conversion application would still be required for (1) thrifts with a
CAMEL supervisory rating of 3, 4, or 5, (2) thrifts with a less than
satisfactory CRA rating, or (3) thrifts that do not meet their capital
requirements.
FEDERAL SECURITIES LAWS
The Company's Common Stock is registered with the Securities and Exchange
Commission. The Company is subject to the information, proxy solicitation,
insider trading restrictions and other requirements under the Exchange Act.
The registration under the Securities Act of shares of the Common Stock issued
in the Conversion does not cover the resale of such shares. Shares of the
Common Stock purchased by persons who are not affiliates of the Company may be
resold without registration. Shares purchased by an affiliate of the Company
are subject to the resale restrictions of Rule 144 under the Securities Act.
Provided the Company meets the current public information requirements of Rule
144 under the Securities Act, each affiliate of the Company who complies with
the other conditions of Rule 144 (including those that require the affiliate's
sale to be aggregated with those of certain other persons) is able to sell in
the public market, without registration, a number of shares not to exceed, in
any three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.
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FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The Company and the Bank report their income on a fiscal year
basis using the accrual method of accounting and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including the method of the Bank's addition to its reserve for bad debts
discussed below. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Bank or the Company. The Bank was last audited by the
Internal Revenue Service for the tax year ending September 30, 1992.
Bad Debt Reserves. For tax years beginning before January 1, 1996,
savings institutions such as the Bank which meet certain definitional tests
primarily relating to their assets and the nature of their business
("qualifying thrifts") are permitted to establish a reserve for bad debts
and to make annual additions thereto, which additions may, within specified
formula limits, be deducted in arriving at their taxable income. A qualifying
savings institution, such as the Bank, may elect annually, and is not bound by
such election in any subsequent year, one of the following two methods for
computing additions to its bad debt reserves for losses on "qualifying real
property loans" (generally loans secured by interests in improved real
property): (i) the experience method, or (ii) the percentage of taxable
income method. Additions to the reserve for losses on non-qualifying
loans, however, must be computed under the experience method and reduce the
current year's addition to the reserve for losses on qualifying real property
loans, unless that addition is also determined under the experience method.
Under the percentage of taxable income method, the bad debt deduction equals 8%
of the taxable income of the Bank, determined without regard to that deduction
and with certain adjustments.
A qualifying savings institution that is a member of a group of affiliated
corporations that files consolidated income tax returns for federal income tax
purposes is required under current Treasury Department Regulations to reduce
its taxable income for purposes of calculating its bad debt deduction under the
percentage of taxable income method for losses that are attributable to other
savings institution members of the consolidated group and to
"functionally-related" activities of non-savings institution members of the
group. There are presently no other savings institution members of the Bank's
consolidated group. The Bank has not been required to reduce its taxable
income for such purposes on account of functionally-related activities of
non-savings institution members of the group as a result of the Treasury
Department Regulations.
The amount of the addition to the reserve for losses on qualifying real
property loans under the percentage of taxable income method cannot exceed the
amount necessary to increase the balance of the reserve for losses on
qualifying real property loans at the close of the taxable year to 6% of the
balance of the qualifying real property loans outstanding at the end of the
taxable year. The Bank's balance for its reserve for losses on qualifying real
property loans was approximately $20.6 million at September 30, 1996. Also, if
the qualifying thrift uses the percentage of taxable income method, then the
qualifying thrift's aggregate addition to its reserve for losses on qualifying
real property loans cannot, when added to the addition to the reserve for
losses on nonqualifying loans,
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exceed the amount by which (i) 12% of the amount that the total deposits or
withdrawable accounts of depositors of the qualifying thrift at the close of
the taxable year exceeded (ii) the sum of the qualifying thrift's surplus,
undivided profits and reserves at the beginning of such year. For the year
ended September 30, 1996, the 12% of the Bank's deposits and withdrawable
accounts, less its surplus, undivided profits and reserves, exceeds by
approximately $38.9 million the balance of its reserve for losses on
qualifying real property loans.
In August 1996, Congress passed legislation which repeals the Bank's
present method of accounting for bad debts for federal income tax purposes. As
discussed in Note 12 to the consolidated financial statements, the Bank
currently uses the percentage of taxable income method to determine its bad
debt deduction in the computation of its taxable income. Under the new
legislation, the Bank will be required to use the specific charge-off method,
which may result in a different deduction for bad debts in determining taxable
income than as presently computed under its current method. Additionally, the
Bank will be required to recapture its post-1987 additions to its bad debt
reserves. Because the Bank has provided deferred taxes for the income tax bad
debt reserves established after 1987, management does not anticipate any
additional income tax liability related to the recapture. The new legislation
is effective for taxable years beginning after December 31, 1995.
Distributions. To the extent that (i) the Bank's reserve for losses on
qualifying real property loans exceeds the amount that would have been allowed
under the experience method and (ii) the Bank makes "nondividend distributions"
to the Company that are considered to result in distributions from the excess
bad debt reserve or the supplemental reserve for losses on loans ("Excess
Distributions"), then an amount based on the amount distributed will be
included in the Bank's taxable income. Nondividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock, and distributions in partial or
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax
purposes, will not be considered to result in a distribution from the Bank's
bad debt reserves. Thus, any dividends to the Company that would reduce
amounts appropriated to the Bank's bad debt reserves and deducted for federal
income tax purposes would create a tax liability for the Bank.
The amount of additional taxable income created from an Excess
Distribution is an amount that when reduced by the tax attributable to the
income is equal to the amount of the distribution. Thus, if certain portions
of the Bank's accumulated bad debt reserve are used for any purpose other than
to absorb qualified bad debt losses, such as for the payment of dividends or
other distributions with respect to the Bank's capital stock (including
distributions upon redemption or liquidation), approximately one and one-half
times the amount so used would be includable in gross income for federal income
tax purposes, assuming a 35% corporate income tax rate (exclusive of state
taxes). The Bank does not intend to pay dividends that would result in a
recapture of any portion of its bad debt reserves.
Corporate Alternative Minimum Tax. Corporations, including qualifying
savings institutions such as the Bank, generally are subject to the alternative
minimum tax, to the extent that the amount of such tax exceeds the amount of
the corporation's regular income tax. The Internal Revenue Code imposes this
tax at the rate of 20% on the corporation's AMTI, which is, regular taxable
income with certain adjustments plus tax preference items, less any available
exemption. Tax preference items for these purposes include, among other items
(i) the excess of a savings institution's deduction for an addition to its
reserve for bad debts over the amount that would have been allowable if such
deduction had been computed under the experience method, and (ii) interest on
certain tax-exempt bonds issued after August 7, 1986. AMTI can be offset by
only 90% of net operating loss carryovers. For taxable years beginning after
December 31, 1989, the adjustment to AMTI based on book income will be an
amount equal to 75% of the amount by which a corporation's adjusted current
earnings exceeds its AMTI (determined without regard to this adjustment and
prior to reduction for net operating losses). In addition, for taxable years
beginning after December 31, 1986, and before January 1, 1996, an environmental
tax of .12% of the excess of AMTI (with certain modifications) over $2.0
million is imposed on corporations, including the Bank, whether or not an
Alternative Minimum Tax ("AMT") is paid. The Bank does not expect to be
subject to the AMT. The Bank was subject to an environmental tax liability for
the tax year ended September 30, 1994, which was not material.
Dividends Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the
same affiliated group of corporations. The corporate dividends received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations, except that if the Company and the Bank own more than 20% of the
stock of a corporation distributing a dividend 80% of any dividends received
may be deducted.
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Proposed Federal Tax Legislation. Under proposals announced by the
President, the dividends-received deduction in circumstances in which the Bank
owns 20% or less of the stock of a corporation would be reduced from 70% to
50%.
Florida Taxation. The Bank files Florida income tax returns. For Florida
income tax purposes, savings institutions are presently taxed at a rate equal
to 5.5% of taxable income. For this purpose, "taxable income" generally means
federal taxable income, subject to certain adjustments (including the addition
of interest income on State and municipal obligations). The Florida tax may be
reduced by a credit of up to 65% of the tax due as a result of certain
intangible taxes paid. The tax is deductible by the Bank in determining its
federal income tax liability. The Bank is not currently under audit with
respect to its Florida income tax returns.
IMPACT OF NEW ACCOUNTING STANDARDS
In November 1995, FASB issued "A Guide to Implementation of SFAS No. 115
on Accounting for Certain Investments in Debt and Equity Securities - Questions
and Answers" ("SFAS 115 Q&A Guide"). SFAS 115 Q&A Guide includes a one-time
opportunity for entities which had previously adopted the provisions of SFAS
115 to reconsider their ability and intent to hold securities to maturity and
such entities would be allowed to transfer securities from the held-to-maturity
category to available-for-sale without calling into question the intent to hold
securities to maturity. Management evaluated the impact of the SFAS 115 Q&A
Guide on the investment portfolio. SFAS 115 Q&A Guide required that any
one-time reclassifications must occur between November 15, 1995 and December
31, 1995. In November 1995, the Bank reclassified $10.5 million of municipal
securities and $20.0 million of U.S. Treasury notes from held-to-maturity to
available-for-sale. Of the reclassified amounts, $15.6 million were sold
during the fiscal year, and the Bank recorded net gains of $811,000.
In May 1995, FASB issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights." The Statement, which amends SFAS No. 65, "Accounting for Certain
Mortgage Banking Activities," requires that an entity with mortgage banking
operations recognize as separate assets rights to service mortgage loans for
others. An entity that acquires mortgage servicing rights through either the
purchase or origination of mortgage loans and sells or securitizes those loans
with servicing rights retained should allocate the total cost of the mortgage
loans to the mortgage servicing rights and the loans based on their relative
fair values if it is practicable to estimate fair value. SFAS No. 122 applies
prospectively in fiscal years beginning after December 15, 1995 to sales of
mortgage loans with servicing rights retained and to impairment evaluations of
all amounts capitalized as mortgage servicing rights, including those purchased
before the adoption of this Statement. SFAS No. 122, when adopted, is not
expected to have a material effect on the Company's consolidated financial
statements.
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This statement requires certain disclosures about stock-based
employee compensation arrangements, regardless of the method used to account
for them, and defines a fair value based method of accounting for an employee
stock option or similar equity instrument and encourages all entities to adopt
that method of accounting for all of their employee stock compensation plans.
However, it also allows an entity to continue to measure compensation cost for
stock based compensation plans using the intrinsic value method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Entities electing to remain with the accounting in APB Opinion No. 25 must make
pro forma disclosures of net income and, if presented, earnings per share, as
if the fair value method of accounting defined in this Statement had been
applied. Under the fair value method, compensation cost is measured at the
grant date based on the value of the award and is recognized over the service
period, which is usually the vesting period. Under the intrinsic value based
method, compensation cost is the excess, if any, of the quoted market price of
the stock at grant date or other measurement date over the amount an employee
must pay to acquire the stock. The disclosure requirements of this Statement
are effective for financial statements for fiscal years beginning after
December 15, 1995. Pro forma disclosures required for entities that elect to
continue
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to measure compensation cost using APB No. 25 must include the effects of all
awards granted in fiscal years that begin after December 15, 1994. Management
is in the process of considering the alternatives presented in SFAS No. 123.
IMPACT OF NEW LEGISLATIVE ISSUES - On September 30, 1996, Congress passed
and the President signed the Deposit Insurance Funds Act of 1996 which mandated
that all depository institutions that are insured by the SAIF pay a one-time
special assessment of 65.7 basis points (subject to certain adjustments) on
SAIF-insured deposits that were held at March 31, 1995 by November 27, 1996 to
recapitalize the SAIF portion of the FDIC fund. The assessment is intended to
bring the SAIF's reserve ratios to a comparable level of the Bank Insurance
Fund at 1.25% of total insured deposits. In connection with the
recapitalization, the FDIC also lowered SAIF premiums from $0.23 per $100 to
$0.064 per $100 of insured deposits in January 1997. The Bank's pre-tax share
of this special assessment totals $6.6 million and is included in the
consolidated financial statements at September 30, 1996.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company and the Bank are located and conduct their business at the
Bank's main office located at 215 South Olive Avenue, West Palm Beach, Florida.
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The following table sets forth certain information regarding the Company's
properties:
NET BOOK
DATE DATE VALUE AT LEASED
LEASED OR LEASE SEPTEMBER 30, OR
LOCATION ACQUIRED EXPIRES 1996 OWNED
- -------- --------- ------- ------------- ------
(DOLLARS
IN THOUSANDS)
MAIN OFFICE:
215 S. Olive Avenue
West Palm Beach, FL 33401 1996 1997 $ 0 Leased
BRANCH OFFICES:
Southern Boulevard
301 Southern Boulevard
West Palm Beach, FL 33405 1959 285 Owned
Westward
2701 Okeechobee Boulevard
West Palm Beach, FL 33409 1960 583 Owned
Lake Park
500 Federal Highway
Lake Park, FL 33403 1962 277 Owned
Delray East
95 N.E. 5th Avenue
Delray Beach, FL 33483 1971 510 Owned
Boca East
2400 Federal Highway
Boca Raton, FL 33431 1973 397 Owned
Boynton
280 N. Congress Avenue
Boynton Beach, FL 33426 1973 1998 0 Leased
Lake Worth
531 Lucerne Avenue
Lake Worth, FL 33460 1974 431 Owned
Palm Beach Galleria
165 Bradley Place
Palm Beach, FL 33480 1980 1998 30 Leased
Palm Springs
2950 10th Avenue North
Lake Worth, FL 33461 1993 644 Owned
Boca West
9033 Glades Road
Boca Raton, FL 33434 1981 1,217 Owned
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NET BOOK
DATE DATE VALUE AT LEASED
LEASED OR LEASE SEPTEMBER 30, OR
LOCATION ACQUIRED EXPIRES 1996 OWNED
- -------- --------- ------- ------------- ------
(DOLLARS
IN THOUSANDS)
Delray West
4920 West Atlantic Avenue
Delray Beach, FL 33445 1981 2006 0 Leased
Stuart
2285 S.E. Federal Highway
Stuart, FL 33494 1982 1999 14 Leased
Golden Lakes
1950 Golden Lakes Boulevard
West Palm Beach, FL 33411 1984 296 Owned
Jupiter
4050 U.S. Highway One
Jupiter, FL 33477 1986 1998 2 Leased
Gardens
3101 PGA Boulevard
Palm Beach Gardens, FL 33477 1988 1998 93 Leased
Boynton Lakes
4770 North Congress Avenue
Lantana, FL 33462 1994 1999 85 Leased
Wellington
13841 Wellington Trace
West Palm Beach, FL 33414 1994 1999 75 Leased
Royal Palm Beach
1135 Royal Palm Beach Boulevard
Royal Palm Beach, FL 33411 1994 1999 103 Leased
Stuart Square
2160 S.E. Federal Highway
Stuart, FL 34994 1994 1999 55 Leased
Aberdeen Square
4956-22/23 LeChalet Boulevard
Boynton Beach, FL 33436 1994 1997 62 Leased
Boca Polo
5030-F8 Champion Boulevard
Boca Raton, FL 33496 1994 1997 0 Leased
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NET BOOK
DATE DATE VALUE AT LEASED
LEASED OR LEASE SEPTEMBER 30, OR
LOCATION ACQUIRED EXPIRES 1996 OWNED
- -------- --------- ------- ------------- ------
(DOLLARS
IN THOUSANDS)
Pinewood Square
6338-52/53 Lantana Road
Lake Worth, FL 33461 1994 1997 87 Leased
Boca Gardens
7050-29 West Palmetto Park
Road
Boca Raton, FL 33433 1995 1998 156 Leased
Coral Creek
6572 N. State Road 7, Bay #9
Coconut Creek, FL 33073 1995 1998 135 Leased
Lakeview Center
1430 Coral Ridge Drive,
Bay A2
Coral Springs, FL 33071 1996 2001 51 Leased
Okeechobee
5405 Okeechobee Boulevard
West Palm Beach, FL 33417 1995 2000 0 Leased
Lake Worth West
3979 Jog Road
Lake Worth, FL 33467 1995 1999 0 Leased
Downtown West Palm Beach
301 Clematis Street
West Palm Beach, FL 33401 1995 2000 44 Leased
Westchester East (A)
7805-A S.W. 40th Street
Miami, FL 33165 1995 2000 86 Leased
Lake Worth (A)
4481-A Lake Worth Road
Lake Worth, FL 33461 1995 2000 94 Leased
Pembroke Pines (A)
17171-A Pines Boulevard
Pembroke Pines, FL 33027 1995 2000 84 Leased
Sunrise (A)
9919-A West Oakland Park
Blvd.
Sunrise, FL 33351 1995 2000 112 Leased
Ft. Myers South (A)
16970-A San Carlos Blvd.
Ft. Myers, FL 33908 1995 2000 40 Leased
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NET BOOK
DATE DATE VALUE AT LEASED
LEASED OR LEASE SEPTEMBER 30, OR
LOCATION ACQUIRED EXPIRES 1996 OWNED
- -------- --------- ------- ------------- ------
(DOLLARS
IN THOUSANDS)
Bonita Springs
26831-A South Tamiami Trail
Bonita Springs, FL 34134 1996 2001 0 Leased
Sawgrass Hub
3495 Hiatus Road
Sunrise, FL 33351 1996 1999 2 Leased
Tamarac
7100-A N. University Drive
Tamarac, FL 33319 1996 2001 28 Leased
Coral Springs
2201-A University Drive
Coral Springs, FL 33065 1996 2001 93 Leased
LOAN ORIGINATION OFFICES:
Wellington
Unit 10-C, 12773
West Forest Hill Blvd., 102A
Wellington, FL 33414 1993 1997 0 Leased
Broward
10100 West Sample Road
Suite 312
Coral Springs, FL 33065 1996 1997 0 Leased
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NET BOOK
DATE DATE VALUE AT LEASED
LEASED OR LEASE SEPTEMBER 30, OR
LOCATION ACQUIRED EXPIRES 1996 OWNED
- -------- --------- ------- ------------- ------
(DOLLARS
IN THOUSANDS)
OPERATIONS CENTER:
2206 Mercer Avenue
West Palm Beach, FL 33401 1984 1,300 Owned
LOTS:
Clear Lake Property
S.E. Corner of First Street
and Australian Avenue
West Palm Beach, FL 33401 1979 1,799 Owned
OFFICE BUILDING:
Reflections Office Centre
400 and 450 Australian Avenue
West Palm Beach, FL 1994 9,117 Owned
STORAGE WAREHOUSES:
1638 Latham Road and
2730 Rocky Drive
West Palm Beach, FL 1984 1996 0 Leased
-------
Total Net Book Value $18,387
=======
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Item 3. Legal Proceedings.
Neither the Company nor its subsidiaries are involved in any pending
legal proceedings other than routine legal matters occurring in the ordinary
course of business which in the aggregate involve amounts which are believed by
management to be immaterial to the consolidated financial condition or results
of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters.
Stock Price Information
First Palm Beach Bancorp, Inc.'s common stock is traded on the NASDAQ
National Market System under the symbol "FFPB." Newspaper stock tables list the
Company as First Palm (FstPalm). The common stock began trading on September 29,
1993. As of November 25, 1996 there were 5,069,097 shares of common stock
outstanding and 745 stockholders of record, not including the number of persons
or entities whose stock is held in nominee or "street" name through various
brokerage firms or banks. The following table sets forth the high and low
closing trade prices per common share for the periods indicated as reported by
NASDAQ.
Cash Dividends
-------------- Closing Prices
Declared ----------------------
Quarter Ended Per Share High Low
- ------------- --------- ---- ---
December 31, 1994 $0.05 18 5/16 14
March 31, 1995 $0.05 20 1/8 17 5/8
June 30, 1995 $0.05 23 1/8 17 3/8
September 30, 1995 $0.05 24 7/8 21 1/8
December 31, 1995 $0.10 24 1/4 21 1/8
March 31, 1996 $0.10 23 3/8 21
June 30, 1996 $0.10 23 3/8 21 1/8
September 30, 1996 $0.10 23 3/8 19 15/16
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Item 6 - Selected Financial Data
SELECTED FINANCIAL DATA
At September 30,
--------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- ---------- ---------- ----------
(In thousands)
SELECTED FINANCIAL CONDITION DATA:
Total assets...................................... $ 815,571 $ 856,307 $1,076,583 $1,208,845 $1,490,020
Loans receivable, net............................. 444,965 429,104 576,731 825,024 1,007,881
Cash and cash equivalents......................... 59,286 14,924 19,145 25,132 161,413
Securities held-to-maturity, available-for-sale
and trading securities........................... 82,142 96,768 117,122 80,941 34,532
Mortgage-backed and related securities held-to-
maturity and available-for-sale.................. 194,788 284,012 324,044 238,442 232,273
Deposits.......................................... 723,881 698,458 718,282 878,670 1,136,722
Borrowed funds.................................... 17,469 26,325 229,892 189,552 211,025
Stockholders' equity.............................. 50,983 102,330 100,462 104,611 105,425
For the Years Ended September 30,
--------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- ---------- ---------- ----------
(In thousands)
SELECTED OPERATING DATA:
Interest income................................... $ 61,906 $ 50,580 $ 57,874 $ 80,964 $ 103,532
Interest expense.................................. 37,764 28,783 30,049 48,900 61,300
--------- --------- ---------- ---------- ----------
Net interest income............................... 24,142 21,797 27,825 32,064 42,232
Less provision for loan losses.................... 1,675 149 135 261 15,704
--------- --------- ---------- ---------- ----------
Net interest income after provision for loan
losses........................................... 22,467 21,648 27,690 31,803 26,528
--------- --------- ---------- ---------- ----------
Other income:
Servicing income and other fees................. 3,264 2,956 2,597 2,576 3,206
Net gain (loss) on sale of securities
available-for-sale, mortgage-backed and related
securities available-for-sale, trading
securities and loans........................... 3,035 922 424 (1,660) 4,516
Net gain on sale of property.................... -- -- -- 975 460
Gain on sale of servicing....................... -- -- -- 1,008 412
Equity in net income (loss) of real estate
ventures....................................... 964 716 294 -- --
Miscellaneous................................... 2,011 1,181 1,122 1,131 1,475
--------- --------- ---------- ---------- ----------
Total other income.......................... 9,274 5,775 4,437 4,030 10,069
--------- --------- ---------- ---------- ----------
Other expenses:
Employee compensation and benefits.............. 9,928 10,583 13,900 13,849 15,905
Early retirement plan........................... -- -- -- 2,361 --
Occupancy and equipment......................... 3,699 3,905 4,223 4,259 4,830
Federal deposit insurance premiums.............. 1,561 1,428 1,582 1,799 8,848
Provision for losses and net losses on sale of
real estate owned.............................. 184 192 (410) 74 451
Advertising and promotion....................... 650 683 801 679 663
Miscellaneous................................... 3,128 2,818 2,730 3,588 4,905
--------- --------- ---------- ---------- ----------
Total other expenses........................ 19,150 19,609 22,826 26,609 35,602
Income before provision for income taxes and
cumulative effect of change in accounting
principle........................................ 12.591 7,814 9,301 9,224 995
Provision for income taxes........................ 5,066 3,019 3,502 3,578 446
--------- --------- ---------- ---------- ----------
Income before cumulative effect of change in
accounting principle............................. 7,525 4,795 5,799 5,646 549
Cumulative effect of change in accounting for
income taxes..................................... -- 422 -- -- --
--------- --------- ---------- ---------- ----------
Net income........................................ $ 7,525 $ 5,217 $ 5,799 $ 5,646 $ 549
========= ========= ========== ========== ==========
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SELECTED FINANCIAL RATIOS AND OTHER DATA
At or For the Years Ended September 30,
----------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
PERFORMANCE RATIOS:
Return on average assets (4)..................... 0.93% 0.64% 0.60% 0.48% 0.04%
Return on average stockholders' equity (4)....... 16.19 9.73 5.61 5.50 0.49
Average stockholders' equity to average assets... 5.76 6.54 10.62 8.74 8.06
Stockholders' equity to total assets............. 6.25 11.95 9.33 8.65 7.08
Interest rate spread............................. 2.78 2.42 2.46 2.32 2.73
Net interest margin (1).......................... 3.17 2.78 2.97 2.83 3.18
Average interest-earning assets to average
interest-bearing liabilities.................... 1.08x 1.10x 1.16x 1.12x 1.10x
Operating expenses to average assets (4)......... 2.37% 2.39% 2.35% 2.27% 2.56%
Net interest income to operating expenses (4).... 1.26x 1.11x 1.22x 1.21x 1.19x
ASSET QUALITY RATIOS:
Non-performing loans to total loans (2).......... 0.71% 0.58% 0.30% 0.21% 1.20%
Non-performing assets to total assets (3)........ 0.99 0.48 0.23 0.23 1.08
Allowance for loan losses to non-performing
loans........................................... 69.84 70.43 101.29 118.91 92.40
Allowance for loan losses to non-performing
assets.......................................... 28.78 46.21 79.51 78.90 73.82
Allowance for loan losses to total loans
receivable-net.................................. 0.52 0.44 0.34 0.26 1.18
OTHER DATA:
Loan originations................................ $ 92,153 $ 161,353 $ 271,913 $ 364,203 $ 539,599
Number of deposit accounts....................... 78,343 74,913 77,167 84,670 106,517
Full service facilities.......................... 16 16 20 23 33
- --------------------------
(1) Calculation is based upon net interest before provision for loan losses
divided by average interest-earning assets.
(2) Non-performing loans consist of loans 90 days or more delinquent.
(3) Non-performing assets consist solely of non-performing loans, real estate
owned and repossessed automobiles.
(4) Ratios for fiscal year ended September 30, 1996 include a one-time special
assessment paid by all financial institutions insured by SAIF. The Bank's
pre-tax assessment was $6.6 million.
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60
Item 7 - Management's Discussion Analysis
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
GENERAL
First Palm Beach Bancorp, Inc. (the "Company") was organized in May 1993 as
the holding company for First Bank of Florida (the "Bank"), formerly First
Federal Savings and Loan Association of the Palm Beaches. On September 29, 1993,
the Company issued and sold in its initial public offering 5,284,775 shares of
common stock, $.01 par value, (the "Common Stock") at $10.00 per share and used
50% of the net proceeds of this public offering to acquire the Bank as part of
the Bank's conversion from a mutual to a federally-chartered stock savings
association (the "Conversion"). The Bank's Recognition and Retention Plans (the
"RRPs") purchased 211,600 shares at $10 per share making the total shares
outstanding equal to 5,496,375 as of September 30, 1993.
On December 8, 1995 (the "Effective Date"), the Company completed the
acquisition of PBS Financial Corp. ("PBS") by means of the merger (the "Merger")
of PBS with and into the Company, pursuant to an Agreement and Plan of Merger
between the Company and PBS dated as of May 31, 1995 (the "Agreement").
Concurrently with the Merger, Palm Beach Savings and Loan, F.S.A. ("Palm Beach
Savings"), the savings and loan subsidiary of PBS, merged with and into the Bank
in accordance with the Plan of Merger and Combination dated May 31, 1995 between
Palm Beach Savings and the Bank. In conjunction with and as a part of the
Merger, each of the 283,700 shares of PBS Class A common stock issued and
outstanding and 419,300 shares of PBS Class B common stock issued and
outstanding as of the Effective Date was converted into (i) .426 of a share of
the Company's Common Stock and (ii) a cash payment of $0.75 per share of PBS
common stock. Based on an aggregate of 703,000 shares of PBS Class A and Class B
common stock issued and outstanding, the Company issued in the aggregate 299,478
shares of the Company's Common Stock and made $527,250 in cash payments. Also in
conjunction with the Merger, the Company paid $88,544 in exchange for all
outstanding PBS options and $459,536 in exchange for all outstanding PBS
warrants.
During the fiscal year ended September 30, 1996, the Company repurchased
345,853 shares of Common Stock at an average price of $22.10 per share. In
addition, employees and directors of the Bank exercised options to purchase
6,408 shares at $10 per share. At September 30, 1996, 5,093,096 shares of Common
Stock were outstanding. The Board of Directors has authorized the repurchase of
up to 509,310 shares of the Company's Common Stock during the fiscal year ending
September 30, 1997.
The Company's consolidated results of operations are substantially the same
as those of the Bank. The Bank's revenues are derived principally from interest
on loans, mortgage-backed securities and investments, and its major expense is
interest paid on deposits and borrowings. The Bank's results of operations
depend primarily on the level of net interest income, which is the difference
between interest earned on its loan and investment portfolios and interest paid
on its deposits and borrowings. Net interest income is impacted by the provision
for loan losses. The Bank's operating expenses principally consist of employee
compensation, occupancy expenses, federal deposit insurance premiums and other
general and administrative expenses. The Bank's results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities. In particular, the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA") significantly changed the
regulation of all
58
61
savings associations, including the Bank. Further changes in regulation have
come into effect more recently pursuant to the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). The Bank is a member of the
Federal Home Loan Bank (the "FHLB") system and its deposits are insured to the
applicable limits by the Federal Deposit Insurance Corporation (the "FDIC")
through the Savings Association Insurance Fund ("SAIF"). The Bank is subject to
regulation by its chartering agency, the Office of Thrift Supervision (the
"OTS"), and the FDIC as its insurer. On September 30, 1996, the President signed
into law the Deposit Insurance Funds Act of 1996 which mandated that all
financial institutions insured by the SAIF pay a one-time special assessment in
an amount equal to 65.7 basis points on SAIF-insured deposits that were held at
March 31, 1995. The Bank recorded a pre-tax expense of $6.6 million for the
one-time special assessment on September 30, 1996. The after-tax effect of the
assessment was $4.0 million.
MANAGEMENT STRATEGY
The mission of the Bank is to provide a profitable return to stockholders
through a commitment to excellence and the sale and delivery of quality
financial products and services to its customers. The Bank strives to be a
recognized leader in providing retail banking services to the community.
The Bank seeks to fulfill its mission and accomplish its goals by pursuing
the following strategies: (i) emphasizing lending in the one- to four-family
residential mortgage market; (ii) managing interest rate risk; (iii) managing
deposit pricing and asset growth; (iv) emphasizing consumer lending; (v)
maintaining asset quality; and (vi) expanding its franchise by branching into
new geographic markets. Management intends to continue to employ these
strategies.
EMPHASIZING LENDING IN THE ONE- TO FOUR-FAMILY RESIDENTIAL MORTGAGE MARKET.
The Bank has emphasized, and plans to continue to emphasize, making traditional
one- to four-family residential mortgage loans in its primary market areas of
Palm Beach, Martin, and Broward Counties, Florida. The Bank intends to expand
marketing efforts for lending in Lee and Dade Counties during fiscal year 1997.
The Bank originated $126.0 million, $135.9 million and $192.5 million in one- to
four-family residential mortgage loans in fiscal 1994, 1995 and 1996,
respectively. One- to four-family residential mortgage loans totaling $652.6
million constituted 60.9% of the Bank's total loan portfolio at September 30,
1996. In fiscal year 1994, the Bank instituted a wholesale lending function to
acquire first mortgage loans from wholesale originators in Palm Beach, Martin
and Broward Counties. Wholesale lending was expanded during fiscal years 1995
and 1996 and enhanced the loan production efforts of the Bank with no material
effect on operating expenses. Prior to commitment, these loans are reviewed for
compliance with the Bank's normal underwriting guidelines. These efforts have
caused one- to four-family residential mortgage loans to increase to $652.6
million at September 30, 1996 from $587.6 million at September 30, 1995. In
addition, the Bank's construction lending, which is primarily one-to-four family
residences, increased to $130.5 million at September 30, 1996 from $101.5
million at September 30, 1995.
MANAGING INTEREST RATE RISK. Interest rate risk is the sensitivity of an
institution's earnings and net asset values to fluctuations in interest rates.
The Bank monitors its interest rate risk through its Asset/Liability Committee
which meets monthly and reports the results of the monitoring to the Board of
Directors quarterly. The Bank's policy is to seek to maintain a balance between
interest-earning assets and interest-bearing liabilities so that its cumulative
one-year gap ratio is within the range which the Asset/Liability Committee
considers conducive to maintaining profitability without incurring undue risk.
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62
One of the ways the Bank manages its exposure to interest rate risk is
through originating and retaining adjustable rate mortgage ("ARM") loans. At
September 30, 1996, 53% of the Bank's one-to four-family residential mortgage
loans were in one-, three- and five-year ARM loans. Another 12% were ARM loans
which first adjust in seven or ten years and become one-year ARM loans after the
initial adjustment. Management has concluded that although investment in ARM
loans may reduce short-term earnings below that which may be obtainable through
investment in fixed-rate mortgage loans, an ARM loan portfolio reduces the
Bank's exposure to adverse interest rate fluctuations, and enhances longer term
profitability. While the Bank has been able to originate significant quantities
of ARM loans in the past, there is no assurance that ARM loans meeting the
Bank's underwriting standards will be available in the future to continue to
allow the Bank to manage interest rate risk in this manner.
During fiscal 1995 and fiscal 1996, the Bank's policy was to retain in
portfolio sufficient quantities of its originated fixed-rate residential
mortgage loans to maintain outstanding fixed rate loans at approximately 25% to
35% of total mortgage loans. If interest rates were to rise, the value of fixed
rate loans could decline substantially.
Through its held-to-maturity, available-for-sale and trading securities, and
mortgage-backed and related securities, the Bank has invested primarily in
securities with less interest rate risk, particularly through the investment in
short-term repricing instruments such as short-term U.S. Treasury securities,
floating rate collateralized mortgage obligations ("CMOs") and real estate
mortgage investment conduits ("REMICs") with an average life of ten years or
less and fixed rate CMOs and REMICs with short average lives. The average life
of the CMOs and REMICs vary with fluctuations in interest rates and prepayments.
At September 30, 1996, the Bank's securities held-to-maturity and
available-for-sale consisted of $10.4 million of fixed rate securities and $24.1
million of adjustable rate securities. At September 30, 1996, the Association's
mortgage-backed and related securities held-to-maturity and available-for-sale
consisted of $129.4 million with a fixed-rate and $102.9 million with an
adjustable rate. This distribution of securities is consistent with the
objective of controlling asset interest rate risk to better match liability
repricing through adjustable rates or shorter terms to maturity or average life.
MANAGING DEPOSIT PRICING AND ASSET GROWTH. The Bank manages its deposit
accounts and certificates of deposit pricing based on current interest rate
trends in both the U.S. Treasury market and the local market. Traditionally, the
Bank sets its deposit rates at levels between the deposit rates offered at
commercial banks and those offered at other savings institutions. During fiscal
years 1995 and 1996, the Bank became more competitive in its pricing of
certificates of deposit to generate funds required to sustain growth in its loan
portfolio. The Bank pursued a controlled growth strategy during fiscal years
1990 through 1993, resulting in annual average asset growth less than 4%. During
fiscal years 1994, 1995 and 1996, the Bank's annual average asset growth was
20.4%.
EMPHASIZING CONSUMER LENDING. From 1991 through September 30, 1993, the
level of the Bank's consumer loans consistently declined. During fiscal year
1994, through a competitive pricing structure, indirect automobile lending,
promotional activities, and cross selling consumer products through its branch
offices, the Bank increased its consumer lending. During fiscal years ended 1995
and 1996, the Bank became more active in the indirect automobile lending market.
Indirect loans typically carry more credit risk. Higher than anticipated
charge-offs were experienced in the indirect automobile lending portfolio,
primarily during the latter part of the fiscal year ended September 30, 1996. As
a result, a $16.4 million provision for loan losses related to consumer lending
was recorded during fiscal year 1996. Based upon an analysis of the overall
performance of the indirect lending program, management determined that
effective September 30, 1996 no new applications for indirect loans would be
accepted, thereby discontinuing the indirect lending program. Total consumer and
other loans outstanding increased to $194.1 million at September 30, 1996 from
$112.5 million at September 30, 1995. Of these amounts, $148.2 million and $76.4
million at September 30, 1996 and September 30, 1995, respectively, were
indirect loans.
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MAINTAINING ASSET QUALITY. The Bank has continued to focus on maintaining
its asset quality even though non-performing assets increased during the fiscal
year ended September 30, 1996. At September 30, 1996, the Bank's non-performing
assets as a percentage of total assets amounted to 1.08% compared to 0.23% for
the fiscal year ended 1995. The increase is primarily due to the non-performing
indirect automobile loans and repossessions, non-performing assets acquired from
Palm Beach Savings and one loan relationship totaling $6.2 million on a
residential marina project in Charlotte County, Florida which is over ninety
days delinquent. As noted previously, the Bank has discontinued its indirect
lending program. In its underwriting of mortgage loans, the Bank has generally
accepted somewhat lower origination rates in order to assure loan quality. Even
though this may result in a lower net interest margin, asset quality is critical
to the Bank's long term stability. The Bank has limited its commercial lending
during the past five years. The Bank's commercial real estate lending increased
from an outstanding balance of $35.6 million at September 30, 1995 to $51.8
million at September 30, 1996. Of the balance at September 30, 1996, $13.8
million were commercial loans acquired in conjunction with the purchase of Palm
Beach Savings during fiscal 1996.
EXPANSION OF FRANCHISE. During the 1980s and early 1990s, the Bank's primary
objective was to limit growth and build capital. As a result of this strategy,
the Bank's market share, as a percentage of the total Palm Beach County market,
consistently declined during this period. In 1993, management determined that
increasing the Bank's market share was essential to its growth. Management
concluded that a primary use of the capital raised in the Conversion would be to
increase the number of branch locations in an effort to increase the Bank's
market share. During fiscal 1996, the Bank opened eleven full service branches
in Palm Beach, Broward, Dade and Lee Counties. Of the eleven full service
branches opened, six were in Albertson's supermarkets.
INTEREST RATE SENSITIVITY ANALYSIS
The matching of the maturities of assets and liabilities may be analyzed by
examining the extent to which assets and liabilities are "interest rate
sensitive" and by monitoring an institution's interest rate sensitivity "gap."
An asset or liability is said to be "interest rate sensitive" within a specific
time period if it will mature or reprice within that time period. The interest
rate sensitivity "gap" is defined as the difference between the amount of
interest-earning assets anticipated, based upon certain assumptions, to mature
or reprice within a specific time period and the amount of interest-bearing
liabilities anticipated, based upon certain assumptions, to mature or reprice
within that time period. A gap is considered negative when the amount of
interest rate sensitive liabilities maturing or repricing within a specific time
frame exceeds the amount of interest rate sensitive assets maturing or repricing
within that same time frame. During a period of rising interest rates, a
negative gap would tend to result in a decrease in net interest income while a
positive gap would tend to result in an increase in net interest income. In a
declining interest rate environment, an institution with a negative gap would
generally be expected, absent the effects of other factors, to experience a
greater decrease in the cost of its liabilities relative to the yield of its
assets and thus an increase in the institution's net interest income, whereas an
institution with a positive gap would be expected to experience the opposite
results.
At September 30, 1996, total interest-bearing liabilities maturing or
repricing within one year exceeded total interest-earning assets maturing or
repricing within the same time period by $66.6 million, representing a negative
cumulative one-year gap of 4.5% of total assets compared to a negative
cumulative one-year gap of 10.59% at September 30, 1995. Management has
determined that the Bank has an acceptable and reasonable level of interest rate
risk that will not compromise credit quality.
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The Bank's prepayment rates for its loans are based on the most recent
assumptions used by the FHLB as of June 30, 1996. The FHLB assumptions could
vary substantially from the actual prepayment rates experienced by the Bank. The
assumptions are as follows:
Annual
Prepayment
Type Rate
- ---- ----
ARM loans -- current market index 18.0%
ARM loans -- lagging market index 16.0%
Fixed-rate one- to four-family loans with maturities equal to or greater than
five years:
Below 8% interest rate 9.0%
8.00% to 8.99% 11.0%
9.00% to 9.99% 13.0%
10.00% and over 22.0%
Mortgage-backed and related securities with maturities equal to or greater than
five years:
Below 8% interest rate 11.0%
8.00% to 8.99% 15.0%
9.00% to 9.99% 24.0%
10.00% and over 32.0%
Other residential and all nonresidential loans 6.0%
Second mortgages 18.0%
Decay rates indicate an assumed annual rate at which an interest-bearing
liability will be withdrawn in favor of an account with a more favorable
interest rate. Decay rates have been assumed for demand deposits, NOW accounts,
passbook and money market deposits. The following decay rates are based on the
most recent assumptions used by the FHLB as of June 30, 1996. The assumptions
used at the dates indicated, although standardized, may not be indicative of
actual withdrawals and repricing experienced by the Bank.
ANNUAL PERCENTAGE DECAY RATE
More
3 Mos. 3-6 6 Mos. 1-3 3-5 5-10 Than
or Less Mos. 1 Yr. Years Years Years 10 Yrs.
------- ----- ------ ----- ----- ----- -------
Passbook 17% 17% 17% 17% 16% 14% 14%
NOW 37% 37% 37% 32% 17% 17% 17%
Money market 79% 79% 79% 31% 31% 31% 31%
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1996 which are
anticipated by the Bank, based upon certain assumptions described above, to
reprice or mature in each of the future time periods shown. Except as stated
above, the amounts of assets and liabilities shown which reprice or mature
during a particular period were determined in accordance with the earlier of the
term in which repricing will occur or the contractual terms of the asset or
liability.
Certain shortcomings are inherent in the method of analysis presented in the
following table. For example, although some assets and liabilities have similar
maturities or periods to repricing, they may react differently to changes in
market interest rates. The interest rates on certain types of assets and
liabilities may also fluctuate in advance of changes in market interest rates,
while interest rates on other types may lag behind changes in market rates.
Assets such as ARM loans often have features which restrict changes in interest
rates on a short-term basis and over the life of the asset. In the event
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of a change in interest rates, prepayment and early withdrawal levels would
likely deviate significantly from those assumed in calculating the table. The
ability of borrowers to repay their ARM loans may decrease in the event of
interest rate increases.
ANTICIPATED PERIOD UNTIL MATURITY OR REPRICING
At September 30, 1996
--------------------------------------------------------------------------------------
More Than More Than 3 More Than 5
Less Than 3 to 6 6 Months 1 Year to Years to Years to More Than
3 Months Months to 1 Year 3 Years 5 Years 10 Years 10 Years
----------- --------- ----------- ---------- ----------- ----------- -----------
(In thousands)
INTEREST-EARNING ASSETS:
Mortgage loans, net................ $ 103,943 $ 54,186 $ 107,802 $ 217,070 $ 160,433 $ 105,305 $ 67,408
Consumer loans, net................ 39,138 15,014 25,891 73,769 29,996 5,467 25
Other loans........................ 454 195 337 950 428 70 --
Interest-earning deposits.......... 141,975 -- -- -- -- -- --
Securities held-to-maturity and
securities available-for-sale..... 12,448 -- 17,103 4,981 -- -- --
Mortgage-backed and related
securities held-to-maturity and
available-for-sale................ 85,524 37,299 54,083 30,747 17,570 7,050 --
FHLB stock......................... -- -- -- -- -- -- 10,053
---------- --------- ---------- ---------- ---------- ---------- ----------
Total interest-earning assets.... 383,482 106,694 205,216 327,517 208,427 117,892 77,486
---------- --------- ---------- ---------- ---------- ---------- ----------
NON INTEREST-BEARING LIABILITIES:
Non interest-bearing deposits...... 4,098 4,098 6,508 13,368 3,602 4,834 3,141
---------- --------- ---------- ---------- ---------- ---------- ----------
INTEREST-BEARING LIABILITIES:
Passbook and statement savings..... 6,687 6,687 12,184 38,918 25,306 32,119 28,532
NOW................................ 6,156 6,156 9,770 20,248 5,409 7,259 4,718
Money market....................... 10,742 10,743 9,844 4,374 2,077 1,592 295
Certificates of deposit............ 214,870 172,719 205,759 198,705 55,204 -- --
Borrowed Funds..................... 50,000 -- 25,000 135,000 1,025 -- --
---------- --------- ---------- ---------- ---------- ---------- ----------
Total non interest-bearing and
interest-bearing liabilities.... 292,553 200,403 269,065 410,613 92,623 45,804 36,686
---------- --------- ---------- ---------- ---------- ---------- ----------
Interest sensitivity gap............. $ 90,929 $ (93,709) $ (63,849) $ (83,096) $ 115,804 $ 72,088 $ 40,800
========= ========= ========= ========== ========= ========= =========
Cumulative interest sensitivity gap.. $ 90,929 $ (2,780) $ (66,629) $ (149,725) $ (33,921) $ 38,167 $ 78,967
========= ========= ========= ========== ========= ========= =========
Cumulative interest sensitivity gap
as a percentage of total assets..... 6.10% -0.19% -4.47% -10.05% -2.28% 2.56% 5.29%
Cumulative net interest-earning
assets as a percentage of net non
interest-bearing and
interest-bearing liabilities........ 131.08% 99.44% 91.26% 87.23% 97.32% 102.91% 105.86%
Total
----------
INTEREST-EARNING ASSETS:
Mortgage loans, net................ $ 816,147
Consumer loans, net................ 189,300
Other loans........................ 2,434
Interest-earning deposits.......... 141,975
Securities held-to-maturity and
securities available-for-sale..... 34,532
Mortgage-backed and related
securities held-to-maturity and
available-for-sale................ 232,273
FHLB stock......................... 10,053
----------
Total interest-earning assets.... 1,426,714
----------
NON INTEREST-BEARING LIABILITIES:
Non interest-bearing deposits...... 39,649
----------
INTEREST-BEARING LIABILITIES:
Passbook and statement savings..... 150,433
NOW................................ 59,716
Money market....................... 39,667
Certificates of deposit............ 847,257
Borrowed Funds..................... 211,025
----------
Total non interest-bearing and
interest-bearing liabilities.... 1,347,747
----------
Interest sensitivity gap............. $ 78,967
==========
Cumulative interest sensitivity
gap.................................
Cumulative interest sensitivity gap
as a percentage of total assets.....
Cumulative net interest-earning assets
as a percentage of net non interest-
bearing and interest-bearing
liabilities.........................
66
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income depends upon the volume of interest-earning assets and
interest-bearing liabilities and the interest rates earned or paid on them.
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AVERAGE BALANCE SHEET
The following table presents the average balances of the Bank's
interest-earning assets and interest-bearing liabilities, interest income earned
and interest expense incurred, and weighted average yield or cost for the fiscal
years ended September 30, 1994, 1995 and 1996. These yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods shown. Average balances are derived
from average monthly balances. Management does not consider that the use of
average monthly balances instead of average daily balances has caused any
material differences in the information presented. The average balance of loans
receivable includes loans on which the Bank has discontinued accruing interest.
"Net interest margin" is net interest income divided by the average balance of
total interest earning assets. "Net interest spread" is the difference between
the yields earned on interest-earning assets and the rates paid on
interest-bearing liabilities. The yields and costs include fees which are
considered adjustments to yields. The average yield/cost, net interest spread,
and net interest margin have been calculated on a pre-tax basis.
YEARS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------
1994 1995
------------------------------------ -------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
--------- ----------- ------------ ---------- ----------- ------------
(IN THOUSANDS)
ASSETS:
Interest-earning assets:
Mortgage loans, net....................... $ 452,887 $ 34,373 7.59% $ 615,886 $ 48,765 7.92%
Consumer loans............................ 33,062 2,597 7.85% 70,729 5,722 8.09%
Other loans............................... 2,029 139 6.85% 1,980 151 7.63%
Interest-earning deposits................. 9,964 263 2.64% 16,551 759 4.59%
Securities held-to-maturity,
available-for-sale and trading
securities............................... 126,320 5,557 4.40% 107,011 5,735 5.36%
Mortgage-backed and related securities
held-to-maturity and
available-for-sale....................... 304,948 14,440 4.74% 311,929 19,199 6.15%
FHLB stock................................ 7,403 505 6.82% 7,643 633 8.28%
--------- ---------- ---- ---------- --------- ----
Total interest-earning assets......... 936,613 57,874 6.18% 1,131,729 80,964 7.15%
Non-interest earning assets................. 36,404 42,450
--------- ----------
Total assets.......................... $ 973,017 $1,174,179
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposit accounts:
Passbook and statement savings.......... $ 94,548 1,819 1.92% $ 86,310 1,902 2.20%
NOW..................................... 60,617 954 1.57% 60,407 877 1.45%
Money market............................ 75,916 1,802 2.37% 60,070 1,432 2.38%
Certificates of deposit................. 417,519 18,555 4.44% 623,134 33,636 5.40%
Borrowed funds:
FHLB advances........................... 121,048 5,375 4.44% 141,837 8,699 6.13%
Reverse repurchase agreements........... 38,004 1,544 4.06% 40,321 2,354 5.84%
Mortgage-backed bond.................... -- -- -- -- -- --
--------- --------- ---- ---------- --------- ----
Total interest-bearing liabilities.... 807,652 30,049 3.72% 1,012,079 48,900 4.83%
Other liabilities........................... 62,010 59,424
--------- ----------
Total liabilities..................... 869,662 1,071,503
Stockholders' equity........................ 103,355 102,676
--------- ----------
Total liabilities and stockholders'
equity............................... $ 973,017 $1,174,179
========= ==========
Net interest income/interest rate spread...... $ 27,825 2.46% $ 32,064 2.32%
========= =========
Net interest-earning assets/net margin........ $ 128,961 2.97% $ 119,650 2.83%
========= ==========
Ratio of interest-earning assets to interest-
bearing liabilities.......................... 1.16x 1.12x
68
1996
-------------------------------------
Interest Average
Average Income/ Yield/
Balance Expense Cost
---------- ----------- ------------
ASSETS:
Interest-earning assets:
Mortgage loans, net....................... $ 844,822 $ 67,157 7.95%
Consumer loans............................ 173,450 16,755 9.66%
Other loans............................... 2,147 178 8.29%
Interest-earning deposits................. 17,103 871 5.09%
Securities held-to-maturity,
available-for-sale and trading
securities............................... 58,288 3,259 5.59%
Mortgage-backed and related securities
held-to-maturity and
available-for-sale....................... 221,285 14,487 6.55%
FHLB stock................................ 10,197 825 8.09%
---------- ---------- ----
Total interest-earning assets......... 1,327,292 103,532 7.80%
Non-interest earning assets................. 62,987
----------
Total assets.......................... $1,390,279
==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposit accounts:
Passbook and statement savings.......... $ 122,578 4,088 3.34%
NOW..................................... 60,598 856 1.41%
Money market............................ 46,118 1,094 2.37%
Certificates of deposit................. 766,697 42,576 5.55%
Borrowed funds:
FHLB advances........................... 200,158 11,974 5.98%
Reverse repurchase agreements........... 11,935 712 5.97%
Mortgage-backed bond.................... -- -- --
---------- ---------- ----
Total interest-bearing liabilities.... 1,208,084 61,300 5.07%
Other liabilities........................... 70,208
----------
Total liabilities..................... 1,278,292
Stockholders' equity........................ 111,987
----------
Total liabilities and stockholders'
equity............................... $1,390,279
==========
Net interest income/interest rate spread...... $ 42,232 2.73%
=========
Net interest-earning assets/net margin........ $ 119,208 3.18%
==========
Ratio of interest-earning assets to interest-
bearing liabilities.......................... 1.10x
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RATE/VOLUME ANALYSIS
The following table presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Bank's interest income and interest expense during
the periods indicated. Information is provided in each category with respect to
(i) changes attributable to changes in volume (changes in volume multiplied by
prior year's rate), (ii) changes attributable to changes in rate (changes in
rate multiplied by prior year's volume), and (iii) the net change (total changes
in rate and volume). The changes attributable to the combined impact of volume
and rate have been allocated proportionately to the changes due to volume and
the changes due to rate. The calculations of rate and volume changes reflect
pre-tax yields.
Year Ended Year Ended
September 30, 1995 September 30, 1996
Compared to Year Ended Compared to Year Ended
September 30, 1994 September 30, 1995
Increase (Decrease) Increase (Decrease)
in Net Interest Income in Net Interest Income
--------------------------------- ---------------------------------
Due To Due To
Volume Rate Net Volume Rate Net
----------- --------- --------- ----------- --------- ---------
(In thousands) (In thousands)
INTEREST-EARNING ASSETS:
Mortgage loans, net..................... $ 12,624 $ 1,768 $ 14,392 $ 18,206 $ 186 $ 18,392
Consumer loans.......................... 3,043 82 3,125 9,733 1,300 11,033
Other loans............................. (4) 16 12 14 13 27
Interest-earning deposits............... 233 263 496 26 86 112
Securities held-to-maturity,
available-for-sale and trading
securities............................. (926) 1,104 178 (2,712) 236 (2,476)
Mortgage-backed and related securities
held-to-maturity and
available-for-sale..................... 340 4,419 4,759 (6,071) 1,359 (4,712)
FHLB stock.............................. 17 111 128 207 (15) 192
---------- --------- --------- ---------- --------- ---------
Total............................... 15,327 7,763 23,090 19,403 3,165 22,568
---------- --------- --------- ---------- --------- ---------
INTEREST-BEARING LIABILITIES:
Deposits accounts:
Passbook and statement savings........ (167) 250 83 (936) 3,122 2,186
NOW................................... (3) (74) (77) 3 (24) (21)
Money market.......................... (378) 8 (370) (332) (6) (338)
Certificates of deposit............... 10,480 4,601 15,081 7,978 962 8,940
Borrowed Funds:
FHLB advances......................... 1,033 2,291 3,324 3,482 (207) 3,275
Reverse repurchase agreements......... 99 711 810 (1,695) 53 (1,642)
---------- --------- --------- ---------- --------- ---------
Total............................... 11,064 7,787 18,851 8,500 3,900 12,400
---------- --------- --------- ---------- --------- ---------
Net change in interest income............. $ 4,263 $ (24) $ 4,239 $ 10,903 $ (735) $ 10,168
========= ========= ========= ========= ========= =========
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COMPARISON OF FINANCIAL CONDITION
AT SEPTEMBER 30, 1996 COMPARED TO SEPTEMBER 30, 1995
Total assets were $1.490 billion at September 30, 1996 as compared to $1.209
billion at September 30, 1995. The increase of $281.0 million was the result of
the acquisition of Palm Beach Savings on December 8, 1995 which had assets of
approximately $109 million and an increase in loans receivable, net, of $182.9
million. Deposits increased $258.3 million to $1.137 billion at fiscal year
ended September 30, 1996 from $878.7 million at fiscal year ended September 30,
1995 because of continued aggressive pricing of certificate accounts and the
additional accounts generated from opening eleven additional full service branch
offices during fiscal year ended September 30, 1996. Also, deposits of $103.8
million were acquired in conjunction with the purchase of Palm Beach Savings
during fiscal 1996. Borrowed funds increased by $21.4 million to $211.0 million
at fiscal year ended September 30, 1996 as compared to $189.6 million at
September 30, 1995. This increase was used to fund loan production during fiscal
year 1996.
Loans receivable, net, increased by $182.9 million to $1.008 billion at
September 30, 1996 from $825.0 million at September 30, 1995. Loan originations
were $539.6 million for fiscal year ended September 30, 1996 as compared to
$364.2 million for the year ended September 30, 1995. Approximately $78.5
million net loans were acquired in conjunction with the purchase of Palm Beach
Savings during fiscal year 1996. Loan repayments and sales increased during
fiscal 1996 to $402.9 million from $134.9 million during fiscal 1995.
Securities held-to-maturity, securities available-for-sale, mortgage-backed
and related securities held-to-maturity and mortgage-backed and related
securities available-for-sale in the aggregate decreased $52.6 million to $266.8
million at September 30, 1996 from $319.4 million at September 30, 1995. This
decrease reflects the Bank's continuing strategy of using funds from investment
sales and principal payments to fund loan production.
Real estate owned (real estate acquired through foreclosures) increased to
$1.6 million at September 30, 1996 from $549,000 at September 30, 1995. The
increase of $1.1 million was primarily the result of real estate owned acquired
in conjunction with the purchase of Palm Beach Savings.
Office properties and equipment increased to $23.1 million at September 30,
1996 from $17.8 million at September 30, 1995. The increase of $5.3 million is
due to purchases related to eleven new branch offices opened in fiscal year 1996
and to renovations of the Reflections Office Centre, a complex of two,
eight-story buildings purchased by the Company during fiscal year 1994. The Bank
plans to relocate and consolidate its operations to the new office buildings
during fiscal year 1997. In conjunction with its planned relocation, the Bank
sold its home office during fiscal year 1996 for $1.1 million, recording a net
gain on the sale of approximately $400,000. The Bank updated its data processing
mainframe computer and related software during fiscal 1996.
Deposits increased by $258.3 million to $1.137 billion as of September 30,
1996 from $878.7 million at September 30, 1995. The increase resulted from
deposits generated through the opening of eleven new branch offices during
fiscal year 1996 and continued aggressive pricing of certificate products. The
Bank offered higher interest rates on certificates of deposit than other
financial institutions in order to fund higher loan originations during the
fiscal year. Deposits of $103.8 million were acquired with the purchase of Palm
Beach Savings during the fiscal year ended September 30, 1996.
Borrowings increased to $211.0 million at September 30, 1996 from $189.6
million at September 30, 1995. This $21.4 million increase was also used to fund
higher loan production during the year.
Stockholders' equity increased to $105.4 million at September 30, 1996 from
$104.6 million at September 30, 1995. Net income for the year was $0.5 million.
The acquisition of PBS Financial Corp.
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in December 1995, through the issuance by the Company of 299,478 treasury shares
at a price of $22.125 per share, increased stockholders' equity by $6.6 million.
Stockholders' equity was increased by a reduction in the unrealized loss in fair
value on available-for-sale securities of $1.4 million. In addition, there was a
reduction in unallocated ESOP shares of $0.7 million and a reduction of unvested
shares retained in the RRPs with a value of $0.5 million. During fiscal year
ended September 30, 1996, dividends totaled $2.1 million. A total of 345,853
shares were repurchased as treasury shares during the fiscal year 1996 at an
average price per share of $22.10 reducing stockholders' equity by $7.6 million.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED
SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
GENERAL OPERATING RESULTS. Net income for the fiscal year ended September
30, 1996 was $0.5 million as compared to $5.6 million for the fiscal year ended
September 30, 1995. Contributing to the decline was an increase in loan loss
provisions to $15.7 million at September 30, 1996 from $261,000 at September 30,
1995. Expenses during the fiscal year ended September 30, 1996 included the
pre-tax $6.6 million one-time SAIF assessment. Expenses for the fiscal year
ended September 30, 1995 included a pre-tax charge to earnings of approximately
$2.4 million relating to a voluntary early retirement program for officers and
employees of the Bank. Other income for the fiscal year ended September 30, 1996
included net gains on sales of securities, loans, loan servicing and property
totaling $5.3 million as compared to net gains of $323,000 for the fiscal year
ended September 30, 1995.
Net interest income before provision for loan losses increased to $42.2
million for the fiscal year ended September 30, 1996 as compared to $32.1
million for the same period last year. The increase was primarily due to the
increase in loans receivable, net, to $1.008 billion at fiscal year ended
September 30, 1996 from $825.0 million at fiscal year ended September 30, 1995.
Net interest margin for fiscal 1996 was 3.18% as compared to 2.83% for fiscal
1995.
INTEREST INCOME. Interest income increased $22.5 million, or 27.8%, to
$103.5 million for the fiscal year ended September 30, 1996 from $81.0 million
for the fiscal year ended September 30, 1995. The increase was primarily due to
an increase in mortgage and consumer loans outstanding during fiscal year 1996.
The average yield on interest earning assets increased to 7.80% for the fiscal
year ended September 30, 1996 from 7.15% for the fiscal year ended September 30,
1995.
INTEREST EXPENSE. Interest expense increased $12.4 million, or 25.4%, to
$61.3 million for the fiscal year ended September 30, 1996 from $48.9 million
for the fiscal year ended September 30, 1995. This increase was the result of an
increase in deposits outstanding and the higher level of interest rates
experienced throughout fiscal year 1996. During fiscal year 1996, deposits
averaged $996.0 million as compared to $829.9 million during fiscal year 1995.
The weighted average rate paid on interest-bearing liabilities increased to
5.07% during fiscal year 1996 from 4.83% during fiscal year 1995.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest income
before provision for loan losses increased $10.1 million, or 31.5%, to $42.2
million for the fiscal year ended September 30, 1996 from $32.1 million for the
fiscal year ended September 30, 1995. The increase in net interest income is due
primarily to net growth in loans receivable to $1.008 billion at September 30,
1996 from $825.0 million at September 30, 1995. The net interest margin improved
to 3.18% for fiscal year 1996 from 2.83% for fiscal year 1995.
PROVISION FOR LOAN LOSSES. The Bank's provision for loan losses increased by
$15.4 million to $15.7 million for the fiscal year ended September 30, 1996 from
$261,000 for the fiscal year ended September 30, 1995. During the latter part of
fiscal year 1996, the Bank experienced higher than
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72
anticipated charge-offs in connection with its indirect automobile lending
portfolio. The increased loan loss provisions recorded during fiscal year 1996
were primarily to cover losses related to the indirect automobile lending
program. The provision for loan losses for the year ended September 30, 1996
consisted of a charge of approximately $16.4 million related to consumer lending
and a credit provision of approximately $0.7 million related to real estate
lending. Based upon an analysis of the overall performance of the indirect
lending program, it was determined that no new applications for indirect loans
would be accepted after September 30, 1996, thereby discontinuing the indirect
lending program. The balance of indirect auto loans at September 30, 1996 was
$148.2 million. Loan loss allowances related to indirect loans equaled $9.0
million at September 30, 1996.
OTHER INCOME. For the fiscal year ended September 30, 1996, other income
increased to $10.1 million from $4.0 million for the fiscal year ended September
30, 1995. During the year ended September 30, 1996, the Bank sold approximately
$164.3 million of mortgage loans, recording net gains on the sales of $3.6
million. The Bank also recorded net gains on the sale of securities of $959,000
for the fiscal year ended September 30, 1996. During the fiscal year ended
September 30, 1995, losses on sales of securities and loans totaled $1.7
million.
OTHER EXPENSES. Other expenses increased $9.0 million, or 33.8% to $35.6
million for the fiscal year ended September 30, 1996 from $26.6 million for the
fiscal year ended September 30, 1995. As previously discussed, during the year
ended September 30, 1996, the Bank recorded the pre-tax $6.6 million one-time
SAIF assessment. Losses on real estate owned for the fiscal year ended September
30, 1996 were $451,000 as compared to $74,000 for the fiscal year ended
September 30, 1995. Other expenses for the fiscal year ended September 30, 1995
included a pre-tax $2.4 million expense resulting from the voluntary early
retirement program initiated during the fiscal year ended September 30, 1995.
Increases in other expenses reflect the expenses related to franchise growth of
adding eleven additional full-service branches since September 30, 1995 and
expanded loan servicing requirements related primarily to indirect lending. This
growth resulted in the number of full-time equivalent employees increasing to
383 at September 30, 1996 from 299 at September 30, 1995 and a $2.1 million
increase in compensation and benefits to $15.9 million at September 30, 1996
from $13.8 million at September 30, 1995.
PROVISION FOR INCOME TAXES. Federal and state income taxes decreased to $0.4
million for the fiscal year ended September 30, 1996 from $3.6 million for the
fiscal year ended September 30, 1995. Lower taxes resulted from the decline in
net income before provision for income taxes to $1.0 million for the fiscal year
ended September 30, 1996 as compared to $9.2 million for the fiscal year ended
September 30, 1995. The effective income tax rate of the Bank was 44.8% and
38.8% for fiscal years 1996 and 1995, respectively.
COMPARISON OF FINANCIAL CONDITION
AT SEPTEMBER 30, 1995 COMPARED TO SEPTEMBER 30, 1994
Total assets were $1.209 billion at September 30, 1995 as compared to $1.077
billion at September 30, 1994. The increase of $132.3 million primarily reflects
net growth in loans receivable of $248.3 million. Deposits increased by $160.4
million primarily because of more aggressive pricing of certificate accounts.
Borrowed funds decreased by $40.3 million as a result of the increase in
deposits and liquidation of securities and mortgage-backed and related
securities.
Loans receivable, net, increased to $825.0 million at September 30, 1995,
from $576.7 million at September 30, 1994. The increase was primarily due to
loan originations which increased to
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$364.2 million for the year ended September 30, 1995 from $271.9 million for the
year ended September 30, 1994. Loan repayments and sales increased during fiscal
1995 to $135.7 million from $107.0 million during fiscal 1994.
Securities held-to-maturity, securities available-for-sale, trading
securities, mortgage-backed and related securities held-to-maturity and
mortgage-backed and related securities available-for-sale in the aggregate
decreased $121.8 million to $319.4 million at September 30, 1995 from $441.2
million at September 30, 1994. During fiscal 1995, the Bank implemented a
strategy to accelerate the increase in yield on interest-earning assets by
selling lower-yielding, shorter-term securities and reinvesting the proceeds in
higher yielding mortgage and consumer loans. As a result of this strategy, the
Bank sold approximately $195 million of securities available-for-sale and
mortgage-backed and related securities available-for-sale at a loss of
approximately $1.7 million. Additional sales will be considered in the future.
Real estate owned (real estate acquired through foreclosures) increased to
$549,000 at September 30, 1995, from $529,000 at September 30, 1994. This
continued low level of real estate owned reflected the Bank's aggressive
marketing of real estate owned at prices that the Bank considers to approximate
the fair market value.
Office properties and equipment decreased to $17.8 million at September 30,
1995, from $18.1 million at September 30, 1994. The decrease was primarily due
to the sale of property in Vero Beach, Florida which had a carrying value of
$312,000. A gain was recognized on the sale of $975,000. During fiscal 1994, the
Company purchased the Reflections Office Centre in West Palm Beach, Florida. The
Reflections Office Centre is an office complex consisting of two, eight-story
buildings on 5.74 acres of land with 116,800 rentable square footage.
As previously discussed, deposits increased by $160.4 million to $878.7
million at September 30, 1995, from $718.3 million at September 30, 1994. The
Bank raised its interest rates offered on certificates of deposit as compared to
other financial institutions in order to fund the higher loan originations
experienced during the year.
Borrowings decreased by $40.3 million to $189.6 million at September 30,
1995, from $229.9 million at September 30, 1994. The increase in deposits and
liquidation of securities provided funds to reduce the level of borrowings.
Stockholders' equity increased to $104.6 million at September 30, 1995 from
$100.5 million at September 30, 1994. The increase in qstockholders' equity
resulted from net income of $5.6 million, the reduction in funds advanced to the
Employee Stock Ownership Plan of $0.7 million, the reduction of shares retained
in the RRPs (as a result of vesting and distribution of those shares) with a
value of approximately $0.5 million, and a reduction in the unrealized decrease
in fair value on available for sale securities of $2.2 million. These increases
were offset by reductions in paid-in capital amounting to $0.2 million, an
increase of treasury stock of $3.6 million, and dividends declared of $1.1
million.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED
SEPTEMBER 30, 1995 AND SEPTEMBER 30, 1994
GENERAL OPERATING RESULTS. Net income for the fiscal year ended September
30, 1995 was $5.6 million as compared to $5.8 million during the same period one
year ago. Expenses during the fiscal year ended September 30, 1995 included a
pre-tax charge to earnings of approximately $2.4 million relating to a voluntary
early retirement program for officers and employees of the Bank.
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74
Other income included a pre-tax gain of $975,000 on the sale of a parcel of land
in Vero Beach, Florida and $1.7 million in losses on sales of securities. Loan
servicing on loans serviced for others was sold at a profit of approximately
$1.0 million. Net interest income before provision for loan losses increased to
$32.1 million for the fiscal year ended September 30, 1995 as compared to $27.8
million for the fiscal year ended September 30, 1994. The increase was primarily
due to the increase in loans receivable, net. Net interest margin for fiscal
1995 was 2.83% as compared to 2.97% for fiscal 1994.
INTEREST INCOME. Interest income increased $23.1 million, or 39.9%, to $81.0
million for the fiscal year ended September 30, 1995 from $57.9 million for the
fiscal year ended September 30, 1994. The increase was primarily due to an
increase in mortgage and consumer loans outstanding during fiscal 1995. The
average yield on interest-earning assets increased to 7.15% for the fiscal year
ended September 30, 1995 from 6.18% for the fiscal year ended September 30,
1994. This increase of 97 basis points was primarily due to higher yields on
loans and the liquidation of lower yielding securities with the proceeds being
invested in higher yielding loans.
INTEREST EXPENSE. Interest expense increased $18.8 million, or 62.7%, to
$48.9 million for the fiscal year ended September 30, 1995 from $30.1 million
for the fiscal year ended September 30, 1994. This increase was caused by the
increase in deposits as well as the higher level of interest rates experienced
throughout most of fiscal 1995. During fiscal 1995, deposits averaged $829.9
million as compared to $648.6 million during fiscal 1994. The weighted average
rate paid on interest-bearing liabilities increased to 4.83% during fiscal 1995
from 3.72% during fiscal 1994.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest income
before provision for loan losses increased $4.3 million, or 15.2%, to $32.1
million for the fiscal year ended September 30, 1995 from $27.8 million for the
fiscal year ended September 30, 1994. As previously discussed, the net interest
margin decreased to 2.83% for fiscal 1995 from 2.97% for fiscal year 1994. The
increase in net interest income was due to increases in outstanding loans.
PROVISION FOR LOAN LOSSES. The Bank's provision for loan losses increased to
$261,000 for the fiscal year ended September 30, 1995 from $135,000 for the
fiscal year ended September 30, 1994. The increased level of provision for loan
losses reflects the increased balance of mortgage and consumer loans. Higher
levels of loan loss provisions can be expected in the future from increased
volumes of loans and higher balances of indirect automobile, home equity and
credit card loans. Non-performing assets increased to $2.7 million as of
September 30, 1995 from $2.5 million as of September 30, 1994.
OTHER INCOME. For the fiscal year ended September 30, 1995, other income
decreased to $4.0 million from $4.4 million for the fiscal year ended September
30, 1994. As discussed above, other income for the year ended September 30, 1995
included a gain on sale of property of $975,000, net losses on loan and security
sales of $1.7 million, and a gain on sale of servicing of approximately $1.0
million. Other income for the year ended September 30, 1994 included gains on
sales of securities of $424,000 and equity in net income of a real estate joint
venture of $294,000. During fiscal year ended September 30, 1995 an amount due
from Channing Corporation XVIII totaling $424,000 was expensed.
OTHER EXPENSES. Other expenses increased $3.8 million, or 16.6%, to $26.6
million for the fiscal year ended September 30, 1995 from $22.8 million for the
fiscal year ended September 30, 1994. This increase was primarily caused by a
voluntary early retirement program for officers and employees which resulted in
a pre-tax expense of $2.4 million. Deposit insurance premiums increased $217,000
primarily due to increased deposits. Provision for losses and net losses on sale
of real estate owned was $74,000 for the fiscal year ended September 30, 1995 as
compared to income of $410,000 for the fiscal year ended September 30, 1994.
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75
PROVISION FOR INCOME TAXES. Federal and state income taxes increased to $3.6
million for fiscal year ended September 30, 1995 from $3.5 million for the
fiscal year ended September 30, 1994. The effective income tax rate was 38.8%
and 37.7% for fiscal 1995 and 1994, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Bank is required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which periodically varies depending upon
economic conditions and deposit flows, is based upon a percentage of deposits
and short-term borrowings. The current required ratio is 5%. The Bank
historically has maintained a level of liquid assets in excess of this
regulatory requirement. Liquid assets consist of, among other things, cash, cash
equivalents, short and intermediate term U.S. Government and government agency
securities. The maintenance of liquid assets allows for the possibility of
withdrawal of deposits when interest rates fluctuate. The Bank's liquidity
ratios were 16.3% and 8.0% at September 30, 1996 and September 30, 1995,
respectively. The liquidity ratio at September 30, 1996 was high as a result of
proceeds from loan sales of $141.4 million during September 1996.
The Bank's primary sources of funds are deposits and borrowings, proceeds
from principal and interest payments on loans, and proceeds from the maturing of
and sales of securities. While maturities and scheduled amortization of loans
and investment securities are predictable sources of funds, deposit inflows and
mortgage prepayments are greatly influenced by local conditions, general
interest rates, and regulatory changes.
The Bank's most liquid assets are cash and cash equivalents. The levels of
these assets depend on the Bank's lending, investing, operating and deposit
activities during any given period. At September 30, 1996, 1995 and 1994, cash
and cash equivalents totaled $161.4 million, $25.1 million, and $19.1 million,
respectively. As previously mentioned, the high level of cash and cash
equivalents at September 30, 1996 was due to proceeds from loan sales of $141.4
million during the month of September. The Bank's sources of funds include
deposits, borrowings, proceeds from payments and prepayments on mortgage loans
and mortgage-backed and related securities, proceeds from sales of
mortgage-backed and related securities and loans, proceeds from the maturities
of investment securities and sales of securities.
The primary investment activity of the Bank is the origination of mortgage
and consumer loans. During the fiscal years ended September 30, 1996, 1995 and
1994, the Bank originated mortgage and consumer loans in the aggregate amounts
of $539.6 million, $364.2 million, and $271.9 million, respectively. In
addition, net mortgage loans of approximately $78.5 million were acquired in
conjunction with the purchase of Palm Beach Savings. Another investment activity
of the Bank, but to a much lesser degree, is the investment of funds in REMICs,
CMOs, mortgage-backed securities, U.S. Treasury and agency securities and
FHLB-Atlanta overnight funds.
The Bank's cash flows are comprised of three primary classifications: cash
flows from operating activities, investing activities, and financing activities.
Cash flows from operating activities, consisting primarily of interest and
dividends received less interest paid on deposits, were $11.0 million, $18.5
million and $0.4 million for the fiscal years ended September 30, 1996, 1995 and
1994, respectively. Net cash used for investing activities consisted primarily
of disbursement of loan originations, mortgage-backed and related securities
purchases and investment purchases, offset by principal collections on loans and
proceeds from the sale of loans, mortgage-backed and related securities,
securities available for sale, repossessed automobiles and office properties and
equipment, were $40.5 millon, $129.8 million and $216.9 million for the fiscal
years ended September 30, 1996,
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1995 and 1994, respectively. Net cash provided by financing activities consisted
primarily of net activity in deposits, advances and escrow accounts, and were
$165.7 million, $117.3 million and $220.8 million for the fiscal years ended
September 30, 1996, 1995 and 1994, respectively.
At September 30, 1996, the Bank had outstanding commitments to originate
$40.6 million of loans. The Bank has determined that it will have sufficient
funds available to meet all of its commitments. At September 30, 1996,
certificates of deposit which were scheduled to mature in one year or less from
September 30, 1996 totaled $593.3 million. Based on past experience, management
is of the opinion that a significant portion of these funds will remain with the
Bank. If disintermediation of deposits does occur, the Bank has the ability to
borrow from the FHLB and/or sell available-for-sale securities. At September 30,
1996, the unrealized loss on available-for-sale securities was $2.0 million
which would become a recognized loss if the securities were to be sold.
At September 30, 1996, the Bank exceeded each of the OTS capital
requirements. Tangible and core capital were 6.2% of adjusted total assets as
compared to the minimum requirements of 1.5% and 3.0%, respectively. Risk-based
capital was 12.3% of risk-weighted assets as compared to the minimum requirement
of 8.0%.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with Generally Accepted Accounting Principles
("GAAP"), which requires the measurement of financial position and operating
results in terms of historical dollars or without considering the changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Bank's operations. Unlike
most industrial companies, nearly all the assets and liabilities of the Bank are
monetary in nature. As a result, interest rates have a greater impact on the
Bank's performance than do the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
In November 1995, FASB issued "A Guide to Implementation of SFAS No. 115 on
Accounting for Certain Investments in Debt and Equity Securities -- Questions
and Answers" ("SFAS 115 Q&A Guide"). SFAS 115 Q&A Guide includes a one-time
opportunity for entities which had previously adopted the provisions of SFAS 115
to reconsider their ability and intent to hold securities to maturity and such
entities would be allowed to transfer securities from the held-to-maturity
category to available-for-sale without calling into question the intent to hold
securities to maturity. Management evaluated the impact of the SFAS 115 Q&A
Guide on the investment portfolio. SFAS 115 Q&A Guide required that any one-time
reclassifications must occur between November 15, 1995 and December 31, 1995. In
November 1995, the Bank reclassified $10.5 million of municipal securities and
$20.0 million of U.S. Treasury notes from held-to-maturity to
available-for-sale. Of the reclassified amounts, $15.6 million were sold during
the fiscal year, and the Bank recorded net gains of $811,000.
In May 1995, FASB issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights." The Statement, which amends SFAS No. 65, "Accounting for Certain
Mortgage Banking Activities," requires that an entity with mortgage banking
operations recognize as separate assets rights to service mortgage loans for
others. An entity that acquires mortgage servicing rights through either the
purchase or
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origination of mortgage loans and sells or securitizes those loans with
servicing rights retained should allocate the total cost of the mortgage loans
to the mortgage servicing rights and the loans based on their relative fair
values if it is practicable to estimate fair value. SFAS No. 122 applies
prospectively in fiscal years beginning after December 15, 1995 to sales of
mortgage loans with servicing rights retained and to impairment evaluations of
all amounts capitalized as mortgage servicing rights, including those purchased
before the adoption of this Statement. SFAS No. 122, when adopted, is not
expected to have a material effect on the Company's consolidated financial
statements.
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This statement requires certain disclosures about stock-based
employee compensation arrangements, regardless of the method used to account for
them, and defines a fair value based method of accounting for an employee stock
option or similar equity instrument and encourages all entities to adopt that
method of accounting for all of their employee stock compensation plans.
However, it also allows an entity to continue to measure compensation cost for
stock based compensation plans using the intrinsic value method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Entities electing to remain with the accounting in APB Opinion No. 25 must make
pro forma disclosures of net income and, if presented, earnings per share, as if
the fair value method of accounting defined in this Statement had been applied.
Under the fair value method, compensation cost is measured at the grant date
based on the value of the award and is recognized over the service period, which
is usually the vesting period. Under the intrinsic value based method,
compensation cost is the excess, if any, of the quoted market price of the stock
at grant date or other measurement date over the amount an employee must pay to
acquire the stock. The disclosure requirements of this Statement are effective
for financial statements for fiscal years beginning after December 15, 1995. Pro
forma disclosures required for entities that elect to continue to measure
compensation cost using APB No. 25 must include the effects of all awards
granted in fiscal years that begin after December 15, 1994. Management is in the
process of considering the alternatives presented in SFAS No. 123.
IMPACT OF NEW LEGISLATIVE ISSUES. In August 1996, Congress passed
legislation which repeals the Bank's present method of accounting for bad debts
for federal income tax purposes. As discussed in Note 12 to the consolidated
financial statements, the Bank currently uses the percentage of taxable income
method to determine its bad debt deduction in the computation of its taxable
income. Under the new legislation, the Bank will be required to use the specific
charge-off method, which may result in a different deduction for bad debts in
determining taxable income than as presently computed under its current method.
Additionally, the Bank will be required to recapture its post-1987 additions to
its bad debt reserves. Because the Bank has provided deferred taxes for the
income tax bad debt reserves established after 1987, management does not
anticipate any additional income tax liability related to the recapture. The new
legislation is effective for taxable years beginning after December 31, 1995.
On September 30, 1996, Congress passed and the President signed the Deposit
Insurance Funds Act of 1996 which mandated that all depository institutions that
are insured by the SAIF pay a one-time special assessment of 65.7 basis points
(subject to certain adjustments) on SAIF-insured deposits that were held at
March 31, 1995 by November 27, 1996 to recapitalize the SAIF portion of the FDIC
fund. The assessment is intended to bring the SAIF's reserve ratios to a
comparable level of the Bank Insurance Fund at 1.25% of total insured deposits.
In connection with the recapitalization, the FDIC also lowered SAIF premiums
from $0.23 per $100 to $0.064 per $100 of insured deposits in January 1997. The
Bank's pre-tax share of this special assessment totals $6.6 million and is
included in the consolidated financial statements at September 30, 1996.
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Item 8 - Financial Statements
Supplementary Data
INDEPENDENT AUDITORS' REPORT
Board of Directors of
First Palm Beach Bancorp, Inc.:
We have audited the consolidated statements of financial condition of First
Palm Beach Bancorp, Inc. (the "Company") and its wholly-owned subsidiary, First
Bank of Florida as of September 30, 1995 and 1996, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the three years in the period ended September 30, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company and subsidiary at
September 30, 1995 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended September 30, 1996 in
conformity with generally accepted accounting principles.
As discussed in the Notes to the Consolidated Financial Statements, the
Company changed its method of accounting for debt and equity securities
effective October 1, 1993, to conform with Statement of Financial Accounting
Standards No. 115.
/s/ Deloitte & Touche LLP
Certified Public Accountants
West Palm Beach, Florida
December 10, 1996
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FIRST PALM BEACH BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1995 AND 1996 (IN THOUSANDS)
September 30, September 30,
1995 1996
------------- -------------
ASSETS
CASH AND CASH EQUIVALENTS (Note 1):
Cash and amounts due from depository institutions.................... $ 11,254 $ 19,438
----------- -----------
Interest-bearing deposits............................................ 13,878 141,975
----------- -----------
Total cash and cash equivalents................................ 25,132 161,413
SECURITIES AVAILABLE-FOR-SALE (Notes 1, 2)............................. 32,443 27,551
SECURITIES HELD-TO-MATURITY (Approximate fair value --
1995, $49,276; 1996, $7,042) (Notes 1, 3)............................. 48,498 6,981
MORTGAGE-BACKED AND RELATED SECURITIES AVAILABLE-FOR-SALE (Notes 1,
4).................................................................... 81,460 105,866
MORTGAGE-BACKED AND RELATED SECURITIES HELD-TO-MATURITY (Approximate
fair value -- 1995, $157,429; 1996, $127,495) (Notes 1, 5)............ 156,982 126,407
LOANS RECEIVABLE, Net of allowance for loan losses -- 1995, $2,157;
1996, $11,855 (Notes 1, 6, 10)........................................ 825,024 1,007,881
REAL ESTATE OWNED, Net of allowance for losses -- 1995, $132;
1996, $361 (Note 1)................................................... 549 1,626
REPOSSESSED AUTOMOBILES, At estimated fair value (Note 1).............. 371 1,602
OFFICE PROPERTIES AND EQUIPMENT, Net (Notes 1, 7)...................... 17,763 23,077
FEDERAL HOME LOAN BANK STOCK -- At cost................................ 8,558 10,053
ACCRUED INTEREST RECEIVABLE (Notes 1, 6, 8)............................ 6,778 8,147
GOODWILL (Note 1)...................................................... -- 2,825
OTHER ASSETS........................................................... 5,287 6,591
----------- -----------
TOTAL ASSETS........................................................... $ 1,208,845 $ 1,490,020
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSIT ACCOUNTS (Note 9).............................................. $ 878,670 $ 1,136,722
ADVANCES FROM FEDERAL HOME LOAN BANK (Note 10)......................... 171,125 201,025
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (Note 11)............... 18,427 10,000
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE.......................... 14,981 14,657
OTHER LIABILITIES (Notes 1, 12, 13).................................... 21,412 27,756
DEFERRED INCOME TAXES, NET (Notes 1, 12)............................... (381) (5,565)
----------- -----------
Total liabilities.............................................. $ 1,104,234 $ 1,384,595
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 15, 16, 17)
STOCKHOLDERS' EQUITY: (Notes 14, 17, 18)
PREFERRED STOCK ($.01 par value) authorized 1,000,000 shares; none
outstanding
COMMON STOCK ($.01 par value) authorized 10,000,000 shares; issued
5,496,375 shares; outstanding 5,133,063 and 5,093,096 (net of
treasury stock) at September 30, 1995 and 1996, respectively........ 55 55
ADDITIONAL PAID-IN CAPITAL........................................... 51,733 52,891
RETAINED EARNINGS -- Substantially restricted (Notes 17, 18)......... 66,592 65,064
TREASURY STOCK, at cost (363,312 shares at September 30, 1995 and
403,279 shares at September 30, 1996)............................... (7,283) (8,660)
COMMON STOCK PURCHASED BY: (Note 13)
Employee stock ownership plan...................................... (2,509) (1,769)
Recognition and retention plans.................................... (621) (161)
UNREALIZED DECREASE IN FAIR VALUE ON AVAILABLE-FOR-SALE SECURITIES
(Net of applicable income taxes) (Note 1)........................... (3,356) (1,995)
----------- -----------
Total stockholders' equity..................................... 104,611 105,425
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................. $ 1,208,845 $ 1,490,020
=========== ===========
See notes to consolidated financial statements.
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FIRST PALM BEACH BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1994, 1995, AND 1996
(IN THOUSANDS)
For the Years Ended
September 30,
-------------------------------
1994 1995 1996
--------- --------- ---------
INTEREST INCOME:
Loans (Notes 1, 6)................................................................. $ 37,109 $ 54,638 $ 84,090
Securities held-to-maturity, securities available-for-sale, and trading securities
(Note 1).......................................................................... 5,820 6,494 4,130
Mortgage-backed and related securities held-to-maturity and mortgage-backed and
related securities available-for-sale (Note 1).................................... 14,440 19,199 14,487
Other.............................................................................. 505 633 825
--------- --------- ---------
Total interest income........................................................ 57,874 80,964 103,532
--------- --------- ---------
INTEREST EXPENSE:
Deposits (Note 9).................................................................. 23,130 37,847 48,614
Advances from Federal Home Loan Bank (Note 10)..................................... 5,375 8,699 11,974
Securities sold under agreements to repurchase (Note 11)........................... 1,544 2,354 712
--------- --------- ---------
Total interest expense....................................................... 30,049 48,900 61,300
--------- --------- ---------
Net interest income.......................................................... 27,825 32,064 42,232
PROVISION FOR LOAN LOSSES (Notes 1, 6)............................................... 135 261 15,704
--------- --------- ---------
Net interest income after provision for loan losses (Note 1)................. 27,690 31,803 26,528
--------- --------- ---------
OTHER INCOME:
Servicing income and other fees.................................................... $ 2,597 $ 2,576 $ 3,206
Net gain (loss) on sale of loans and mortgage-backed and related securities
available-for-sale (Notes 1, 4)................................................... 480 (1,276) 3,557
Net gain (loss) on sale of securities available-for-sale (Notes 1, 2).............. 55 (473) 959
Net gain (loss) on trading securities (Note 1)..................................... (111) 89 --
Equity in net income of real estate venture........................................ 294 -- --
Net gain on sale of property....................................................... -- 975 460
Net gain on sale of loan servicing (Note 6)........................................ -- 1,008 412
Miscellaneous...................................................................... 1,122 1,131 1,475
--------- --------- ---------
Total other income........................................................... 4,437 4,030 10,069
--------- --------- ---------
OTHER EXPENSES:
Employee compensation and benefits (Notes 13, 14).................................. 13,900 13,849 15,905
Early retirement program........................................................... -- 2,361 --
Occupancy and equipment (Note 16).................................................. 4,223 4,259 4,830
Federal deposit insurance premium (Note 1)......................................... 1,582 1,799 8,848
Provision for losses and net (gains) losses on sale of real estate owned (Note
1)................................................................................ (410) 74 451
Advertising and promotion.......................................................... 801 679 663
Miscellaneous...................................................................... 2,730 3,588 4,905
--------- --------- ---------
Total other expenses......................................................... 22,826 26,609 35,602
--------- --------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES............................................. 9,301 9,224 995
--------- --------- ---------
PROVISION (BENEFIT) FOR INCOME TAXES: (Notes 1, 12)
Current............................................................................ 3,355 3,672 5,288
Deferred........................................................................... 147 (94) (4,842)
--------- --------- ---------
Total provision for income taxes............................................. 3,502 3,578 446
--------- --------- ---------
NET INCOME........................................................................... $ 5,799 $ 5,646 $ 549
========= ========= =========
PRIMARY AND FULLY DILUTED EARNINGS PER SHARE (Note 1)................................ $ 1.05 $ 1.11 $ 0.11
========= ========= =========
See notes to consolidated financial statements.
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FIRST PALM BEACH BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1994, 1995, AND 1996
(IN THOUSANDS)
Common Common
Additional Stock Stock
Common Paid-in Retained Treasury Purchased Purchased
Stock Capital Earnings Stock by ESOP by RRP
------------- ----------- ----------- ----------- ----------- -----------
Balance at September 30, 1993.......... $ 55 $ 52,423 $ 56,200 $ -- $ (4,232) $ (2,116)
Cumulative effect of change in method
of accounting for investments in
debt and equity securities, net of
income taxes........................ -- -- -- -- -- --
Net income........................... -- -- 5,799 -- -- --
Additional conversion expenses....... -- (18) -- -- -- --
Unrealized gain on securities and
mortgage-backed and related
securities transferred from
available-for-sale to
held-to-maturity, net of income
taxes............................... -- -- -- -- -- --
Accretion of unrealized gain on
securities and mortgage-backed and
related securities transferred from
available-for-sale to
held-to-maturity, net of income
taxes............................... -- -- -- -- -- --
Change in unrealized losses on
securities available-for-sale and
mortgage-backed and related
securities available-for-sale, net
of income taxes..................... -- -- -- -- -- --
Amortization of deferred compensation
-- Employee Stock Ownership Plan and
Recognition and Retention Plans..... -- -- -- -- 1,058 1,005
Purchase of Treasury Stock at cost
(274,819 shares).................... -- -- -- (4,573) -- --
Exercise of stock options by certain
directors and employees............. -- (470) -- 855 -- --
---- ------ --------- -------- -------- --------
Balance at September 30, 1994.......... 55 51,935 61,999 (3,718) (3,174) (1,111)
---- ------ --------- -------- -------- --------
Net income........................... -- -- 5,646 -- -- --
Accretion of unrealized gain on
securities and mortgage-backed and
related securities transferred from
available-for-sale to
held-to-maturity, net of income
taxes............................... -- -- -- -- -- --
Change in unrealized losses of
securities available-for-sale and
mortgage-backed and related
securities available-for-sale, net
of income taxes..................... -- -- -- -- -- --
Amortization of deferred compensation
-- Employee Stock Option Plan and
Recognition and Retention Plans..... -- 522 -- -- 665 490
Purchase of Treasury Stock at cost
(225,600 shares).................... -- -- -- (4,902) -- --
Exercise of stock options by certain
directors and employees............. -- (724) -- 1,337 -- --
Dividends of $0.20 per share......... -- -- (1,053) -- -- --
---- ------ --------- -------- -------- --------
Balance at September 30, 1995.......... 55 51,733 66,592 (7,283) (2,509) (621)
Unrealized
(Decrease)
Increase in
Fair Value Total
on Available- Stock-
for-Sale holders'
Securities Equity
------------- ---------
Balance at September 30, 1993.......... $ -- $ 102,330
Cumulative effect of change in method
of accounting for investments in
debt and equity securities, net of
income taxes........................ 546 546
Net income........................... -- 5,799
Additional conversion expenses....... (18)
Unrealized gain on securities and
mortgage-backed and related
securities transferred from
available-for-sale to
held-to-maturity, net of income
taxes............................... 142 142
Accretion of unrealized gain on
securities and mortgage-backed and
related securities transferred from
available-for-sale to
held-to-maturity, net of income
taxes............................... (33) (33)
Change in unrealized losses on
securities available-for-sale and
mortgage-backed and related
securities available-for-sale, net
of income taxes..................... (6,179) (6,179)
Amortization of deferred compensation
-- Employee Stock Ownership Plan and
Recognition and Retention Plans..... -- 2,063
Purchase of Treasury Stock at cost
(274,819 shares).................... -- (4,573)
Exercise of stock options by certain
directors and employees............. -- 385
-------- ---------
Balance at September 30, 1994.......... (5,524) 100,462
Net income........................... -- 5,646
Accretion of unrealized gain on
securities and mortgage-backed and
related securities transferred from
available-for-sale to
held-to-maturity, net of income
taxes............................... (57) (57)
Change in unrealized losses of
securities available-for-sale and
mortgage-backed and related
securities available-for-sale, net
of income taxes..................... 2,225 2,225
Amortization of deferred compensation
-- Employee Stock Option Plan and
Recognition and Retention Plans..... -- 1,677
Purchase of Treasury Stock at cost
(225,600 shares).................... -- (4,902)
Exercise of stock options by certain
directors and employees............. -- 613
Dividends of $0.20 per share......... -- (1,053)
-------- ---------
Balance at September 30, 1995.......... (3,356) 104,611
(CONTINUED)
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FIRST PALM BEACH BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1994, 1995, AND 1996
(IN THOUSANDS)
Common Common
Additional Stock Stock
Paid-in Retained Treasury Purchased Purchased
Common Stock Capital Earnings Stock by ESOP by RRP
------------- ----------- ----------- ----------- ----------- -----------
Balance at September 30, 1995.......... 55 51,733 66,592 (7,283) (2,509) (621)
Net income........................... -- -- 549 -- -- --
Accretion of unrealized gain on
securities and mortgage-backed and
related securities transferred from
available-for-sale to
held-to-maturity, net of income
taxes............................... -- -- -- -- -- --
Change in unrealized losses on
securities available-for-sale and
mortgage-backed and related
securities available-for-sale, net
of income taxes..................... -- -- -- -- -- --
Amortization of deferred compensation
-- Employee Stock Ownership Plan and
Recognition and Retention Plans..... -- 733 -- -- 740 460
Issuance of 299,478 shares of
Treasury Stock for the purchase of
PBS Financial Corp.................. -- 496 -- 6,130 -- --
Purchase of Treasury Stock at cost
(345,853 shares).................... -- -- -- (7,642) -- --
Exercise of stock options by certain
directors and employees............. -- (71) -- 135 -- --
Dividends of $0.40 per share......... -- -- (2,077) -- -- --
--------- --------- --------- --------- --------- ---------
Balance at September 30, 1996.......... $ 55 $ 52,891 $ 65,064 $ (8,660) $ (1,769) $ (161)
========= ========= ========= ========= ========= =========
Unrealized
(Decrease)
Increase in
Fair Value Total
on Available- Stock-
for-Sale holders'
Securities Equity
------------- ---------
Balance at September 30, 1995.......... (3,356) 104,611
Net income........................... -- 549
Accretion of unrealized gain on
securities and mortgage-backed and
related securities transferred from
available-for-sale to
held-to-maturity, net of income
taxes............................... (41) (41)
Change in unrealized losses on
securities available-for-sale and
mortgage-backed and related
securities available-for-sale, net
of income taxes..................... 1,402 1,402
Amortization of deferred compensation
-- Employee Stock Ownership Plan and
Recognition and Retention Plans..... -- 1,933
Issuance of 299,478 shares of
Treasury Stock for the purchase of
PBS Financial Corp.................. -- 6,626
Purchase of Treasury Stock at cost
(345,853 shares).................... -- (7,642)
Exercise of stock options by certain
directors and employees............. -- 64
Dividends of $0.40 per share......... -- (2,077)
--------- ---------
Balance at September 30, 1996.......... $ (1,995) $ 105,425
========= =========
See notes to consolidated financial statements.
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FIRST PALM BEACH BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(IN THOUSANDS)
For the Years Ended
September 30,
-------------------------------
1994 1995 1996
--------- --------- ---------
CASH FLOW FROM (FOR) OPERATING ACTIVITIES:
Net income.............................................................. $ 5,799 $ 5,646 $ 549
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Depreciation.......................................................... 1,516 1,308 1,227
Employee Stock Ownership Plan and Recognition and Retention Plan
Compensation Expense................................................. 2,063 1,677 1,933
Federal Home Loan Bank stock dividend................................. (405) -- --
Accretion of discounts, amortization of premiums, and other deferred
yield items.......................................................... 276 (910) (538)
Amortization of goodwill.............................................. -- -- 145
Provision for loans and real estate losses............................ 135 261 15,704
Provision for losses and net (gains) losses on sales of real estate
owned................................................................ (410) 74 451
Net realized and unrealized (gain) loss on trading securities......... 121 (89) --
Purchase of trading securities.......................................... (19,959) -- --
Sale of trading securities.............................................. 14,932 5,003 --
Net (gain) loss on sale of:
Loans................................................................. (71) (84) (3,494)
Mortgage-backed and related securities available-for sale............. (409) 1,360 (63)
Other securities...................................................... (65) 473 (959)
Property and equipment................................................ -- (975) (460)
Decrease in loans held for sale......................................... 910 127 --
Changes in assets and liabilities net of effects from purchase of PBS
Financial Corp.:
Increase in accrued interest receivable............................... (1,316) (1,496) (792)
(Increase) decrease in other assets................................... (2,835) 1,743 (1,330)
Increase in other liabilities -- net of change in dividends payable
and deferred taxes................................................... 71 4,339 (1,348)
--------- --------- ---------
Net cash provided by operating activities......................... 353 18,457 11,025
--------- --------- ---------
CASH FLOW FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on loans....................... (150,144) (255,190) (286,867)
Principal payments received on mortgage-backed and related securities... 148,408 42,877 37,830
Purchases of:
Loans................................................................. (6,659) (5,687) (3,712)
Mortgage-backed and related securities held-to-maturity............... (66,346) (49,883) --
Mortgage-backed and related securities available-for-sale............. (194,823) -- (41,360)
Securities held-to-maturity........................................... (14,881) (13,475) --
Securities available-for-sale......................................... (85,034) (74,906) (361,931)
Office properties and equipment....................................... (8,063) (1,313) (7,237)
Proceeds from sales of:
Loans................................................................. 7,462 13,991 164,301
Mortgage-backed and related securities available-for-sale............. 64,359 94,391 18,040
Securities available-for-sale......................................... 83,741 100,965 294,117
Repossessed automobiles............................................... -- 407 11,928
Real estate acquired in settlement of loans........................... 2,826 1,085 2,395
Office properties and equipment....................................... 11 1,307 1,593
(Purchase) sale of Federal Home Loan Bank stock......................... (1,631) 52 (525)
Proceeds from maturities of securities.................................. -- 19,952 125,587
Cash acquired through purchase of PBS Financial Corp. net of cash
payments relating to purchase.......................................... -- -- 9,873
Investment in real estate venture....................................... 3,807 -- --
Other investing activities.............................................. 56 (4,340) (4,509)
--------- --------- ---------
Net cash used for investing activities............................ (216,911) (129,767) (40,477)
--------- --------- ---------
(Continued)
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FIRST PALM BEACH BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(IN THOUSANDS)
For the Years Ended
September 30,
-------------------------------
1994 1995 1996
--------- --------- ---------
CASH FLOW FROM (FOR) FINANCING ACTIVITIES:
Purchase of Treasury Stock at cost...................................... (4,573) (4,902) (7,642)
Exercise of stock options............................................... 110 613 64
Decrease in additional paid in capital due to additional conversion
expenses............................................................... (18) -- --
Net increase (decrease) in:
NOW accounts, demand deposits, and savings accounts................... (18,091) (19,332) 55,343
Certificates of deposit............................................... 37,915 179,720 98,872
Advances from Federal Home Loan Bank.................................. 145,850 (1,050) 29,900
Securities sold under agreement to repurchase......................... 57,717 (39,290) (8,427)
Advances by borrowers for taxes and insurance......................... 1,869 2,328 (539)
Dividends paid on stock............................................... -- (790) (1,838)
--------- --------- ---------
Net cash provided by financing activities......................... 220,779 117,297 165,733
--------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................................. 4,221 5,987 136,281
CASH AND CASH EQUIVALENTS, Beginning of year.............................. 14,924 19,145 25,132
--------- --------- ---------
CASH AND CASH EQUIVALENTS, End of year.................................... $ 19,145 $ 25,132 $ 161,413
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS Supplemental Disclosure of Cash Flow
Information:
Cash paid for income taxes............................................ $ 2,131 $ 3,806 $ 6,508
========= ========= =========
Cash paid for interest on deposits and other borrowings............... $ 29,162 $ 48,003 $ 60,640
========= ========= =========
Supplemental Schedule of Noncash Investing and and Financing Activities:
Repossessed automobiles acquired in settlement of loans............... $ -- $ 765 $ 21,122
========= ========= =========
Real estate acquired in settlement of loans........................... $ 1,595 $ 1,057 $ 961
========= ========= =========
Decrease (increase) in unrealized loss on available-for-sale securities. $ (5,524) $ 2,168 $ 1,361
========= ========= =========
On December 8, 1995 the Company purchased all of the stock of PBS Financial
Corp.
Consideration paid for PBS:
Cash.................................................................... $ 1,107
Capital stock issued.................................................... 6,626
---------
Total purchase price.................................................... 7,733
Fair value of net assets acquired....................................... (4,763)
---------
Goodwill................................................................ $ 2,970
=========
See notes to consolidated financial statements.
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FIRST PALM BEACH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
First Palm Beach Bancorp, Inc. (the "Company") was organized in May 1993 as
the holding company for First Bank of Florida (the "Bank"), formerly First
Federal Savings and Loan Association of the Palm Beaches, in connection with the
Bank's conversion (the "Conversion") from a federally chartered mutual savings
and loan association to a federally chartered stock savings and loan
association. The Bank changed its name from First Federal Savings and Loan
Association of the Palm Beaches to First Bank of Florida on October 15, 1996. On
September 29, 1993, the Company completed its initial public offering and sold
5,496,375 shares of common stock at $10.00 per share to depositors, borrowers,
and the employees of the Bank during the subscription offering. The proceeds
from the Conversion, after recognizing Conversion expenses and underwriting
costs of $2.5 million, were $52.5 million and are recorded as common stock and
additional paid-in capital in the accompanying consolidated statements of
financial condition. The Company utilized $25.2 million of the net proceeds to
purchase all of the capital stock of the Bank.
On December 8, 1995 (the "Effective Date"), the Company completed the
acquisition of PBS Financial Corp. ("PBS") by means of the merger (the "Merger")
of PBS with and into the Company, pursuant to an Agreement and Plan of Merger
between the Company and PBS dated as of May 31, 1995 (the "Agreement").
Concurrently with the Merger, Palm Beach Savings and Loan, F.S.A. ("Palm Beach
Savings"), the savings and loan subsidiary of PBS, merged with and into the Bank
in accordance with the Plan of Merger and Combination dated May 31, 1995 between
Palm Beach Savings and the Bank. In conjunction with and as a part of the
Merger, each of the 283,700 shares of PBS Class A common stock issued and
outstanding and 419,300 shares of PBS Class B common stock issued and
outstanding as of the Effective Date was converted into (i) .426 of a share of
the Company's Common Stock and (ii) a cash payment of $0.75 per share of PBS
common stock. Based on an aggregate of 703,000 shares of PBS Class A and Class B
common stock issued and outstanding, the Company issued in the aggregate 299,478
shares of the Company's Common Stock and made $527,250 in cash payments. Also in
conjunction with the Merger, the Company paid $88,544 in exchange for all
outstanding PBS options and $459,536 in exchange for all outstanding PBS
warrants.
The supplemental proforma information related to the Bank's acquisition of
PBS for the years ended September 30, 1995 and 1996 is considered immaterial to
the consolidated operations of the Company.
The accounting and reporting policies of the Company and the Bank conform,
in all material respects, to generally accepted accounting principles. The
following summarizes the more significant of these policies and practices.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and the Bank, and the Bank's wholly-owned subsidiaries, The Big First, Inc.,
First Corporate Center, Inc., and First Bank of Florida Mortgage Corporation.
The Company's business is conducted principally through the Bank. At September
30, 1996, the Company reimbursed the Bank for services rendered by Bank
employees on behalf of the Company. All material intercompany balances and
transactions have been eliminated in consolidation.
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The Bank was organized in 1934 as a federally chartered savings and loan
association. The Bank's principal business has been and continues to be
attracting deposits from the general public and investing those deposits,
together with funds generated from operations and borrowings, in one-to
four-family, owner occupied residential mortgage loans, construction loans,
consumer and other loans, commercial real estate loans and multi-family
residential mortgage loans.
The Big First, Inc. was formed in March 1981. The primary purpose of this
service corporation was the development of residential real estate. This service
corporation is currently inactive.
First Corporate Center, Inc. was formed in 1995. The primary purpose of the
service corporation is to engage in maintenance and management of improved real
estate. It currently manages one building of the Reflections Office Centre owned
by the Company.
First Bank of Florida Mortgage Corporation, formerly First Federal Mortgage
Corporation, was formed in 1982. The primary purpose of the corporation is to
provide mortgage brokerage services.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and that affect the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
CASH EQUIVALENTS
For presentation purposes in both the consolidated statements of financial
condition and consolidated statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
SECURITIES AVAILABLE-FOR-SALE AND MORTGAGE-BACKED AND RELATED SECURITIES
AVAILABLE-FOR SALE
Securities available-for-sale and mortgage-backed and related securities
available-for-sale as of September 30, 1995 and 1996 are carried at fair value,
based upon market or broker quotations. Deferred income taxes are provided on
any unrealized appreciation or decline in value. Such appreciation or decline in
value, net of deferred taxes, is reflected as a separate component of
stockholders' equity. Securities available-for-sale as of September 30, 1993
were carried at lower of cost or market value with any unrealized decline
recognized by charges to earnings. This different accounting treatment is caused
by the fact that Statement of Financial Accounting Standards ("SFAS No. 115")
"Accounting for Certain Investments in Debt and Equity Securities" was
implemented effective October 1, 1993. The cumulative effect of adopting SFAS
No. 115 is reflected as an adjustment to stockholders' equity as of the
beginning of the year ended September 30, 1994.
SECURITIES HELD-TO-MATURITY AND MORTGAGE-BACKED AND RELATED SECURITIES
HELD-TO-MATURITY
Securities held-to-maturity and mortgage-backed and related securities
held-to-maturity are carried at amortized cost. Premiums and discounts related
to these securities are amortized to expense and accreted to income over the
life of the securities using the interest method. These securities are
classified as held-to-maturity based on management's intent and the Bank's
ability to hold such securities to maturity.
TRADING SECURITIES
Trading securities are carried at fair value, based upon market quotations.
Unrealized holding gains or losses are included in earnings.
LOANS HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized in a valuation allowance by charges to
earnings.
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INTEREST RATE RISK
The Bank is engaged principally in providing first mortgage loans (both
adjustable rate and fixed rate mortgage loans) to individuals (see Note 6 for
the composition of the mortgage loan portfolio at September 30, 1995 and 1996).
To a lesser extent, the Bank also purchases and holds investment securities
which primarily provide both fixed rate and floating rate returns. Mortgage
loans and investment securities are funded primarily with short-term liabilities
that have interest rates that vary with market rates over time. Net interest
income and the market value of net interest-earning assets will fluctuate based
on changes in interest rates and changes in the levels of interest-sensitive
assets and liabilities. The actual duration of interest-earning assets and
interest-bearing liabilities may differ significantly from the stated duration
as a result of prepayment, early withdrawals and similar factors.
PROVISION FOR LOAN LOSSES
Provision for loan losses, which increase the allowance for loan losses, is
established by charges to earnings. Such allowance represents the amounts which,
in management's judgment, are adequate to absorb charge-offs of existing loans
which may become uncollectible. The adequacy of the allowance is determined by
management's continuing evaluation of the loan portfolio in light of past loss
experience, present economic conditions, and other factors considered relevant
by management at the financial statement date. Loan evaluation occurs on a
monthly basis with corresponding loan provisions adjusted quarterly. Anticipated
changes in economic factors which may influence the level of the allowance are
considered in the evaluation by management when the likelihood of the changes
can be reasonably determined. In estimating the allowance for losses,
consideration is given to asset performance, the financial condition of
borrowers or guarantors, additional collateral provided, current and anticipated
economic conditions, appraisals, cost of disposal, and holding costs. While
management uses the best information available to make such evaluations, future
adjustments to the allowance may be necessary, which may be material, if
economic conditions differ substantially from the assumptions used in making the
evaluation. If additions to the original estimate of the allowance for loan
losses are deemed necessary, they will be reported in earnings in the period in
which they become reasonably estimable.
REAL ESTATE OWNED
Properties acquired through foreclosure or a deed in lieu of foreclosure are
initially recorded at cost, which is the estimated fair value of the property at
the time the loan is foreclosed. If the fair value less the estimated cost to
sell an individual property declines below the cost of such property, a
provision for losses is charged to earnings.
Subsequent costs relating to the improvement of property are capitalized in
amounts not to exceed the property's fair value. Costs relating to holding the
property are charged to expense when incurred.
The amounts the Bank could ultimately recover from property acquired by
foreclosure or deed in lieu of foreclosure could differ materially from the
amounts used in arriving at the net carrying value of the assets because of
future market factors beyond the Bank's control or changes in the Bank's
strategy for attempting to recover its investment.
REPOSSESSED AUTOMOBILES
Repossessed automobiles are carried at estimated fair value, which
approximates management's estimate of proceeds to be received at time of
disposition.
OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are carried at cost less accumulated
depreciation. Land is carried at cost. Depreciation is computed on the
straight-line method over the estimated useful lives of the assets, which range
from five to fifty years for buildings and improvements and three to ten years
for furniture and equipment.
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88
GOODWILL
The Bank recorded goodwill in the amount of $2,970,000 in connection with
the acquisition of PBS in December 1995. Such goodwill represents the excess of
cost over net assets and identifiable intangible assets acquired in such
acquisition. Goodwill is being amortized on a straight-line basis over 15 years.
At September 30, 1996 the Bank had recorded $145,000 of accumulated
amortization.
UNCOLLECTED INTEREST
The Bank does not accrue interest on mortgage loans on which principal
and/or interest is 90 days or more past due, unless the loan is fully secured
and in the process of collection. At the time interest accruals are ceased, the
Bank reverses previously accrued interest or provides an allowance for the loss
of the uncollected interest. Interest ultimately collected is credited to income
in the period of recovery.
LOAN ORIGINATION FEES AND COSTS
Loan origination fees result from services performed by the Bank in
originating mortgage loans. Such fees and certain direct incremental costs
related to origination of such loans are deferred and reflected as an adjustment
to the carrying value of mortgage loans. Deferred loan fees and costs are
amortized to income over the life of the loans using the interest method. Fees
paid to dealers in connection with the origination of consumer loans are
deferred and amortized over the life of the loan using the interest method.
INCOME TAXES
Deferred income taxes are provided on elements of income that are recognized
for financial accounting purposes in periods different from such items
recognized for income tax purposes in accordance with the provisions of SFAS No.
109, "Accounting for Income Taxes."
EARNINGS PER SHARE
Primary and fully diluted earnings per share for the years ended September
30, 1994, 1995 and 1996 were determined by dividing net income for fiscal year
1994 by 5,522,568 and 5,534,379; for fiscal year 1995 by 5,071,942 and
5,098,853; and for fiscal year 1996 by 5,093,975 and 5,101,625, the weighted
average number of shares of common stock and common stock equivalents
outstanding, respectively. Effective October 1, 1994, the Company implemented a
Statement of Position ("SOP") entitled "Employers' Accounting for Employee Stock
Ownership Plans." The SOP requires that unallocated ESOP shares be excluded from
outstanding shares when calculating earnings per share. Earnings per share of
common stock for the year ended September 30, 1994 were calculated including
unallocated ESOP shares. Stock options are regarded as common stock equivalents
and therefore considered in the primary and fully diluted earnings per share
calculations. Common stock equivalents are computed using the treasury stock
method.
IMPACT OF NEW ACCOUNTING STANDARDS
In November 1995, FASB issued "A Guide to Implementation of SFAS No. 115 on
Accounting for Certain Investments in Debt and Equity Securities -- Questions
and Answers" ("SFAS 115 Q&A Guide"). SFAS 115 Q&A Guide includes a one-time
opportunity for entities which had previously adopted the provisions of SFAS 115
to reconsider their ability and intent to hold securities to maturity and such
entities would be allowed to transfer securities from the held-to-maturity
category to available-for-sale without calling into question the intent to hold
securities to maturity. SFAS 115 Q&A Guide required that any one-time
reclassifications must occur between November 15, 1995 and December 31, 1995. In
November 1995, the Bank reclassified $10.5 million of municipal securities and
$20.0 million of U.S. Treasury notes from held-to-maturity to
available-for-sale. Of the reclassified amounts, $15.6 million were sold during
the fiscal year, and the Bank recorded net gains of $811,000.
In May 1995, FASB issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights." The Statement, which amends SFAS No. 65, "Accounting for Certain
Mortgage Banking Activities," requires that an entity with mortgage banking
operations recognize as separate assets rights to service mortgage loans for
others. An entity that acquires mortgage servicing rights through either the
purchase or
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origination of mortgage loans and sells or securitizes those loans with
servicing rights retained should allocate the total cost of the mortgage loans
to the mortgage servicing rights and the loans based on their relative fair
values if it is practicable to estimate fair value. SFAS No. 122 applies
prospectively in fiscal years beginning after December 15, 1995 to sales of
mortgage loans with servicing rights retained and to impairment evaluations of
all amounts capitalized as mortgage servicing rights, including those purchased
before the adoption of this Statement. SFAS No. 122, when adopted, is not
expected to have a material effect on the Company's consolidated financial
statements.
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This statement requires certain disclosures about stock-based
employee compensation arrangements, regardless of the method used to account for
them, and defines a fair value based method of accounting for an employee stock
option or similar equity instrument and encourages all entities to adopt that
method of accounting for all of their employee stock compensation plans.
However, it also allows an entity to continue to measure compensation cost for
stock based compensation plans using the intrinsic value method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Entities electing to remain with the accounting in APB Opinion No. 25 must make
pro forma disclosures of net income and, if presented, earnings per share, as if
the fair value method of accounting defined in this Statement had been applied.
Under the fair value method, compensation cost is measured at the grant date
based on the value of the award and is recognized over the service period, which
is usually the vesting period. Under the intrinsic value based method,
compensation cost is the excess, if any, of the quoted market price of the stock
at grant date or other measurement date over the amount an employee must pay to
acquire the stock. The disclosure requirements of this Statement are effective
for financial statements for fiscal years beginning after December 15, 1995. Pro
forma disclosures required for entities that elect to continue to measure
compensation cost using APB No. 25 must include the effects of all awards
granted in fiscal years that begin after December 15, 1994. Management is in the
process of considering the alternatives presented in SFAS No. 123.
IMPACT OF NEW LEGISLATIVE ISSUES
In August 1996, Congress passed legislation which repeals the Bank's present
method of accounting for bad debts for federal income tax purposes. As discussed
in Note 12 to the consolidated financial statements, the Bank currently uses the
percentage of taxable income method to determine its bad debt deduction in the
computation of its taxable income. Under the new legislation, the Bank will be
required to use the specific charge-off method, which may result in a different
deduction for bad debts in determining taxable income than as presently computed
under its current method. Additionally, the Bank will be required to recapture
its post-1987 additions to its bad debt reserves. Because the Bank has provided
deferred taxes for the income tax bad debt reserves established after 1987,
management does not anticipate any additional income tax liability related to
the recapture. The new legislation is effective for taxable years beginning
after December 31, 1995.
On September 30, 1996, Congress passed and the President signed the Deposit
Insurance Funds Act of 1996 which mandated that all depository institutions that
are insured by the Savings Associations Insurance Fund ("SAIF") pay a one-time
special assessment of 65.7 basis points (subject to certain adjustments) on
SAIF-insured deposits that were held at March 31, 1995 by November 27, 1996 to
recapitalize the SAIF portion of the Federal Deposit Insurance Corporation
("FDIC") fund. The assessment is intended to bring the SAIF's reserve ratios to
a comparable level of the Bank Insurance Fund at 1.25% of total insured
deposits. In connection with the recapitalization, the FDIC also lowered SAIF
premiums from $0.23 per $100 to $0.064 per $100 of insured deposits in January
1997. The Bank's pre-tax share of this special assessment totals $6.6 million
and is included in the consolidated financial statements at September 30, 1996.
RECLASSIFICATIONS
Certain amounts in the 1994 and 1995 consolidated financial statements have
been reclassified to conform to the presentation for 1996.
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2. SECURITIES AVAILABLE-FOR-SALE
Securities available-for-sale at September 30, 1995 and 1996 are summarized
as follows:
Gross Gross
Amortized Unrealized Unrealized Estimated
Costs Gains Losses Fair Value
----------- ------------- ------------- -----------
(In thousands)
September 30, 1995:
United States Government and agency
securities................................ $ 2,000 $ -- $ -- $ 2,000
Securities Purchased Under Agreement to
Resell.................................... 30,443 -- -- 30,443
--------- --------- --------- ---------
$ 32,443 $ -- $ -- $ 32,443
========= ========= ========= =========
Weighted average interest rate............. 6.43%
=========
September 30, 1996:
United States Government and agency
securities................................ $ 27,002 $ 114 $ 11 $ 27,105
Certificates of deposit.................... 396 -- -- 396
Other investments.......................... 50 -- -- 50
--------- --------- --------- ---------
$ 27,448 $ 114 $ 11 $ 27,551
========= ========= ========= =========
Weighted average interest rate............. 6.28%
=========
The Bank enters into purchases of mortgage-backed securities under
agreements to resell substantially identical securities. The Bank had no
securities purchased under agreements to resell at September 30, 1996. The
securities underlying such agreements are book-entry securities. During the
years ended September 30, 1995 and 1996, the securities were delivered into a
third-party custodian's account designated by the Bank under a written custodial
agreement that explicitly recognized the Bank's interest in the securities.
During the fiscal years ended September 30, 1995 and September 30, 1996, the
securities purchased under agreements to resell had maturities ranging from
daily to monthly and averaged approximately $8,822,000 and $15,551,000,
respectively. The maximum amounts outstanding at any month end during 1994, 1995
and 1996 were $-0-, $30,443,000 and $60,153,000, respectively.
Proceeds from the sale of securities available-for-sale were $83,741,000,
$100,965,000 and $294,117,000 during the fiscal years ended September 30, 1994,
1995 and 1996, respectively. During the fiscal years ended September 30, 1994,
1995 and 1996, sales resulted in gross realized gains of $202,000, $149,000 and
$996,000, respectively and gross losses of $147,000, $572,000 and $37,000,
respectively.
In November 1995, the Bank reclassified $10.5 million of municipal
securities and $20.0 million of U.S. Treasury notes from held-to-maturity to
available-for-sale, in accordance with the provisions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities -- Questions
and Answers Guide," which allowed a one-time reclassification of securities
between held-to-maturity and available-for-sale.
At September 30, 1996, the Bank had pledged $2.0 million par value of
securities available-for-sale as collateral for treasury, tax and loan accounts.
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The table below sets forth the contractual maturity distribution of the
Bank's securities available-for-sale at September 30, 1996:
Carrying Estimated
Value Fair Value
----------- -----------
(In thousands)
Due in one year or less................................................ $ 12,394 $ 12,384
Due after one year through five years.................................. 15,054 15,167
--------- ---------
$ 27,448 $ 27,551
========= =========
3. SECURITIES HELD-TO-MATURITY
Securities held-to-maturity at September 30, 1995 and 1996 are summarized as
follows:
Gross Gross
Amortized Unrealized Unrealized Estimated
Costs Gains Losses Fair Value
----------- ------------- ------------- -----------
(In thousands)
September 30, 1995:
United States Government and agency
securities................................. $ 38,110 $ 169 $ 291 $ 37,988
Municipal bonds............................ 10,388 900 -- 11,288
--------- --------- --------- ---------
$ 48,498 $ 1,069 $ 291 $ 49,276
========= ========= ========= =========
Weighted average interest rate............. 5.26%
=========
September 30, 1996:
United States Government and agency
securities................................ $ 6,981 $ 61 $ -- $ 7,042
========= ========= ========= =========
Weighted average interest rate............. 6.61%
=========
Sales of securities held-to-maturity and a security which was called in the
fiscal year ended September 30, 1995 were $19,952,000. These securities were
sold within three months of maturity and resulted in losses of $50,000. There
were no sales of securities held-to-maturity during the year ended September 30,
1996.
The table below sets forth the contractual maturity distribution of the
Bank's securities held-to-maturity at September 30, 1996:
Carrying Estimated
Value Fair Value
----------- -----------
(In thousands)
Due in one year or less................................................ $ 2,000 $ 2,000
Due after one year through five years.................................. 4,981 5,042
--------- ---------
$ 6,981 $ 7,042
========= =========
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4. MORTGAGE-BACKED AND RELATED SECURITIES AVAILABLE-FOR-SALE
Mortgage-backed and related securities available-for-sale at September 30,
1995 and 1996 are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Estimated
Costs Gains Losses Fair Value
----------- ------------- ------------- -----------
(In thousands)
September 30, 1995:
GNMA pass-through certificates............. $ 116 $ 17 $ -- $ 133
Collateralized mortgage obligations........ 87,039 -- 5,712 81,327
--------- --------- --------- ---------
Total........................................ $ 87,155 $ 17 $ 5,712 $ 81,460
========= ========= ========= =========
September 30, 1996:
FHLMC pass-through certificates............ $ 14,090 $ 38 $ -- $ 14,128
FNMA pass-through certificates............. 9,944 37 -- 9,981
Collateralized mortgage obligations........ 85,310 1 3,554 81,757
--------- --------- --------- ---------
Total........................................ $ 109,344 $ 76 $ 3,554 $ 105,866
========= ========= ========= =========
Proceeds from the sales of mortgage-backed and related securities
available-for-sale were $64,359,000, $94,391,000 and $18,040,000 during the
fiscal years ended September 30, 1994, 1995 and 1996, respectively. During the
fiscal years ended September 30, 1994, 1995 and 1996, sales resulted in gross
realized gains of $416,000, $3,000 and $81,000, respectively and gross losses of
$7,000, $1,363,000 and $18,000, respectively.
Mortgage-backed and related securities represent participating interests in
pools of long-term first mortgage loans. Although mortgage-backed and related
securities are initially issued with a stated maturity date, the underlying
mortgage collateral may be prepaid by the mortgagee and, therefore, such
securities may not reach their maturity date.
The Bank also invests in mortgage-related securities such as collateralized
mortgage obligations ("CMOs") and real estate mortgage investment conduits
("REMICs"). CMOs and REMICs are generally divided into tranches whereby
principal repayments from the underlying mortgages are used in a predetermined
order to retire the securities according to the priority of the tranches. The
Bank invests in the following collateralized mortgage obligation tranches: first
or second sequential; planned amortization class ("PAC"); targeted amortization
class ("TAC"); and support or companion floating rate tranches. Such tranches
have stated maturities ranging from 6 to 30 years, but because of prepayments,
the expected weighted average life of these securities is approximately 4.4
years. At September 30, 1996, the Bank had $131.4 million in CMOs/REMICs. Of
this amount, $49.6 million represents CMOs/REMICs classified as held-to-maturity
with an approximate fair value of $49.2 million, and $81.8 million represents
CMOs/REMICs classified as available-for-sale and reported at fair value. Market
quotes are affected by key assumptions made when estimating fair value,
including prepayment speeds, spreads to treasury securities and interest rate
caps. Changes in key market assumptions may result in material fluctuations in
the fair value of the CMO/REMICs and in the unrealized gain or loss on such
securities. The majority of the CMOs/REMICs owned by the Bank are insured or
guaranteed, either directly or indirectly, through mortgage-backed securities
underlying the obligations by either the FNMA, FHLMC or GNMA. Depending on the
amount of the Bank's mortgage-backed securities available-for-sale, fluctuations
in the interest rate environment and other factors, stockholders' equity may be
materially affected by categorizing these securities as available-for-sale. The
Bank's CMOs/REMICs include $54.8 million of floating rate securities with
interest caps
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93
ranging from 9% to 11.6%. The Bank's CMOs/REMICs may be subject to volatile
price movements which usually result from prepayment on the underlying
obligations. The Bank's CMOs/REMICs have coupon rates ranging from 5.0% to 7.5%
and had a weighted average yield of 6.10% at September 30, 1996. The Bank
purchases only CMOs/REMICs rated AA or better by nationally recognized rating
services. Management estimates that the $76.6 million of fixed rate tranches
have an expected average life of approximately 3.7 years.
5. MORTGAGE-BACKED AND RELATED SECURITIES HELD-TO-MATURITY
Mortgage-backed and related securities held-to-maturity at September 30,
1995 and 1996, are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Estimated
Costs Gains Losses Fair Value
----------- ------------- ------------- -----------
(In thousands)
September 30, 1995:
GNMA pass-through certificates............. $ 31,667 $ 744 $ 108 $ 32,303
FHLMC pass-through certificates............ 11,793 317 -- 12,110
FNMA pass-through securities............... 49,602 545 9 50,138
Collateralized mortgage obligations........ 63,920 440 1,482 62,878
--------- --------- --------- ---------
Total........................................ $ 156,982 $ 2,046 $ 1,599 $ 157,429
========= ========= ========= =========
September 30, 1996:
GNMA pass-through certificates............. $ 28,269 $ 679 $ -- $ 28,948
FHLMC pass-through certificates............ 9,267 242 -- 9,509
FNMA pass-through certificates............. 39,292 586 66 39,812
Collateralized mortgage obligations........ 49,579 274 627 49,226
--------- --------- --------- ---------
Total........................................ $ 126,407 $ 1,781 $ 693 $ 127,495
========= ========= ========= =========
Although mortgage-backed and related securities held-to-maturity are
initially issued with a stated maturity date, the underlying mortgage collateral
may be prepaid by the mortgagee and, therefore, such securities may not reach
their maturity date. There were no sales of mortgage-backed and related
securities held-to-maturity during the years ended September 30, 1994, 1995 and
1996.
At September 30, 1996, the Bank had pledged $29.1 million par value of
mortgage-backed and related securities held-to-maturity as collateral for
municipal funds on deposit and securities sold under agreements to repurchase.
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6. LOANS RECEIVABLE
Loans receivable at September 30, 1995 and 1996 consisted of the following:
For the Years Ended
September 30,
--------------------
1995 1996
--------- ---------
(In thousands)
Real estate mortgage loans:
One-to four-family................................................ $ 587,598 $ 652,606
Commercial real estate............................................ 35,610 51,754
Multi-family...................................................... 11,837 17,564
Land.............................................................. 17,261 24,489
Real estate construction loans...................................... 101,538 130,499
Consumer loans...................................................... 110,384 191,654
Other loans......................................................... 2,155 2,434
--------- ----------
Total gross loans............................................... 866,383 1,071,000
Less:
Undisbursed portion of loans in process........................... 43,967 61,633
Unearned discounts, premiums and deferred loan fees and costs, net (4,765) (10,369)
Allowance for loan losses......................................... 2,157 11,855
--------- ----------
Loans receivable -- net............................................. $ 825,024 $1,007,881
========= ==========
An analysis of the changes in the allowance for loan losses for the years
ended September 30, 1994, 1995, and 1996 is as follows:
For the Years Ended September
30,
-------------------------------
1994 1995 1996
--------- --------- ---------
(In thousands)
Balance at beginning of period..................................... $ 1,886 $ 1,956 $ 2,157
Increase in allowance due to acquisition of PBS.................... -- -- 2,253
Current provision.................................................. 135 261 15,704
Charge-offs........................................................ (69) (92) (8,630)
Recoveries......................................................... 4 32 371
--------- --------- ---------
Ending balance..................................................... $ 1,956 $ 2,157 $ 11,855
========= ========= =========
During the latter part of fiscal 1995 and continuing in fiscal 1996, the
Bank became more active in the indirect automobile lending market, and increases
in the provision for loan losses during 1996 primarily reflect the losses
associated with that type of consumer lending. Indirect automobile loans
included in consumer loans totaled $76,354,000 and $148,186,000 at September 30,
1995 and September 30, 1996, respectively. As a result of higher than
anticipated charge-off experience with the indirect automobile lending
portfolio, primarily during the latter part of the fiscal year ended September
30, 1996, additional provisions for loan losses were recorded during the year
ended September 30, 1996. The portion of the allowance for loan losses relating
to consumer loans, including indirect automobile loans, was $603,000 and
$9,463,000 at September 30, 1995 and 1996, respectively.
In connection with the origination of indirect loans, the Bank paid a fee to
automobile dealers. At September 30, 1995 and 1996 the unamortized balances of
such fees were $3,085,000 and $7,351,000, respectively, and are included as
deferred loan costs within loans receivable.
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95
The Bank originates both adjustable and fixed rate loans. There were no
loans held for sale at September 30, 1995 or September 30, 1996.
The composition and maturity or repricing structure of the loan portfolio at
September 30, 1996 is presented below:
Fixed Rate Adjustable Rate
- -------------------------------------------- --------------------------------------------
Term to Maturity Book Value Term to Maturity or Repricing Book Value
- ---------------- ------------- ----------------------------- -------------
(In (In
thousands) thousands)
1 month - 1 year............. $ 69,664 1 month - 1 year............. $ 131,947
1 year - 3 years............. 38,556 1 year - 3 years............. 104,804
3 years - 5 years............ 129,456 3 years - 5 years............ 167,671
5 years - 10 years........... 51,913 5 years - 10 years........... 87,183
10 years - 20 years.......... 87,445 10 years - 20 years.......... --
Over 20 years................ 139,125 Over 20 years................ 117
--------- ---------
Total........................ $ 516,159 $ 491,722
========= =========
The adjustable rate loans have interest rate adjustment limitations and are
generally indexed to the 1, 3, and 5-year U.S. Treasury Note rates for a period
approximating the loan term. Future market factors may affect the correlation of
the interest rate adjustment with the rates the Bank pays on the short-term
deposits that have been primarily used to fund these loans.
The Bank's lending markets are primarily concentrated in the communities
surrounding its full service offices in Palm Beach, Martin, St. Lucie and
Broward Counties in Southeast Florida.
The Bank held commercial real estate, multi-family and land loans, totaling
approximately $64,708,000 and $93,807,000 at September 30, 1995 and 1996,
respectively. These loans are considered by management to be of somewhat greater
risk of uncollectability because profitability and collectability of these loans
depend to some extent on income production or future development of the real
estate. The composition of commercial real estate loans, multi-family and land
loans at September 30, 1995 and 1996, are approximately as follows:
September 30,
--------------------
1995 1996
--------- ---------
(In thousands)
Office buildings.......................................................... $ 10,928 $ 15,584
Retail buildings.......................................................... 10,482 11,990
Warehouses................................................................ 4,507 5,392
Adult care living facilities.............................................. 2,543 3,832
Multi-family residential.................................................. 11,837 17,564
Hotels and motels......................................................... 309 224
Undeveloped land.......................................................... 17,261 24,489
Other..................................................................... 6,841 14,732
--------- ---------
$ 64,708 $ 93,807
========= =========
As of October 1, 1995, impaired commercial real estate, multi-family and
land loans held by the Bank have been recognized in conformity with SFAS No.
114, "Accounting by Creditors for Impairment of a Loan" as amended by SFAS No.
118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and
Disclosures". 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.
When interest accrual is discontinued, all unpaid accrued interest is
reversed. Interest income is subsequently recognized only to the extent cash
payments are received.
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96
Had the Bank elected earlier adoption of the provisions of SFAS No. 114 as
amended by SFAS No. 118, there would have been no impaired loans as of September
30, 1995.
At September 30, 1996, the Bank's impaired loans consisted of the following:
September 30, 1996
------------------------
Loan Related
Balances Allowance
----------- -----------
(In thousands)
Impaired loan balances and related allowance for loan losses.......... $ 7,649 $ 1,125
Under the Financial Institution Reform, Recovery and Enforcement Act of 1989
("FIRREA"), a federally chartered savings and loan association's aggregate
commercial real estate loans may not exceed 400% of its capital as determined
under the capital standards provisions of FIRREA. The Bank is federally
chartered and subject to this limitation. FIRREA does not require divestiture of
any loan that was lawful when it was originated.
Under FIRREA, the Bank may not make real estate loans to one borrower in
excess of 15% of its unimpaired capital and surplus. This 15% limitation results
in a dollar limitation of approximately $14.3 million at September 30, 1996. The
Bank has no loans to one borrower in excess of this limitation.
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
these loans at September 30, 1995 and 1996 were $137,889,000 and $169,245,000,
respectively. The balance of $169,245,000 at September 30, 1996 includes
$99,843,000 of loans subserviced on a short-term basis in connection with a sale
of loans and servicing. Custodial escrow balances maintained in connection with
the foregoing loan servicing were $3,939,000 and $4,368,000 at September 30,
1995 and 1996, respectively.
The Bank offers loans to its employees at preferential interest rates on
adjustable mortgage loans, consumer loans, and personal lines of credit for
full-time employees and salaried officers, who have been employed by the Bank
for a period of at least one year. This preferential loan policy does not apply
to Directors, the President, Executive Vice President, Senior Vice Presidents
and Vice Presidents. Loans to employees are made in the ordinary course of
business and on substantially the same terms and collateral, except for interest
rates and fees, as those of comparable transactions prevailing at the time. The
loans do not involve more than the normal risk of collectability or present
other unfavorable features to the Bank. The Bank's present policy is to make
loans at 1% below the current rate (note rate) offered to the general public for
the applicable loans, but not less than 2% over the Bank's current cost of
funds. Direct out-of-pocket costs are charged to employees on such loans.
The total of loans to directors, officers and associates of such persons was
approximately $1,167,000 at September 30, 1996.
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7. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at September 30, 1995 and 1996 consisted of
the following:
September 30,
--------------------
1995 1996
--------- ---------
(In thousands)
Land...................................................................... $ 7,706 $ 7,448
Buildings and improvements................................................ 12,055 14,568
Furniture and equipment................................................... 10,997 14,139
--------- ---------
Total..................................................................... 30,758 36,155
Less accumulated depreciation............................................. 12,995 13,078
--------- ---------
Office properties and equipment -- net.................................... $ 17,763 $ 23,077
========= =========
8. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at September 30, 1995 and 1996 consisted of the
following:
September 30,
--------------------
1995 1996
--------- ---------
(In thousands)
Loans....................................................................... $ 4,638 $ 6,415
Investments................................................................. 852 442
Mortgage-backed and related securities...................................... 1,288 1,290
--------- ---------
Accrued interest receivable................................................. $ 6,778 $ 8,147
========= =========
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9. DEPOSIT ACCOUNTS
Deposit accounts, by type and range of rates, at September 30, 1995 and 1996
consisted of the following:
September 30,
--------------------
1995 1996
--------- ---------
(In thousands)
Passbook and statement accounts -- 1995 and 1996, 2.56% and 3.62%,
respectively......................................................... $ 89,967 $ 150,433
--------- ----------
Interest-bearing NOW accounts 1995 and 1996, 1.41% and 1.41%,
respectively......................................................... 57,464 59,716
--------- ----------
Non-interest bearing NOW accounts..................................... 31,912 39,649
--------- ----------
Variable Rate Money Market Accounts 1995 and 1996, 2.41% and 2.40%,
respectively......................................................... 50,853 39,667
--------- ----------
Certificates:
Less than 3.00%..................................................... 326 833
3.00% - 3.99%....................................................... 5,184 303
4.00% - 4.99%....................................................... 98,532 86,471
5.00% - 5.99%....................................................... 266,157 595,436
6.00% - 6.99%....................................................... 224,788 131,927
7.00% - 7.99%....................................................... 49,477 32,151
8.00% or greater.................................................... 4,010 136
--------- ----------
Total certificate accounts........................................ 648,474 847,257
--------- ----------
Total................................................................. $ 878,670 $1,136,722
========= ==========
The weighted-average cost of deposits at September 30, 1995 and 1996 was
4.77% and 4.87%, respectively.
Individual deposits greater than $100,000 at September 30, 1995 and 1996
aggregated approximately $102,079,000 and $118,618,000, respectively.
Interest expense on deposits consisted of the following during the years
ended September 30, 1994, 1995 and 1996:
For the Years Ended
September 30,
-------------------------------
1994 1995 1996
--------- --------- ---------
(In thousands)
Passbook and statement accounts.................................. $ 1,819 $ 1,902 $ 4,088
NOW accounts..................................................... 954 877 856
Money market accounts............................................ 1,802 1,432 1,094
Certificate accounts............................................. 18,555 33,636 42,576
--------- --------- ---------
Total............................................................ $ 23,130 $ 37,847 $ 48,614
========= ========= =========
Interest on deposit accounts is net of interest forfeited by depositors on
early withdrawal of certificate accounts of approximately $101,000, $197,000 and
$165,000 for the years ended September 30, 1994, 1995 and 1996, respectively.
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Scheduled maturities of certificate accounts are as follows:
September 30, 1996
---------------------
Amount Percent
--------- ----------
(In thousands)
MATURITY
Less than 1 year........................................................ $ 593,348 70.03%
1 year - 2 years........................................................ 170,570 20.13%
2 years - 3 years....................................................... 28,135 3.32%
3 years - 4 years....................................................... 30,899 3.65%
4 years - 5 years....................................................... 24,305 2.87%
--------- ------
Total................................................................... $ 847,257 100.00%
Under FIRREA, any insured depository institution that does not meet its
applicable minimum capital requirements may not accept brokered deposits. This
prohibition includes renewals and rollovers of existing brokered deposits and
deposit solicitations at higher than prevailing interest rates paid by
institutions in the Bank's normal market area. Even though the Bank meets all of
the applicable minimum capital requirements at September 30, 1996, the Bank had
no brokered deposits.
10. ADVANCES FROM FEDERAL HOME LOAN BANK
The Bank had outstanding advances from the FHLB of $171,125,000 bearing an
interest rate of approximately 6.28% at September 30, 1995 and $201,025,000
bearing an interest rate of 5.88% at September 30, 1996. The advances at
September 30, 1996 are repayable as follows:
Year Ending September 30 Amount
- ------------------------ -----------
1997.......................................................................... $ 75,000,000
1998.......................................................................... 50,000,000
1999.......................................................................... 75,000,000
2000.......................................................................... 1,025,000
------------
Total......................................................................... $201,025,000
============
The terms of a security agreement with the FHLB include a blanket floating
lien that requires the Bank to maintain qualifying first mortgage loans as
pledged collateral in an amount equal to, when discounted at 65% of the unpaid
principal balances, the advances.
As of September 30, 1996, the Bank had total credit available with the FHLB
of $350 million. With $201,025,000 currently advanced, remaining credit
available equals $148,975,000.
11. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
During the fiscal years ended September 30, 1995 and 1996, all of the Bank's
transactions were fixed-coupon securities sold under agreements to repurchase
("Reverse Repurchase Agreements"). Reverse Repurchase Agreements were delivered
to the broker-dealer who arranged the transactions. The agreements at September
30, 1996 matured in October 1997.
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100
Information concerning reverse repurchase agreements is summarized as
follows:
1995 1996
---------- ----------
Average balance during the year.................................... $40,321,000 $11,935,000
Average interest rate during the year.............................. 5.84% 5.97%
Maximum month-end balance during the year.......................... $76,947,000 $28,408,000
Balance at year-end................................................ $18,427,000 $10,000,000
Securities underlying the agreements at year-end:
Carrying value..................................................... $18,995,000 $12,193,840
Estimated fair value............................................... $18,862,000 $12,233,176
12. INCOME TAXES
The Association is permitted under the Internal Revenue Code (the "Code") to
deduct an annual addition to a reserve for bad debts in determining taxable
income, subject to certain limitations. The Bank's deduction for the years ended
September 30, 1994 and 1995 was based upon the percentage of income method, as
defined by the Code. During the year ended September 30, 1996 the Bank used the
experience method, as defined by the Code to compute their bad debt deduction.
The bad debt deduction allowable under the percentage of taxable income method
equals 8% of taxable income determined without regard to that deduction and with
certain adjustments. This addition differs from the provision for loan losses
used for financial reporting purposes. Pursuant to the Bank's adoption of SFAS
No. 109, no deferred taxes have been provided on the income tax reserves for
years prior to 1988 of $21,912,000. This tax reserve for bad debts is included
in taxable income of later years only if the bad debt reserve is used
subsequently for purposes other than to absorb bad debts losses. Because the
Bank does not intend to use the reserve for purposes other than to absorb
losses, no deferred income taxes have been provided. SFAS No. 109 requires the
recognition of deferred tax consequences of differences between financial
statement and income tax treatment of allowances for loan losses arising after
December 31, 1987.
The components of the provision for income taxes for the years ended
September 30, 1994, 1995 and 1996 are as follows:
September 30,
-------------------------------
1994 1995 1996
--------- --------- ---------
(In thousands)
Current -- Federal............................................... $ 2,859 $ 3,174 $ 4,525
Current -- State................................................. 496 498 763
--------- --------- ---------
Total current.................................................... 3,355 3,672 5,288
Deferred -- Federal.............................................. 126 (80) (4,134)
Deferred -- State................................................ 21 (14) (708)
--------- --------- ---------
Total deferred................................................... 147 (94) (4,842)
--------- --------- ---------
Total provision.................................................. $ 3,502 $ 3,578 $ 446
========= ========= =========
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The provision for income taxes differs from the amounts determined by
applying the federal income tax rate to income before income taxes for the
following reasons:
For the Years Ended September 30,
-------------------------------------------------------------------------
1994 1995 1996
----------------------- ----------------------- -----------------------
Amount % Amount % Amount %
----------- ---------- ----------- ---------- ----------- ----------
(In thousands)
Tax at federal tax rate................. $ 3,255 35.0% $ 3,229 35.0% $ 348 35.0%
Benefit of graduated rates............ (93) (1.0) (92) (1.0) (10) (1.0)
Increase resulting from:
State income taxes, net of federal
income tax benefit................... 336 3.6 310 3.4 37 3.7
Other -- net.......................... 4 0.1 131 1.4 71 7.1
--------- ---- --------- ---- --------- ----
Total provision and effective tax
rate................................... $ 3,502 37.7% $ 3,578 38.8% $ 446 44.8%
========= ==== ========= ==== ========= ====
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at September 30, 1995 and 1996 are presented
below:
September 30,
--------------------
1995 1996
--------- ---------
(In thousands)
Deferred tax liabilities:
Depreciation............................................................ $ 227 $ 629
Loan fee income......................................................... 1,379 1,218
FHLB stock dividends.................................................... 674 625
Investment in partnership............................................... 550 570
Other................................................................... 1 --
--------- ---------
Gross deferred tax liabilities............................................ 2,831 3,042
--------- ---------
Deferred tax assets --
Excess of book bad debt reserve over tax reserve........................ 166 3,337
Retirement plan......................................................... 837 588
Accrued compensation.................................................... -- 72
AMT credit.............................................................. -- 117
Mark-to-market adjustment -- Securities available-for-sale.............. 2,181 970
Deferred compensation................................................... -- 20
Loss on sale deferred for tax purposes.................................. 19 --
Other................................................................... 9 158
SAIF assessment......................................................... -- 2,471
NOL carryforward........................................................ -- 874
--------- ---------
Gross deferred assets..................................................... 3,212 8,607
Less valuation allowance for deferred tax assets.......................... -- --
--------- ---------
Gross deferred tax assets net of valuation allowance...................... 3,212 8,607
--------- ---------
Net deferred tax (asset).................................................. $ (381) $ (5,565)
========= =========
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13. BENEFIT PLANS
PENSION PLAN
Substantially all employees participate in the Bank's funded qualified
defined benefit pension plan. The plan calls for benefits to be paid to eligible
employees at retirement based primarily upon years of service with the Bank and
compensation rates during those years. Currently, the Bank's policy is to fund
the qualified retirement plan in an amount that falls between the minimum
contribution required by the Employee Retirement Income Security Act of 1974, as
amended, and the maximum tax deductible contribution. Plan assets consist
primarily of common stock, mutual funds and U.S. Government obligations.
The plan also has one wholly-owned subsidiary. Employees First Insurance
Agency, Inc. is an active subsidiary which receives fees from the endorsement of
mortgage insurance related products. Assets of Employees First Insurance Agency,
Inc. were $50,000 as of September 30, 1996 and are reflected in the pension plan
assets at book value.
At September 30, 1996, the pension plan held 16,681 shares of the common
stock of the Company with a market value of $23.25 per share. Cash dividends of
$0.40 per share were received on the shares during fiscal year ended September
30, 1996.
Pension expense for the plan amounted to $341,000 in 1994, $421,000 in 1995
and $360,000 in 1996 and included the following components:
1994 1995 1996
--------- --------- ---------
(In thousands)
Service cost......................................................... $ 501 $ 551 $ 424
Interest cost........................................................ 849 908 669
Return on assets..................................................... (201) (1,238) (665)
Net amortization and deferral........................................ (808) 200 (68)
--------- --------- ---------
Pension expense...................................................... $ 341 $ 421 $ 360
========= ========= =========
Fiscal year end 1994, 1995 and 1996 pension expense amounts were based upon
actuarial computations. The early retirement program expense in fiscal year 1995
included approximately $1.9 million of pension related expense.
The following sets forth the funded status of the qualified plan at
September 30, 1995 and 1996:
1995 1996
--------- ---------
(In thousands)
Actuarial present value of benefit obligations:
Vested benefits......................................................... $ 5,509 $ 5,674
Nonvested benefits...................................................... 634 427
--------- ---------
Accumulated benefit obligation............................................ 6,143 6,101
Effect of anticipated future compensation levels and other events......... 2,780 2,838
--------- ---------
Projected benefit obligation.............................................. 8,923 8,939
Fair value of assets held in the plans (estimated)........................ 7,276 8,388
--------- ---------
Deficiency of plan assets under projected benefit obligation.............. $ (1,647) $ (551)
========= =========
98
103
The deficiency consisted of the following:
1995 1996
--------- ---------
Unamortized transition asset.............................................. $ 337 $ 289
Unrecognized net (loss) gain.............................................. (160) 382
Accrued pension liability................................................. (1,824) (1,222)
--------- ---------
Total..................................................................... $ (1,647) $ (551)
========= =========
At September 30, 1995 and 1996, the weighted average discount rate used to
measure the projected benefit obligation was 8%. The rate of increase in future
compensation levels is estimated at 7% and the expected long-term rate of return
on assets is estimated at 9%.
EMPLOYEE STOCK OWNERSHIP PLAN
The Bank established an Employee Stock Ownership Plan ("ESOP") for eligible
employees in connection with the Conversion. The ESOP borrowed $4.2 million from
the Company and purchased 423,200 common shares issued in the Conversion. The
Bank has made and is expected to make scheduled discretionary cash contributions
to the ESOP sufficient to service the amount borrowed. In accordance with
generally accepted accounting principles, the unallocated common stock held by
the ESOP are shown as a reduction of stockholders' equity. During fiscal years
ended September 30, 1994, 1995 and 1996, ESOP expense was $1,058,000, $1,128,000
and $1,337,000, respectively, which is included in employee compensation and
benefits.
RECOGNITION AND RETENTION PLANS
The Bank has established two Recognition and Retention Plans ("RRPs") which
purchased in the aggregate 211,600 shares of common stock in the Conversion. The
Bank contributed $2.1 million to fund the purchase of the RRP shares. Awards
vest in three equal annual installments commencing on the first anniversary date
of the effective date of the awards. The aggregate purchase price of these
shares is amortized as compensation expense as participants become vested. The
unamortized cost, which is comparable to deferred compensation, is reflected as
a reduction of stockholders' equity. During fiscal years ended September 30,
1994, 1995 and 1996, RRP expense totaled $1,005,000, $490,000 and $460,000,
respectively, which is included in employee compensation and benefits.
14. STOCK OPTION PLANS
STOCK OPTION PLANS
The Company has adopted stock option plans for the benefit of directors,
officers, and other key employees of the Bank. The number of shares of common
stock reserved for issuance under the stock option plans was equal to 529,000
shares or 10% of the total number of common shares issued pursuant to the
Conversion. The option exercise price cannot be less than the fair value of the
underlying common stock as of the date of the option grant, and the maximum
option term cannot exceed ten years. The stock options awarded to directors may
be exercised at any time after grant provided the grantee remains a director of
the Company. At September 29, 1993, there were 132,500 options granted to
directors with 53,000 options reserved for future use. The stock options granted
to officers and employees are exercisable in three equal installments. The first
installment became exercisable on September 29, 1994. At September 29, 1993,
there were 322,700 options granted to
99
104
officers and employees with 20,800 options reserved for future use. During the
year ended September 30, 1996, 26,500 and 20,000 additional options have been
granted to directors and officers, respectively. Below is a summary of
transactions:
Option Price
-----------------------
Number Average
of Options Price Aggregate
Outstanding Per Share Price
----------- ----------- ----------
Balance -- September 30, 1993......................... 455,200 $ 10.00 $4,552,000
Granted............................................. -- -- --
Exercised........................................... (110,013) $ 10.00 (1,100,130)
Canceled............................................ (500) $ 10.00 (5,000)
---------- ----------
Balance -- September 30, 1994......................... 344,687 $ 10.00 3,446,870
Granted............................................. -- -- --
Exercised........................................... (100,054) $ 10.00 (1,000,540)
Canceled............................................ (668) $ 10.00 (6,680)
---------- ----------
Balance -- September 30, 1995......................... 243,965 $ 10.00 2,439,650
Granted............................................. 46,500 $ 21.73 1,010,445
Exercised........................................... (6,408) $ 10.00 (64,080)
Canceled............................................ -- -- --
---------- ----------
Balance -- September 30, 1996......................... 284,057 $3,386,015
=== ===== ========== ==========
Options exercisable at year end under
stock option plans................................... 237,557
==========
Weighted average option price per share of
outstanding options.................................. $ 11.92
==========
15. EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS
EMPLOYMENT AGREEMENTS
The Bank and the Company have outstanding employment agreements with two key
officers. The employment agreements provide for three-year terms. Commencing on
the first anniversary date and continuing with each anniversary date thereafter,
the respective Boards of Directors may extend the agreements for an additional
year so that the remaining terms shall be three years, unless written notice of
non-renewal is given by the Boards of Directors after conducting a performance
evaluation of the executive. The agreements provide that the base salary of each
executive will be reviewed annually. In addition to the base salary, the
agreements provide for, among other things, disability pay, participating in
stock benefit plans and other fringe benefits applicable to executive personnel.
The agreements provide for termination by the Bank or the Company for cause at
any time. In the event the Bank or the Company choose to terminate the
executive's employment for reasons other than for cause, or in the event of the
executive's resignation from the Bank and the Company upon (i) failure to
re-elect the executive to his current offices or board membership, (ii) a
material change in the executive's functions, duties or responsibilities, or
relocation of his principal place of employment, (iii) a relocation of the
executive's principal place of employment by more than 30 miles, (iv)
liquidation or dissolution of the Bank or the Company, or (v) breach of the
agreement by the Bank or the Company, the executive, or in the event of death,
his beneficiary, would be entitled to severance pay in an amount equal to the
remaining salary payments under the agreement, including base salary, bonuses
and other cash compensation. In the event of termination, the Bank and the
Company would also continue the executive's life, health and disability coverage
for the remaining unexpired term of the agreement.
100
105
CHANGE OF CONTROL AGREEMENTS
Upon the Conversion, the Bank and the Company entered into Change of Control
Agreements ("COC") with certain key officers. Each COC provides for a three-year
term. Commencing on the first anniversary date and continuing on each
anniversary thereafter, the COCs may be renewed by the Boards of Directors for a
year so that the remaining term shall be three years. Each COC provides that at
any time following a change in control of the Company or the Bank, if the
Company or the Bank terminates the officer's employment for any reason other
than cause, or if the officer terminates his employment following his demotion,
loss of title, office or significant authority, a reduction in his compensation,
or relocation of his principal place of employment by more than 30 miles, the
officer or, in the event of death, his beneficiary, would be entitled to receive
a severance payment equal to three times the officer's then current annual
salary.
16. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Bank makes commitments to extend
credit. Commitments to extend credit are agreements to lend to a customer
provided there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation of the customer. Collateral may include single-family homes,
marketable securities, and income-producing residential and commercial
properties. Credit losses may occur if one of the parties fails to perform in
accordance with the terms of the contract. The Bank's exposure to credit risk is
represented by the contractual amount of the commitments to extend credit. The
Bank had commitments to originate loans approximating $39,228,000 at September
30, 1995 and $40,608,000 at September 30, 1996. The Bank had commitments to
purchase loans of $1,250,000 and $-0- at September 30, 1995 and September 30,
1996, respectively. The Bank had letters of credit approximating $3,917,000 and
$3,393,000 outstanding at September 30, 1995 and 1996, respectively.
Commitments to purchase securities are contracts for delayed delivery of
securities in which the seller agrees to make delivery at a specified future
date of a specified instrument at a specified price of yield. Risks arise from
the possible inability of counter-parties to meet the terms of their contracts
and from movements in securities values and interest rates. The Bank had no
commitments to purchase investment securities or mortgage pool and related
securities at September 30, 1995. The Bank had commitments to purchase
$20,000,000 in mortgage pool securities at September 30, 1996.
The Bank had commitments to sell mortgage pool securities of $-0- and
$20,000,000 at September 30, 1995 and September 30, 1996, respectively.
101
106
The Bank leases various properties for original periods ranging from one to
ten years. Rent expense for the fiscal years ended September 30, 1994, 1995 and
1996 was $568,000, $789,000 and $1,154,000, respectively. At September 30, 1996,
future minimum lease payments under these operating leases are as follows:
Years Ended
September 30,
Amounts
---------------
(In thousands)
1997......................................................................... $ 1,188
1998......................................................................... 876
1999......................................................................... 511
2000......................................................................... 316
2001......................................................................... 118
Thereafter................................................................... 216
---------
Total........................................................................ $ 3,225
=========
17. REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered
by the Office of Thrift Supervision. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classifications are also subject to qualitative judgments by regulators about
components, risk weighting and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of tangible capital of
not less than 1.5% of adjusted total assets, total capital to risk-weighted
assets of not less than 8.0% and core capital equal to 3.0% of adjusted total
assets. As of September 30, 1996, the Bank exceeded all capital adequacy
requirements to which it is subject.
As of September 30, 1996 the most recent notification from the Office of
Thrift Supervision categorized the Bank as Well Capitalized under the framework
for Prompt Corrective Action. To be considered Well Capitalized under Prompt
Corrective Action Provisions, the Bank must maintain risk based, and core
capital ratios as set forth in the following table. There are no conditions or
events since that notification that management believes have changed the Bank's
categorization.
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107
The following tables present the capital of the Bank at September 30, 1995
and 1996:
Regulatory
------------------------------------
Tangible Core Risk-Based
Capital Capital Capital
---------- ---------- ------------
(In thousands)
As of September 30, 1995:
Capital of the Association................................ $ 89,234 $ 89,234 $ 89,234
Unrealized losses on certain available-for-sale
securities............................................... 3,356 3,356 3,356
General valuation allowances.............................. -- -- 2,156
Assets required to be deducted............................ -- -- (31)
---------- --------- -----------
Computed regulatory capital............................... 92,590 92,590 94,715
Minimum capital requirements.............................. 18,132 36,264 50,610
---------- --------- -----------
Excess of regulatory capital over minimum capital
requirements............................................. $ 74,458 $ 56,326 $ 44,105
========= ========= =========
Actual regulatory capital ratios.......................... 7.66% 7.66% 14.97%
========= ========= =========
Required regulatory capital ratios........................ 1.50% 3.00% 8.00%
========= ========= =========
Required capital ratios to be considered as well
capitalized.............................................. -- 5.00% 10.00%
========= ========= =========
Required capital to be considered as well capitalized..... -- $ 60,440 $ 63,263
========= ========= =========
As of September 30, 1995 the Bank's adjusted total assets and risk-weighted
assets were $1,208,793,000 and $632,628,000, respectively.
Regulatory
------------------------------------
Tangible Core Risk-Based
Capital Capital Capital
---------- ---------- ------------
(In thousands)
As of September 30, 1996:
Capital of the Bank....................................... $ 93,074 $ 93,074 $ 93,074
Unrealized losses on certain available-for-sale
securities............................................... 1,995 1,995 1,995
Goodwill.................................................. (2,825) (2,825) (2,825)
General valuation allowances.............................. -- -- 11,455
Assets required to be deducted............................ -- -- (31)
--------- --------- -----------
Computed regulatory capital............................... 92,244 92,244 103,668
--------- --------- -----------
Minimum capital requirements.............................. 22,413 44,826 67,518
--------- --------- -----------
Excess of regulatory capital over minimum capital
requirements............................................. $ 69,831 $ 47,418 $ 36,150
========= ========= =========
Actual regulatory capital ratios.......................... 6.17% 6.17% 12.28%
========= ========= =========
Required regulatory capital ratios........................ 1.50% 3.00% 8.00%
========= ========= =========
Required capital ratios to be considered as well
capitalized.............................................. -- 5.00% 10.00%
========= ========= =========
Required capital to be considered as well capitalized..... -- $ 74,710 $ 84,398
========= ========= =========
As of September 30, 1996 the Bank's adjusted total assets and risk-weighted
assets were $1,494,207,080 and $843,976,000, respectively.
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18. STOCKHOLDERS' EQUITY
As part of the Conversion, the Bank established a "Liquidation Account" in
an amount equal to the retained income of the Bank as of June 30, 1993. The
Liquidation Account was established to provide a limited priority claim to the
assets of the Bank to qualifying depositors ("Eligible Account Holders") who
continue to maintain deposits in the Bank after Conversion. In the unlikely
event of a complete liquidation of the Bank, and only in such event, each
Eligible Account Holder would receive from the Liquidation Account a liquidation
distribution based on the person's proportionate share of the then total
remaining qualifying deposits.
Current regulations allow the Bank to pay dividends on its stock after the
Conversion if its regulatory capital would not thereby be reduced below the
amount then required for the Liquidation Account. Capital distribution
regulations limit the Bank's ability to make capital distributions which include
dividends, stock redemptions and repurchases, cash-out mergers, interest
payments on certain convertible debt and other transactions charged to the
capital account based on their capital level and supervisory condition. Unlike
the Bank, the Company is not subject to these regulatory restrictions on the
payment of dividends to its stockholders. However, the source of future
dividends is likely to depend upon dividends from the Bank. Federal regulations
also preclude any repurchase of the stock by the Bank or its holding company for
three years after Conversion except for purchases of qualifying shares of a
director and repurchases pursuant to an offer made on a pro rata basis to all
stockholders and with prior approval of the Office of Thrift Supervision or
pursuant to an open-market stock repurchase program that complies with certain
regulatory criteria. During fiscal 1994, the Company completed a stock
repurchase which was approved by the Office of Thrift Supervision totaling
274,819 shares of common stock. During fiscal 1995, the Company purchased
225,600 shares of an OTS approved repurchase of 261,453 shares to be completed
by September 30, 1995. The additional 35,853 shares settled the first two
business days after September 30, 1995. During fiscal 1996, the Company
completed a repurchase of 310,000 shares approved by the OTS relating to the
purchase of PBS Financial Corp. (See Note 1)
19. REGULATORY EXAMINATIONS
At periodic intervals, both the OTS, and now the Federal Deposit Insurance
Corporation ("FDIC") as a result of FIRREA, routinely examine the Bank's
financial statements as part of their legally prescribed oversight of the
savings and loan industry. Based on these examinations, the regulators can
direct that the Bank's financial statements be adjusted in accordance with their
findings.
The OTS last concluded an examination of the Bank's financial statements in
February 1996. Such examination did not result in any material adjustments.
A future examination by the OTS or the FDIC could include a review of
certain transactions or other amounts reported in the Bank's 1995 or 1996
financial statements. In view of FIRREA and the increasingly uncertain
regulatory environment in which the Bank now operates, the extent, if any, to
which a forthcoming regulatory examination may ultimately result in adjustments
to the 1995 or 1996 financial statements cannot presently be determined.
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20. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", as
amended by SFAS 119 ("SFAS 107"), requires the estimation of fair values of
financial instruments.
Estimates of fair value are made at a specific date, based upon, where
available, relevant market prices and information about the financial
instrument. For a substantial portion of the Bank's financial instruments, no
quoted market exists. Therefore, estimates of fair value are necessarily based
on a number of significant assumptions (many of which involve events outside the
control of management). Such assumptions include assessments of current economic
conditions, perceived risks associated with these financial instruments and
their counterparties, future expected loss experience and other factors. Given
the uncertainties surrounding these assumptions, the reported fair values
represent estimates only and therefore cannot be compared to the historical
accounting model. Use of different assumptions or methodologies are likely to
result in significantly different fair value estimates.
The estimated fair values presented neither include nor give effect to the
values associated with the Bank's existing customer relationships, extensive
branch banking network or property, or certain tax implications related to the
realization of unrealized gains or losses. Also under SFAS 107, the fair value
of non-interest bearing NOW deposits, interest bearing NOW accounts, passbook
and statement accounts and money market accounts is equal to the carrying amount
because these deposits have no stated maturity. The approach to estimating fair
value excludes the significant benefit that results from the low-cost funding
provided by such deposit liabilities, as compared to alternative sources of
funding.
The following methods and assumptions were used to estimate the fair value
of each major classification of financial instruments at September 30, 1995 and
1996:
CASH AND CASH EQUIVALENTS
The carrying amounts reported in the consolidated statement of financial
condition for cash and cash equivalents approximates their fair value.
INVESTMENT SECURITIES
Fair value is determined by reference to quoted market prices.
MORTGAGE RELATED SECURITIES
Fair value is determined by use of broker price estimates.
LOANS RECEIVABLE
The fair value of loans was estimated using a method which approximates the
effect of discounting the estimated future cash flows over the expected
repayment periods using rates which consider credit risk, servicing costs and
other relevant factors.
DEPOSITS WITH NO STATED MATURITY
Current carrying amounts approximate estimated fair value.
FIXED MATURITY CERTIFICATES
Fair value was estimated by discounting the contractual cash flows using
current market rates offered in the Bank's market area for deposits with
comparable terms and maturities.
ADVANCES FROM FHLB
Fair value is estimated using rates currently offered for advances of
similar remaining maturities.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Fair value is estimated using rates currently offered for securities sold
under agreements to repurchase of similar remaining maturities.
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110
COMMITMENTS TO EXTEND CREDIT AND PURCHASE SECURITIES
At September 30, 1995 and 1996, the fair value of commitments to extend
credit and purchase securities was considered insignificant due to the short
term nature of the commitments and other market considerations.
The carrying amounts and fair value of the Bank's financial instruments are
as follows:
September 30, 1995 September 30, 1996
-------------------- --------------------
Carrying Fair Carrying Fair
Value Value Value Value
--------- --------- --------- ---------
(In Thousands)
Financial Assets
- ----------------
Cash and cash equivalents........................ $ 11,254 $ 11,254 $ 19,438 $ 19,438
Interest earning deposits........................ 13,878 13,878 141,975 141,975
Investment securities............................ 80,941 81,719 34,532 34,593
Mortgage-backed and related securities........... 238,442 238,889 232,273 233,361
Loans receivable................................. 825,024 814,216 1,007,881 981,926
Financial Liabilities
- ---------------------
Deposits......................................... $ 878,670 $ 856,765 $1,136,722 $1,115,722
Advances from FHLB............................... 171,125 171,088 201,025 200,237
Securities Sold Under Agreements to Repurchase... 18,427 18,452 10,000 10,156
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111
21. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed statements of financial condition as of September
30, 1995 and 1996, and the condensed statements of operations and statements of
cash flows for the years ended September 30, 1995 and 1996 should be read in
conjunction with the consolidated financial statements and the related notes.
September 30,
Parent Company Only --------------------
Statements of Financial Condition (in thousands) 1995 1996
- ------------------------------------------------ --------- ---------
Assets:
Cash and cash equivalents:
Cash and amounts due from depository institutions................... $ 1,418 $ 2,864
Office properties and equipment -- net................................ 6,700 2.932
Equity in net assets of Bank.......................................... 88,612 92,912
Receivable from Bank.................................................. 8,104 7,364
Other assets.......................................................... 81 33
--------- ---------
Total assets............................................................ $ 104,915 $ 106,105
Liabilities and Stockholders' Equity:
Other liabilities..................................................... $ 304 $ 680
--------- ---------
Total liabilities....................................................... 304 680
Stockholders' Equity:
Common stock.......................................................... 55 55
Additional paid-in capital............................................ 51,733 52,891
Retained earnings -- substantially restricted......................... 66,592 65,064
Treasury stock........................................................ (7,283) (8,660)
Common stock purchased by:
Employee Stock Ownership Plan....................................... (2,509) (1,769)
Recognition and Retention Plans..................................... (621) (161)
Unrealized loss on available-for-sale securities...................... (3,356) (1,995)
--------- ---------
Total stockholders' equity.............................................. 104,611 105,425
--------- ---------
Total liabilities and stockholders' equity.............................. $ 104,915 $ 106,105
========= =========
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Years Ended
September 30,
Parent Company Only --------------------
Statements of Operations (in thousands) 1995 1996
- --------------------------------------- --------- ---------
Net interest income......................................................... $ 887 $ 293
--------- ---------
Other income:
Equity in undistributed earnings of Bank.................................. 5,222 556
Miscellaneous............................................................. 322 (21)
--------- ---------
Total other income.......................................................... 5,544 535
Miscellaneous operating expenses............................................ 525 278
--------- ---------
Total expenses.............................................................. 525 278
--------- ---------
Income before income taxes.................................................. 5,906 550
Provision for income taxes................................................ 260 1
--------- ---------
Net income.................................................................. $ 5,646 $ 549
Years Ended
September 30,
Parent Company Only --------------------
Statements of Cash Flows (in thousands) 1995 1996
- --------------------------------------- --------- ---------
Cash flow from (for) operating activities:
Net income.............................................................. $ 5,646 $ 549
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed earnings of Bank.............................. (5,222) (556)
Depreciation.......................................................... 68 66
(Increase) decrease in other assets................................... 805 (997)
Decrease in other liabilities net of dividend payable................. (530) (615)
--------- ---------
Net cash provided by (used by) operating activities................. 767 (1,553)
--------- ---------
Cash flow from (for) investing activities:
Decrease in receivable from Bank........................................ 4,589 7,740
Sale of building to Bank................................................ -- 4,280
Purchase of office properties, equipment and land....................... (205) (578)
Principal payment received on ESOP loan................................. 665 740
Cash acquired through purchase of PBS Financial Corp. net of cash
payments relating to purchase.......................................... -- 233
--------- ---------
Net cash provided by investing activities........................... 5,049 12,415
--------- ---------
Cash flow from (for) financing activities:
Purchase of Treasury Stock at cost...................................... (4,902) (7,642)
Sale of Treasury Stock for exercise of stock options.................... 613 64
Dividends paid on stock................................................. (790) (1,838)
--------- ---------
Net cash used for financing activities.............................. (5,079) (9,416)
--------- ---------
Net increase in cash and cash equivalents................................. 737 1,446
Cash and cash equivalents, beginning of year.............................. 681 1,418
--------- ---------
Cash and cash equivalents, end of year.................................... $ 1,418 $ 2,864
========= =========
Supplemental disclosure of cash flow information:
Cash paid for income taxes.............................................. $ 3,806 $ 6,508
========= =========
Supplemental schedule of non-cash investing and financing activities:
Decrease in unrealized loss on available-for-sale securities.......... $ 2,168 $ 1,361
========= =========
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22. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
For the Year Ended
September 30, 1994
--------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
Interest income........................................ $ 12,871 $ 13,845 $ 14,900 $ 16,258
Interest expense....................................... 6,786 6,867 7,566 8,830
--------- --------- --------- ---------
Net interest income.................................... 6,085 6,978 7,334 7,428
Provision for loan losses.............................. 58 94 6 (23)
--------- --------- --------- ---------
XNet interest income after provision for loan losses.... 6,027 6,884 7,328 7,451
Other income........................................... 1,474 922 913 1,128
Other expense.......................................... 5,584 5,538 5,702 6,002
--------- --------- --------- ---------
Income before income tax expense....................... 1,917 2,268 2,539 2,577
Income taxes........................................... 767 907 959 869
--------- --------- --------- ---------
Net income............................................. $ 1,150 $ 1,361 $ 1,580 $ 1,708
========= ========= ========= =========
Primary and fully diluted earnings per share........... $ 0.20 $ 0.24 $ 0.29 $ 0.32
========= ========= ========= =========
For the Year Ended
September 30, 1995
--------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
Interest income........................................ $ 17,980 $ 20,040 $ 21,327 $ 21,617
Interest expense....................................... 10,441 12,173 13,087 13,199
--------- --------- --------- ---------
Net interest income.................................... 7,539 7,867 8,240 8,418
Provision for loan losses.............................. 17 141 167 (64)
--------- --------- --------- ---------
Net interest income after provision for loan losses.... 7,522 7,726 8,073 8,482
Other income........................................... 1,838 1,141 659 392
Other expense.......................................... 8,664 6,127 5,876 5,942
--------- --------- --------- ---------
Income before income tax expense....................... 696 2,740 2,856 2,932
Income taxes........................................... 265 1,103 1,148 1,062
--------- --------- --------- ---------
Net income............................................. $ 431 $ 1,637 $ 1,708 $ 1,870
========= ========= ========= =========
Primary and fully diluted earnings per share........... $ 0.09 $ 0.32 $ 0.34 $ 0.36
========= ========= ========= =========
109
114
For the Year Ended
September 30, 1996
--------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
Interest income........................................ $ 23,161 $ 26,505 $ 26,932 $ 26,934
Interest expense....................................... 13,780 15,673 15,654 16,193
--------- --------- --------- ---------
Net interest income.................................... 9,381 10,832 11,278 10,741
Provision for loan losses.............................. 627 957 1,429 12,691
--------- --------- --------- ---------
Net interest income (loss) after provision for loan
losses................................................ 8,754 9,875 9,849 (1,950)
Other income........................................... 1,557 1,495 1,560 5,457
Other expense.......................................... 6,109 6,912 6,884 15,697
--------- --------- --------- ---------
Income (loss) before income tax expense................ 4,202 4,458 4,525 (12,190)
Income taxes........................................... 1,678 1,783 1,835 (4,850)
--------- --------- --------- ---------
Net income (loss)...................................... $ 2,524 $ 2,675 $ 2,690 $ 7,340
========= ========= ========= =========
Primary and fully diluted earnings per share........... $ 0.50 $ 0.52 $ 0.53 $ (1.44)
========= ========= ========= =========
The fiscal 1996 fourth quarter results of operations include a pre-tax $12.7
million charge to the provision for loan losses primarily related to the Bank's
consumer lending portfolio as well as a one-time special pre-tax assessment of
$6.6 million for the recapitalization of the SAIF portion of the FDIC insurance
fund.
Item 9. Change In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
110
115
PART III
Item 10. Directors and Executive Officers of the Company.
Information relating to directors and executive officers of the Company
appears in the Company's definitive Proxy Statement which was filed with the SEC
in connection with the Annual Meeting of Stockholders (the "Proxy Statement") to
be held on January 21, 1997 at pages 5 through 10 and is incorporated herein by
reference.
Information relating to the filing of reports required under Section
16(a) of the Securities Exchange Act of 1934 by directors, executive officers
and 10% beneficial owner's of the Company's Common Stock appears in the
Company's Proxy Statement at page 4 and is incorporated herein by reference.
Item 11. Executive Compensation.
The information relating to executive compensation appears in the Proxy
Statement at pages 13 through 26 and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information relating to security ownership of certain beneficial
owners and management appears in the Proxy Statement at pages 3 through 10 and
is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information relating to certain relationships and related
transactions appears in the Proxy Statement at page 27 and is incorporated
herein by reference.
111
116
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1) The following documents are filed as a part of this report:
Independent Auditors' Report
Consolidated Statements of Financial Condition as of
September 30, 1995 and 1996
Consolidated Statements of Operations for the Years Ended
September 30, 1994, 1995 and 1996
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended September 30, 1994, 1995 and 1996
Consolidated Statements of Cash Flows for the Years
Ended September 30, 1994, 1995 and 1996
Notes to Consolidated Financial Statements
(2) All financial statement schedules are omitted because they are not
required or applicable, or the required information is shown in the
Consolidated Financial Statements or the Notes thereto.
(3) Exhibits
(a) The following exhibits are filed as part of this report:
3(i) Certificate of Incorporation of the Company incorporated by
reference into this Report from Exhibits to Form S-1 Registration
Statement initially filed on June 9, 1993, Registration No.
33-64164. Certificate of Amendment to the Company's Certificate
of Incorporation incorporated by reference into this Report from
Form 10-Q filed on May 12, 1995, File No. 0-21942.
3(ii) Bylaws of Company incorporated by reference into this Report
from the Exhibits to Form S-1 Registration Statement initially
filed on June 9, 1993, Registration No. 33-64174.
4.1 Stock Certificate of First Palm Beach Bancorp, Inc. incorporated
by reference into this Report from the Exhibits to Form S-1
Registration Statement initially filed on June 9, 1993,
Registration No. 33-64174.
4.2 Stockholder Rights Plan incorporated by reference into this
Report from Form 8-A Registration Statement filed on January 26,
1995, File No. 0-21492.
10.1 First Federal Savings and Loan Association of the Palm Beaches
Recognition and Retention Plan for Officers and Employees
incorporated by reference into this Report from the Proxy
Statement for the 1993 Annual Meeting of Stockholders filed on
December 17, 1993.
112
117
10.2 First Federal Savings and Loan Association of the Palm Beaches
Recognition and Retention Plan for Outside Directors (filed
herewith).
10.3 First Palm Beach Bancorp, Inc. Incentive Stock Option Plan for
Officers and Employees incorporated by reference into this Report
from the Proxy Statement for the 1993 Annual Meeting of
Stockholders filed on December 17, 1993.
10.4 First Palm Beach Bancorp, Inc. Stock Option Plan for Outside
Directors (filed herewith).
10.5 Change of Control Agreement between First Federal Savings and
Loan Association of the Palm Beaches and John C. Trammel
incorporated by reference into this Report from Form 10-K filed
on December 29, 1994, File No. 0-21492.
10.6 Employment Agreement between First Federal Savings and Loan
Association of the Palm Beaches and Louis O. Davis, Jr.
incorporated by reference into this Report from Form 10-K filed
on December 29, 1994, File No. 0-21492.
10.7 Employment Agreement between First Federal Savings and Loan
Association of the Palm Beaches and R. Randy Guemple incorporated
by reference into this Report from Form 10-K filed on December
29, 1994, File No. 0-21492.
10.8 Employees Pension Plan of First Federal Savings and Loan
Association of the Palm Beaches incorporated by reference into
this Report from Form 10-K filed on December 29, 1994, File No.
0-21492.
10.9 Employment Agreement between First Palm Beach Bancorp, Inc. and
Louis O. Davis, Jr. incorporated by reference into this Report
from Form 10-K filed on December 29, 1994, File No. 0-21492.
10.10 Employment Agreement between First Palm Beach Bancorp, Inc. and
R. Randy Guemple incorporated by reference into this Report from
Form 10-K filed on December 29, 1994, File No. 0-21492.
10.11 Change of Control Agreement between First Palm Beach Bancorp,
Inc. and John C. Trammel incorporated by reference into this
Report from Form 10-K filed on December 29, 1994, File No.
0-21492.
10.12 Consulting Agreement between First Federal Savings and Loan
Association of the Palm Beaches and William W. Lynch incorporated
by reference into this Report from Form 10-K filed on December
29, 1994, File No. 0-21492.
113
118
10.13 Supplemental Retirement Income Agreement between First Federal
Savings and Loan Association of the Palm Beaches and William W.
Lynch incorporated by reference into this Report from Form 10-K
filed on December 29, 1994, File No. 0-21492.
10.14 First Federal Savings and Loan Association of the Palm Beaches
Amended and Restated Employee Severance Compensation Plan
incorporated by reference into this Report from Form 10-K filed
on December 22, 1995, File No. 0-21492.
10.15 Change of Control Agreement between First Federal Savings and
Loan Association of the Palm Beaches and Linda O. Terrell
(filed herewith).
10.16 Change of Control Agreement between First Palm Beach Bancorp and
Linda O. Terrell (filed herewith).
10.17 Amendment to First Federal Savings and Loan Association of the
Palm Beaches Recognition and Retention Plan for Outside Directors
(filed herewith).
10.18 Amendment to First Palm Beach Bancorp, Inc. Stock Option Plan
for Outside Directors (filed herewith).
11 Computation of earnings per share as shown in Item 8, page 84.
21 Subsidiary information is incorporated by reference from
subsidiary activities described in "Part I - Subsidiaries" on
page 30 of this Form 10-K.
23 Independent Auditors' Consent (filed herewith).
27 Financial Data Schedule (filed herewith).
99 Proxy Statement for Annual Meeting to be held on January 21, 1997
(filed herewith).
(b) Reports on Form 8-K
None.
114
119
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
FIRST PALM BEACH BANCORP, INC.
By: /s/ Louis O. Davis Jr.
-----------------------------
Louis O. Davis, Jr.
Chief Executive Officer, President
and Director
Dated: December 20, 1996
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ William W. Lynch Chairman of the Board December 20, 1996
- -------------------------
William W. Lynch
/s/ R. Randy Guemple Chief Financial Officer and December 20, 1996
- ------------------------- Treasurer
R. Randy Guemple
/s/ Linda O. Terrell Controller December 20, 1996
- -------------------------
Linda O. Terrell
/s/ Edward M. Eissey Vice Chairman of the Board December 20, 1996
- -------------------------
Edward M. Eissey
Director December , 1996
- -------------------------
Ted R. Moffett, Jr.
/s/ Fred A. Greene Director December 20, 1996
- -------------------------
Fred A. Greene
/s/ Robert P. Miller Director December 20, 1996
- -------------------------
Robert P. Miller
/s/ Holly W. Hadley, M.D. Director December 20, 1996
- -------------------------
Holly W. Hadley, M.D.
/s/ Daniel O. Sokoloff, M.D. Director December 20, 1996
- -------------------------
Daniel O. Sokoloff, M.D.