1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 of the Securities Exchange Act of 1934
For the fiscal year ended September 30, 1997
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 Incorporation or Organization) (I.R.S. Employer Identification No.)
450 SOUTH AUSTRALIAN AVENUE, WEST PALM BEACH, FLORIDA 33402
(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
--- -----
Indicated by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. X
------
The aggregate market value of the common stock held by non-affiliates
of the registrant is $175,768,648 and is based upon the last trade price as
reported by the NASDAQ National Market System for December 18, 1997.
The Registrant had 5,054,746 shares of common stock outstanding as of
December 18, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the Annual Meeting of Stockholders to be held
on January 21, 1998 is incorporated by reference into Part III of this Form
10-K.
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INDEX
PAGE
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PART I.
Item 1. Business ..........................................................................................1
Safe Harbor Statement......................................................................1
Business...................................................................................1
Market Area and Competition................................................................3
Lending Activities.........................................................................4
Asset Quality.............................................................................12
Mortgage-Backed and Related Securities....................................................19
Investment Activities.....................................................................20
Sources of Funds..........................................................................23
Borrowings................................................................................26
Subsidiary Activities.....................................................................27
Personnel.................................................................................27
Regulation and Supervision................................................................28
Federal and State Taxation................................................................42
Item 2. Properties........................................................................................44
Item 3. Legal Proceedings.................................................................................48
Item 4. Submission of Matters to a Vote of Security Holders...............................................48
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.............................49
Item 6. Selected Financial Data...........................................................................50
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............52
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................66
Item 8. Financial Statements and Supplementary Data.......................................................70
Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure..............104
PART III
Item 10. Directors and Executive Officers of the Registrant...............................................105
Item 11. Executive Compensation...........................................................................105
Item 12. Security Ownership of Certain Beneficial Owners and Management...................................105
Item 13. Certain Relationships and Related Transactions...................................................105
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..................................106
3
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"), First Palm Beach
Bancorp, Inc. (the "Company") is hereby filing cautionary statements identifying
important factors that could cause the Company's actual results, or those of its
subsidiary, First Bank of Florida (the "Bank") to differ materially from those
projected in "forward-looking statements" (as such term is defined in the Reform
Act) of the Company or the Bank, made by or on behalf of the Company or 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
Company with the Securities and Exchange Commission ("SEC"), or in the Company'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," or "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 Company's or the Bank's actual results to differ materially from those
contained in forward-looking statements of the Company or the Bank made by or on
behalf of the Company or the Bank.
The Company and the Bank caution that the following important factors
could cause actual results or outcomes to differ materially from those expressed
in any forward-looking statements of the Company or the Bank made by or on
behalf of the Company or the Bank. All forward-looking statements speak only as
of the date on which such statements are made, and the Company and the Bank
undertake 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 Company and the Bank operate), 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 Company
and the Bank.
BUSINESS
On September 29, 1993, the Company closed its public offering for
5,284,775 shares of its common stock ("common stock") and acquired the Bank,
formerly First Federal Savings and Loan Association of the Palm Beaches (the
"Association"), as part of the Bank's conversion (the "conversion") from a
mutual to a stock federally chartered savings association. Additionally, the
Recognition and Retention Plans ("RRPs") implemented during the conversion
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purchased 211,600 shares of the Company's Common Stock, making a total of shares
outstanding at that time of 5,496,375. The Company was incorporated under
Delaware law on May 27, 1993. The Company 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 SEC. Currently, the Company does
not transact any material business other than through its subsidiary, the Bank.
The net conversion proceeds totaled $52.5 million of which $25.2 million was
invested in the Bank and $27.3 million was retained by the Company. The Company
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, 1997,
the loan to the ESOP had a balance of $955,000 and the loan to the Bank had a
balance of $5,854,000. On June 30, 1997, the Company issued $35 million of
10.35% Senior Debentures Due 2002 (the "Series A Debentures"), in a private
placement. Of the net proceeds of $33.8 million, the Company contributed $25
million to the capital of the Bank. For a period beginning on November 17, 1997
and ending on December 18, 1997 the Company offered to exchange such outstanding
Series A Debentures for a like amount of Series B 10.35% Senior Debentures Due
2002 (the "Series B Debentures"), which Series B Debentures were registered with
the SEC. As of the date of this 10-K, all outstanding Series A Debentures have
been tendered for exchange. The Series A Debentures and the Series B Debentures
are hereinafter collectively referred to as the "Senior Debentures."
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.
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.
On June 30, 1997, the Company issued $35 million of Series A Debentures
Due 2002. The net proceeds of the debenture issuance are being used for general
corporate purposes, including, as noted previously, contributing $25 million of
the net proceeds to the Bank. The Indenture entered into by the Company in
connection with the Senior Debentures (the "Indenture") includes certain
covenants which, among other things, (i) limit the Company's disposition of the
voting stock of the Bank, other than dispositions which (a) are for fair market
value and, after giving effect to such dispositions and to any potential
dilution, the Company will own not less than 80% of the shares of voting stock
of the Bank free and clear of any security interest; (b) are made in compliance
with an order of a court or regulatory authority of competent jurisdiction, a
condition imposed by any such court or authority permitting the acquisition by
the Company, directly or indirectly, of any other bank or entity the activities
of which are legally permissible for a bank holding company or a subsidiary
thereof to engage in, or an undertaking made to such authority in connection
with such an acquisition; (c) are made where the Bank, having obtained any
necessary regulatory approvals, unconditionally guarantees payment when due of
the principal of and interest on the Senior Debentures; or (d) are made to the
Company or any wholly-owned subsidiary if such wholly-owned subsidiary agrees to
be bound by the covenant as if it were the Company and the Company agrees to
maintain such wholly-owned subsidiary as a wholly-owned subsidiary
(notwithstanding the foregoing, the Bank may be merged into or consolidated with
another banking institution if, after giving effect to such merger or
consolidation, the Company or any wholly-owned subsidiary owns at least 80% of
the voting stock of such other banking institution then issued and outstanding
free and clear of any security interest and if, immediately after giving effect
thereto and treating any such resulting banking institution thereafter as the
Bank and a subsidiary, for purposes of the Indenture, no Event of Default (as
such term is defined in the Indenture), and no event which, after notice or
lapse of time or both, would become an Event of Default, shall have happened and
be continuing); (ii) limit, to a percentage of net worth, the Company's and the
Bank's ability to become liable on certain forms of indebtedness generally
outside the normal course of the Company's and the Bank's business; (iii)
provide that the Company will not permit its Consolidated Net Worth minus
Goodwill to be less than $90 million; (iv) provide that the Company shall not
allow the Bank to be classified as other than "well-capitalized"; and (v)
restrict dividend or other
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distributions of the Company and the Bank and stock repurchases by the Company
in such a way that any such dividends, distributions or stock repurchases after
March 31, 1997 may not exceed in the aggregate, the sum of (a) $10,000,000 plus
(b) 75% (or 100% in the case of deficit) of consolidated net income for the
period beginning March 31, 1997 and ending and including the date such dividend,
distribution or stock repurchase (each, a "Restricted Payment") is declared or
made (plus 100% of the proceeds of issuances of equity securities after March
31, 1997), and a Restricted Payment may not be made if at the time of and
immediately before the Restricted Payment is declared, and after giving effect
to the Restricted Payment a Default (as such term is defined in the Indenture)
or Event of Default is existing or shall have occurred within 365 days of the
declaration of the Restricted Payment.
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.
The Bank utilizes and is dependent upon data processing systems and
software to conduct its business. The data processing systems and software
include a mainframe processing system licensed to the Bank by an outside vendor
and various purchased software packages which are run on in-house computer
networks. In 1997, the Bank initiated a review and assessment of all hardware
and software to confirm that it will function properly in the year 2000. The
Bank's mainframe software vendor and the majority of the other vendors which
have been contacted have indicated that their hardware and/or software will be
Year 2000 compliant. Testing will be performed for compliance. While there may
be some expenses incurred during the next two years, Year 2000 compliance is not
expected to have a material effect on the Company's consolidated financial
statements.
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, three 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 from which the Bank draws a
substantial portion of its business has derived its strength primarily from
government, tourism, retirement communities, agriculture, service industries and
foreign trade. Unemployment in Palm Beach County is higher than the national and
State of Florida 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 south
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
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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 recent
regulatory changes 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, 1997, the Bank's total
loans outstanding were $1,194.7 million, of which $846.4 million, or 70.9% 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, 46.3% were fixed-rate loans and 53.7% were adjustable
rate mortgage ("ARM") loans as hereinafter described. At the same date,
construction and land loans totaled $138.7 million or 11.6% of the Bank's total
loan portfolio; commercial real estate loans totaled $40.9 million or 3.4% of
the Bank's total loan portfolio; and multi-family mortgage loans totaled $14.9
million or 1.3% 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 $153.8 million or
12.9% of the Bank's total loan portfolio at September 30, 1997. At September 30,
1997, $88.4 million of consumer and other loans consisted of indirect automobile
loans. The Bank had $82.5 million of loans serviced for others at September 30,
1997.
At September 30, 1997, $6.2 million or 0.5% 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, 1997, the Bank's mortgage-backed and related
securities held-to-maturity and available-for-sale, a significant portion of
which were collateralized mortgage obligations ("CMOs") or real estate mortgage
investment conduits ("REMICs"), aggregated $421.6 million or 23.3% 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,
----------------------------------------------------
1993 1994
---------------------- ------------------------
Percent Percent
Amount of Total Amount of Total
--------- --------- --------- --------
(Dollars in thousands)
MORTGAGE LOANS:
One- to four-family ........................................... $335,750 72.48% $ 436,135 68.88%
Construction and land ......................................... 61,233 13.22% 104,324 16.47%
Commercial real estate ........................................ 29,930 6.46% 30,802 4.86%
Multi-family .................................................. 11,720 2.53% 11,515 1.82%
-------- ------ --------- ------
Total mortgage loans ........................................ 438,633 94.69% 582,776 92.03%
Consumer loans ................................................ 22,184 4.78% 48,611 7.68%
Other loans ................................................... 2,436 0.53% 1,848 0.29%
-------- ------ --------- ------
Total loans receivable ...................................... 463,253 100.00% 633,235 100.00%
====== ======
LESS:
Loans in process .............................................. 31,320 54,856
Unearned discounts (premiums) and deferred loan fees, net ..... 943 (308)
Allowance for loan losses ..................................... 1,886 1,956
-------- ---------
Loans receivable, net ......................................... $429,104 $ 576,731
======== =========
MORTGAGE-BACKED AND RELATED SECURITIES HELD-TO-MATURITY
AND MORTGAGE-BACKED AND RELATED SECURITIES AVAILABLE-FOR-SALE:
CMOs (includes REMICs) ........................................ $282,460 $ 258,166
FHLMC ......................................................... -- 3,595
FNMA .......................................................... -- 34,025
GNMA .......................................................... 153 30,169
Net premiums and (discounts) .................................. 1,399 (1,911)
-------- ---------
Total mortgage-backed and related securities held-to-a
and mortgage-backed and related securities
available-for-sale .......................................... $ 284,012 $ 324,044
========= =========
At September 30
--------------------------------------------------
1995 1996
------------------------ -----------------------
Percent Percent
Amount of Total Amount of Total
----------- -------- ----------- ---------
(Dollars in thousands)
MORTGAGE LOANS:
One- to four-family ........................................... $ 587,598 67.82% $ 652,606 60.93%
Construction and land ......................................... 118,799 13.71% 154,988 14.47%
Commercial real estate ........................................ 35,610 4.11% 51,754 4.83%
Multi-family .................................................. 11,837 1.37% 17,564 1.64%
----------- ------ ---------- ------
Total mortgage loans ........................................ 753,844 87.01% 876,912 81.87%
Consumer loans ................................................ 110,384 12.74% 191,654 17.90%
Other loans ................................................... 2,155 0.25% 2,434 0.23%
----------- ------ ---------- ------
Total loans receivable ...................................... 866,383 100.00% 1,071,000 100.00%
====== ======
Less:
Loans in process .............................................. 43,967 61,633
Unearned discounts (premiums) and deferred loan fees, net ..... (4,765) (10,369)
Allowance for loan losses ..................................... 2,157 11,855
----------- ----------
Loans receivable, net ......................................... $ 825,024 $1,007,881
=========== ==========
MORTGAGE-BACKED AND RELATED SECURITIES HELD-TO-MATURITY AND
MORTGAGE-BACKED AND RELATED SECURITIES AVAILABLE-FOR-SALE:
CMOs (includes REMICs) ........................................ $ 145,879 $ 132,067
FHLMC ......................................................... 12,023 23,739
FNMA .......................................................... $ 49,837 49,512
GNMA .......................................................... 33,035 29,222
Net premiums and (discounts) .................................. (2,332) (2,267)
----------- ----------
Total mortgage-backed and related securities held-to-a
and mortgage-backed and related securities
available-for-sale........................................... $ 238,442 $ 232,273
=========== ==========
At September 30
-----------------------
1997
-----------------------
Percent
Amount of Total
----------- ---------
(Dollars in thousands)
MORTGAGE LOANS:
One- to four-family ........................................... $ 846,449 70.85%
Construction and land ......................................... 138,664 11.60%
Commercial real estate ........................................ 40,905 3.42%
Multi-family .................................................. 14,904 1.25%
---------- ------
Total mortgage loans ........................................ 1,040,922 87.12%
Consumer loans ................................................ 150,991 12.64%
Other loans ................................................... 2,816 0.24%
---------- ------
Total loans receivable ...................................... 1,194,729 100.00%
======
Less:
Loans in process .............................................. 52,776
Unearned discounts (premiums) and deferred loan fees, net ..... (8,193)
Allowance for loan losses ..................................... 6,046
----------
Loans receivable, net ......................................... $1,144,100
==========
MORTGAGE-BACKED AND RELATED SECURITIES HELD-TO-MATURITY AND
MORTGAGE-BACKED AND RELATED SECURITIES AVAILABLE-FOR-SALE:
CMOs (includes REMICs) ........................................ $ 174,313
FHLMC ......................................................... 12,850
FNMA .......................................................... 113,110
GNMA .......................................................... 124,492
Net premiums and (discounts) .................................. (3,120)
----------
Total mortgage-backed and related securities held-to-a
and mortgage-backed and related securities
available-for-sale........................................... $ 421,645
==========
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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,
---------------------------------------
1995 1996 1997
----------- ----------- -----------
(IN THOUSANDS)
MORTGAGE LOANS (GROSS):
At the beginning of period ..................... $582,776 $ 753,844 $ 876,912
-------- --------- -----------
Mortgage loans originated:
One- to four- family ....................... 135,875 192,524 196,925
Construction and land ...................... 120,234 163,097 134,029
Commercial real estate ..................... 5,556 3,563 1,176
Multi-family ............................... 830 1,877 -
-------- --------- -----------
Total mortgage loans originated .............. 262,495 361,061 332,130
-------- --------- -----------
Mortgage loans purchased:
One- to four- family ....................... 5,450 47,854 13,976
Construction and land ...................... -- 16,323 -
Commercial real estate ..................... 237 19,519 192
Multi-family ............................... - 5,626 -
-------- --------- -----------
Total mortgage loans purchased ............... 5,687 89,322 14,168
-------- --------- -----------
Total mortgage loans originated and purchased .. 268,182 450,383 346,298
Transfer of mortgage loans to real estate owned 1,057 961 3,580
Principal repayments ........................... 82,151 162,053 150,961
Sales of loans ................................. 13,906 164,301 27,747
-------- --------- -----------
At end of period ............................... $753,844 $ 876,912 $ 1,040,922
======== ========= ===========
CONSUMER LOANS (GROSS):
At beginning of period ......................... $ 48,611 $ 110,384 $ 191,654
Consumer loans originated ...................... 99,251 177,466 63,627
Consumer loans purchased ....................... -- 357 -
Transfer of loans to repossessed automobiles ... 765 21,122 15,452
Principal repayments ........................... 36,713 75,431 88,838
-------- --------- -----------
At end of period ............................... $110,384 $ 191,654 $ 150,991
======== ========= ===========
OTHER LOANS (GROSS):
At beginning of period ......................... $ 1,848 $ 2,155 $ 2,434
Other loans originated ......................... 2,457 1,056 2,996
Principal repayments ........................... 2,150 777 2,614
-------- --------- -----------
At end of period ............................... $ 2,155 $ 2,434 $ 2,816
======== ========= ===========
MORTGAGE-BACKED AND RELATED SECURITIES(1):
At beginning of period ......................... $324,044 $ 238,442 $ 232,273
Mortgage-backed and related securities purchased 49,883 46,873 370,617
Mortgage-backed and related securities sold .... 95,751 18,040 127,735
Increase (decrease) in unrealized loss on
available-for-sale securities ................ (2,342) (2,178) (1,537)
Amortization and repayments .................... 42,076 37,180 55,047
-------- --------- -----------
At end of period ............................... $238,442 $ 232,273 $ 421,645
======== ========= ===========
- -------------------
(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 loans and mortgage-backed and
related securities, which includes mortgage-backed and related securities
held-to-maturity and available-for-sale, at September 30, 1997. Loans that have
adjustable rates are shown as amortizing to final maturity rather than when the
interest rates are next subject to change. The table does not include
prepayments or scheduled principal amortization. Prepayments and scheduled
principal amortization on the Bank's loans totaled $121.0 million, $238.6
million and $242.4 for the years ended September 30, 1995, 1996 and 1997,
respectively.
AT SEPTEMBER 30, 1997
------------------------------------------------------------------
MORTGAGE LOANS
---------------------------------------
ONE TO COMMERCIAL
FOUR- CONSTRUCTION AND MULTI- CONSUMER OTHER
FAMILY AND LAND FAMILY LOANS LOANS
---------- ------------ ---------- --------- -------
(In thousands)
AMOUNTS DUE:
Within 1 year ............................. $ 3,860 $ 40,137 $ 6,684 $ 15,293 $1,818
--------- -------- ------- --------- ------
1 to 2 years .............................. 2,029 6,839 4,666 11,446 579
2 to 3 years .............................. 1,746 1,843 3,742 25,295 184
3 to 5 years .............................. 14,997 4,298 6,852 74,536 231
5 to 10 years ............................. 20,098 2,664 10,946 24,347 4
10 to 15 years ............................ 145,255 8,072 5,110 37 -
Over 15 years ............................. 658,464 74,811 17,809 37 -
--------- -------- ------- --------- ------
Total due after 1 year .................... 842,589 98,527 49,125 135,698 998
--------- -------- ------- --------- ------
Total amounts due ........................... 846,449 138,664 55,809 150,991 2,816
Less:
Loans in process .......................... 51,615 -- - 1,161 -
Unearned discounts, (premiums) and deferred
loan fees, net ............................ (5,018) --- - (3,175) -
Allowance for loan losses ................. 2,250 --- - 3,796 -
--------- -------- ------- --------- ------
Loans receivable and mortgage- backed and
related securities, net ..................... $ 797,602 $138,664 $55,809 $ 149,209 $2,816
========= ======== ======= ========= ======
AT SEPTEMBER 30, 1997
---------------------------------------------------------------
TOTALS
--------------------------------
MORTGAGE- MORTGAGE-
BACKED AND BACKED AND
RELATED RELATED
SECURITIES SECURITIES
TOTAL LOANS HELD-TO- AVAILABLE-FOR-
RECEIVABLE MATURITY SALE TOTAL
------------- ------------- ------------- ------------
(In thousands)
AMOUNTS DUE:
Within 1 year ............................. $ 67,792 $ 556 - $ 68,348
----------- -------- -------- -----------
1 to 2 years .............................. 25,559 542 - 26,101
2 to 3 years .............................. 32,810 - - 32,810
3 to 5 years .............................. 100,914 9,296 - 110,210
5 to 10 years ............................. 58,059 8,635 $ 28,685 95,379
10 to 15 years ............................ 158,474 25,797 70,045 254,316
Over 15 years ............................. 751,121 170,960 110,249 1,032,330
----------- -------- -------- -----------
Total due after 1 year .................... 1,126,937 215,230 208,979 1,551,146
----------- -------- -------- -----------
Total amounts due ........................... 1,194,729 215,786 208,979 1,619,494
Less:
Loans in process .......................... 52,776 -- -- 52,776
Unearned discounts, (premiums) and deferred
loan fees, net ............................ (8,193) 2,483 637 (5,073)
Allowance for loan losses ................. 6,046 -- -- 6,046
----------- -------- -------- -----------
Loans receivable and mortgage- backed and
related securities, net ..................... $ 1,144,100 $213,303 $208,342 $ 1,565,745
=========== ======== ======== ===========
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10
The following table sets forth at September 30, 1997, the dollar amount
of all loans and mortgage-backed and related securities held-to-maturity and
mortgage-backed and related securities available-for-sale due after September
30, 1998, and whether such loans have fixed interest rates or adjustable
interest rates:
DUE AFTER SEPTEMBER 30, 1998
-----------------------------------
FIXED ADJUSTABLE TOTAL
-------- ---------- ----------
(IN THOUSANDS)
MORTGAGE LOANS:
One- to four- family ...................................................... $391,531 $451,058 $ 842,589
Construction and land ..................................................... 76,604 21,923 98,527
Multi-family .............................................................. 5,721 8,944 14,665
Commercial real estate .................................................... 6,868 27,592 34,460
CONSUMER LOANS ............................................................... 135,698 -- 135,698
OTHER LOANS .................................................................. 995 3 998
-------- -------- ----------
TOTAL LOANS RECEIVABLE .................................................. 617,417 509,520 1,126,937
MORTGAGE-BACKED AND RELATED SECURITIES HELD-TO-MATURITY AND
AVAILABLE-FOR-SALE ........................................................ 171,106 253,103 424,209
-------- -------- ----------
TOTAL LOANS RECEIVABLE AND MORTGAGE-BACKED AND RELATED SECURITIES
HELD-TO MATURITY AND AVAILABLE-FOR-SALE.................................. 788,523 $762,623 $1,551,146
======== ======== ==========
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"), by its nine loan originators who are
compensated on a commission basis. Loan applications originated by 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, 1997, the Bank's mortgage loans
originated through all sources totaled $332.1 million. FBMC accounted for $166.4
million in mortgage loans originated, or 50.1% of this total. The Bank has
expanded the mortgage lending activities in its branch network by training
branch personnel and placing FBMC loan officers in certain branch offices.
The Bank obtains one- to four-family residential 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. Wholesale loans comprised
approximately 43% of the total new mortgage loans originated by the Bank in
fiscal 1997.
At September 30, 1997, 70.9% of mortgage loans receivable consisted of
one- to four-family residential loans, of which 53.5% 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. The Bank has discontinued originating ARM loans which have an
initial monthly payment adjustment after seven or ten years. The balance of ARM
seven or ten year loans totaled $84.4 million at September 30, 1997.
8
11
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 1996 and 1997, in accordance
with its growth strategy, 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
$214,600. 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.
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, 1997, the outstanding balance of
such loans was $3.2 million. These loans may entail more risk than loans with
private mortgage insurance because, if a borrower defaults, the Bank will not be
able to seek reimbursement for any portion of the loan from a private mortgage
insurer. As of September 30, 1997, the Bank had not experienced any material
difference between the delinquency rate for those loans and the delinquency rate
for 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 their higher
loan-to-value ratios.
Sale of Loans. During the fiscal year ended September 30, 1997, the
Bank sold approximately $27.7 million of mortgage loans. A gain of $387,000 on
the sales was recognized during fiscal year 1997.
Commercial and Multi-Family Real Estate Lending. As of September 30,
1997, $40.9 million, or 3.4% of the Bank's total loan portfolio, consisted of
commercial loans, and $14.9 million, or 1.3% 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.
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 real estate loans only
in its primary market area. All commercial and multi-family real estate 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.
9
12
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, 1997,
construction loans totaled $115.6 million, or 9.7% 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 loans generally
convert into permanent loans with terms of up to 30 years 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 up
to 80%. 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, 1997 were for loans on single family dwellings.
The Bank offers 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 may grant
preferential rates to the builder through these commitments.
Land Loans. The Bank 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, 1997, land loans totaled $23.0
million, or 1.9% 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 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, 1997, this loan had an outstanding balance of $8.4
million.
Consumer and Other Lending. At September 30, 1997, $153.8 million, or
12.9% 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.
During the fiscal years ended 1995 and 1996, the Bank became more
active in the indirect automobile lending market. Indirect automobile 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. Higher delinquencies
and charge-offs did not occur until the third quarter of fiscal 1996, as
insufficient time had passed prior to the third quarter for the indirect
automobile loan portfolio to mature and for the Bank to experience collection
problems, which indicated that significant additional provisions were necessary.
As a result, a $16.4 million provision for loan losses related to consumer
lending was recorded during fiscal year 1996. The provisions were determined by
projecting charge-offs based on the latest repossession activity and recovery
rates. 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
10
13
indirect lending program. Total consumer and other loans outstanding decreased
to $153.8 million at September 30, 1997 from $194.1 million at September 30,
1996. Of these amounts, $88.4 million and $148.2 million at September 30, 1997
and September 30, 1996, respectively, were indirect loans.
Notwithstanding the decline in indirect loans, other consumer loans
increased by $19.5 million in fiscal 1997. This increase reflects a primary
focus on increasing the volume of home equity loans and lines of credit, direct
automobile lending and personal lines of credit.
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 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. The Bank is in its third year of its credit card program.
The Bank offers Visa Classic, Visa Gold and Secured Visa Programs. The credit
applications for credit cards are underwritten and collected by the Bank, and
the payments and statement processing are carried out by a third party.
As of September 30, 1997, the Bank had approved 3,866 credit card
accounts having an aggregate credit limit of $8.5 million. The outstanding
balance on these cards at September 30, 1997 was $3.6 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 the Bank's 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%. The Bank introduced a "tax reducer" account which is a home
equity line of credit which allows access through a Visa credit card. At
September 30, 1997 the balance of these accounts was $6.0 million.
Commercial Lending. With the ongoing consolidation of banking
institutions in Florida, the Bank believes there is a significant opportunity
for lending to small business enterprises. In preparation, the Bank has hired
experienced commercial bankers to provide expertise in developing conservative
lending programs to meet the needs of that market. Growth in this area of
lending will be disciplined, with asset quality being of primary importance.
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 $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 primarily 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
primarily consists of members of senior management 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 $5
million must be authorized by the Bank's President. All mortgage loan approvals
are ratified by the Bank's Board of Directors.
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14
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 in connection with 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.
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 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 decreased to $6.8
million at September 30, 1997 from $11.3 million at September 30, 1996. The
decrease was primarily due to one loan relationship totaling $6.2 million at
September 30, 1996 on a marina and beach club in Charlotte County, Florida which
was refinanced and paid down to $3.8 million and brought current during fiscal
year 1997. See "Asset Quality - Classified Assets."
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 unresponsive
borrowers. Upon repossession, the collateral is evaluated to determine its
condition. Repairs are made at the discretion of the Collections supervisor. The
Bank attempts to sell the asset 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, 1995, 1996 and 1997, delinquencies of 60 days or more
in the Bank's loan portfolio were as follows:
At September 30, 1995 At September 30, 1996
------------------------------------------ ------------------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
---------------------- ------------------ ---------------------- ----------------------
Number Principal Number Principal Number Principal Number Principal
of Loans Balance of Loans Balance of Loans Balance of of Loans Balance of
of Loans of Loans Loans Loans
--------- --------- -------- --------- -------- ---------- --------- ---------
(Dollars in thousands)
Mortgage loans:
One- to four- family .............. 10 $ 163 28 $1,172 19 $1,150 45 $ 2,621
Construction and land ............. - - 5 267 3 742 13 8,658
Commercial real estate ............ - - 1 80 - - - -
Multi-family ...................... - - 2 243 - - - -
----- ------ ------- ------ ----- ------ --- -------
Total mortgage loans .............. 10 163 36 1,762 22 1,892 58 11,279
Consumer and other loans .......... 20 187 16 52 160 2,065 132 1,552
----- ------ ------- ------ ----- ------ --- -------
Total loans ....................... 30 $ 350 52 $1,814 182 3,957 190 $12,831
===== ====== ======= ====== ===== ====== === =======
Delinquent loans to total loans ... 0.04% 0.21% 0.37% 1.20%
At September 30, 1997
-------------------------------------------------
60-89 Days 90 Days or More
---------------------- ------------------------
Number Principal Number Principal
of Loans Balance of of Loans Balance of
Loans Loans
--------- ---------- --------- ----------
(Dollars in thousands)
MORTGAGE LOANS:
One- to four- family .............. 28 $ 1950 62 $5,340
Construction and land ............. 1 120 10 1,484
Commercial real estate ............ - - - -
Multi-family ...................... 1 89 - -
----- ------ ------ ------
Total mortgage loans .............. 30 2,159 72 6,824
Consumer and other loans .......... 153 1,623 114 1,262
----- ------ ------ ------
Total loans ....................... 183 $3,782 186 $8,086
===== ====== ====== ======
Delinquent loans to total loans ... 0.32% 0.68%
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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,
1997, there were $7.9 million in loans restructured within the meaning of SFAS
No. 15, the majority of which were indirect automobile loans.
AT SEPTEMBER 30,
-----------------------------------------------------------
1993 1994 1995 1996 1997
------ ----- ---- ----- ----
(DOLLARS IN THOUSANDS)
-----------------------------------------------------------
Non-Accrual mortgage loans(1), (2) .......................... $2,633 $1,451 $1,743 $11,269 $ 6,824
Mortgage loans delinquent 90 days or more and still accruing(2) 25 443 18 10 --
Non-accrual consumer loans and other loans(1), (2) .......... -- -- 8 1,390 1,037
Consumer and other loans delinquent 90 days or more and still
accruing(3) ................................................. 20 37 45 162 225
------ ------ ------ ------- -------
Total non-performing loans .................................. 2,678 1,931 1,814 12,831 8,086
Real estate owned and in-substance foreclosed loans ......... 1,403 529 549 1,626 1,795
Repossessed automobiles(3)................................... -- 13 371 1,602 474
------ ------ ------ ------- -------
Total non-performing assets ................................. $4,081 $2,473 $2,734 $16,059 $10,355
====== ====== ====== ======= =======
Non-performing loans to total loans ......................... 0.58% 0.30% 0.21% 1.20% 0.68%
Total non-performing assets to total assets ................. 0.48% 0.23% 0.23% 1.08% 0.57%
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 decreased to $6.8 million at September 30,
1997 from $11.3 million at September 30, 1996. This decrease was primarily the
result of a $6.2 million loan relationship on a marina/residential development
in Charlotte County, Florida which was refinanced and paid down to $3.8 million
and brought current during fiscal year 1997. See "Asset Quality - Classified
Assets."
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
- ---------------
(1) For the fiscal year ended September 30, 1997, $678,000 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
$301,000 in interest income on these loans was included in net income.
(2) As to principal or interest.
(3) Repossessed automobiles are carried as estimated fair value, which
approximates management's estimate of proceeds to be received at time of
disposition based on historical experience. Recovery rates have averaged
55-60% per repossession.
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not currently expose the 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 its reviews to the
Board of Directors on a monthly basis.
At September 30, 1997, the Bank had one classified asset with an
aggregate carry value in excess of $1.0 million. Set forth below is a brief
description of the classified asset with a carrying value of $1.0 million or
more at September 30, 1997.
Marina/Residential Development, Charlotte County, Florida. At September
30, 1997, the Bank's classified assets included one loan to one borrower and a
speculative loan on two model residences to a party related to the borrower. The
loans totaled $3.8 million at September 30, 1997 and are secured by first
mortgages on a marina, a beachfront lot and two speculative model residences.
The Bank has personal guarantees on the notes.
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18
The following table sets forth at September 30, 1997 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.... 52 $ 4,567 -- -- -- -- 16 $ 2,490
Multi-family............ -- -- -- -- -- -- -- --
Commercial real estate.. 4 4,208 -- -- 1 $ 349 1 1,318
Construction and land... 8 1,664 -- -- -- -- -- --
Consumer and other loans 116 1,379 2 $ 28 1 8 -- --
---------- --------- ---------- ---------- --------- ---------- ---------- ----------
Total................. 180 11,818 2 28 2 357 17 3,808
Repossessed automobiles... 48 474 -- -- -- -- -- --
Other assets.............. -- -- 39 1,070 -- -- -- --
Real estate owned:
One- to four- family.... 9 865 -- -- 3 42 -- --
Multi-family............ -- -- -- -- -- -- -- --
Commercial real estate.. 4 930 -- -- 3 119 -- --
Land.................... -- -- -- -- -- -- -- --
---------- --------- ---------- ---------- --------- ---------- ---------- ----------
Total real estate owned 13 1,795 -- -- 6 161 -- --
---------- --------- ---------- ---------- --------- ---------- ---------- ----------
Total for all Classified Assets 241 $ 14,087 41 $ 1,098 8 $ 518 17 $ 3,808
========== ========= ========== ========== ========= ========== ========== ==========
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.
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.
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, 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. 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. At September 30, 1997, indirect automobile loans
totaled $88.4 million and related general reserves equaled $3.3 million or 3.7%
of outstanding indirect loan balances.
16
19
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 and 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 Reform 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 Reform Act.
The following table sets forth the Bank's allowance for loan losses at
the dates indicated:
AT OR FOR THE FISCAL YEAR ENDED
--------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Balance at beginning of period .............................. $2,334 $1,886 $1,956 $ 2,157 11,855
Provision for loan losses ................................... 149 135 261 15,704 3,281
Increase in allowance due to acquisition of PBS ............. -- -- -- 2,253 --
Less: Charge-offs:
One- to four- family ...................................... -- -- -- -- 14
Construction and land ..................................... -- -- -- -- --
Multi-family .............................................. 81 -- -- -- 4
Commercial real estate .................................... 406 -- -- 668 353
Consumer loans ............................................ 122 69 92 7,962 10,912
Other loans ............................................... -- -- -- -- --
------ ------ ------ ------- -------
Total charge-offs ....................................... 609 69 92 8,630 11,283
Recoveries .................................................. 12 4 32 371 2,193
------ ------ ------ ------- -------
Balance at end of period .................................... $1,886 $1,956 $2,157 $11,855 $ 6,046
====== ====== ====== ======= =======
17
20
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,
---------------------------------------------------------------------------------
1993 1994 1995
------------------------ ------------------------ ------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
---------- ------------ ---------- ------------ ---------- ------------
(DOLLARS IN THOUSANDS)
At end of period allocated to:
One- to four- family...... $ 589 72.48% $ 660 68.88% $ 556 67.82%
Construction and land..... 876 13.22% 1,000 16.47% 490 13.71%
Multi-family.............. 8 2.53% 8 1.82% 12 1.37%
Commercial real estate.... 320 6.46% 35 4.86% 472 4.11%
Consumer loans............ 93 4.78% 252 7.68% 603 12.74%
Other loans............... -- 0.53% 1 0.29% 24 0.25%
---------- ------------ ---------- ------------ ---------- ------------
Total................... $ 1,886 100.00% $ 1,956 100.00% $ 2,157 100.00%
========== ============ ========== ============ ========== ============
AT SEPTEMBER 30,
----------------------------------------------------
1996 1997
------------------------- -------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
---------- ------------- ----------- ------------
At end of period allocated to:
One- to four- family...... $ 416 60.93% $ 525 70.85%
Construction and land..... 768 14.47% 1,093 11.60%
Multi-family.............. 24 4.83% 22 1.25%
Commercial real estate.... 1,163 1.64% 565 3.42%
Consumer loans............ 9,463 17.90% 3,797 12.64%
Other loans............... 21 0.23% 44 0.24%
---------- ------------- ----------- ------------
Total................... $ 11,855 100.00% $ 6,046 100.00%
========== ============= =========== ============
18
21
The following table sets for 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,
--------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- ------ ------ -------
Ratio of net charge-offs during the period to average
outstanding during the period ............................ 0.14% 0.01% 0.01% 0.81% 0.85%
Ratio of allowance for loan losses to total loans
receivable, net, at the end of period .................... 0.44% 0.34% 0.26% 1.18% 0.53%
Ratio of allowance for loan losses to non-performing
laons at end of period ................................... 70.43% 101.29% 118.91% 92.40% 74.77%
Ratio of allowance for loan losses to total non-performing 46.21% 79.51% 78.90% 73.82% 58.39%
assets at end of period
MORTGAGE-BACKED AND RELATED SECURITIES
The Bank invests in mortgage-related securities such as CMOs and
REMICs. At September 30, 1997, the Bank had $173.4 million in CMOs/REMICs, or
9.6% of total assets. Of this amount, $20.8 million are CMOs/REMICs classified
as held-to-maturity with an approximate fair value of $20.7 million, and $152.6
million are CMOs/REMICs classified as available-for-sale and reported at fair
value. Of the $173.4 million of CMOs/REMICs, $53.5 million, or 30.9%, 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 6.50% at
September 30, 1997. 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.
19
22
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, 1997 issued by the following entities:
ISSUER BOOK VALUE FAIR VALUE
------------------------------------------------------- --------------------------
(DOLLARS IN THOUSANDS)
1. FNMA $ 170,636 $ 171,692
2. GNMA $ 122,033 $ 123,874
3. G.E. Capital Mortgage Corporation $ 38,531 $ 38,325
4. Prudential Home Mortgage Securities Company, Inc $ 33,298 $ 33,296
5. Residential Funding Corporation $ 18,051 $ 18,051
6. FHLMC $ 16,019 $ 16,382
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, 1997, the Bank had $33.3 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, 1997, the Bank had $59.5 million in securities
available-for-sale consisting primarily of United States Government and agency
securities and municipal bonds.
20
23
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,
-----------------------------------------------------------------
1995 1996 1997
------------------ --------------------- --------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
---------- ------- --------- --------- --------- --------
(IN THOUSANDS)
INTEREST-EARNING DEPOSITS ...................... $13,878 $13,878 $141,975 $141,975 $78,806 $78,806
======= ======= ======== ======== ======= =======
SECURITIES HELD-TO-MATURITY:
U.S. Government and agency obligations ....... 38,110 37,988 6,981 7,042 14,988 15,144
Municipal bonds .............................. 10,388 11,288 -- -- -- --
FHLB stock ................................... 8,558 8,558 10,053 10,053 18,296 18,296
------- ------- -------- -------- ------- -------
Total ...................................... $57,056 $57,834 $ 17,034 $ 17,095 $33,284 $33,440
======= ======= ======== ======== ======= =======
SECURITIES AVAILABLE-FOR-SALE:
U.S. Government and agency obligations ....... $ 2,000 $ 2,000 $ 27,105 $ 27,105 $49,891 $49,891
Municipal bonds .............................. -- -- -- -- 9,527 9,527
Securities purchased under agreement to resell 30,443 30,443 -- -- -- --
Certificates of deposit and other securities . -- -- 446 446 50 50
------- ------- -------- -------- ------- -------
Total ...................................... $32,443 $32,443 $ 27,551 $ 27,551 $59,468 $59,468
======= ======= ======== ======== ======= =======
21
24
The table below sets forth certain information regarding the carrying
value and weighted average yields of the Bank's investment securities at
September 30, 1997.
AT SEPTEMBER 30, 1997
------------------------------------------------------------------------------
AFTER 1 THROUGH 5 YEARS AFTER 5 THROUGH 10
1 YEAR OR LESS 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 ..... -- -- $14,988 6.42% -- --
Municipal bonds ............................ -- -- -- -- -- --
FHLB stock ................................. -- -- -- -- -- --
----- ------- ------
Total securities held-to-maturity ............ -- -- $14,988 6.42% -- --
===== ======= ======
Securities available-for-sale(1), (2):
U.S. Government and agency obligations ..... -- -- $45,050 6.64% $4,841 6.66%
Municipal bonds(3) ......................... -- -- -- -- -- --
Certificates of deposit and other securities -- -- -- -- 50 7.88%
----- ------- ------
Total securities available-for-sale .......... -- -- $45,050 6.64% $4,891 6.66%
===== ======= ======
-------------------------------------------------------
AFTER 10 YEARS TOTAL SECURITIES
-------------------------------------------------------
ANNUALIZED
WEIGHTED
CARRYING AVERAGE CARRYING APPROXIMATE
VALUE YIELD VALUE FAIR VALUE
---------- ---------- -------- -----------
(DOLLARS IN THOUSANDS)
Securities held-to-maturity:
U.S. Government and agency obligations ..... -- -- $14,988 $15,144
Municipal bonds ............................ -- -- -- --
FHLB stock ................................. $18,296 7.25% 18,296 18,296
------- ------- -------
Total securities held-to-maturity ............ $18,296 7.25% $33,284 $33,440
======= ======= =======
Securities available-for-sale(1), (2):
U.S. Government and agency obligations ..... -- -- $49,891 $49,891
Municipal bonds(3) ......................... 9,527 7.39% 9,527 9,527
Certificates of deposit and other securities -- -- 50 50
------- ------- -------
Total securities available-for-sale .......... $ 9,527 7.39% $59,468 $59,468
======= ======= =======
- ---------------
(1) Carrying value is fair value of securities.
(2) Annualized weighted average yield is calculated utilizing the book
value of the securities prior to adjustments for unrealized gain or
loss on available-for-sale and trading securities.
(3) Annualized weighted average yield is presented on a fully tax
equivalent basis
22
25
SOURCES OF FUNDS
General. Deposits, loan repayments, borrowings, and cash flows
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 13,335 accounts or 12.5%. On December 8, 1995, the Bank
acquired 8,764 accounts from Palm Beach Savings as part of the acquisition of
PBS by the Company.
Management considers local competition, U.S. Treasury security
offerings, and internal cash flows 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 26.2% of
total deposits on September 30, 1995, 25.5% of total deposits on September 30,
1996 and 24.2% of total deposits on September 30, 1997. 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, 1996 and 1997, the Bank
became more competitive in its pricing of certificates of deposit.
23
26
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,
-------------------------------------------------------------------------------------
1995 1996
---------------------------------------- -----------------------------------------
PERCENT WEIGHTED PERCENT WEIGHTED
OF TOTAL AVERAGE OF TOTAL AVERAGE
AMOUNT DEPOSITS NOMINAL RATE AMOUNT DEPOSITS NOMINAL RATE
---------- ---------- -------------- ------------ ---------- -------------
(Dollars in thousands)
Demand accounts:
Non-interest bearing checking $ 31,912 3.63% 0.00% $ 39,649 3.49% 0.00%
NOW checking.................. 57,464 6.54% 1.41% 59,716 5.25% 1.41%
Passbook and statement savings 89,967 10.24% 2.56% 150,433 13.24% 3.62%
Money market.................. 50,853 5.79% 2.41% 39,667 3.49% 2.41%
---------- ---------- ------------ ----------
Total........................... 230,196 26.20% 1.87% 289,465 25.47% 2.47%
---------- ---------- ------------ ----------
Certificate accounts by original
maturity:
7-31 days..................... 437 0.05% 4.24% 672 0.06% 2.83%
91 days....................... 8,265 0.94% 4.85% 6,925 0.61% 4.91%
6 months...................... 44,314 5.04% 5.08% 39,459 3.47% 4.76%
9 months...................... 95,435 10.86% 5.86% 144,293 12.69% 5.45%
9-18 months................... 1,727 0.20% 5.18% 451 0.04% 5.33%
1 year........................ 126,694 14.42% 5.64% 171,201 15.06% 5.42%
11/2 years.................... 79,983 9.10% 5.73% 124,665 10.97% 5.92%
2 years....................... 58,335 6.64% 5.42% 93,988 8.27% 6.04%
21/2 years ................... 10,708 1.22% 6.10% 30,060 2.64% 5.98%
3 years....................... 23,984 2.73% 5.52% 26,921 2.37% 5.78%
4 years....................... 7,007 0.80% 5.84% 7,596 0.67% 5.78%
5 years....................... 92,722 10.55% 6.68% 101,065 8.89% 6.40%
Negotiated rate certificates(1) 98,863 11.25% 5.86% 99,961 8.79% 5.43%
---------- ---------- ------------ ----------
Total........................... 648,474 73.80% 5.80% 847,257 74.53% 5.61%
---------- ---------- ------------ ----------
Total deposits.................. $ 878,670 100.00% 4.77% $ 1,136,722 100.00% 4.87%
========== ========== ============ ==========
AT SEPTEMBER 30,
-----------------------------------------
1997
-----------------------------------------
PERCENT WEIGHTED
OF TOTAL AVERAGE
AMOUNT DEPOSITS NOMINAL RATE
------------ ---------- --------------
Demand accounts:
Non-interest bearing checking $ 49,513 4.03% 0.00%
NOW checking.................. 61,185 4.98% 0.75%
Passbook and statement savings 157,094 12.77% 3.65%
Money market.................. 29,446 2.40% 2.18%
------------ ----------
Total........................... 297,238 24.18% 2.22%
------------ ----------
Certificate accounts by original
maturity:
7-31 days..................... 1,351 0.11% 3.79%
91 days....................... 2,112 0.17% 4.08%
6 months...................... 31,806 2.59% 4.82%
9 months...................... 78,992 6.43% 5.56%
9-18 months................... -- -- --
1 year........................ 210,305 17.11% 5.57%
1 1/2 years................... 362,818 29.51% 6.03%
2 years....................... 96,809 7.88% 5.91%
2 1/2 years .................. 34,841 2.83% 6.00%
3 years....................... 25,974 2.11% 6.11%
4 years....................... 12,336 1.00% 6.05%
5 years....................... 74,697 6.08% 6.27%
Negotiated rate certificates(1) -- -- --
------------ ----------
Total........................... 932,041 75.82% 5.85%
------------ ----------
Total deposits.................. $ 1,229,279 100.00% 4.99%
============ ==========
- ---------------
(1) Deposit account balances at September 30, 1995 and 1996 include
certificates of deposit of $50,000 and up which have negotiated rates.
During fiscal year ended September 30, 1997 the Bank changed their
policy to one where rates may be negotiated on any certificate of
deposit within certain limits.
24
27
The following table presents the deposit activity of the Bank for the
periods indicated:
FISCAL YEAR ENDED SEPTEMBER 30,
-------------------------------------------
1995 1996 1997
------------- ------------ -----------
(IN THOUSANDS)
Deposits ............................. $ 1,597,936 2,095,914(1) $ 2,149,461
Withdrawals........................... 1,474,866 1,886,048 2,113,748
------------- ------------ -----------
Deposits greater than withdrawals..... 123,070 209,866 35,713
Interest credited on deposits......... 37,318 48,186 56,844
------------- ------------ -----------
Total increase in deposits............ $ 160,388 $ 258,052 $ 92,557
============= ============ ===========
At September 30, 1997, the Bank had outstanding $119.5 million in
certificate of deposit accounts of $100,000 or more maturing as follows:
BALANCE AT SEPTEMBER 30, 1997
----------------------------------------------------
ORIGINATION AMOUNT
----------------------------------------------------
$100,000 AND OVER
---------------------------------------------------
(IN THOUSANDS)
MATURING PERIOD:
One month through three months.. $ 24,526
Three through six months........ 31,222
Six through 12 months........... 22,795
Over 12 months.................. 40,965
---------------------------------------------------
Total........................... $119,508
===================================================
The following table presents, by various rate categories, the amount of
certificate of deposit accounts outstanding at September 30, 1995, 1996 and 1997
and the period to maturity of these accounts from September 30, 1997:
AT SEPTEMBER 30, PERIOD TO MATURITY FROM SEPTEMBER 30, 1997
----------------------------------- ------------------------------------------------------------
WITHIN ONE TO TWO TO
ONE YEAR TWO THREE
1995 1996 1997 YEARS YEARS THEREAFTER TOTAL
---------- --------- ---------- --------- --------- ------- ----------- ---------
(IN THOUSANDS)
Certificate accounts:
Less than 3.00%......... $ 326 $ 833 $ 252 $ 252 -- -- -- $ 252
3.00% to 3.99% ......... 5,184 303 466 466 -- -- -- 466
4.00% to 4.99% ......... 98,532 86,471 51,009 48,565 $ 2,444 -- -- 51,009
5.00% to 5.99% ......... 266,157 595,436 722,063 573,199 107,035 $ 15,497 26,332 722,063
6.00% to 6.99% ......... 224,788 131,927 139,753 84,244 29,423 13,020 13,066 139,753
7.00% to 7.99% ......... 49,477 32,151 18,356 153 75 18,093 35 18,356
8.00% or greater........ 4,010 136 142 - - -- 142 142
--------- ---------- ---------- --------- ----------- -------- -------- ---------
Total..................... $ 648,474 $ 847,257 $ 932,041 $ 706,879 $ 138,977 $ 46,610 $ 39,575 $ 932,041
========= ========== ========== ========= =========== ======== ======== =========
- --------------
(1) Deposits include $103.8 million of deposits acquired in the acquisition
of PBS.
25
28
BORROWINGS
On June 30, 1997, the Company issued $35.0 million of 10.35% Senior
Debentures, maturing on June 30, 2002. The interest on the Senior Debentures is
payable semi-annually in arrears on June 30 and December 31 of each year. The
Senior Debentures may not be redeemed prior to maturity. The net proceeds of the
debenture issuance are being used for general corporate purposes, including
contributing $25.0 million of the net proceeds to the Bank.
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, 1997, the Bank had a total credit availability with the
FHLB-Atlanta of $500.0 million. With $365.9 million currently advanced,
remaining credit availability equals $134.1 million.
The Bank executes sales of its securities under agreements to
repurchase ("Reverse Repurchase Agreements"). During the fiscal year ended
September 30, 1997, 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 $30.7 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 $40.3 million, $11.9 million and $15.6
million during the fiscal years ended September 30, 1995, 1996 and 1997,
respectively. The maximum amounts outstanding at any month end under such
agreements were $76.9 million, $28.4 million and $28.9 million during 1995, 1996
and 1997, respectively. The weighted average interest rate on the Reverse
Repurchase Agreements at September 30, 1997 was 5.71%.
The following table sets forth certain information relating to the
Bank's borrowings at September 30, 1995, 1996 and 1997.
AT OR FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
---------------------------------------------
1995 1996 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
FHLB advances:
Average balance outstanding ................................. $ 141,837 $ 200,158 $ 226,271
Maximum amount outstanding at any month end during the period 171,125 226,100 365,925
Balance outstanding at end of period ........................ 171,125 201,025 365,925
Weighted average interest rate during the period ............ 6.13% 5.98% 5.94%
Weighted average interest rate at end of period ............. 6.28% 5.88% 5.98%
Reverse repurchase agreements:
Average balance outstanding ................................. $ 40,321 $ 11,935 $ 15,574
Maximum amount outstanding at any month end during the period 76,947 28,408 28,946
Balance outstanding at end of period ........................ 18,427 10,000 28,946
Weighted average interest rate during the period ............ 5.84% 5.97% 5.80%
Weighted average interest rate at end of the period ......... 6.19% 5.92% 5.71%
Total borrowings:
Average balance outstanding ................................. $ 182,158 $ 212,093 $ 241,829
Maximum amount outstanding at any month end during the period 248,072 254,508 394,871
Balance outstanding at end of period ........................ 189,552 211,025 394,871
Weighted average interest rate during the period ............ 6.07% 5.98% 5.93%
Weighted average interest rate at end of period ............. 6.27% 5.88% 5.96%
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SUBSIDIARY ACTIVITIES
During fiscal 1997, the Bank had three wholly-owned subsidiaries: FBMC,
The Big First, Inc. and First Corporate Center, Inc.
FBMC 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,
1997, the Bank's investment in FBMC was $455,000 and its assets were $987,000.
FBMC's earnings were $92,000 for the fiscal year ended September 30, 1997.
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 is inactive.
PERSONNEL
As of September 30, 1997, the Bank had 409 full-time employees and 36
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.
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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. 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.
The OTS has primary enforcement responsibility over federally chartered
savings institutions and has substantial discretion to impose enforcement action
on an institution that fails to comply with its regulatory requirements,
particularly with respect to its capital requirements. In addition, the FDIC has
the authority to recommend to the Director of the OTS that enforcement action be
taken with respect to a particular federally chartered savings institution and,
if action is not taken by the Director, the FDIC has authority to take such
action under certain circumstances. 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
Congress, could have a material adverse impact on the Company, the Bank and
their operations. Certain of the regulatory requirements applicable to the Bank
and to the Company are referred to below or elsewhere herein.
The descriptions of statutory provisions and regulations applicable to
savings associations and savings and loan holding companies set forth in this
document do not purport to be complete descriptions of such statutes and
regulations and their effects on the Company and the Bank.
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 regulation of federally-insured savings
associations and empower the OTS and the FDIC, among other agencies, to
promulgate regulations implementing its provisions.
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, (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 of the OTS, (5) permit bank holding
companies to acquire healthy savings institutions and (6) require the federal
banking agencies
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to establish by regulation uniform standards for 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 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
stockholders' equity (including retained earnings but excluding net unrealized
gains and losses from available-for-sale debt securities), certain
non-cumulative perpetual preferred stock and related surplus, minority interests
in equity accounts of consolidated subsidiaries less intangibles other than
certain qualifying supervisory intangible assets, certain mortgage servicing
rights and certain other assets as defined by OTS capital regulations. 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 meeting 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
the maintenance of total risk-based capital (which is defined as core capital
plus supplementary capital less certain adjustments) to risk-weighted assets of
8%. 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. The components of core capital are equivalent to
those discussed above with respect to the 3% leverage ratio. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock and 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
supplementary capital counted toward total capital cannot exceed 100% of core
capital. In addition, certain assets are required to be deducted from risk-based
capital such as certain equity investments and construction loans with
loan-to-value ratios exceeding 80%.
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 ("IRR"), concentration of risk and
the risks of non-traditional activities. The OTS adopted regulations, effective
January 1, 1994, that set forth the methodology for calculating an interest rate
risk component to be incorporated into the OTS risk-based capital regulations.
The OTS has indefinitely deferred its requirement of the interest rate risk
component in the calculation of an institution's risk-based capital calculation.
The OTS continues to monitor the IRR of individual institutions and retains the
right to impose minimum capital on individual institutions. Based on the Bank's
IRR profile and the level of interest rates at September 30, 1997, as well as
the Bank's level of risk-based capital at September 30, 1997, management
believes that the Bank does not have a greater than normal level of IRR as
measured under the OTS rule and would not be required to increase its capital as
a result of the rule.
At September 30, 1997, 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, 1997, calculated in
accordance with applicable requirements of the OTS:
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To Be Considered Well
Capitalized Under
For Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
---------------------- --------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ---------- ----------- -------- ------- ------
(Dollars in thousands)
As of September 30, 1997:
Total Capital (to Risk-weighted Assets) $ 133,761 14.76% 72,481 8.00% $ 90,602 10.00%
Core (Tier 1) Capital (to Adjusted Tangible Assets) 128,065 7.07% 72,423 4.00% 90,529 5.00%
Tangible Capital (to Tangible Assets) 128,065 7.07% 27,159 1.50% N/A N/A
Core (Tier 1) Capital (to Risk-weighted Assets) 128,065 14.31% N/A N/A 54,361 6.00%
In accordance with the Interstate Act (as hereinafter defined), the
bank regulators have released a joint notice of proposed rule-making to revise
the risk-based capital standards to address the regulatory capital treatment of
recourse obligations and direct credit substitutes that expose banking
organizations to credit risks. It is the Bank's understanding that these
agencies intend that any final rules adopted in connection with this proposal
that result in increased risk-based capital requirements apply only to
transactions consummated after the effective date of the final rules.
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 Capital (to Risk-weighted Assets) ratio
of 10% or more, a Core (Tier 1) Capital (to Adjusted Tangible Assets) of 5% or
more, and a Core (Tier 1) 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 Capital (to Risk-weighted Assets)
ratio of 8% or more, a Core (Tier 1) Capital (to Adjusted Tangible Assets) ratio
of 4% or more, and Core (Tier 1) Capital (to Risk-weighted Assets) of 4% or
more.
A savings institution that has a Total Capital (to Risk-weighted
Assets) ratio of less than 8%, a Core (Tier 1) Capital (to Adjusted Tangible
Assets) ratio of less than 4% and Core (Tier 1) Capital (to Risk-weighted
Assets) of less than 4% is considered "undercapitalized." A savings institution
that has a Total Capital (to Risk-weighted Assets) ratio less than 6%, a Core
(Tier 1) Capital (to Risk-weighted Assets) ratio of less than 3% or a Core (Tier
1) Capital (to Adjusted Tangible Assets) ratio that is less than 3% is
considered to be "significantly undercapitalized" and a savings institution that
has a Tangible Capital (to Tangible 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." In addition,
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various mandatory supervisory actions become immediately applicable to the
institution, including restrictions on growth of assets and other forms of
expansion. 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. As of September 30,
1997, the Bank was considered "well capitalized" by the OTS.
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 was 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"), effective October
1, 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 risks
attributable to different categories and concentrations of assets and
liabilities. 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 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's assessment and establish a
procedure for resolving disagreements between the FDIC and an institution
regarding assessment computations.
For the semi-annual assessment period beginning July 1, 1996, SAIF
insurance premiums ranged from annualized rates of 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 year ended September 30, 1996 was 0.23% of insured deposits,
which rate was reduced effective January 1, 1997 to 0% and will be increased
effective January 1, 1998 to 0.03%. 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. Insurance premium
expense during the fiscal year ended September 30, 1997 was $1.0 million.
The FDIC in early December 1996 adopted a rule that reduced regular
semi-annual SAIF assessments from the range of 0.23% - 0.31% of deposits to a
range of 0% - 0.27% of deposits. The new rates were effective for
SAIF-assessable institutions on January 1, 1997. From October 1, 1996 through
December 31, 1996, SAIF-assessable institutions were assessed at rates ranging
from 0.18% to 0.27% of deposits, which represents the amount the FDIC calculated
as necessary to cover the interest due for that period on outstanding Financing
Corporation ("FICO") Bonds discussed below. Because SAIF-assessable institutions
had 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 refunded the amount
collected from such
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institutions for the period from October 1, 1996 through December 31, 1996 which
exceeded the amount due for that period under the reduced assessment schedule.
DIFA also provides that the FDIC cannot assess regular insurance assessments for
an insurance fund unless required to maintain or to achieve the designated
reserve ratio of 1.25% of insured deposits, except on those of its member
institutions that are not classified as "well capitalized" or that have been
found to have "moderately severe" or "unsatisfactory" financial, operational or
compliance weaknesses. The Bank has not been so classified by the FDIC or the
OTS.
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. 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. The annual rate of assessment for the payments on
the FICO bonds for the semi-annual period beginning on January 1, 1997 was
0.0649% for SAIF-assessable deposits, and for the semi-annual period beginning
on July 1, 1997 was 0.0630%.
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, 1997, 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.
Immediately prior to the 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.
DIFA directs the Secretary of the Treasury to conduct a study of
relevant factors with respect to the development of a common charter for all
insured depository institutions and to report the Secretary's conclusions and
findings to the Congress. The Secretary of the Treasury has recommended that the
separate charter for thrifts be eliminated only if other legislation is adopted
that permits bank holding companies to engage in certain non-financial
activities. Absent legislation permitting such non-financial activity, the
Secretary of the Treasury recommended retention of the thrift charter. The
Secretary of the Treasury also recommended the merger of the BIF and the SAIF
irrespective of whether the thrift charter is eliminated. Other proposed
legislation has been introduced in Congress that
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would require thrift institutions to convert to bank charters. These bills
include provisions that would (i) apply the restrictions on activities
applicable to multiple savings and loan holding companies and bank holding
companies to unitary savings and loan building companies and (ii) eliminate the
savings association charter and require savings associations to become banks and
simultaneously abolish the OTS and its supervisory role over savings and loan
holding companies. Although no assurances can be given as to whether legislation
will be enacted to eliminate the thrift charter or if enacted, what powers would
be available to the Bank under any new or revised depository institution
charter, management of the Bank believes that such legislation will not
significantly impact its core business activities. Management intends to
continue to closely monitor such developments.
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, 1997, the Bank's largest aggregate amount of loans to
one borrower consisted of $12.0 million in lines of credit, with $8.4 million
then drawn. At September 30, 1997, 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 $19.6 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%).
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 and mortgage-related 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
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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. On September
30, 1996, as part of the omnibus appropriations bill, Congress enacted the
Economic Growth and Paperwork Reduction Act of 1996 ("Regulatory Paperwork
Reduction Act"), modifying and expanding the investment authority of federal
savings institutions under the QTL test. Prior to the enactment of the
Regulatory Paperwork Reduction Act, commercial, corporate, business, or
agricultural loans were limited in the aggregate to 10% of a thrift's assets and
education loans were limited to 5% of a thrift's assets. Further, in order to
qualify for favorable tax treatment, federal savings institutions also had to
meet a different asset test under the Internal Revenue Code (the "domestic
building and loan association test"). The amendments permit federal thrifts to
invest in, sell, or otherwise deal in education and credit card loans without
limitation and raise from 10 to 20 percent of total assets the aggregate amount
of commercial, corporate, business, or agricultural loans or investments that
may be made by a thrift, subject to a requirement that amounts in excess of 10%
of total assets be used only for small business loans. In addition, the
legislation defines "qualified thrift investment" to include, without
limitation, education, small business, and credit card loans; and removes the
10% limit on personal, family, or household loans for purposes of the QTL test.
The legislation also provides that a thrift meets the QTL test if it qualifies
as a domestic building and loan association under the Internal Revenue Code. As
of September 30, 1997, the Bank maintained 82.1% 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.
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, 1997, 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
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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.) At the time of the conversion to stock
form, the Bank was required to establish a liquidation account in an amount
equal to its capital as of June 30, 1993. As part of the acquisition of Palm
Beach Savings, the Bank established a similar liquidation account equal to the
remaining liquidation account balance previously maintained by Palm Beach
Savings, as a result of its conversion from mutual to stock form of ownership.
The liquidation account will be reduced to the extent that eligible account
holders reduce their qualifying deposits. In the unlikely event of a complete
liquidation of the Bank, each eligible account holder will be entitled to
receive a distribution from the liquidation account. The Bank may not declare or
pay cash dividends on or repurchase any of its shares of common stock if the
effect thereof would cause stockholders' equity to be reduced below the amount
required for the liquidation account.
Liquidity. OTS regulations currently require a savings institution to
maintain an average daily balance of liquid assets (generally 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 a specified percentage
(determined as of the end of the preceding calendar quarter or as an average
daily balance during the preceding quarter) of its net withdrawable deposit
accounts plus short-term borrowings. 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,
and is currently 4%. In addition to this minimum requirement, each savings
institution must maintain sufficient liquidity to ensure its safe and sound
operation. Monetary penalties may be imposed by the OTS for failure to meet
these liquidity requirements. The Bank's average daily liquidity ratio at
September 30, 1997 was 7.0%, 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 1997 totaled $272,908.
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 a "satisfactory"
rating in its last CRA examination by the OTS in January 1997.
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 were not effective until January 1, 1997.
Evaluation under the regulations became mandatory on July 1, 1997. The Bank
believes its current operations and policies substantially comply with the
regulations, and therefore, no material changes to operations or policies are
expected.
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On May 7, 1997 the Federal Housing Finance Board ("FHFB") approved
community support regulations which establish uniform performance standards for
all members of the Federal Home Loan Bank System.
The FHFB's new regulations implement a statutory requirement that
members of the FHLB System promote housing finance and support the communities
in which they do business. Generally, member institutions must meet the minimum
community support requirements to maintain access to (i) long-term system
advances for housing finance and (ii) certain funding for targeted community
development projects.
A member institution which is subject to CRA, such as the Bank, can
meet the new CRA standard by receiving an "outstanding" or "satisfactory" rating
from its regulator. A member with a "needs to improve" CRA rating will be placed
on probation until its next CRA exam with no restrictions on access to long-term
advances and other funding. However, an institution that fails to improve its
CRA rating, or receives a "substantial non-compliance" rating, will be denied
access to FHLB System funds. With respect to the first-time home buyer
performance standard, the FHFB will waive that requirement for a member
institution which receives an "outstanding" CRA rating. All other members may
meet the standard by submitting satisfactory evidence of lending to, or
participation in programs for, first-time home buyers. An institution with an
unsatisfactory record of assistance to first-time home buyers will be put on
probation for one year, with no restrictions on its access to FHLB funds. An
institution that fails to improve its performance or provides no evidence of
service to first-time home buyers will be restricted from long-term advances and
other funds. The Bank believes that its current operations and policies
substantially comply with these requirements, and therefore expect that the
regulations will not have a material effect on its business.
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 rollover 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, 1997, 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. These regulations
impose stringent reporting requirements and require the establishment and
maintenance of internal control structures and procedures. 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 must include members with banking or related financial
management expertise, have access to outside counsel and not include any large
customer
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of the institution. 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, is controlled by 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 transactions,
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 ("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
promulgated 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 or, in the case of officers and directors, on the same basis made to
the institution's employees generally on a non-discriminatory basis, 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, asset quality,
earnings, stock valuation and compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The OTS,
together with the other federal bank regulatory agencies, has adopted guidelines
prescribing safety and soundness standards pursuant to FDICIA, as amended. The
guidelines establish general standards relating to internal controls,
information systems and internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, asset quality, earnings and
employee compensation. In
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general, the guidelines require, among other things, appropriate systems and
practices to identify and manage the risks and exposures specified in the
guidelines. The guidelines prohibit excessive compensation as an unsafe and
unsound practice and describe compensation as excessive when the amounts paid
are unreasonable or disproportionate to the services performed by an executive
officer, employee, director or principal shareholder. In addition, regulations
were adopted pursuant to FDICIA to require a savings institution that is given
notice by the OTS that it is not satisfying any of such safety and soundness
standards to submit a compliance plan to the OTS. If, after being so notified, a
savings institution fails to submit an acceptable compliance plan or fails in
any material respect to implement an accepted compliance plan, the OTS may issue
an order directing corrective and other actions of the types to which a
significantly undercapitalized institution is subject under the "prompt
corrective action" provisions of FDICIA. If a savings institution fails to
comply with such an order, the OTS may seek to enforce such order in judicial
proceedings and to impose civil money penalties.
Interstate Banking and Branching. 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. The OTS regulations authorize federally chartered savings
institutions to branch nationwide to the extent allowed by federal statute. This
permits federal savings and loan institutions with interstate networks to
diversify more easily their loan portfolios and lines of business
geographically. The OTS' authority preempts state law purporting to regulate
branching by federal savings institutions. As of June 1997, national banks and
state chartered banks and savings banks will have increased authority under the
Interstate Act to establish interstate branches. See "Holding Company
Regulation." Management believes the Bank meets all the standards adopted in the
Interstate Act.
Florida law has permitted interstate reciprocal acquisitions of and by
Florida savings institutions since 1986. The Interstate Act and Florida law have
expanded the number of out-of-state bank holding companies acquiring Florida
financial institutions, which has increased consolidation and competition in the
Bank's market and is expected to continue to do so.
Recapture of Bad Debt Reserves. The Bank is permitted under the
Internal Revenue Code of 1986, as amended (the "Code"), to deduct an annual
addition to a reserve for bad debts in determining taxable income, subject to
certain limitations. During the year ended September 30, 1996, the Bank used the
experience method, as defined by the Code. The Small Business Job Protection Act
of 1996 (the "1996 Act") repealed the experience method. Under the 1996 Act, the
Bank will be permitted to deduct bad debts only as they occur, and will be
required to recapture (that is, take into income) over a six-year period,
beginning with the taxable year ending September 30, 1997, the excess of the
balance of such reserves as of September 30, 1996. However, under the 1996 Act,
such recapture requirements will be suspended for each of the two successive
taxable years beginning October 1, 1996 in which the Bank originates a minimum
amount of certain residential loans during such years that is not less than the
average of the principal amounts of such loans made by the Bank during its six
taxable years preceding October 1, 1996. Since the Bank has already provided a
deferred income tax liability for financial reporting purposes, there will be no
adverse impact to the Bank's financial condition or results of operations from
the enactment of this legislation.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs which are governed and regulated by the Federal Housing Finance Board. The
FHLB 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 FHLB advances to a
member institution, and in some circumstances, limits advances to institutions
that do not meet the QTL test. See "Federal
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Savings Institution Regulation - QTL Test." At September 30, 1997, advances from
the FHLB-Atlanta to the Bank totaled $365.9 million. The weighted average
interest rate on those advances as of September 30, 1997 was 5.98%.
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, 1997 of
$18.3 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, 1995, 1996 and
1997, dividends from the FHLB-Atlanta to the Bank amounted to $549,000, $741,000
and $849,000, 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 (the "FRB") regulations require savings
institutions to maintain non-interest-earning reserves against certain of their
transaction accounts (primarily NOW and regular checking accounts). FRB
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $47.8 million or less
(subject to adjustment by the FRB), the reserve requirement is 3% of the amount
of transaction accounts; for accounts greater than $47.8 million, the reserve
requirement is 10% (subject to adjustment by the FRB between 8% and 14%) of the
amount of transaction accounts in excess of $47.8 million. The first $4.7
million of otherwise reservable balances (subject to adjustments by the FRB) are
exempted from the reserve requirements. At September 30, 1997, 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 FRB 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 FRB, 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 FRB regulations require
institutions to exhaust all FHLB sources before borrowing from a Federal Reserve
Bank.
In addition, FRB 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 registered 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, of which there currently are none.
Among other things, this authority permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
institution. The Bank must notify the OTS 30 days before declaring any dividend
to the Company.
Because the Company is a holding company, the rights of the Company to
participate in any distribution of assets of any subsidiary, including the Bank,
upon the subsidiary's liquidation or reorganization or otherwise (and thus the
ability of the Company's stockholders to benefit from such distribution) would
be subject to the prior claims of
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creditors of that subsidiary, except to the extent that the Company itself may
be a creditor of that subsidiary with recognized claims. Claims on the Company's
subsidiaries by creditors other than the Company will include substantial
obligations with respect to deposit liabilities and borrowed funds.
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 non-subsidiary savings
institution, a non-subsidiary holding company or a non-subsidiary 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, which
activities include mortgage banking, consumer finance, operation of a trust
company and certain types of securities brokerage activities.
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 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 CAMELS 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 SEC. The Company is
subject to the information, proxy solicitation, insider trading restrictions and
other requirements under the Exchange Act of 1934, as amended. The registration
under the Securities Act of 1933 as amended (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.
DELAWARE CORPORATION LAW
The Company is incorporated under the laws of the State of Delaware.
Thus, the Company is subject to regulation by the State of Delaware and the
rights of its stockholders are governed by the Delaware General Corporation Law.
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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. 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's income tax returns for the years ended September 30, 1994
and September 30, 1995 are currently being examined by the Internal Revenue
Service.
Bad Debt Reserves. The percentage of taxable income method has been
repealed for years beginning after December 31, 1995, and "large" associations
(i.e., the quarterly average of the association's total assets or of the
consolidated group of which it is a member, exceeds $500 million for the year)
cannot use the experience method of computing additions to their bad debt
reserve. A "large" association must use the direct write-off method for
deducting bad debts, under which charge-offs are deducted and recoveries are
taken into taxable income as incurred. If the Bank is not a "large" association,
the Bank will continue to be permitted to use the experience method. The Bank
will be required to recapture (i.e., take into income) over a six-year period
its applicable excess reserves (i.e., the balance of its reserves for losses on
qualifying loans and nonqualifying loans) as of the close of the last tax year
beginning before January 1, 1996, over the greater of (a) the balance of such
reserves as of December 31, 1987 (pre-1988 reserves) or (b) in the case of a
bank which is not a "large" association, an amount that would have been the
balance of such reserves as of the close of the last tax year beginning before
January 1, 1996, had the Bank always computed the additions to its reserves
using the experience method. Postponement of the recapture is possible for a
two-year period if an association meets a minimum level of mortgage lending for
1996 and 1997.
If an association ceases to qualify as a "bank" (as defined in Code
Section 581) or converts to a credit union, the pre-1988 reserves and the
supplemental reserve are restored to income ratable over a six-year period,
beginning in the tax year the association no longer qualifies as a bank. The
balance of the pre-1988 reserves are also subject to recapture in the case of
certain excess distributions to (including distributions on liquidation and
dissolution), or redemptions of, shareholders.
Corporate Alternative Minimum Tax. Corporations, including qualifying
savings institutions such as the Bank, generally are subject to the alternative
minimum tax ("AMT"), to the extent that the amount of such tax exceeds the
amount of the corporation's regular income tax. The 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.
AMTI can be offset by only 90% of net operating loss carry-overs. 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). The Bank does not
expect to be subject to the AMT.
Dividends Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the 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.
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.
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IMPACT OF NEW ACCOUNTING STANDARDS
In June 1996, FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The
Statement, which amends SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," supersedes SFAS No. 122, "Accounting for Mortgage
Servicing Rights." This Statement provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities. Those standards are based on consistent application of a
financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when extinguished. This Statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. SFAS No. 125 requires that servicing assets and
liabilities be subsequently measured by (a) amortization in proportion to and
over the period of estimated net servicing income or loss and (b) assessment for
asset impairment or increased obligation based on their fair values. SFAS No.
125 also requires that debtors reclassify financial assets pledged as collateral
and that secured parties recognize those assets and their obligation to return
them in certain circumstances in which the secured party has taken control of
those assets. SFAS No. 125 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996.
During the fiscal year ended September 30, 1997, the Company sold $27.7 million
of loans and retained the loan servicing rights. The gain on the sale was
determined in accordance with SFAS No. 125.
In February 1997, FASB issued SFAS No.128, "Earnings Per Share." This
Statement simplifies the standards for computing earnings per share previously
required under APB Opinion No. 15, "Earnings Per Share," and makes the
computation comparable to international EPS standards. Basic EPS (formerly
primary EPS) excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted EPS is computed similarly to fully
diluted EPS pursuant to APB Opinion No. 15. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997 and
requires restatement of all prior period EPS data presented. If the Company had
adopted the provision of SFAS No. 128, basic EPS and diluted EPS would have been
$1.91 and $1.86, respectively, for the fiscal year ended September 30, 1997.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income," which requires that an enterprise report, by major components and as a
single total, the change in its net assets during the period from nonowner
sources, and SFAS No. 131 "Disclosures about Segments of an Enterprise and
Related Information," which establishes annual and interim reporting standards
for an enterprise's operating segments and related disclosures about its
products, services, geographic areas, and major customers. Adoption of these
Statements will not impact the Bank's consolidated financial position, results
of operations or cash flows, and any effect will be limited to the form and
content of its disclosures. Both Statements are effective for fiscal years
beginning after December 15, 1997, with earlier application permitted.
43
46
ITEM 2. DESCRIPTION OF PROPERTY.
The Company and the Bank are located and conduct their business at the
Bank's main office located at 450 South Australian Avenue, West Palm Beach,
Florida.
NET BOOK LEASED
DATE LEASED DATE LEASE VALUE AT OR
LOCATION OR ACQUIRED EXPIRES 9/30/97 OWNED
----------------------------- ------------ -------------- --------------- ---------
BRANCH OFFICES
Southern Boulevard 1959 $ 278,000 Owned
301 Southern Boulevard
West Palm Beach, FL 33405
Westward 1960 $ 704,000 Owned
2701 Okeechobee Boulevard
West Palm Beach, FL 33409
Lake Park 1962 $ 266,000 Owned
500 Federal Highway
Lake Park, FL 33403
Delray East 1971 $ 497,000 Owned
95 NE 5th Avenue
Delray Beach, FL 33483
Boca East 1973 $ 384,000 Owned
2400 Federal Highway
Boca Raton, FL 33431
Boynton 1973 1998 $ 0 Leased
280 North Congress Avenue
Boynton Beach, FL 33426
Lake Worth 1974 $ 422,000 Owned
531 Lucerne Avenue
Lake Worth, FL 33460
Palm Beach Galleria 1980 1998 $ 20,000 Leased
165 Bradley Place
Palm Beach, FL 33480
Boca West 1981 $ 1,223,000 Owned
9033 Glades Road
Boca Raton, FL 33434
Delray West 1981 2006 $ 6,000 Leased
4920 West Atlantic Avenue
Delray Beach, FL 33445
Stuart 1982 1999 $ 11,000 Leased
2285 SE Federal Highway
Stuart, FL 33494
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NET BOOK LEASED
DATE LEASED DATE LEASE VALUE AT OR
LOCATION OR ACQUIRED EXPIRES 9/30/97 OWNED
--------------------------------- ------------ -------------- --------------- ---------
Golden Lakes 1984 $ 282,000 Owned
1950 Golden Lakes Boulevard
West Palm Beach, FL 33411
Jupiter 1986 1998 $ 6,000 Leased
4050 U.S. Highway One
Jupiter, FL 33477
Gardens 1988 1998 $ 71,000 Leased
3101 PGA Boulevard
Palm Beach Gardens, FL 33477
Palm Springs 1993 $ 632,000 Owned
2950 10th Avenue North
Lake Worth, FL 33461
Aberdeen Square 1994 2000 $ 54,000 Leased
4956-22/23 LeChalet Boulevard
Boynton Beach, FL 33436
Boca Polo 1994 2000 $ 0 Leased
5030-F8 Champion Boulevard
Boca Raton, FL 33496
Boynton Lakes 1994 1999 $ 74,000 Leased
4770 North Congress Avenue
Lantana, FL 33462
Pinewood Square 1994 2000 $ 80,000 Leased
6338-52/53 Lantana Road
Lake Worth, FL 33461
Royal Palm Beach 1994 1999 $ 90,000 Leased
1135 Royal Palm Beach Boulevard
Royal Palm Beach, FL 33411
Stuart Square 1994 1999 $ 48,000 Leased
2160 SE Federal Highway
Stuart, FL 34994
Wellington 1994 1999 $ 65,000 Leased
13841 Wellington Trace
West Palm Beach, FL 33414
Boca Gardens 1995 1998 $ 139,000 Leased
7050-29 West Palmetto Park Road
Boca Raton, FL 33433
Coral Creek 1995 1998 $ 117,000 Leased
6572 North State Road 7, Bay #9
Coconut Creek, FL 33073
Downtown West Palm Beach 1995 2000 $ 40,000 Leased
301 Clematis Street
West Palm Beach, FL 33401
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NET BOOK LEASED
DATE LEASED DATE LEASE VALUE AT OR
LOCATION OR ACQUIRED EXPIRES 9/30/97 OWNED
--------------------------------- ------------ -------------- --------------- ---------
Ft. Myers South 1995 2000 $ 47,000 Leased
16970-A San Carlos Boulevard
Ft. Myers, FL 33908
Lake Worth 1995 2000 $ 84,000 Leased
4481-A Lake Worth Road
Lake Worth, FL 33461
Lake Worth West 1995 1999 $ 0 Leased
3979 Jog Road
Lake Worth, FL 33467
Okeechobee 1995 2000 $ 0 Leased
5405 Okeechobee Boulevard
West Palm Beach, FL 33417
Pembroke Pines 1995 2000 $ 75,000 Leased
17171-A Pines Boulevard
Pembroke Pines, FL 33027
Sunrise 1995 2000 $ 101,000 Leased
9919-A West Oakland Park Boulevard
Sunrise, FL 33351
Westchester East 1995 2000 $ 77,000 Leased
7805-A SW 40th Street
Miami, FL 33165
Bonita Springs 1996 2001 $ 67,000 Leased
26831-A South Tamiami Trail
Bonita Springs, FL 34134
Boynton 1996 2001 $ 79,000 Leased
9839-A South Military Trail
Boynton Beach, FL 33436
Coral Springs 1996 2001 $ 170,000 Leased
2201-A University Drive
Coral Springs, FL 33065
Kendall Lakes 1996 2001 $ 71,000 Leased
14655-A SW 56th Street
Miami, FL 33175
Lakeview Center 1996 2001 $ 45,000 Leased
1430 Coral Ridge Drive, Bay A2
Coral Springs, FL 33071
Mission Bay 1996 2001 $ 87,000 Leased
20409-A State Road 7
Boca Raton, FL 33434
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NET BOOK LEASED
DATE LEASED DATE LEASE VALUE AT OR
LOCATION OR ACQUIRED EXPIRES 9/30/97 OWNED
--------------------------------- ------------ -------------- --------------- ---------
Sawgrass Hub 1996 1999 $ 66,000 Leased
3495 Hiatus Road
Sunrise, FL 33351
Tamarac 1996 2001 $ 36,000 Leased
7100-A North University Drive
Tamarac, FL 33319
Turtle Run 1996 2001 $ 92,000 Leased
6355-A Sample Road
Coral Springs, FL 33067
Cape Coral 1997 2002 $ 69,000 Leased
127-A Cape Coral Parkway
Cape Coral, FL 33914
Deerfield Beach 1997 2002 $ 112,000 Leased
3701-A West Hillsboro Boulevard
Deerfield Beach, FL 33442
Delray Town Center 1997 2002 $ 101,000 Leased
4801-A Linton Boulevard
Delray Beach, FL 33445
Ft. Myers Central 1997 2002 $ 96,000 Leased
13401-A Summerlin Road
Ft. Myers, FL 33907
Jupiter 1997 2002 $ 8,000 Leased
17400-A Alternate A1A
Jupiter, FL 33477
Pembroke Pines East 1997 2002 $ 99,000 Leased
8030-A Pines Boulevard
Pembroke Pines, FL 33024
Riverwalk 1997 2002 $ 0 Leased
7477 Riverwalk Circle, Suite 215
West Palm Beach, FL 33411
West Palm Beach 1997 2002 $ 13,000 Leased
1901-A Military Trail
West Palm Beach, FL 33409
Westview 1997 2002 $ 9,000 Leased
9545-A Westview Drive
Coral Springs, FL 33076
LOAN ORIGINATION OFFICES
Broward 1996 Month to Month $ 0 Leased
10100 West Sample Road, Suite 312
Coral Springs, FL 33065
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50
NET BOOK LEASED
DATE LEASED DATE LEASE VALUE AT OR
LOCATION OR ACQUIRED EXPIRES 9/30/97 OWNED
--------------------------------- ------------ -------------- --------------- ---------
OFFICE BUILDING
Reflections Office Centre 1994 $ 10,028,000 Owned
400 and 450 South Australian Avenue
West Palm Beach, FL 33401
STORAGE WAREHOUSES
2206 Mercer Avenue 1984 $ 0 Owned
West Palm Beach, FL 33401 ------------
Total Net Book Value $ 17,141,000
============
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.
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51
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 December 18, 1997 there were 5,054,746 shares of common stock
outstanding and 633 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 trade prices per common share for the periods indicated as reported by
NASDAQ.
PRICES
----------------------------
CASH
DIVIDENDS
DECLARED PER
QUARTER ENDED SHARE HIGH LOW
----------------------- ------------- -------- ---------
December 31, 1995 $0.10 24 5/8 21 1/8
March 31, 1996 $0.10 23 5/8 20 3/4
June 30, 1996 $0.10 23 3/4 20 7/8
September 30, 1996 $0.10 23 1/2 19 1/2
December 31, 1996 $0.15 25 7/8 22 3/4
March 31, 1997 $0.15 30 1/4 23 1/4
June 30, 1997 $0.15 34 3/8 26 1/2
September 30, 1997 $0.15 35 5/8 30 1/4
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ITEM 6. SELECTED FINANCIAL DATA
At September 30,
----------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(In thousands)
SELECTED FINANCIAL CONDITION DATA:
Total assets .............................................. $856,307 $1,076,583 $1,208,845 $1,490,020 $1,808,420
Loans receivable, net ..................................... 429,104 576,731 825,024 1,007,881 1,144,100
Cash and cash equivalents ................................. 14,924 19,145 25,132 161,413 99,929
Securities held-to-maturity, available-for-sale and
trading securities......................................... 96,768 117,122 80,941 34,532 74,456
Mortgage-backed and related securities held-to-maturity and
available-for-sale ........................................ 284,012 324,044 238,442 232,273 421,645
Deposits .................................................. 698,458 718,282 878,670 1,136,722 1,229,279
Borrowed funds ............................................ 26,325 229,892 189,552 211,025 394,871
Senior debentures, net of issuance costs .................. -- -- -- -- 33,839
Stockholders' equity ...................................... 102,330 100,462 104,611 105,425 113,030
For the Years Ended September 30,
----------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(In thousands)
SELECTED OPERATING DATA:
Interest income ......................................................... $50,580 57,874 80,964 103,532 116,930
Interest expense ........................................................ 28,783 30,049 48,900 61,300 72,851
------- ------- -------- ------- -------
Net interest income ..................................................... 21,797 27,825 32,064 42,232 44,079
Less provision for loan losses .......................................... 149 135 261 15,704 3,281
------- ------- -------- ------- -------
Net interest income after provision for loan losses ..................... 21,648 27,690 31,803 26,528 40,798
------- ------- -------- ------- -------
Other income:
Servicing income and other fees ........................................ 2,956 2,597 2,576 3,206 4,106
Net gain (loss) on sale of securities available-for-sale, mortgage-
backed and related securities
available-for-sale, trading securities and loans ....................... 922 424 (1,660) 4,516 1,896
Net gain on sale of property ............................................ -- -- 975 460 551
Gain on sale of loan servicing .......................................... -- -- 1,008 412 --
Equity in net income(loss) of real estate ventures ...................... 716 294 -- -- --
Miscellaneous ........................................................... 1,181 1,122 1,131 1,475 2,448
------- ------- -------- ------- -------
Total other income .................................................... 5,775 4,437 4,030 10,069 9,001
------- ------- -------- ------- -------
Other expenses:
Employee compensation and benefits ..................................... 10,583 13,900 13,849 15,905 18,511
Early retirement plan .................................................. -- -- 2,361 -- --
Occupancy and equipment ................................................ 3,905 4,223 4,259 4,830 6,729
Federal deposit insurance premiums ..................................... 1,428 1,582 1,799 8,848 977
Provision for losses and net (gains) losses on sale of real estate owned 192 (410) 74 451 329
Advertising and promotion .............................................. 683 801 679 663 1,005
Miscellaneous .......................................................... 2,818 2,730 3,588 4,905 6,855
------- ------- -------- ------- -------
Total other expenses .................................................. 19,609 22,826 26,609 35,602 34,406
Income before provision for income taxes and cumulative effect
of change in accounting principle ....................................... 7,814 9,301 9,224 995 15,393
Provision for income taxes ............................................. 3,019 3,502 3,578 446 6,037
------- ------- -------- ------- -------
Income before cumulative effect of change in accounting principle 4,795 5,799 5,646 549 9,356
Cumulative effect of change in accounting for income taxes ............. 422 -- -- -- --
------- ------- -------- ------- -------
Net income ............................................................. $ 5,217 $ 5,799 $ 5,646 $ 549 $ 9,356
======= ======= ======== ======= =======
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53
SELECTED FINANCIAL RATIOS AND OTHER DATA
At or For the Years Ended September 30,
------------------------------------------------------
1993 1994 1995 1996 1997
---------- --------- -------- -------- -----------
(Dollars in thousands)
C>
PERFORMANCE RATIOS:
Return on average assets (4) ...................................... 0.64% 0.60% 0.48% 0.04% 0.59%
Return on average stockholders' equity (4) ........................ 9.73% 5.61% 5.50% 0.49% 8.71%
Average stockholders' equity to average assets .................... 6.54% 10.62% 8.74% 8.06% 6.78%
Stockholders' equity to total assets .............................. 11.95% 9.33% 8.65% 7.08% 6.25%
Interest rate spread .............................................. 2.42% 2.46% 2.32% 2.73% 2.51%
Net interest margin (1) ........................................... 2.78% 2.97% 2.83% 3.18% 2.91%
Average interest-earning assets to average interest-bearing
liabilities...................................................... 1.10x 1.16x 1.12x 1.10x 1.08x
Operating expenses to average assets (4) .......................... 2.39% 2.35% 2.27% 2.56% 2.17%
Net interest income to operating expenses (4) ..................... 1.11x 1.22x 1.21x 1.19x 1.28x
PER COMMON SHARE DATA:
Cash dividends declared ........................................... -- -- 0.20 0.40 $ 0.60
Book value (tangible) .............................................$ 18.62 $ 19.03 20.38 20.14 $ 21.87
Net income ........................................................ -- $ 1.05 1.11 0.11 $ 1.86
ASSET QUALITY RATIOS:
Non-performing loans to total loans (2) ........................... 0.58% 0.30% 0.21% 1.20% 0.68%
Non-performing assets to total assets (3) ......................... 0.48% 0.23% 0.23% 1.08% 0.57%
Allowance for loan losses to non-performing loans ................. 70.43% 101.29% 118.91% 92.40% 74.77%
Allowance for loan losses to non-performing assets ................ 46.21% 79.51% 78.90% 73.82% 58.39%
Allowance for loan losses to total loans receivable, net .......... 0.44% 0.34% 0.26% 1.18% 0.53%
OTHER DATA:
Loan originations .................................................$161,353 $271,913 $364,203 $539,599 $398,753
Number of deposit accounts ........................................ 74,913 77,167 84,670 106,517 119,817
Full service facilities ........................................... 16 20 23 33 45
- -----------------
(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 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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54
ITEM 7. MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
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.
On June 30, 1997, the Company issued $35 million of Series A 10.35%
Senior Debentures Due 2002. The net proceeds of the debenture issuance are being
used for general corporate purposes, including contributing $25 million of the
net proceeds to the Bank. The Indenture entered into by the Company in
connection with the 10.35% Senior Debentures includes certain covenants which,
among other things, (i) limit the Company's disposition of the voting stock of
the Bank, other than dispositions which (a) are for fair market value and, after
giving effect to such dispositions and to any potential dilution, the Company
will own not less than 80% of the shares of voting stock of the Bank free and
clear of any security interest; (b) are made in compliance with an order of a
court or regulatory authority of competent jurisdiction, a condition imposed by
any such court or authority permitting the acquisition by the Company, directly
or indirectly, of any other bank or entity the activities of which are legally
permissible for a bank holding company or a subsidiary thereof to engage in, or
an undertaking made to such authority in connection with such an acquisition;
(c) are made where the Bank, having obtained any necessary regulatory approvals,
unconditionally guarantees payment when due of the principal of and interest on
the Senior Debentures; or (d) are made to the Company or any wholly-owned
subsidiary if such wholly-owned subsidiary agrees to be bound by the covenant as
if it were the Company and the Company agrees to maintain such wholly-owned
subsidiary as a wholly-owned subsidiary (notwithstanding the foregoing, the Bank
may be merged into or consolidated with another banking institution if, after
giving effect to such merger or consolidation, the Company or any wholly-owned
subsidiary owns at least 80% of the voting stock of such other banking
institution then issued and outstanding free and clear of any security interest
and if, immediately after giving effect thereto and treating any such resulting
banking institution thereafter as the Bank and a subsidiary, for purposes of the
Indenture, no Event of Default (as such term is defined in the Indenture), and
no event which, after notice or lapse of time or both, would become an Event of
Default, shall have happened and be continuing); (ii) limit, to a percentage of
net worth, the Company's and the Bank's ability to become liable on certain
forms of indebtedness generally outside the normal course of the Company's and
the Bank's business; (iii) provide that the
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55
Company will not permit its Consolidated Net Worth minus Goodwill to be less
than $90 million; (iv) provide that the Company shall not allow the Bank to be
classified as other than "well-capitalized"; and (v) restrict dividend or other
distributions of the Company and the Bank and stock repurchases by the Company
in such a way that any such dividends or stock repurchases after March 31, 1997
may not exceed, in the aggregate, the sum of (a) $10,000,000 plus (b) 75% (or
100% in the case of deficit) of consolidated net income for the period beginning
March 31, 1997 and ending and including the date such dividend, distribution or
stock repurchase (each a "Restricted Payment") is declared or made (plus 100% of
the proceeds of issuances of equity securities after March 31, 1997), and a
Restricted Payment may not be made if at the time of and immediately before the
Restricted Payment is declared, and after giving effect to the Restricted
Payment a Default (as such term is defined in the Indenture) or Event of Default
is existing or shall have occurred within 365 days of the declaration of the
Restricted Payment. For a period beginning on November 17, 1997 and ending on
December 18, 1997, unless extended, the Company offered to exchange the
outstanding Series A Debentures for Series B Debentures, which are registered
under the Securities Act of 1933, as amended, do not provide for any liquidated
damages, and are otherwise identical to the Series A Debentures.
During the fiscal year ended September 30, 1997, the Company
repurchased 114,000 shares of Common Stock at an average price of $23.40 per
share. The Company had repurchased 345,853 and 225,600 shares of Common Stock at
an average price of $22.10 and $21.73 in the fiscal years ended September 30,
1996 and 1995 respectively. In addition, in the fiscal year ended September 30,
1997 employees and directors of the Bank exercised options to purchase 68,650
shares at $10 per share. At September 30, 1997, 5,047,746 shares of Common Stock
were outstanding.
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") and the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA") significantly changed
the regulation of all savings associations, including the Bank. 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
Company's long term growth strategy during fiscal year 1997 which included
branch expansion, growth of the ATM network and upgrading the Company's computer
network, resulted in a return on average assets of 0.59%. Although the Company's
growth has resulted in lower short term profitability, management believes that
this growth will position the Company favorably for achieving long term
shareholder value.
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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
1998. The Bank originated $135.9 million, $192.5 million and $196.9 million in
one- to four-family residential mortgage loans in fiscal 1995, 1996 and 1997,
respectively. One- to four-family residential mortgage loans totaling $846.4
million constituted 70.8% of the Bank's total loan portfolio at September 30,
1997. The Bank utilizes a wholesale lending function to acquire first mortgage
loans from wholesale originators in Palm Beach, Martin and Broward Counties.
Prior to commitment, these loans are reviewed for compliance with the Bank's
standard underwriting guidelines. These efforts have helped one- to four-family
residential mortgage loans to increase to $846.4 million at September 30, 1997
from $652.6 million at September 30, 1996. Because residential construction
lending typically carries more risk than purchased residential loans, in the
third quarter of fiscal 1997, management determined to reduce its volume of
construction lending. Construction lending decreased to $115.6 million at
September 30, 1997 compared to $130.5 million at September 30, 1996.
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.
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, 1997, 52% of the Bank's one-to four-family residential mortgage
loans were in one-, three- and five-year ARM loans. Another 10% 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.
Through its held-to-maturity and available-for-sale securities, and
mortgage-backed and related securities, the Bank has invested primarily in
securities with less interest rate risk, particularly through 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, 1997, the Bank's securities held-to-maturity and
available-for-sale consisted of $59.5 million of fixed rate securities and $15.0
million of adjustable rate securities. At September 30, 1997, the Bank's
mortgage-backed and related securities held-to-maturity and available-for-sale
consisted of $201.2 million with a fixed-rate and $220.4 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. During fiscal
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years 1995, 1996 and 1997, the Bank was competitive in its pricing of
certificates of deposit in order to generate the funds required to sustain
growth in its loan portfolio. During fiscal years 1995, 1996 and 1997, the
Bank's annual average asset growth was 18.97%.
EMPHASIZING CONSUMER LENDING. During the fiscal years ended 1995 and
1996, the Bank became more active in the indirect automobile lending market.
Indirect automobile 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 decreased to $153.8 million at September 30, 1997
from $194.1 million at September 30, 1996. Of these amounts, $88.4 million and
$148.2 million at September 30, 1997 and September 30, 1996, respectively, were
indirect loans.
Notwithstanding the decline in indirect loans, other consumer loans
increased by $19.5 million in fiscal 1997. This increase reflects a primary
focus on increasing the volume of home equity loans and lines of credit, direct
automobile lending and personal lines of credit. During the year ended September
30, 1997, the Bank enhanced its home equity line of credit to allow for access
through a VISA credit card.
MAINTAINING ASSET QUALITY. At September 30, 1997, the Bank's
non-performing assets as a percentage of total assets amounted to 0.57% compared
to 1.08% at September 30, 1996. The decrease is primarily due to one loan
relationship totaling $6.2 million at September 30, 1996 on a marina and beach
club in Charlotte County, Florida which was refinanced and paid down to $3.8
million and brought current during fiscal year 1997. As noted previously, the
Bank had discontinued its indirect lending program at September 30, 1996. The
balance of the Bank's indirect lending portfolio at September 30, 1997 was $88.4
million. In its underwriting of mortgage loans, the Bank has generally accepted
lower interest rates than its competitors in order to enhance loan quality. Even
though this will result in a lower net interest margin, management believes that
asset quality is critical to the Bank's long term performance. The Bank has
intentionally limited its commercial real estate lending during the past five
years, although management is currently reassessing this strategy. The Bank's
commercial real estate lending decreased from an outstanding balance of $51.8
million at September 30, 1996 to $40.9 million at September 30, 1997.
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,
which in turn was necessary to improve its long-term results. 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 1997, the Bank opened twelve full service branches
in Palm Beach, Broward, Dade and Lee Counties. Of the twelve full service
branches opened, ten are located in Albertson's supermarkets.
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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.
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, 1995, 1996 and 1997. 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,
-------------------------------------------------------------------------------------------------
1995 1996 1997
------------------------------- ------------------------------- ---------------------------------
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost Balance Expense Cost
---------- ------- ----- ---------- ------- ----- ---------- -------- -----
(In thousands)
ASSETS:
Interest-earning assets:
Mortgage loans, net....... $ 615,886 $48,765 7.92% $ 844,822 $67,157 7.95% $ 905,502 $ 71,427 7.89%
Consumer loans............ 70,729 5,722 8.09% 173,450 16,755 9.66% 163,547 16,116 9.85%
Other loans............... 1,980 151 7.63% 2,147 178 8.29% 2,497 203 8.13%
Interest-earning
deposits................ 16,551 759 4.59% 17,103 871 5.09% 39,081 1,946 4.98%
Securities held-to-
maturity, available-for-
sale and trading
securities................ 107,011 5,735 5.36% 58,288 3,259 5.59% 66,722 4,264 6.39%
Mortgage-backed and
related securities held-
to-maturity and
available-for-sale........ 311,929 19,199 6.15% 221,285 14,487 6.55% 325,140 22,037 6.78%
FHLB stock................ 7,643 633 8.28% 10,197 825 8.09% 11,785 937 7.95%
---------- ------- ----- ---------- ------- ----- ---------- -------- -----
Total interest-earning
assets.................. 1,131,729 80,964 7.15% 1,327,292 103,532 7.80% 1,514,274 116,930 7.72%
Non-interest earning
assets.................. 42,450 62,987 70,588
---------- ---------- ----------
Total assets............ $1,174,179 $1,390,279 $1,584,862
========== ========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing
liabilities:
Deposit accounts:
Passbook and statement
savings................. $ 86,310 $ 1,902 2.20% $ 122,578 $ 4,088 3.34% $ 157,497 $ 5,549 3.52%
NOW..................... 60,407 877 1.45% 60,598 856 1.41% 60,555 718 1.19%
Money market............ 60,070 1,432 2.38% 46,118 1,094 2.37% 34,564 781 2.26%
Certificates of deposit. 623,134 33,636 5.40% 766,697 42,576 5.55% 895,549 50,487 5.64%
Borrowed funds:
FHLB advances........... 141,837 8,699 6.13% 200,158 11,974 5.98% 226,271 13,445 5.94%
Reverse repurchase
agreements.............. 40,321 2,354 5.84% 11,935 712 5.97% 15,574 904 5.80%
Senior debentures....... -- -- -- -- -- -- 8,548 967 11.31%
---------- ------- ----- ---------- ------- ----- ---------- -------- -----
Total interest-bearing
liabilities............ 1,012,079 48,900 4.83% 1,208,084 61,300 5.07% 1,398,558 72,851 5.21%
Other liabilities.......... 59,424 70,208 78,868
---------- ---------- ----------
Total liabilities...... 1,071,503 1,278,292 1,477,426
Stockholders' equity....... 102,676 111,987 107,436
---------- ---------- ----------
Total liabilities and
stockholders' equity... $1,174,179 $1,390,279 $1,584,862
========== ========== ==========
Net interest
income/interest rate
spread.................... $32,064 2.32% $42,232 2.73% $ 44,079 2.51%
======= ======= ========
Net interest-earning
assets/net margin......... $ 119,650 2.83% $ 119,208 3.18% $ 115,716 2.91%
========== ========== ==========
Ratio of interest-earning
assets to interest-bearing
liabilities . . . . . . . 1.12x 1.10x 1.08x
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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 September 30, Year Ended September 30,
1996 Compared to Year 1997 Compared to Year
Ended September 30, 1995 Ended September 30, 1996
Increase (Decrease) in Net Increase (Decrease) in Net
Interest Income Interest Income
-------------------------- --------------------------
Due to Due to
------------------ ----------------
Volume Rate Net Volume Rate Net
--------- ------- ------- ------- ------ -------
Interest-earning assets:
Mortgage loans, net.............................. $ 18,206 $ 186 $18,392 $ 4,781 $ (511) $ 4,270
Consumer loans................................... 9,733 1,300 11,033 (965) 326 (639)
Other loans...................................... 14 13 27 28 (3) 25
Interest-earning deposits........................ 26 86 112 1,094 (19) 1,075
Securities held-to-maturity, available-for-sale
and trading securities........................... (2,712) 236 (2,476) 505 500 1,005
Mortgage-backed and related securities held-to-
maturity and available-for-sale.................. (6,071) 1,359 (4,712) 7,024 526 7,550
FHLB stock....................................... 207 (15) 192 126 (14) 112
--------- ------- ------- ------- ------ --------
Total......................................... 19,403 3,165 22,568 12,593 805 13,398
--------- ------- ------- ------- ------ --------
Interest-bearing liabilities:
Deposit accounts:
Passbook and statement savings................. (936) 3,122 2,186 1,229 232 1,461
NOW............................................ 3 (24) (21) (1) (137) (138)
Money market................................... (332) (6) (338) (264) (49) (313)
Certificates of deposit........................ 7,978 962 8,940 7,215 696 7,911
Borrowed Funds:
FHLB advances.................................. 3,482 (207) 3,275 1,552 (81) 1,471
Reverse repurchase agreements.................. (1,695) 53 (1,642) 213 (21) 192
Senior debentures.............................. -- -- -- 967 -- 967
--------- ------- ------- ------- ------ --------
Total......................................... 8,500 3,900 12,400 10,911 640 11,551
--------- ------- ------- ------- ------ --------
Net change in interest income...................... $ 10,903 $ (735) $10,168 $ 1,682 $ 165 $ 1,847
========= ====== ======= ======= ====== ========
COMPARISON OF FINANCIAL CONDITION
AT SEPTEMBER 30, 1997 COMPARED TO SEPTEMBER 30, 1996
Total assets were $1.808 billion at September 30, 1997 as compared to
$1.490 billion at September 30, 1996. The increase of $318.0 million was
primarily the result of an increase of $136.2 million in loans receivable, net,
and growth in securities and mortgage-backed and related securities of $229.3
million. Deposits increased $92.6 million to $1.229 billion at fiscal year end
September 30, 1997 from $1.137 billion at fiscal year end September 30, 1996
because of continued aggressive pricing of certificate accounts and the
additional accounts generated from opening twelve additional full service branch
offices during the fiscal year ended September 30, 1997. Borrowed funds, which
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included advances from the Federal Home Loan Bank and securities sold under
agreements to repurchase, increased by $183.8 million to $394.8 million at
fiscal year end September 30, 1997 as compared to $211.0 million at September
30, 1996. This increase was used to fund loan production and security purchases
during fiscal year 1997.
Loans receivable, net, increased by $136.2 million to $1.144 billion at
September 30, 1997 from $1.008 billion at September 30, 1996. Loan originations
were $398.8 million for the fiscal year ended September 30, 1997 as compared to
$539.6 million for the fiscal year ended September 30, 1996. Approximately $78.5
million net loans were acquired in conjunction with the purchase of Palm Beach
Savings during fiscal year 1996. Also, origination of indirect automobile loans
was ended during fiscal year 1996. Loan repayments increased from $238.3 million
during fiscal 1996 to $242.4 million during fiscal 1997. Loan sales decreased
from $164.3 million during fiscal 1996 to $27.7 million during fiscal 1997.
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 increased $229.3 million
to $496.1 million at September 30, 1997 from $266.8 million at September 30,
1996. This increase reflects the utilization of the funds from the issuance of
the senior debentures and the related wholesale leveraging where securities were
purchased with borrowings.
Real estate owned (real estate acquired through foreclosures)
increased to $1.8 million at September 30, 1997 from $1.6 million at September
30, 1996.
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Office properties and equipment increased to $28.3 million at September
30, 1997 from $23.1 million at September 30, 1996. The increase of $5.2 million
is due to purchases related to twelve new branch offices opened in fiscal year
1997 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
relocated and consolidated its operations to one of such new office buildings
and a portion of the other during fiscal year 1997.
Deposits increased by $92.6 million to $1.229 billion as of September
30, 1997 from $1.137 billion at September 30, 1996. The increase resulted from
deposits generated through the opening of twelve new branch offices during
fiscal year 1997 and continued aggressive pricing of certificate products.
Borrowings, which include advances from the FHLB and securities sold
under agreements to repurchase, increased to $394.8 million at September 30,
1997 from $211.0 million at September 30, 1996. This $183.8 million increase was
used to fund loan production and security purchases during the year. On June 30,
1997, the Company issued $35.0 million of 10.35% Senior Debentures Due 2002. The
net proceeds of the debenture issue are being used for general corporate
purposes.
Stockholders' equity increased to $113.0 million at September 30, 1997
from $105.4 million at September 30, 1996. Net income for the year was $9.4
million. Stockholders' equity was increased by a reduction in the unrealized
loss in fair value on available-for-sale securities of $0.9 million. In
addition, there was a reduction in unallocated ESOP shares of $0.8 million.
During the fiscal year ended September 30, 1997, dividends totaled $3.0 million.
A total of 114,000 shares were repurchased as treasury shares during the fiscal
year 1997 at an average price per share of $23.40, reducing stockholders' equity
by $2.7 million.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED
SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
GENERAL OPERATING RESULTS. Net income for the fiscal year ended
September 30, 1997 was $9.4 million as compared to $0.5 million for the fiscal
year ended September 30, 1996. Loan loss provisions declined to $3.3 million
during the fiscal year ended September 30, 1997 from $15.7 million during the
fiscal year ended September 30, 1996. Expenses during the fiscal year ended
September 30, 1996 included a pre-tax $6.6 million one-time SAIF assessment.
Other income for the fiscal year ended September 30, 1997 of $9.0 million
included net gains on sales of securities, loans and property of $2.4 million as
compared to net gains of $5.4 million for the fiscal year ended September 30,
1996.
Net interest income before provision for loan losses increased to $44.1
million for the fiscal year ended September 30, 1997 as compared to $42.2
million for the same period last year. The increase was primarily due to the
increase in loans receivable, net, to $1.144 billion at fiscal year end
September 30, 1997 from $1.008 billion at fiscal year end September 30, 1996.
Net interest margin for fiscal 1997 was 2.91% as compared to 3.18% for fiscal
1996. The primary reason for the decline in net interest margin was higher cost
deposits caused by the higher level of interest rates generally experienced
throughout most of fiscal year 1997. An additional factor was the issuance of
the $35 million of Senior Debentures on June 30, 1997, carrying an interest rate
of 10.35%.
INTEREST INCOME. Interest income increased $13.4 million, or 13.0%, to
$116.9 million for the fiscal year ended September 30, 1997 from $103.5 million
for the fiscal year ended September 30, 1996. The increase was primarily due to
an increase in loans receivable during fiscal year 1997 of $136.2 million. The
average yield on interest-earning assets decreased to 7.72% for the fiscal year
ended September 30, 1997 from 7.80% for the fiscal year ended September 30,
1996. The decrease is primarily due to the run-off of indirect automobile loans
which carried higher interest yields.
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INTEREST EXPENSE. Interest expense increased $11.6 million, or 18.8%,
to $72.9 million for the fiscal year ended September 30, 1997 from $61.3 million
for the fiscal year ended September 30, 1996. This increase was the result of an
increase of 8.1% in deposits outstanding and the higher level of interest rates
generally experienced throughout most of fiscal year 1997. During fiscal year
1997, interest bearing deposits averaged $1.148 billion as compared to $996.0
million during fiscal year 1996. The weighted average rate paid on
interest-bearing liabilities increased to 5.21% during fiscal year 1997 from
5.07% during fiscal year 1996 primarily because of the higher interest rate
environment generally experienced during fiscal 1997 and the higher cost
associated with the senior debentures discussed earlier.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest
income before provision for loan losses increased $1.9 million, or 4.4%, to
$44.1 million for the fiscal year ended September 30, 1997 from $42.2 million
for the fiscal year ended September 30, 1996. The increase in net interest
income is due primarily to net growth in loans receivable to $1.144 billion at
September 30, 1997 from $1.008 billion at September 30, 1996. The net interest
margin declined to 2.91% for fiscal year 1997 from 3.18% for fiscal year 1996.
PROVISION FOR LOAN LOSSES. The Bank's provision for loan losses
declined by $12.4 million to $3.3 million for the fiscal year ended September
30, 1997 from $15.7 million for the fiscal year ended September 30, 1996. The
increased loan loss provisions recorded during fiscal year 1996 were primarily
to cover losses related to the indirect automobile lending program. The Company
began to originate indirect automobile loans in large volumes in August 1995 and
continued this practice through September 1996. During September 1996, the
Company ceased its originations of indirect automobile loans. Higher
delinquencies and charge-offs resulting from the indirect lending program did
not occur until the third quarter of fiscal year 1996, as the significant credit
problems did not surface until that time. During the third quarter of fiscal
year 1996, the Company increased its provision for loan losses, but further
delinquencies and charge-offs in the quarter ended September 30, 1996 indicated
that significant additional provisions were necessary. The provisions were
determined by projecting charge-offs based on the latest repossession activity
and recovery rates. Provisions related to the indirect portfolio decreased in
quarters subsequent to September 30, 1996, because, as indicated above, the
Company discontinued its indirect lending as of September 30, 1996. Recovery
rates have been averaging approximately 60% per repossession. 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. The balance of
indirect auto loans at September 30, 1997 was $88.4 million as compared to
$148.2 million at September 30, 1996. Loan loss allowances related to indirect
loans equaled $3.3 million at September 30, 1997.
OTHER INCOME. For the fiscal year ended September 30, 1997, other
income declined to $9.0 million from $10.1 million for the fiscal year ended
September 30, 1996. Other income for the fiscal year ended September 30, 1997
included net gains on sales of securities, loans and property of $2.4 million as
compared to net gains of $5.4 million for the fiscal year ended September 30,
1996, partially offset by increased servicing income, other fees and
miscellaneous income.
OTHER EXPENSES. Other expenses decreased $1.2 million to $34.4 million
for the fiscal year ended September 30, 1997 from $35.6 million for the fiscal
year ended September 30, 1996. As previously discussed, during the year ended
September 30, 1996, the Bank recorded a pre-tax $6.6 million one-time SAIF
assessment causing the federal insurance deposit premium to be $8.8 million for
the fiscal year ended September 30, 1996. During the fiscal year ended September
30, 1997, the premiums declined to $1.0 million. Increases in other expenses
reflect the expenses related to franchise growth of adding twenty-three
additional full-service branches since September 30, 1995 and expanded loan
servicing requirements related primarily to indirect automobile lending. This
franchise growth resulted in the number of full-time equivalent employees
increasing to 427 at September 30, 1997 from 383 at September 30, 1996 and a
$2.6 million increase in compensation and benefits to $18.5 million at September
30, 1997 from $15.9 million at September 30, 1996.
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The Bank utilizes and is dependent upon data processing systems and
software to conduct its business. The data processing systems and software
include a mainframe processing system licensed to the Bank by an outside vendor
and various purchased software packages which are run on in-house computer
networks. In 1997, the Bank initiated a review and assessment of all hardware
and software to confirm that it will function properly in the year 2000. The
Bank's mainframe software vendor and the majority of the other vendors which
have been contacted have indicated that their hardware and/or software will be
Year 2000 compliant. Testing will be performed for compliance. While there may
be some expenses incurred during the next two years, Year 2000 compliance is not
expected to have a material effect on the Company's consolidated financial
statements.
PROVISION FOR INCOME TAXES. Federal and state income taxes increased to
$6.0 million for the fiscal year ended September 30, 1997 from $0.4 million for
the fiscal year ended September 30, 1996. Higher taxes resulted from the
increase in net income before provision for income taxes to $15.4 million for
the fiscal year ended September 30, 1997 as compared to $1.0 million for the
fiscal year ended September 30, 1996. The effective income tax rate of the Bank
was 39.2% and 44.8% for fiscal years 1997 and 1996, respectively.
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 end 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 the 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 end 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 the fiscal year ended September 30, 1996 as compared to
$364.2 million for the fiscal year ended September 30, 1995. Approximately $78.5
million of net mortgage 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
was due to purchases related to eleven new branch offices opened in fiscal year
1996 and to renovations of the Reflections Office Centre, as previously
discussed. In conjunction with its 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 also updated its data processing mainframe
computer and related software during fiscal 1996.
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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. 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 the 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 in the prior 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.
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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
later part of fiscal year 1996, the Bank experienced higher than 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 to $0.5 million for the fiscal year ended September 30, 1996 as
compared to $5.6 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of funds comes from dividends from the
Bank and repayment of funds advanced to the Bank. Management anticipates that
these sources of funds should continue in the future. Primary uses of funds are
payment of dividends to First Palm Beach Bancorp stockholders, repurchase of
common stock through open market transactions and debt service related to the
Senior Debentures.
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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 11.0% and 16.3% at September 30, 1997 and September 30, 1996,
respectively. At September 30, 1996 the liquidity ratio was unusually high due
to loan sales of $141.4 million during the month of September. The majority of
the proceeds of those sales were included in short term liquidity.
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, 1997, 1996 and 1995, cash
and cash equivalents totaled $99.9 million, $161.4 million, and $25.1 million,
respectively. 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, 1997,
1996 and 1995, the Bank originated mortgage and consumer loans in the aggregate
amounts of $398.8 million, $539.6 million, and $364.2 million, respectively. In
addition, net mortgage loans of approximately $78.5 million were acquired during
the fiscal year ended September 30, 1996 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 $2.9
million, $11.0 million and $18.5 million for the fiscal years ended September
30, 1997, 1996 and 1995, 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 $373.5 million, $40.5 million and $129.8
million for the fiscal years ended September 30, 1997, 1996 and 1995,
respectively. Net cash provided by financing activities consisted primarily of
net activity in deposits, advances and escrow accounts, as well as the issuance
of senior debentures, and were $309.2 million, $165.7 million and $117.3 million
for the fiscal years ended September 30, 1997, 1996 and 1995, respectively.
At September 30, 1997, the Bank had outstanding commitments to
originate $31.2 million of loans. The Bank has determined that it will have
sufficient funds available to meet all of its commitments. At September 30,
1997, certificates of deposit which were scheduled to mature in one year or less
from September 30, 1997 totaled $706.9 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, 1997, the unrealized loss on available-for-sale securities, net
of applicable income taxes, was $1.0 million which would become a realized loss
if the securities were to be sold.
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It is management's opinion that sufficient liquid resources are
available to meet all long and short term commitments of the Company.
At September 30, 1997, the Bank exceeded each of the OTS capital
requirements. At year-end both the Core (Tier 1) Capital to Adjusted Tangible
Assets and Tangible Capital to Tangible Assets ratios were 7.07% (minimum
requirements 4.0% and 1.5%, respectively). The Core (Tier 1) Capital to
Risk-weighted Assets ratio was 14.13% (well capitalized requirement 6.0%) and
Total Capital to Risk-weighted Assets ratio was 14.76% (minimum requirement
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 June 1996, FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The
Statement, which amends SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," supersedes SFAS No. 122, "Accounting for Mortgage
Servicing Rights." This Statement provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities. Those standards are based on consistent application of a
financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when extinguished. This Statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. SFAS No. 125 requires that servicing assets and
liabilities be subsequently measured by (a) amortization in proportion to and
over the period of estimated net servicing income or loss and (b) assessment for
asset impairment or increased obligation based on their fair values. SFAS No.
125 also requires that debtors reclassify financial assets pledged as collateral
and that secured parties recognize those assets and their obligation to return
them in certain circumstances in which the secured party has taken control of
those assets. SFAS No. 125 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996.
During the year ended September 30, 1997, the Company sold $27.7 million of
loans and retained the loan servicing rights. The gain on the sale was
determined in accordance with SFAS No. 125.
In February 1997, FASB issued SFAS No.128, "Earnings per Share." This
statement simplifies the standards for computing earnings per share previously
required under Accounting Principles Board ("APB") Opinion No. 15, "Earnings Per
Share," and makes the computation comparable to international EPS standards.
Basic EPS (formerly primary EPS) excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to APB Opinion No. 15. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997 and requires restatement of all prior period EPS data presented. If the
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Company had adopted the provision of SFAS No. 128, basic EPS and diluted EPS
would have been $1.91 and $1.86, respectively, for the year ended September 30,
1997.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income," which requires that an enterprise report, by major components and as a
single total, the change in its net assets during the period from nonowner
sources; and SFAS No. 131 "Disclosures about Segments of an Enterprise and
Related Information," which establishes annual and interim reporting standards
for an enterprise's operating segments and related disclosures about its
products, services, geographic areas, and major customers. Adoption of these
statements will not impact the Bank's consolidated financial position, results
of operations or cash flows, and any effect will be limited to the form and
content of its disclosures. Both statements are effective for fiscal years
beginning after December 15, 1997, with earlier application permitted.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
MARKET RISK ANALYSIS
As a holding company for a financial institution, the Company's primary
component of market risk is interest rate volatility. Fluctuations in interest
rates will ultimately impact both the level of income and expense recorded on a
large portion of the Bank's assets and liabilities, and the market value of all
interest-earning assets, other than those which possess a short term to
maturity. Since the majority of the Company's interest bearing liabilities and
virtually all of the Company's interest-earning assets are held by the Bank,
virtually all of the Company's interest rate risk exposure lies at the Bank
level. As a result, all significant interest rate risk management procedures are
performed by management of the Bank. Based upon the nature of the Bank's
operations, the Bank is not subject to foreign currency exchange or commodity
price risk. The Bank's loan portfolio is concentrated primarily in Palm Beach,
Martin and Broward Counties in Florida and is therefore subject to risks
associated with the local economy. As of September 30, 1997, the Company does
not own any trading assets. At September 30, 1997, the Company does not have any
hedging transactions in place such as interest rate swaps and caps.
The Bank's interest rate management strategy is designed to stabilize
net interest income and preserve capital. The Bank actively manages interest
rate risk through the use of a simulation model which measures the sensitivity
of future net interest income and the net portfolio value to changes in interest
rates. In addition, the Bank regularly monitors interest rate sensitivity
through analysis, measuring the terms to maturity or next repricing date of
interest-earning assets and interest bearing liabilities. 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, 1997, total interest-bearing liabilities maturing or
repricing within one year exceeded total interest-earning assets maturing or
repricing within the same time period by $279.3 million, representing a negative
cumulative one-year gap of 15.4% of total assets compared to a negative
cumulative one-year gap of 4.5% at September
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30, 1996. Management believes that the negative gap of 4.5% at September 30,
1996 was unusually low due to loan sales of $141.4 million during the month of
September 1996, which resulted in a higher than normal cash position at the end
of that fiscal year, as the majority of the proceeds of those sales were
included in cash and cash equivalents at September 30, 1996. Management has
determined that the Bank has an acceptable and reasonable level of interest rate
risk that will not compromise credit quality.
The Bank's prepayment rates for its loans are based on the most recent
assumptions used by the FHLB as of June 30, 1997. 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.............................................................. 18.0%
Fixed-rate one- to four-family loans with maturities equal to or greater than five years:
Below 7% interest rate............................................................... 9.0%
7.00% to 7.99%....................................................................... 10.0%
8.00% to 8.99%....................................................................... 12.0%
9.00% to 9.99%....................................................................... 16.0%
10.00% and over...................................................................... 25.0%
Mortgage-backed and related securities with maturities equal to or greater than five years:
Below 7% interest rate............................................................... 8.0%
7.00% to 7.99%....................................................................... 12.0%
8.00% to 8.99%....................................................................... 17.0%
9.00% to 9.99%....................................................................... 26.0%
10.00% and over...................................................................... 32.0%
Other residential and all nonresidential loans................................................ 6.0%
Second mortgages.............................................................................. 19.0%
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, 1997. The
assumptions used at the dates indicated, although standardized, may not be
indicative of actual withdrawals and repricing experienced by the Bank.
3 6 More
Months 3-6 Months 1-3 3-5 5-10 Than 10
or Less Months - 1 Year Years Years Years Years
-------- ------- -------- -------- ------- -------- -------
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, 1997 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
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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 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, 1997
-------------------------------------------------------------------------------------------
More More
More Than Than 3 Than 5 More
Less Than 3 to 6 6 Months 1 Year to 3 Years to 5 Years to Than 10
3 Months Months to 1 Year Years Years 10 Years Years Total
--------- ---------- --------- ------------- ----------- ----------- ---------- ----------
(In Thousands)
INTEREST-EARNING ASSETS:
Mortgage loans, net............... $144,312 $ 61,147 $ 114,389 $ 268,742 $205,160 $113,448 $ 84,860 $ 992,058
Consumer loans, net............... 48,888 11,328 19,129 51,023 18,184 657 17 149,226
Other loans....................... 802 231 389 1,021 360 13 -- 2,816
Interest-bearing deposits......... 78,806 -- -- -- -- -- -- 78,806
Securities held-to-maturity and... 10,050 -- 40,066 9,955 405 12,451 1,529 74,456
securities available-for-sale
Mortgage-backed and related....... 100,713 39,801 81,879 81,259 70,165 44,450 3,378 421,645
securities held-to-maturity and
available-for-sale
FHLB stock........................ 18,296 -- -- -- -- -- -- 18,296
-------- --------- --------- --------- -------- -------- -------- ---------
Total interest-earning assets... 401,867 112,507 255,852 412,000 294,274 171,019 89,784 1,737,303
-------- --------- --------- --------- -------- -------- -------- ---------
NON INTEREST-BEARING LIABILITIES:
Non-interest bearing deposits.... 4,969 5,121 8,132 16,823 4,501 6,041 3,926 49,513
-------- --------- --------- --------- -------- -------- -------- ---------
INTEREST-BEARING LIABILITIES:
Passbook and statement savings... 7,133 6,981 12,720 40,522 26,419 33,532 29,787 157,094
NOW.............................. 6,309 6,309 10,018 20,726 5,545 7,442 4,836 61,185
Money market..................... 7,976 7,977 7,310 3,240 1,542 1,182 219 29,446
Certificates of deposit.......... 173,010 236,882 299,689 183,071 39,321 68 -- 932,041
Borrowed funds................... 123,946 50,000 75,000 145,925 -- -- -- 394,871
Senior debentures................ -- -- -- -- 33,839 -- -- 33,839
-------- --------- --------- --------- -------- --------- -------- ---------
Total non interest-bearing and.. 323,343 313,270 412,869 410,307 111,167 48,265 38,768 1,657,989
interest-bearing liabilities -------- --------- --------- --------- -------- -------- -------- ---------
Interest sensitivity gap........... $ 78,524 $(200,763) $(157,017) $ 1,693 $183,107 $122,754 $ 51,016 $ 79,314
======== ========= ========= ========= ======== ========= ======== =========
Cumulative interest sensitivity gap $ 78,524 $(122,239) $(279,256) $(277,563) $(94,456) $ 28,298 $ 79,314
======== ========= ========= ========= ======== ======== ========
Cumulative interest sensitivity gap as
a percentage of total assets 4.34% (6.76)% (15.44)% (15.35)% (5.22)% 1.56% 4.39%
Cumulative net interest-earning assets
as a percentage of net non interest-
bearing and interest-bearing liabilities 124.29% 80.80% 73.39% 80.99% 93.99% 101.75% 104.78%
INTEREST RATE RISK EXPOSURE COMPLIANCE
Increases in the level of interest rates also may adversely affect the
fair value of the Bank's securities and other earning assets. Generally, the
fair value of fixed-rate instruments fluctuates inversely with changes in
interest rates. As a result, increases in interest rates could result in
decreases in the fair value of the Bank's interest-earning assets, which could
adversely affect the Bank's results of operations if sold, or, in the case of
retained interest-earning assets classified as available-for-sale, the Bank's
stockholders' equity. As of September 30, 1997, the Bank's securities
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portfolio included $267.8 million in securities classified as available for
sale. Accordingly, as a result of adoption of Statement of Financial Accounting
Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" and the magnitude of the Bank's holdings of securities
available-for-sale, changes in interest rates could produce significant changes
in the value of such securities and could produce significant fluctuations in
the stockholders' equity of the Bank. The Bank does not own any trading assets
as of September 30, 1997.
On a quarterly basis, an interest rate risk exposure compliance report
is prepared and presented to the Bank's Board of Directors. This report,
prepared in accordance with Thrift Bulletin #13 issued by the OTS, presents an
analysis of the change in net interest income and net portfolio value resulting
from an increase or decrease in the level of interest rates. All changes are
measured as percentage changes from the values of projected net interest income
and net projected portfolio value in the flat rate scenario. The calculated
estimates of change in net interest income and net portfolio value are compared
to current limits established by management and approved by the Board of
Directors. The following is a summary of the interest rate exposure report as of
September 30, 1997:
Net Interest Income Net Portfolio Value
--------------------------- ---------------------------
Change in Interest Rate Projected Projected
Limit Change Limit Change
------------ ------------- ------------ -------------
-400 Basis Points -75.00% -18.18% -85.00% -51.52%
-300 Basis Points -65.00% -11.88% -55.00% -35.42%
-200 Basis Points -45.00% -7.06% -40.00% -21.54%
-100 Basis Points -25.00% -3.22% -30.00% -9.62%
Flat Rate -- -- -- --
+100 Basis Points -25.00% 2.82% -30.00% 9.12%
+200 Basis Points -45.00% 5.14% -40.00% 11.35%
+300 Basis Points -65.00% 8.59% -55.00% 20.57%
+400 Basis Points -75.00% 7.69% -85.00% 17.43%
The model utilized to create the report presented above makes various
estimates at each level of interest rate change regarding cash flows from
principal repayments on loans and mortgage-backed securities and/or call
activity on investment securities. Actual results could differ significantly
from these estimates, which would result in significant differences in the
calculated projected change. In addition, the limits stated above do not
necessarily represent the level of change under which management would undertake
specific measures to realign its portfolio in order to reduce the projected
level of change.
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ITEM 8. FINANCIAL STATEMENTS AND 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, 1996 and 1997, 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, 1997. 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, 1996 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended September 30, 1997 in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Certified Public Accountants
West Palm Beach, Florida
December 5, 1997
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FIRST PALM BEACH BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1996 AND 1997 (IN THOUSANDS)
September September
30, 1996 30, 1997
---------- -----------
ASSETS
Cash and Cash Equivalents: (Note 1)
Cash and amounts due from depository institutions............................................... $ 19,438 $ 21,123
Interest-bearing deposits....................................................................... 141,975 78,806
---------- ----------
Total cash and cash equivalents.......................................................... 161,413 99,929
Securities Available-for-Sale (Notes 1, 2)............................................................... 27,551 59,468
Securities Held-to-Maturity (Approximate fair value - 1996, $7,042; 1997, $15,144)(Notes 1, 3)........... 6,981 14,988
Mortgage-Backed and Related Securities Available-for-Sale (Notes 1, 5)................................... 105,866 208,342
Mortgage-Backed and Related Securities Held-to-Maturity (Approximate fair value - 1996,.................. 126,407 213,303
$127,495; 1997, $216,341) (Notes 1, 6)
Loans Receivable, Net of allowance for loan losses - 1996, $11,855; 1997, $6,046 (Notes 1, 7, 11)........ 1,007,881 1,144,100
Real Estate Owned, Net of allowance for losses - 1996, $361; 1997, $161 (Note 1)......................... 1,626 1,795
Repossessed Automobiles, At estimated fair value (Note 1)................................................ 1,602 474
Office Properties and Equipment, Net (Notes 1, 8)........................................................ 23,077 28,313
Federal Home Loan Bank Stock - At cost................................................................... 10,053 18,296
Accrued Interest Receivable (Notes 1, 7, 9).............................................................. 8,147 9,879
Goodwill (Note 1)........................................................................................ 2,825 2,631
Other Assets............................................................................................. 6,591 6,902
---------- ----------
Total Assets............................................................................................. $1,490,020 $1,808,420
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposit Accounts (Note 10)............................................................................... $1,136,722 $1,229,279
Advances from Federal Home Loan Bank (Note 11)........................................................... 201,025 365,925
Securities Sold Under Agreements to Repurchase (Note 12)................................................. 10,000 28,946
Senior Debentures, Net of unamortized issuance costs (Note 13)........................................... -- 33,839
Advances by Borrowers for Taxes and Insurance............................................................ 14,657 17,866
Other Liabilities (Notes 1, 13, 14, 15).................................................................. 27,756 19,538
Deferred Income Taxes, Net (Notes 1, 14)................................................................. (5,565) (3)
---------- ----------
Total liabilities........................................................................ 1,384,595 1,695,390
---------- ----------
Commitments and Contingencies (Notes 17, 18, 19)
Stockholders' Equity: (Notes 16, 19, 20)
Preferred Stock ($.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;............ 55 55
outstanding 5,093,096 and 5,047,746 (net of treasury stock) at September
30, 1996 and 1997, respectively
Additional Paid-In Capital...................................................................... 52,891 53,521
Retained Earnings - Substantially restricted (Notes 19, 20)..................................... 65,064 71,397
Treasury Stock, at cost (403,279 shares at September 30, 1996 and 448,629 shares at September... (8,660) (9,825)
30, 1997)
Common Stock Purchased By: (Note 15)
Employee stock ownership plan............................................................ (1,769) (955)
Recognition and retention plans.......................................................... (161) (117)
Unrealized Decrease in Fair Value on Available-for-sale Securities (Net of...................... (1,995) (1,046)
applicable income taxes) (Note 1)
---------- ----------
Total stockholders' equity............................................................... 105,425 113,030
---------- ----------
Total Liabilities and Stockholders' Equity............................................................... $1,490,020 $1,808,420
========== ==========
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, 1995, 1996 AND 1997 (IN THOUSANDS)
For the Years Ended September 30,
-------------------------------------
1995 1996 1997
----------- ------------ ------------
INTEREST INCOME:
Loans (Notes 1, 7)......................................................... $ 54,638 $ 84,090 $ 87,746
Securities held-to-maturity, securities available-for-sale, and trading
securities (Note 1)........................................................ 6,494 4,130 6,210
Mortgage-backed and related securities held-to-maturity and mortgage-backed
and related securities available-for-sale (Note 1)......................... 19,199 14,487 22,037
Other...................................................................... 633 825 937
---------- ----------- -----------
Total interest income...................................................... 80,964 103,532 116,930
---------- ----------- -----------
INTEREST EXPENSE:
Deposits (Note 10)......................................................... 37,847 48,614 57,535
Advances from Federal Home Loan Bank (Note 11)............................. 8,699 11,974 13,445
Securities sold under agreements to repurchase (Note 12)................... 2,354 712 904
Senior debentures (Note 13)................................................ -- -- 967
---------- ----------- -----------
Total interest expense..................................................... 48,900 61,300 72,851
---------- ----------- -----------
Net interest income........................................................ 32,064 42,232 44,079
PROVISION FOR LOAN LOSSES (Notes 1, 7)..................................... 261 15,704 3,281
---------- ----------- -----------
Net interest income after provision for loan losses (Note 1)............... 31,803 26,528 40,798
---------- ----------- -----------
OTHER INCOME:
Servicing income and other fees ........................................... $ 2,576 $ 3,206 $ 4,106
Net gain (loss) on sale of loans and mortgage-backed and related securities
available-for-sale (Notes 1, 5)............................................ (1,276) 3,557 1,324
Net gain (loss) on sale of securities available-for-sale (Notes 1, 2)...... (473) 959 278
Net gain on trading securities (Notes 1, 4)................................ 89 -- 294
Net gain on sale of property............................................... 975 460 551
Net gain on sale of loan servicing (Note 7)................................ 1,008 412 --
Miscellaneous.............................................................. 1,131 1,475 2,448
---------- ----------- -----------
Total other income......................................................... 4,030 10,069 9,001
---------- ----------- -----------
OTHER EXPENSES:
Employee compensation and benefits (Notes 15, 16).......................... 13,849 15,905 18,511
Early retirement program................................................... 2,361 -- --
Occupancy and equipment (Note 18).......................................... 4,259 4,830 6,729
Federal deposit insurance premium.......................................... 1,799 8,848 977
Provision for losses and net losses on sale of real estate owned (Note 1).. 74 451 329
Advertising and promotion.................................................. 679 663 1,005
Miscellaneous.............................................................. 3,588 4,905 6,855
---------- ----------- -----------
Total other expenses....................................................... 26,609 35,602 34,406
---------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES................................... 9,224 995 15,393
---------- ----------- -----------
PROVISION (BENEFIT) FOR INCOME TAXES: (Notes 1, 14)
Current.................................................................... 3,672 5,288 788
Deferred................................................................... (94) (4,842) 5,249
---------- ----------- -----------
Total provision for income taxes........................................... 3,578 446 6,037
---------- ----------- -----------
NET INCOME................................................................. $ 5,646 $ 549 $ 9,356
========== =========== ===========
PRIMARY EARNINGS PER SHARE (Note 1)........................................ $ 1.11 $ 0.11 $ 1.86
========== =========== ===========
FULLY DILUTED EARNINGS PER SHARE (Note 1).................................. $ 1.11 $ 0.11 $ 1.85
========== =========== ===========
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, 1995, 1996 AND 1997 (IN THOUSANDS)
Unrealized
(Decrease)
Increase in
Fair Value
Common Common on
Additional Stock Stock Available- Total
Common Paid-in Retained Treasury Purchased Purchased for-Sale Stock-holders'
Stock Capital Earnings Stock by ESOP by RRP Securities Equity
-------- --------- -------- -------- --------- --------- --------- --------------
Balance at September 30, 1994.... 55 51,935 61,999 (3,718) (3,174) (1,111) (5,524) 100,462
Net income...................... -- -- 5,646 -- -- -- -- 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
Ownership Plan and
Recognition and Retention Plans. -- 522 -- -- 665 490 -- 1,677
Purchase of Treasury Stock at
cost (225,600 shares)........... -- -- -- (4,902) -- -- -- (4,902)
Exercise of stock options by
certain directors and employees. -- (724) -- 1,337 -- -- -- 613
Dividends of $0.20 per share.... -- -- (1,053) -- -- -- -- (1,053)
----- ------- ------- ------- --------- -------- --------- ---------
Balance at September 30, 1995.... 55 51,733 66,592 (7,283) (2,509) (621) (3,356) 104,611
Net income...................... -- -- 549 -- -- -- -- 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. -- 733 -- -- 740 460 -- 1,933
Issuance of 299,478 shares of
Treasury Stock for the
purchase of PBS Financial Corp.. -- 496 -- 6,130 -- -- -- 6,626
Purchase of Treasury Stock at
cost (345,853 shares)........... -- -- -- (7,642) -- -- -- (7,642)
Exercise of stock options by
certain directors and employees. -- (71) -- 135 -- -- -- 64
Dividends of $0.40 per share.... -- -- (2,077) -- -- -- -- (2,077)
----- ------- ------- ------- --------- -------- --------- ---------
Balance at September 30, 1996.... 55 52,891 65,064 (8,660) (1,769) (161) (1,995) 105,425
Net income...................... -- -- 9,356 -- -- -- -- 9,356
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.................... -- -- -- -- -- -- (23) (23)
Change in unrealized losses
on securities
available-for-sale and
mortgage-backed and related
securities
available-for-sale, net of
income taxes.................... -- -- -- -- -- -- 972 972
Amortization of deferred
compensation - Employee Stock
Ownership Plan and
Recognition and Retention Plans. -- 906 -- -- 814 44 -- 1,764
Purchase of Treasury Stock at
cost (114,000 shares)........... -- -- -- (2,668) -- -- -- (2,668)
Exercise of stock options by
certain directors and
employees...................... -- (276) -- 1,503 -- -- -- 1,227
Dividends of $0.60 per share... -- -- (3,023) -- -- -- -- (3,023)
----- ------- ------- ------- --------- -------- --------- ---------
Balance at September 30, 1997... $ 55 $53,521 $71,397 $(9,825) $ (955) $ (117) $ (1,046) $ 113,030
===== ======= ======= ======= ========= ======== ========= =========
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, 1995, 1996 AND 1997 (IN THOUSANDS)
For the Years Ended September 30,
---------------------------------
1995 1996 1997
---------- ---------- ---------
CASH FLOW FROM (FOR) OPERATING ACTIVITIES:
Net income........................................................................................ $ 5,646 $ 549 $ 9,356
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation.................................................................................... 1,308 1,227 2,056
Employee Stock Ownership Plan and Recognition and Retention Plan Compensation Expense........... 1,677 1,933 1,764
Amortization of senior debentures' issuance cost................................................ -- -- 61
Accretion of discounts, amortization of premiums, and other deferred yield items................ (910) (538) (1,338)
Amortization of goodwill........................................................................ -- 145 194
Provision for loan losses....................................................................... 261 15,704 3,281
Provision for losses and net losses on sales of real estate owned............................... 74 451 329
Net realized and unrealized gain on trading securities.......................................... (89) -- (294)
Purchase of trading securities.................................................................... -- -- (63,073)
Sale of trading securities........................................................................ 5,003 -- 63,277
Net (gain) loss on sale of:
Loans........................................................................................... (84) (3,494) --
Mortgage-backed and related securities available-for-sale....................................... 1,360 (63) (948)
Securities available-for-sale and stock......................................................... 473 (959) (696)
Property and equipment.......................................................................... (975) (460) (551)
Decrease in loans held for sale................................................................... 127 -- --
Changes in assets and liabilities net of effects from purchase of PBS Financial Corp.:
Increase in accrued interest receivable......................................................... (1,496) (792) (1,732)
(Increase) decrease in other assets............................................................. 1,743 (1,330) (342)
Increase (decrease) in other liabilities - net of change in dividends payable and deferred taxes 4,339 (1,348) (8,466)
-------- --------- --------
Net cash provided by operating activities..................................................... 18,457 11,025 2,878
-------- --------- --------
CASH FLOW FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on loans................................................. (255,190) (286,867) (161,347)
Principal payments received on mortgage-backed and related securities............................. 42,877 37,830 57,225
Purchases of:
Loans........................................................................................... (5,687) (3,712) (14,168)
Mortgage-backed and related securities held-to-maturity......................................... (49,883) -- (134,449)
Mortgage-backed and related securities available-for-sale....................................... -- (41,360) (236,168)
Securities held-to-maturity..................................................................... (13,475) -- (15,413)
Securities available-for-sale................................................................... (74,906) (361,931) (152,510)
Office properties and equipment................................................................. (1,313) (7,237) (9,090)
Net proceeds from sales of:
Loans........................................................................................... 13,991 164,301 27,747
Mortgage-backed and related securities available-for-sale....................................... 94,391 18,040 127,735
Securities available-for-sale and stock......................................................... 100,965 294,117 72,111
Repossessed automobiles......................................................................... 407 11,928 17,432
Real estate acquired in settlement of loans..................................................... 1,085 2,395 3,178
Office properties and equipment................................................................. 1,307 1,593 2,349
(Purchase) sale of Federal Home Loan Bank stock................................................... 52 (525) (8,243)
Proceeds from maturities of securities............................................................ 19,952 125,587 56,896
Cash acquired through purchase of PBS Financial Corp. - net of cash payments relating to
purchase.......................................................................................... -- 9,873 --
Other investing activities........................................................................ (4,340) (4,509) (6,821)
-------- --------- --------
Net cash used for investing activities......................................................... (129,767) (40,477) (373,536)
-------- --------- --------
CASH FLOW FROM (FOR) FINANCING ACTIVITIES:
Senior debentures, net of issuance costs.......................................................... -- -- 33,778
Purchase of Treasury Stock at cost................................................................ (4,902) (7,642) (2,668)
Exercise of stock options......................................................................... 613 64 1,227
Net increase (decrease) in:
NOW accounts, demand deposits, and savings accounts............................................. (19,332) 55,343 7,931
Certificates of deposit......................................................................... 179,720 98,872 84,626
Advances from Federal Home Loan Bank............................................................ (1,050) 29,900 164,900
Securities sold under agreement to repurchase................................................... (39,290) (8,427) 18,946
Advances by borrowers for taxes and insurance................................................... 2,328 (539) 3,209
Dividends paid on stock......................................................................... (790) (1,838) (2,775)
-------- --------- --------
Net cash provided by financing activities...................................................... 117,297 165,733 309,174
-------- --------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................................... 5,987 136,281 (61,484)
CASH AND CASH EQUIVALENTS, Beginning of year....................................................... 19,145 25,132 161,413
-------- --------- --------
CASH AND CASH EQUIVALENTS, End of year............................................................. $ 25,132 $ 161,413 $ 99,929
======== ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes.................................................................... $ 3,806 $ 6,508 $ 349
======== ========== =======
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77
Cash paid for interest on deposits and other borrowings............... $ 48,003 $ 60,640 $ 71,972
======== ======== ==========
Supplemental Schedule of Noncash Investing and Financing Activities:
Repossessed automobiles acquired in settlement of loans............... $ 765 $ 21,122 $ 15,452
======== ======== ==========
Real estate acquired in settlement of loans........................... $ 1,057 $ 961 $ 3,580
======== ======== ==========
Decrease in unrealized loss on available-for-sale securities............ $ 2,168 $ 1,361 $ 949
======== ======== ==========
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.
FIRST PALM BEACH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
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 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, First Bank of Florida Mortgage Corporation, The Big First,
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78
Inc. and First Corporate Center, Inc. The Company's business is conducted
principally through the Bank. All material intercompany balances and
transactions have been eliminated in consolidation.
The Bank was organized in 1934 as a federally chartered mutual 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.
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.
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 was to engage in maintenance and management of improved
real estate. It is currently inactive.
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 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. Gains and losses on the sale of securities
available-for-sale and mortgage-backed and related securities available-for-sale
are determined using the specific identification method.
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.
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 7 for the composition of the mortgage loan portfolio at
September 30, 1996 and 1997). To a lesser extent, the Bank also purchases and
holds investment securities which
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79
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.
On October 1, 1995, the Bank adopted Financial Accounting Standards
Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 114,
"Accounting by Creditors for Impairment of a Loan," and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Recognition and
Disclosures," an amendment of SFAS No. 114. These standards address the
accounting for impairment of certain loans when it is probable that all amounts
due pursuant to the contractual terms of the loan will not be collected.
Adoption of these standards included the identification of commercial, business
and commercial real estate loans which are considered impaired under provisions
of SFAS No. 114. Groups of smaller-balance homogeneous loans (generally
residential mortgage and consumer installment and other loans) are collectively
evaluated for impairment. Adoption of these statements did not have a material
impact on the Bank's financial position or results of operations.
Under the provisions of these standards a loan in 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. Individually identified impaired loans are measured based on the
present value of payments expected to be received, using the historical
effective loan rates as the discount rate. Alternatively, measurement may also
be based on observable market prices, or for loans that are solely dependent on
the collateral for repayment, measurement may be based on the fair value of the
collateral. Loans that are to be foreclosed are measured based on the fair value
of the collateral. If the recorded investment in the impaired loan exceeds the
measure of fair value, a valuation is required as a component of the allowance
for loan losses. Changes to the valuation allowance are recorded as a component
of the provision for loan losses.
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.
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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.
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, 1997 the Bank had recorded $339,000 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. When
management determines that a loan is impaired, or not performing, the accrual of
interest is immediately discontinued. 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."
STOCK BASED COMPENSATION - Effective October 1, 1996, the Company
adopted SFAS No. 123, "Stock Based Compensation." This statement requires the
Company to choose between two different methods of accounting for stock options.
The statement defines a fair-value-based method of accounting for stock options
but allows an entity to continue to measure compensation cost for stock options
using the intrinsic value method of accounting prescribed by Accounting
Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued to
Employees." The Company has elected to continue using the accounting methods
prescribed by APB No. 25 and to provide the pro forma disclosures in Note 16
required by SFAS No. 123.
EARNINGS PER SHARE - Primary and fully diluted earnings per share for
the years ended September 30, 1995, 1996 and 1997 were determined by dividing
net income for fiscal year 1995 by 5,071,942 and 5,098,853; for fiscal year 1996
by 5,093,975 and 5,101,625; and for fiscal year 1997 by 5,025,762 and 5,067,216,
the weighted average number of shares of common stock and common stock
equivalents outstanding, respectively. 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 June 1996, FASB issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." The Statement, which amends SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," supersedes
SFAS No. 122, "Accounting for Mortgage Servicing Rights." This Statement
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. Those standards are based
on consistent application of a financial-components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets
78
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when control has been surrendered, and derecognizes liabilities when
extinguished. This Statement provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. SFAS No. 125 requires that servicing assets and liabilities be
subsequently measured by (a) amortization in proportion to and over the period
of estimated net servicing income or loss and (b) assessment for asset
impairment or increased obligation based on their fair values. SFAS No. 125 also
requires that debtors reclassify financial assets pledged as collateral and that
secured parties recognize those assets and their obligation to return them in
certain circumstances in which the secured party has taken control of those
assets. SFAS No. 125 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996.
During the year ended September 30, 1997, the Company sold $27.7 million of
loans and retained the loan servicing rights. The gain on the sale was
determined in accordance with SFAS No. 125.
In February 1997, FASB issued SFAS No.128, "Earnings per Share." This
statement simplifies the standards for computing earnings per share previously
required under APB Opinion No. 15, "Earnings Per Share," and makes the
computation comparable to international EPS standards. Basic EPS (formerly
primary EPS) excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted EPS is computed similarly to fully
diluted EPS pursuant to APB Opinion No. 15. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997 and
requires restatement of all prior period EPS data presented. If the Company had
adopted the provision of SFAS No. 128, basic EPS and diluted EPS would have been
$1.91 and $1.86, respectively, for the year ended September 30, 1997.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income," which requires that an enterprise report, by major components and as a
single total, the change in its net assets during the period from nonowner
sources; and SFAS No. 131 "Disclosures about Segments of an Enterprise and
Related Information," which establishes annual and interim reporting standards
for an enterprise's operating segments and related disclosures about its
products, services, geographic areas, and major customers. Adoption of these
statements will not impact the Bank's consolidated financial position, results
of operations or cash flows, and any effect will be limited to the form and
content of its disclosures. Both statements are effective for fiscal years
beginning after December 15, 1997, with earlier application permitted.
RECLASSIFICATIONS - Certain amounts in the 1995 and 1996 consolidated
financial statements have been reclassified to conform to the presentation for
1997.
2. SECURITIES AVAILABLE-FOR-SALE
Securities available-for-sale at September 30, 1996 and 1997 are
summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
(In thousands)
September 30, 1996:
United States Government and agency securities $27,002 $114 $11 $27,105
Certificates of deposit ...................... 396 -- -- 396
Other investments ............................ 50 -- -- 50
------- ---- --- -------
Total ........................................... $27,448 $114 $11 $27,551
======= ==== === =======
Weighted average interest rate ............... 6.28%
=======
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September 30, 1997
United States Government and agency securities $49,720 $174 $ 3 $49,891
Municipal bonds .............................. 9,573 17 63 9,527
Other investments ............................ 50 -- -- 50
------- ---- --- -------
Total ........................................... $59,343 $191 $66 $59,468
======= ==== === =======
Weighted average interest rate ............... 6.76%
=======
The Bank enters into purchases of mortgage-backed securities under
agreements to resell substantially identical securities. The securities
underlying such agreements are book-entry securities and are delivered into a
third-party custodian's account designated by the Bank under a written custodial
agreement that explicitly recognizes the Bank's interest in the securities. The
Bank had no securities purchased under agreements to resell transactions at
September 30, 1996 and 1997 and there were no such transactions during the year
ended September 30, 1997. During the fiscal year ended September 30, 1996 the
securities purchased under agreements to resell had maturities ranging from
daily to monthly and averaged approximately $15,551,000. The maximum amount
outstanding at any month end during 1996 was $60,153,000.
Proceeds from the sale of securities available-for-sale were
$100,965,000, $294,117,000 and $71,661,000 during the fiscal years ended
September 30, 1995, 1996 and 1997, respectively. During the fiscal years ended
September 30, 1995, 1996 and 1997, sales resulted in gross realized gains of
$149,000, $996,000 and $326,000, respectively, and gross losses of $572,000,
$37,000 and $48,000, 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, 1997, the Bank had pledged $2.0 million carrying value
of securities available-for-sale as collateral for treasury, tax and loan
accounts.
The table below sets forth the contractual maturity distribution of the
Bank's securities available-for-sale at September 30, 1997:
Estimated Fair
Amortized Cost Value
-------------- --------------
(In thousands)
Due in one year or less ............. $ -- $ --
Due after one year through five years 44,939 45,050
Due after five years ................ 14,404 14,418
------- -------
Total ............................ $59,343 $59,468
======= =======
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3. SECURITIES HELD-TO-MATURITY
Securities held-to-maturity at September 30, 1996 and 1997 are
summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
(In thousands)
September 30, 1996:
United States Government and agency securities $ 6,981 $ 61 $ -- $ 7,042
========== ==== ========= =======
Weighted average interest rate ............... 6.61%
==========
September 30, 1997
United States Government and agency securities $ 14,988 $156 $ -- $15,144
========== ==== ========= =======
Weighted average interest rate ............... 6.42%
==========
The table below sets forth the contractual maturity distribution of the
Bank's securities held-to-maturity at September 30, 1997:
Estimated Fair
Amortized Cost Value
-------------- --------------
(In thousands)
Due in one year or less ................................... $ -- $ --
Due after one year through five years ..................... 14,988 15,144
Due after five years ...................................... -- --
------- -------
Total ..................................................... $14,988 $15,144
======= =======
4. TRADING SECURITIES
There were no trading securities as of September 30, 1996 and 1997.
Proceeds from the sale of trading securities were $-0- and $63,277,000 in the
years ended September 30, 1996 and 1997, respectively. During the years ended
September 30, 1996 and 1997, sales resulted in gross realized gains of $-0- and
$316,000, respectively, and gross realized losses of $-0- and $22,000,
respectively.
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5. MORTGAGE-BACKED AND RELATED SECURITIES AVAILABLE-FOR-SALE
Mortgage-backed and related securities available-for-sale at September
30, 1996 and 1997 are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
(In thousands)
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
======== ==== ====== ========
September 30, 1997
FHLMC pass-through certificates ......... $ 1,223 $ -- $ -- $ 1,223
FNMA pass-through certificates .......... 54,420 123 66 54,477
Collateralized mortgage obligations ..... 154,603 587 2,548 152,642
-------- ---- ------ --------
Total ..................................... $210,246 $710 $2,614 $208,342
======== ==== ====== ========
Proceeds from the sales of mortgage-backed and related securities
available-for-sale were $94,391,000, $18,040,000 and $127,735,000 during the
fiscal years ended September 30, 1995, 1996 and 1997, respectively. During the
fiscal years ended September 30, 1995, 1996 and 1997, sales resulted in gross
realized gains of $3,000, $81,000 and $951,000, respectively, and gross losses
of $1,363,000, $18,000 and $3,000, 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 5.0
years. At September 30, 1997, the Bank had $173.4 million in CMOs/REMICs. Of
this amount, $20.8 million represents CMOs/REMICs classified as held-to-maturity
with an approximate fair value of $20.7 million, and $152.6 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 $53.5 million of floating rate securities with
interest caps 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 6.50% at September 30, 1997. The Bank
purchases only
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CMOs/REMICs rated AA or better by nationally recognized rating services.
Management estimates that the $119.9 million of fixed rate tranches have an
expected average life of approximately 3.6 years.
6. MORTGAGE-BACKED AND RELATED SECURITIES HELD-TO-MATURITY
Mortgage-backed and related securities held-to-maturity at September
30, 1996 and 1997 are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
(In thousands)
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
======== ====== ==== ========
September 30, 1997
GNMA pass-through certificates .......... $122,032 $1,842 $ -- $123,874
FHLMC pass-through certificates ......... 11,555 271 -- 11,826
FNMA pass-through certificates .......... 58,942 1,003 8 59,937
Collateralized mortgage obligations ..... 20,774 158 228 20,704
-------- ------ ---- --------
Total ..................................... $213,303 $3,274 $236 $216,341
======== ====== ==== ========
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.
At September 30, 1997, the Bank had pledged $44.6 million carrying
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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7. LOANS RECEIVABLE
Loans receivable at September 30, 1996 and 1997 consisted of the
following:
For the Years Ended
September 30,
-------------------------------
1996 1997
----------- -----------
(In thousands)
Real estate mortgage loans:
One- to four-family ................................ $ 652,606 $ 846,449
Commercial real estate ............................. 51,754 40,905
Multi-family ....................................... 17,564 14,904
Land ............................................... 24,489 23,028
Real estate construction loans ........................ 130,499 115,636
Consumer loans ........................................ 191,654 150,991
Other loans ........................................... 2,434 2,816
----------- -----------
Total gross loans ................................ 1,071,000 1,194,729
Less:
Undisbursed portion of loans in process ............ 61,633 52,776
Unearned discounts, premiums and deferred loan fees
and costs, net .................................... (10,369) (8,193)
Allowance for loan losses .......................... 11,855 6,046
----------- -----------
Loans receivable - net ................................ $ 1,007,881 $ 1,144,100
=========== ===========
An analysis of the changes in the allowance for loan losses for the
years ended September 30, 1995, 1996, and 1997 is as follows:
For the Years Ended September 30,
-----------------------------------------
1995 1996 1997
------- -------- --------
(In thousands)
Balance at beginning of period ......... $ 1,956 $ 2,157 $ 11,855
Increase in allowance due to acquisition
of PBS ............................... -- 2,253 --
Current provision ...................... 261 15,704 3,281
Charge-offs ............................ (92) (8,630) (11,283)
Recoveries ............................. 32 371 2,193
------- -------- --------
Ending balance ......................... $ 2,157 $ 11,855 $ 6,046
======= ======== ========
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 $148,186,000 and $88,379,000 at September 30,
1996 and 1997, 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 $9,463,000 and $3,796,000 at September 30, 1996
and 1997, respectively.
In connection with the origination of indirect loans, the Bank paid a
fee to automobile dealers. At September 30, 1996 and 1997, the unamortized
balances of such fees were $7,351,000 and $3,175,000, respectively, and are
included as deferred loan costs within loans receivable.
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The Bank originates both adjustable and fixed rate loans. There were no
loans held for sale at September 30, 1996 or September 30, 1997.
The composition and maturity or repricing structure of the loan
portfolio at September 30, 1997 is presented below:
Fixed Rate Adjustable Rate
---------------------------------------------- ----------------------------------------------
Term to Maturity Book Value Term to Maturity or Repricing Book Value
----------------------------- ---------- ----------------------------- ----------
(In thousands) (In thousands)
1 month - 1 year ............ $114,275 1 month - 1 year ........... $124,019
1 year - 3 years ............ 41,180 1 year - 3 years ........... 131,814
3 years - 5 years ........... 89,413 3 years - 5 years .......... 244,218
5 years - 10 years .......... 25,101 5 years - 10 years.......... 57,826
10 years - 20 years ......... 121,732 10 years - 20 years ........ 29
Over 20 years ............... 194,493 Over 20 years .............. --
-------- --------
Total ....................... $586,194 Total ...................... $557,906
======== ========
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 $93,807,000 and $78,837,000 at September 30, 1996 and
1997, 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, 1996 and 1997, is approximately as follows:
September 30,
----------------------
1996 1997
------- -------
(In thousands)
Office buildings ...................................... $15,584 $ 9,975
Retail buildings ...................................... 11,990 10,079
Warehouses ............................................ 5,392 6,319
Adult care living facilities .......................... 3,832 --
Multi-family residential .............................. 17,564 14,904
Hotels and motels ..................................... 224 --
Undeveloped land ...................................... 24,489 24,390
Other ................................................. 14,732 13,170
------- -------
Total .............................................. $93,807 $78,837
======= =======
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At September 30, 1996 and 1997, the Bank's impaired loans consisted of
the following:
September 30,
--------------------
1996 1997
------ ------
(In thousands)
Impaired loan balances ................................ $7,649 $1,267
Related allowance for loan losses ..................... $1,125 $ 349
Average recorded investment in impaired loans ......... $4,115 $4,924
Interest income recognized during impairment period ... $ 148 $ 921
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. FIRREA does not require
divestiture of any loan that was lawful when it was originated. The Bank is
federally chartered and is currently in compliance with this limitation.
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 $19.6 million at September 30,
1997. 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, 1996 and 1997 were $169,245,000 and $82,476,000,
respectively. The balance of $169,245,000 at September 30, 1996 included
$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 $4,368,000 and $2,410,000 at September 30,
1996 and 1997, 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. In accordance with applicable regulations, this
preferential interest rate does not apply to loans made to directors, the
President, Executive Vice Presidents, Senior Vice Presidents and Vice
Presidents. Loans to the directors and such officers are made in the ordinary
course of business and on substantially the same terms and collateral as those
prevailing at the time for comparable transactions. Loans to other 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 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 loans do
not involve more than the normal risk of collectability or present other
unfavorable features to the Bank.
The total of loans to directors, officers and associates of such
persons was approximately $1,185,000 at September 30, 1997.
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8. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at September 30, 1996 and 1997
consisted of the following:
September 30
----------------------
1996 1997
------- -------
(In thousands)
Land .................................................. $ 7,448 $ 6,151
Buildings and improvements ............................ 14,568 18,048
Furniture and equipment ............................... 14,139 18,452
------- -------
Total ................................................. 36,155 42,651
Less accumulated depreciation ......................... 13,078 14,338
------- -------
Office properties and equipment - net ................. $23,077 $28,313
======= =======
9. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at September 30, 1996 and 1997 consisted of
the following:
September 30,
--------------------
1996 1997
------ ------
(In thousands)
Loans ................................................. $6,415 $6,526
Investments ........................................... 442 1,067
Mortgage-backed and related securities ................ 1,290 2,286
------ ------
Accrued interest receivable ........................... $8,147 $9,879
====== ======
10. DEPOSIT ACCOUNTS
Deposit accounts, by type and range of rates, at September 30, 1996 and
1997 consisted of the following:
September 30,
----------------------------
1996 1997
---------- ----------
(In thousands)
Passbook and statement accounts - 1996 and 1997, 3.62% and 3.65%,
respectively .................................................... $ 150,433 $ 157,094
---------- ----------
Interest-bearing NOW accounts 1996 and 1997, 1.41% and 0.75%,
respectively .................................................... 59,716 61,185
---------- ----------
Non-interest bearing NOW accounts ................................. 39,649 49,513
---------- ----------
Variable Rate Money Market Accounts 1996 and 1997, 2.40% and 2.18%,
respectively .................................................... 39,667 29,446
---------- ----------
Certificates:
Less than 3.00% ................................................ 833 252
3.00% - 3.99% .................................................. 303 466
4.00% - 4.99% .................................................. 86,471 51,009
5.00% - 5.99% .................................................. 595,436 722,063
6.00% - 6.99% .................................................. 131,927 139,753
7.00% - 7.99% .................................................. 32,151 18,356
8.00% or greater ............................................... 136 142
---------- ----------
Total certificate accounts ................................... 847,257 932,041
---------- ----------
Total ............................................................. $1,136,722 $1,229,279
========== ==========
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The weighted-average cost of deposits at September 30, 1996 and 1997
was 4.87% and 4.99%, respectively.
Individual deposits greater than $100,000 at September 30, 1996 and
1997 aggregated approximately $118,618,000 and $122,930,000, respectively.
Interest expense on deposits consisted of the following during the
years ended September 30, 1995, 1996 and 1997:
For the Years Ended September 30,
-------------------------------------
1995 1996 1997
------- ------- -------
(In thousands)
Passbook and statement accounts ....... $ 1,902 $ 4,088 $ 5,549
NOW accounts .......................... 877 856 716
Money market accounts ................. 1,432 1,094 781
Certificate accounts .................. 33,636 42,576 50,489
------- ------- -------
Total ................................. $37,847 $48,614 $57,535
======= ======= =======
Interest on deposit accounts is net of interest forfeited by depositors
on early withdrawal of certificate accounts of approximately $197,000, $165,000
and $208,000 for the years ended September 30, 1995, 1996 and 1997,
respectively.
Scheduled maturities of certificate accounts are as follows:
September 30, 1997
-------------------------
Amount Percent
-------- -------
(Dollars in thousands)
MATURITY
Less than 1 year ...................................... $706,879 75.84%
1 year - 2 years ...................................... 138,977 14.91%
2 years - 3 years ..................................... 46,610 5.00%
3 years - 4 years ..................................... 26,986 2.90%
4 years - 6 years ..................................... 12,589 1.35%
-------- ------
Total ................................................. $932,041 100.00%
======== ======
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, 1997, the Bank had
no brokered deposits.
The Deposit Insurance Funds Act of 1996 mandated that all depository
institutions that are insured by the Savings Associations Insurance Fund
("SAIF") were required to 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 to recapitalize the SAIF portion of the FDIC fund. The assessment
was 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 was $6.6 million and is included in the consolidated
financial statements at September 30, 1996.
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11. ADVANCES FROM FEDERAL HOME LOAN BANK
The Bank had outstanding advances from the FHLB of $201,025,000 bearing
a weighted average interest rate of approximately 5.88% at September 30, 1996
and $365,925,000 bearing a weighted average interest rate of 5.98% at September
30, 1997. The advances at September 30, 1997 are repayable as follows:
Year Ending September 30 Amount
-------------------------------- ------------
1998 ............................ $220,000,000
1999 ............................ 145,000,000
2000 ............................ 925,000
------------
Total ........................... $365,925,000
============
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, 1997, the Bank had total credit available with the
FHLB of $500,000,000. With $365,925,000 currently advanced, remaining credit
available equals $134,075,000.
12. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
During the fiscal years ended September 30, 1996 and 1997, all of the
Bank's securities sold under agreements to repurchase ("Reverse Repurchase
Agreement") transactions were fixed-coupon reverse repurchase agreements.
Securities underlying the Reverse Repurchase Agreements were delivered to the
broker-dealer who arranged the transactions. The agreements at September 30,
1997 matured in October 1997.
Information concerning reverse repurchase agreements is summarized as
follows:
1996 1997
----------- -----------
Average balance during the year ....................... $11,935,000 $15,574,000
Average interest rate during the year ................. 5.97% 5.80%
Maximum month-end balance during the year ............. $28,408,000 $28,946,000
Balance at year-end ................................... $10,000,000 $28,946,000
Securities underlying the agreements at year-end:
Carrying value ........................................ $12,193,840 $30,680,441
Estimated fair value .................................. $12,233,176 $31,201,850
13. SENIOR DEBENTURES
On June 30, 1997, the Company issued $35.0 million of 10.35% Senior
Debentures, maturing on June 30, 2002. The interest on the Senior Debentures is
payable semi-annually in arrears on June 30 and December 31 of each year
commencing December 31, 1997. The Senior Debentures may not be redeemed prior to
maturity. The indenture entered into by the Company in connection with the
Senior Debentures includes certain covenants which, among other things, limit
the disposition of voting stock of the Bank, limit the ability to become liable
on certain forms of indebtedness, provide for consolidated net worth
requirements, provide that the Company shall not allow the Bank to be classified
as other than "Well Capitalized" and restrict dividend or other distributions
and stock repurchases. At September 30, 1997 approximately $905,000 of accrued
interest is included in Other Liabilities in the accompanying consolidated
Statement of Financial Condition. Issuance costs related to the Senior
Debentures were $1,161,000 and
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are being amortized over the life of the debt using the interest method. At
September 30, 1997, the Company had amortized approximately $61,400 of such
issuance costs. The net proceeds of the debenture issue are being used for
general corporate purposes.
14. INCOME TAXES
The Bank 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 year ended
September 30, 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 its bad debt deduction. As required
by recent legislation, for the year ended September 30, 1997, the Bank used the
specific charge-off method to determine its bad debt deduction in the
computation of its taxable income. These methods differ 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, 1995, 1996 and 1997 are as follows:
September 30,
--------------------------------------
1995 1996 1997
------- ------- ------
(In thousands)
Current - Federal ..................... $ 3,174 $ 4,525 $ 751
Current - State ....................... 498 763 37
------- ------- ------
Total current ......................... 3,672 5,288 788
------- ------- ------
Deferred - Federal .................... (80) (4,134) 4,482
Deferred - State ...................... (14) (708) 767
------- ------- ------
Total deferred ........................ (94) (4,842) 5,249
------- ------- ------
Total provision ....................... $ 3,578 $ 446 $6,037
======= ======= ======
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,
-------------------------------------------------------------------------------
1995 1996 1997
--------------------- --------------------------------------------------
Amount % Amount % Amount %
------ --- ------ --- ------ ---
(Dollars in thousands)
Tax at federal tax rate ............... $ 3,229 35.0% $ 348 35.0% $ 5,388 35.0%
Benefit of graduated rates ............ (92) (1.0)% (10) (1.0)% (154) (1.0)%
Increase resulting from:
State income taxes, net of federal
income tax benefit .................. 310 3.4% 37 3.7% 531 3.5%
Other - net ........................... 131 1.4% 71 7.1% 272 1.7%
------- ---- ----- ---- ------- ----
Total provision and effective tax rate $ 3,578 38.8% $ 446 44.8% $ 6,037 39.2%
======= ==== ===== ==== ======= ====
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The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at September 30, 1996 and 1997 are presented
below:
September 30,
-----------------------
1996 1997
------- -------
(In thousands)
Deferred tax liabilities:
Depreciation .............................................. $ 629 $ --
Loan fee income ........................................... 1,218 1,534
FHLB stock dividends ...................................... 625 311
Investment in partnership ................................. 570 579
Other ..................................................... -- 203
------- -------
Gross deferred tax liabilities .............................. 3,042 2,627
------- -------
Deferred tax assets:
Excess of book bad debt reserve over tax reserve .......... 3,337 799
Depreciation .............................................. -- 79
Retirement plan ........................................... 588 289
Accrued compensation ...................................... 72 68
AMT credit ................................................ 117 117
Mark-to-market adjustment - Securities available-for-sale . 970 656
Deferred compensation ..................................... 20 --
Other ..................................................... 158 188
SAIF assessment ........................................... 2,471 --
NOL carryforward .......................................... 874 434
------- -------
Gross deferred assets ....................................... 8,607 2,630
Less valuation allowance for deferred tax assets ............ -- --
------- -------
Gross deferred tax assets net of valuation allowance ........ 8,607 2,630
------- -------
Net deferred tax (asset) .................................... $(5,565) $ (3)
======= =======
15. 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 $53,000 as of September 30, 1997 and are reflected
in the pension plan assets at book value.
At September 30, 1997, the pension plan held 16,681 shares of the
common stock of the Company with a market value of $34.81 per share. Cash
dividends of $0.40 and $0.60 per share were received on the shares during the
fiscal years ended September 30, 1996 and 1997, respectively.
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Pension expense for the plan amounted to $421,000 in 1995, $360,000 in
1996 and $377,000 in 1997 and included the following components:
1995 1996 1997
------- ----- -------
(In thousands)
Service cost ........................ $ 551 $ 424 $ 503
Interest cost ....................... 908 669 706
Return on assets .................... (1,238) (665) (1,990)
Net amortization and deferral ....... 200 (68) 1,158
------- ----- -------
Pension expense ..................... $ 421 $ 360 $ 377
======= ===== =======
Fiscal year end 1995, 1996 and 1997 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, 1996 and 1997:
1996 1997
------- -------
(In thousands)
Actuarial present value of benefit obligations:
Vested benefits .................................... $ 5,674 $ 5,920
Nonvested benefits ................................. 427 585
------- -------
Accumulated benefit obligations ....................... 6,101 6,505
Effect of anticipated future compensation levels and
other events ........................................ 2,838 3,308
------- -------
Projected benefit obligation .......................... 8,939 9,813
Fair value of assets held in the plans (estimated) .... 8,388 10,515
------- -------
(Deficiency) surplus of plan assets under projected
benefit obligation .................................. $ (551) $ 702
======= =======
The (deficiency) surplus consisted of the following:
1996 1997
------- -------
Unamortized transition asset .......................... $ 289 $ 241
Unrecognized net gain ................................. 382 1,227
Accrued pension liability ............................. (1,222) (766)
------- -------
Total ................................................. $ (551) $ 702
======= =======
At September 30, 1996 and 1997, the weighted average discount rate used
to measure the projected benefit obligation was 8%. The rates of increase in
future compensation levels are estimated at 7% and 6.5% at September 30, 1996
and 1997, respectively. The expected long-term rate of return on assets is
estimated at 9% at both September 30, 1996 and 1997.
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 is shown as
a reduction of stockholders' equity. During the fiscal years ended September 30,
1995, 1996 and 1997, ESOP expense was $1,128,000, $1,337,000 and $1,511,000,
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
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million to fund the purchase of the RRP shares. Awards generally 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, 1995, 1996 and
1997, RRP expense totaled $490,000, $460,000 and $44,000, respectively, which is
included in employee compensation and benefits.
16. STOCK OPTION PLANS
STOCK OPTION PLANS - The Company 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
initially 529,000 shares or 10% of the total number of common shares issued
pursuant to the Conversion. Under the terms of the stock option plans, 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.
A portion of the options outstanding at September 30, 1997 were granted
prior to the fiscal year 1997. Included in these outstanding options are: 1)
168,907 options granted to certain employees and directors on September 29, 1993
at an exercise price of $10.00 per share which are fully vested; 2) 26,500
options granted to two directors on September 17, 1996 at an exercise price of
$22.94 per share which are fully vested; and 3) 20,000 options granted to two
employees on July 15, 1996 at an exercise price of $20.13 per share, 9,800 of
which are fully vested, 9,800 of which vest on July 15, 1998 and 400 of which
vest on July 15, 1999.
In January 1997, the stockholders approved the reservation of an
additional 250,000 shares of common stock for issuance under the 1993 First Palm
Beach Bancorp, Inc. Incentive Stock Option Plan. On March 18, 1997, the Company
granted 233,000 non-qualified stock options to certain officers of the Bank at
an exercise price of $29.06 per share, all of which are exercisable as of the
date of grant. On April 28, 1997, the Company granted 10,000 non-qualified stock
options to an officer of the Bank at an exercise price of $27.38, all of which
are exercisable as of the date of grant. On June 30, 1997, the Company granted
8,000 incentive stock options to an officer of the Bank at an exercise price of
$33.19, which options are exercisable at a rate of 33 1/3% per year beginning
June 30, 1998. At September 30, 1997 there were 26,500 options available for
future issuance to directors and 968 options available for officers and
employees. Below is a summary of transactions:
Option Price
--------------------------
Number of Average
Options Price Per Aggregate
Outstanding Share Price
----------- --------- ------------
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 $ 11.92 3,386,015
Granted ....................................... 251,000 $ 29.13 7,310,813
Exercised ..................................... (68,650) $ 10.00 (686,500)
Canceled ...................................... -- -- --
------- ------------
Balance - September 30, 1997 .................... 466,407 $ 21.46 $ 10,010,328
======= ========= ============
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Options exercisable at each of fiscal year end September 30, 1995, 1996
and 1997 were 191,950, 237,557 and 448,207, respectively. The Company adopted
the disclosure-only option under SFAS No. 123, "Accounting for Stock-based
Compensation," as of October 1, 1996. The estimated fair value of options
granted since December 15, 1994 is summarized as follows:
Exercise Fair Value of
Grant Date # Options Price Options
---------- --------- -------- --------------
7/15/96 20,000 $20.13 $4.31
9/17/96 26,500 22.94 3.89
3/18/97 233,000 29.06 4.76
4/28/97 10,000 27.38 4.42
6/30/97 8,000 33.19 6.75
The weighted average fair value of options granted during the fiscal
years ended September 30, 1996 and 1997 were $4.07 and $4.81, respectively.
Had compensation cost for the Company's stock options been determined
based on the fair value at the grant date, for awards under those plans
consistent with the method of SFAS No. 123, the Company's net income and
earnings per share for the years ended September 30, 1996 and 1997 would have
been reduced to the pro forma amounts indicated below:
Year Ended Year Ended
September 30, 1996 September 30, 1997
------------------ ------------------
Net Income
--------------------------
As reported $549,000 $9,356,000
Pro Forma $492,000 $8,629,000
Primary Earnings Per Share
--------------------------
As reported $ 0.11 $ 1.86
Pro Forma $ 0.10 $ 1.72
The fair value of options granted under the Company's stock option
plans during the fiscal years ended September 30, 1996 and 1997 was estimated
using the Binary Option Pricing Model with the following assumptions used:
dividend yield of 1.70%, expected volatility of 22%, risk free interest rates of
5.70% and 5.91% for expected lives of 2 years and 3 years, respectively.
17. EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS
EMPLOYMENT AGREEMENTS - Both the Company and the Bank are a party to an
Employment Agreement with each of Messrs. Davis, the President and Chief
Executive Officer, and Guemple, the Executive Vice President and Chief Operating
Officer, (each, a "Contract Executive"). These Employment Agreements establish
the respective duties and compensation of the Contract Executives and are
intended to ensure that the Bank and the Company will be able to maintain a
stable and competent management base. The continued success of the Bank and the
Company depends to a significant degree on the skills and competence of the
Contract Executives.
The Employment Agreements, which supercede previous agreements entered
into with Messrs. Davis and Guemple, provide for an initial term of thirty-six
(36) full calendar months beginning May 20, 1997. The Bank's
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Employment Agreements provide that, prior to the first anniversary date, and on
each anniversary date thereafter, the Bank's Board of Directors may agree,
after conducting a performance evaluation of the Contract Executive, to extend
the Employment Agreements for an additional year so that the remaining terms
shall be three years. The Company's Employment Agreements provide for perpetual
extensions such that the remaining unexpired term shall be three years unless
written notice of non-renewal is given by the Board of Directors or the
Contract Executive, in which event the term becomes a fixed period of three
years beginning on the notice date.
The Employment Agreements provide for termination by the Bank or the
Company at any time with or without cause as defined in the Employment
Agreements. In the event the Bank or the Company choose to terminate the
Contract Executive's employment for reasons other than for cause, or in the
event of the Contract Executive's resignation from the Bank and the Company
upon (i) failure to re-elect the Contract Executive to his current offices or
to more senior positions, (ii) a material change in the executive's functions,
duties or responsibilities that is not cured within 30 days after notice, (iii)
any material breach of a term, covenant or condition of the Employment
Agreements that is not cured within 30 days after notice, or (iv) following a
change of control as defined in the Employment Agreements ("Change of
Control"), demotion, loss of title, office or significant authority or
responsibility, relocation of the Contract Executive's principal office,
material adverse change in working conditions, or failure to include the
Contract Executive in compensation and benefit plans comparable to those in
effect for similarly situated executives of the acquiror, the Contract
Executive or, in the event of death, his beneficiary, would be entitled to a
lump sum cash payment in an amount equal to the remaining base salary and bonus
payments due to the Contract Executive and the additional contributions or
benefits that would have been earned under each employee benefit plan of the
Bank or the Company for which the Contract Executive is eligible during the
remaining terms of the Employment Agreements and payments that would have been
made under any incentive compensation plan during the remaining terms of the
Employment Agreements. The Bank and the Company would also continue the
Contract Executive's life, health and disability insurance coverage for the
remaining terms of the Employment Agreements. Following a Change in Control,
the remaining term of each Employment Agreement is deemed to be 36 months.
If termination, voluntary or involuntary, follows a change in control
of the Bank or the Company, the Contract Executive or, in the event of death,
his beneficiary, would be entitled to a severance payment equal to the greater
of the remaining payments under the agreement or three times his average annual
compensation over the past five years set forth in the employment agreement with
the Bank or the Company. In general, for purposes of the Employment Agreements,
a "Change of Control" will generally be deemed to occur (i) when a person or
group of persons acting in concert acquires beneficial ownership of the shares
of any class of equity security, such as common stock of the Company or the
Bank, representing at least 20% of the combined voting power of all outstanding
securities in the election of directors, or (ii) upon stockholder approval of a
merger or consolidation, or upon liquidation or sale of substantially all the
assets of the Company or the Bank, or (iii) if there occurs a contested election
of directors which results in a change in the majority composition of the Board
of Directors of the Company or the Bank over a two-year look-back period.
Payments to each Contract Executive under the Bank's Employment
Agreements will be guaranteed by the Company in the event that payments or
benefits are not paid by the Bank. Payment and benefits under the Employment
Agreements made contingent upon a change in control, if they would constitute an
excess parachute payment under Section 280G of the Internal Revenue Code of
1986, as amended (the "Code") would be reduced to the extent necessary to avoid
creating an excess parachute payment.
CHANGE OF CONTROL AGREEMENTS - Each of the Bank and the Company are
parties to a Change of Control Agreement ("COC") with eight executive officers
and one other officer, none of whom are parties to an Employment Agreement.
Certain of these supersede previous agreements. Each COC is intended to ensure
that the Bank and the Company will be able to maintain a stable and competent
management base upon a Change of Control of the Bank and the Company.
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Each COC has a three-year term. Commencing on the first anniversary
date of the COC and continuing on each anniversary thereafter, the Bank COC may
be renewed by the Board of Directors of the Bank for an additional year so that
the remaining term shall be three years. The Company COC extends automatically
each year such that the remaining unexpired term shall be three years on each
anniversary date unless written notice of non-extension is given at least sixty
days prior to any anniversary date. The 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 the employer's failure to comply
with any material provision of the COC that is not cured within 10 days after
notice, the officer's demotion, loss of title, office or significant authority,
a reduction in the officer's compensation or benefits, or relocation of the
officer's principal place of employment more than 25 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 annual salary and highest bonus, plus
continued insurance benefits for up to three years. Payments under the COC are
guaranteed by the Company in the event that payments or benefits are not paid by
the Bank.
Payments and benefits resulting under the COC upon a change in control
as defined for purposes of Section 280G of the Code, if they would constitute an
excess parachute payment under Section 280G of the Code, would be reduced to the
extent necessary to avoid creating an excess parachute payment.
18. 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 commitment
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 of the Bank. 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 $40,608,000 at September 30, 1996 and $31,153,000 at September 30,
1997. The Bank had commitments to purchase loans of $-0- and $3,491,000 at
September 30, 1996 and September 30, 1997, respectively. The Bank had letters of
credit approximating $3,393,000 and $783,000 outstanding at September 30, 1996
and 1997, 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
commitments to purchase investment securities or mortgage pool and related
securities of $20,000,000 and $-0- at September 30, 1996 and 1997.
The Bank had commitments to sell mortgage pool securities of
$20,000,000 and $-0- at September 30, 1996 and September 30, 1997, respectively.
The Bank leases various properties for original periods ranging from
one to ten years. Rent expense for the fiscal years ended September 30, 1995,
1996 and 1997 was $798,000, $1,154,000 and $1,485,000, respectively. At
September 30, 1997, future minimum lease payments under these operating leases
are as follows:
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Year Ending September 30 Amount
------------------------------- -------------
(In thousands)
1998 .......................... $1,364
1999 .......................... 993
2000 .......................... 790
2001 .......................... 439
2002 .......................... 189
Thereafter .................... 171
------
Total ......................... $3,946
======
19. 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 set forth in
the table below of Total and Core (Tier 1) capital to risk-weighted assets, and
of Core capital to average assets, as defined in the regulations. As of
September 30, 1997, the Bank exceeded all capital adequacy requirements to which
it is subject.
As of September 30, 1997, 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
the Prompt Corrective Action provisions, the Bank must maintain minimum 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.
The following tables present the capital of the Bank at September 30,
1996 and 1997:
To Be Considered
Well Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
------------------------ ------------------------ ------------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- -----
(Dollars in thousands)
As of September 30, 1996:
Total Capital (to Risk-weighted Assets) $103,668 12.28% $67,518 8.00% $84,398 10.00%
Core (Tier 1) Capital (to Adjusted
Tangible Assets) .................... $ 92,244 6.17% $59,768 4.00% $74,710 5.00%
Tangible Capital (to Tangible Assets) . $ 92,244 6.17% $22,413 1.50% N/A N/A
Core (Tier 1) Capital (to Risk-weighted
Assets) ............................. $ 92,244 10.93% N/A N/A $50,639 6.00%
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As of September 30, 1996, the Bank's tangible assets, adjusted tangible
assets and risk-weighted assets were $1,494,207,000, $1,494,207,000 and
$843,976,000, respectively.
To Be Considered
Well Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
------------------------ ------------------------ ------------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- -----
(Dollars in thousands)
As of September 30, 1997:
Total Capital (to Risk-weighted Assets) $133,761 14.76% $72,481 8.00% $90,602 10.00%
Core (Tier 1) Capital (to Adjusted
Tangible Assets) .................... $128,065 7.07% $72,423 4.00% $90,529 5.00%
Tangible Capital (to Tangible Assets) . $128,065 7.07% $27,159 1.50% N/A N/A
Core (Tier 1) Capital (to Risk-weighted
Assets) ............................. $128,065 14.13% N/A N/A $54,361 6.00%
As of September 30, 1997 the Bank's tangible assets, adjusted tangible
assets and risk-weighted assets were $1,810,580,000, $1,810,580,000 and
$906,017,000, respectively.
20. 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. In addition, the
Indenture pursuant to which the Company issued its 10.35% Senior Debentures Due
2002, contains certain restrictions on the payment of dividends by the Company
and 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) During fiscal 1997, the Company
purchased 114,000 shares of an OTS approved repurchase of 509,310 shares which,
at the Company's option, could have been completed by September 30, 1997.
98
101
21. REGULATORY EXAMINATIONS
At periodic intervals, both the OTS and, as a result of FIRREA, the
Federal Deposit Insurance Corporation ("FDIC"), 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 April 1997. 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 1997 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
1997 financial statements cannot presently be determined.
22. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
as amended by SFAS No. 119 ("SFAS No. 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 counterparts, 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 No. 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,
1996 and 1997:
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-BACKED AND 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.
99
102
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.
SENIOR DEBENTURES - Fair value is estimated using rates offered for an
advance from the FHLB with a similar maturity.
COMMITMENTS TO EXTEND CREDIT AND PURCHASE SECURITIES - At September 30,
1996 and 1997, 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, 1996 September 30, 1997
---------------------------- ----------------------------
Carrying Carrying
Value Fair Value Value Fair Value
---------- ---------- ---------- ----------
(In thousands)
Financial Assets:
Cash and cash equivalents ................. $ 19,438 $ 19,438 $ 21,123 $ 21,123
Interest earning deposits ................. 141,975 141,975 78,806 78,806
Investment securities ..................... 44,585 44,646 92,752 92,908
Mortgage-backed and related securities .... 232,273 233,361 421,645 424,683
Loans receivable .......................... 1,007,881 981,926 1,144,100 1,126,729
Financial Liabilities:
Deposits .................................. $1,136,722 $1,115,722 $1,229,279 $1,207,123
Advances from FHLB ........................ 201,025 200,237 365,925 365,248
Securities Sold Under Agreements to
Repurchase .............................. 10,000 10,156 28,946 28,963
Senior Debentures ......................... -- -- 33,839 38,513
23. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed statements of financial condition as of
September 30, 1996 and 1997, and the condensed statements of operations and
statements of cash flows for the years ended September 30, 1995, 1996 and 1997
should be read in conjunction with the consolidated financial statements and the
related notes.
100
103
September 30
---------------------------
Statements of Financial Condition (in thousands) 1996 1997
--------- ---------
Assets:
Cash and cash equivalents:
Cash and amounts due from depository institutions .... $ 2,864 $ 9,404
Office properties and equipment - net ................. 2,932 2,898
Equity in net assets of Bank .......................... 92,912 129,566
Receivable from Bank .................................. 7,364 5,854
Other assets .......................................... 33 1,217
--------- ---------
Total assets ............................................ $ 106,105 $ 148,939
========= =========
Liabilities and Stockholders' Equity:
Senior debentures - net of issuance costs ............. $ -- $ 33,839
Other liabilities ..................................... 680 2,070
--------- ---------
Total liabilities ....................................... 680 35,909
Stockholders' Equity:
Common stock .......................................... 55 55
Additional paid-in capital ............................ 52,891 53,521
Retained earnings - substantially restricted .......... 65,064 71,397
Treasury stock ........................................ (8,660) (9,825)
Common stock purchased by:
Employee Stock Ownership Plan ........................ (1,769) (955)
Recognition and Retention Plans ...................... (161) (117)
Unrealized loss on available-for-sale securities ...... (1,995) (1,046)
--------- ---------
Total stockholders' equity .............................. 105,425 113,030
--------- ---------
Total liabilities and stockholders' equity .............. $ 106,105 $ 148,939
========= =========
Years Ended September 30,
Statements of Operations (in thousands) 1995 1996 1997
------ ----- --------
Interest income ............................................... $ 887 $ 293 $ 443
Interest expense .............................................. -- -- 967
------ ----- --------
Net interest income ........................................... 887 293 (524)
------ ----- --------
Other income:
Equity in undistributed earnings of Bank .................... 5,222 556 9,755
Miscellaneous ............................................... 322 (21) 328
------ ----- --------
Total other income ............................................ 5,544 535 10,083
Miscellaneous operating expenses .............................. 525 278 459
------ ----- --------
Total expenses ................................................ 525 278 459
------ ----- --------
Income before income taxes .................................... 5,906 550 9,100
Provision (benefit) for income taxes ........................ 260 1 (256)
------ ----- --------
Net income .................................................... $5,646 $ 549 $ 9,356
====== ===== ========
101
104
Years Ended September 30,
Statements of Cash Flows (in thousands) 1995 1996 1997
------- -------- --------
Cash flow from (for) operating activities:
Net income .................................................. $ 5,646 $ 549 $ 9,356
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Equity in undistributed earnings of Bank .................. (5,222) (556) (9,755)
Depreciation .............................................. 68 66 36
Amortization of senior debentures' issuance cost .......... -- -- 61
Net increase in taxes due from Bank ....................... -- -- (5,915)
(Increase) decrease in other assets ....................... 805 (997) 6
Increase (decrease) in other liabilities net of dividend
payable .................................................. (530) (615) 5,867
------- -------- --------
Net cash provided by (used by) operating activities ...... 767 (1,553) (344)
------- -------- --------
Cash flow from (for) investing activities:
Decrease in receivable from Bank ............................ 4,589 7,740 1,510
Capital contribution to Bank ................................ -- -- (25,000)
Sale of building to Bank .................................... -- 4,280 --
Purchase of office properties, equipment and land ........... (205) (578) (2)
Principal payment received on ESOP loan ..................... 665 740 814
Cash acquired through purchase of PBS Financial Corp. net of
cash payments relating to purchase ......................... -- 233 --
------- -------- --------
Net cash provided by (used for) investing activities ...... 5,049 12,415 (22,678)
------- -------- --------
Cash flow from (for) financing activities:
Proceeds of senior debentures - net of issuance cost ........ -- -- 33,778
Purchase of Treasury Stock at cost .......................... (4,902) (7,642) (2,668)
Sale of Treasury Stock for exercise of stock options ........ 613 64 1,227
Dividends paid on stock ..................................... (790) (1,838) (2,775)
------- -------- --------
Net cash provided by (used for) financing activities ...... (5,079) (9,416) 29,562
------- -------- --------
Net increase in cash and cash equivalents ..................... 737 1,446 6,540
Cash and cash equivalents, beginning of year .................. 681 1,418 2,864
------- -------- --------
Cash and cash equivalents, end of year ........................ $ 1,418 $ 2,864 $ 9,404
======= ======== ========
Supplemental disclosure of cash flow information:
Cash paid for income taxes .................................. $ 3,806 $ 6,508 $ 349
======= ======== ========
Supplemental schedule of non-cash investing and financing
activities:
Decrease in unrealized loss on available-for-sale securities $ 2,168 $ 1,361 $ 949
======= ======== ========
102
105
24. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
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
======= ======= ======= ========
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 (loss)
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.
For the Year Ended September 30, 1997
----------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Interest income ............................. $26,988 $27,507 $30,442 $31,993
Interest expense ............................ 16,568 16,562 18,711 21,010
------- ------- ------- -------
Net interest income ......................... 10,420 10,945 11,731 10,983
Provision for loan losses ................... 802 567 831 1,081
------- ------- ------- -------
Net interest income after provision for loan
losses .................................... 9,618 10,378 10,900 9,902
Other income ................................ 1,907 2,134 1,952 3,008
Other expense ............................... 7,738 8,717 8,897 9,054
------- ------- ------- -------
Income before income tax expense ............ 3,787 3,795 3,955 3,856
Income taxes ................................ 1,514 1,520 1,603 1,400
------- ------- ------- -------
Net income .................................. $ 2,273 $ 2,275 $ 2,352 $ 2,456
======= ======= ======= =======
Primary earnings per share .................. $ 0.45 $ 0.46 $ 0.47 $ 0.48
======= ======= ======= =======
Fully diluted earnings per share ............ $ 0.45 $ 0.46 $ 0.46 $ 0.48
======= ======= ======= =======
103
106
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
104
107
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, 1998 at pages 5 through 8 and is incorporated herein by
reference.
Information relating to the filing of reports required under Section
16(a) of the Exchange Act by directors, executive officers and 10% beneficial
owner's of the Company's Common Stock appears in the Company's Proxy Statement
at page 21 and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information relating to executive compensation appears in the Proxy
Statement at pages 9 through 20 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 2 through 4 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 20 and is incorporated
herein by reference.
105
108
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, 1996 and 1997.
Consolidated Statements of Operations for the Years
Ended September 30, 1995, 1996 and 1997.
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended September 30, 1995, 1996
and 1997.
Consolidated Statements of Cash Flows for the Years
Ended September 30, 1995, 1996 and 1997.
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:
3.1 Certificate of Incorporation of the
Company (incorporated by reference
from the 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 from
Form 10-Q filed on May 12, 1995,
File No. 0-21942).
3.2 Bylaws of Company (incorporated by
reference 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 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 from
Form 8-A Registration Statement
filed on January 26, 1995, File No.
0-21942).
4.3 Indenture dated as of June 30, 1997
by and between the Company and The
Bank of New York, as Trustee,
relating to the Company's 10.35%
Senior Debentures due June 30, 2002
(incorporated by reference from the
Exhibits to Form S-4 Registration
Statement filed on September
11,1997, Registration No. 333-
35431).
106
109
4.4 Form of 10.35% Senior Debentures
Due June 30, 2002 (included in the
Indenture filed as Exhibit 4.3
hereto).
4.5 Form of Series B 10.35% Senior
Debentures Due June 30, 2002 (filed
herewith).
10.1 First Federal Savings and Loan
Association of the Palm Beaches
Recognition and Retention Plan for
Officers and Employees
(incorporated by reference from the
Proxy Statement for the 1993 Annual
Meeting of Stockholders filed
December 17, 1993).
10.2 First Federal Savings and Loan
Association of the Palm Beaches
Recognition and Retention Plan for
Outside Directors (incorporated by
reference from Form 10-K filed
December 26, 1996, File No.
0-21942).
10.3 First Palm Beach Bancorp, Inc.
Incentive Stock Option Plan for
Officers and Employees
(incorporated by reference from the
Proxy Statement for the 1997 Annual
Meeting of Stockholders filed
December 19, 1996). Amendment 1 to
the First Palm Beach Bancorp, Inc.
1993 Incentive Stock Option Plan
(incorporated by reference from the
Proxy Statement for the 1997 Annual
Meeting of Stockholders filed
December 19, 1996).
10.4 First Palm Beach Bancorp, Inc.
Stock Option Plan for Outside
Directors (incorporated by
reference from Form 10-K filed
December 26, 1996, File No. 0-
21942).
10.5 Intentionally omitted.
10.6 Supplemental Retirement Income
Agreement between First Federal
Savings and Loan Association of the
Palm Beaches and William W. Lynch
(incorporated by reference from
Form 10-K filed on December 29,
1994, File No. 0-21942).
10.7 Employment Agreement between First
Bank of Florida and Louis O. Davis,
Jr. (incorporated by reference from
Form 10-Q filed August 13, 1997,
File No. 0-21942).
10.8 Employment Agreement between First
Bank of Florida and R. Randy
Guemple (incorporated by reference
from Form 10-Q filed August 13,
1997, File No. 0-21942).
10.9 Employment Agreement between First
Palm Beach Bancorp, Inc. and Louis
O. Davis, Jr. (incorporated by
reference from Form 10-Q filed
August 13, 1997, File No. 0-21942).
10.10 Employment Agreement between First
Palm Beach Bancorp, Inc. and R.
Randy Guemple (incorporated by
reference from Form 10-Q filed
August 13, 1997, File No. 0-21942).
107
110
10.11 Change of Control Agreement between
First Bank of Florida and John C.
Trammel (incorporated by reference
from Form 10-Q filed August 13,
1997, File No. 0-21942).
10.11 Change of Control Agreement between
First Palm Beach Bancorp, Inc. and
John C. Trammel (incorporated by
reference from Form 10-Q filed
August 13, 1997, File No. 0-21942).
10.12 Change of Control Agreement between
First Bank of Florida and Calvin L.
Cearley, dated as of June 30, 1997
(incorporated by reference from
Form 10-Q filed August 13, 1997,
File No. 0-21942).
10.13 Change of Control Agreement between
First Palm Beach Bancorp, Inc. and
Calvin L. Cearley, dated as of June
30, 1997 (incorporated by reference
from Form 10-Q filed August 13,
1997, File No. 0-21942).
10.14 Amendment to Change of Control
Agreement between First Bank of
Florida and Calvin L. Cearley dated
December 16, 1997 (filed herewith).
10.15 Amendment to Change of Control
Agreement between First Palm Beach
Bancorp, Inc. and Calvin L. Cearley
dated December 16, 1997 (filed
herewith).
10.16 Change of Control Agreement between
First Palm Beach Bancorp, Inc. and
Rita Groton (now Zambuto), dated as
of May 20, 1997 (incorporated by
reference from Form 10-Q filed
August 13, 1997, File No. 0-21942).
10.17 Change of Control Agreement between
First Bank of Florida and Rita
Groton (now Zambuto), dated as of
May 20, 1997 (incorporated by
reference from Form 10-Q filed
August 13, 1997, File No. 0-21942).
10.18 Change of Control Agreement between
First Palm Beach Bancorp, Inc. and
John Rudy, dated as of May 20, 1997
(incorporated by reference from
Form 10-Q filed August 13, 1997,
File No. 0-21942).
10.19 Change of Control Agreement between
First Bank of Florida and John
Rudy, dated as of May 20, 1997
(incorporated by reference from
Form 10-Q filed August 13, 1997,
File No. 0-21942).
10.20 Change of Control Agreement between
First Palm Beach Bancorp, Inc. and
Alissa Ballot, dated as of May 20,
1997 (incorporated by reference
from Form 10-Q filed August 13,
1997, File No. 0-21942).
10.21 Change of Control Agreement between
First Bank of Florida and Alissa
Ballot, dated as of May 20, 1997
(incorporated by reference from
Form 10-Q filed August 13, 1997,
File No. 0-21942).
10.22 Amendment to Change of Control
Agreement between First Bank of
Florida and Alissa Ballot dated
November 18, 1997 (filed herewith).
108
111
10.23 Amendment to Change of Control
Agreement between First Palm Beach
Bancorp, Inc. and Alissa Ballot
dated November 18, 1997 (filed
herewith).
10.24 Form of Change of Control Agreement
between First Bank of Florida and
each of Suzanne Brenner (dated
December 1, 1997), Rodney Bayliff,
Angela Greenberg and Jon Geitner,
dated December 16, 1997 (filed
herewith).
10.25 Form of Change of Control Agreement
between First Palm Beach Bancorp,
Inc. and each of Suzanne Brenner
(dated December 1, 1997), Rodney
Bayliff, Angela Greenberg and Jon
Geitner, dated December 16, 1997
(filed herewith).
10.26 Consulting Agreement between First
Bank of Florida and William W.
Lynch (incorporated by reference
from Form 10-K filed on December
29, 1994, File No. 0-21942).
10.27 First Bank of Florida Second
Amended and Restated Employee
Severance Compensation Plan (filed
herewith).
10.28 Amendment to First Bank of Florida
Recognition and Retention Plan for
Outside Directors (incorporated by
reference from Form 10-K filed
December 26, 1996, File No.
0-21942).
10.29 Amendment to First Palm Beach
Bancorp, Inc. Stock Option Plan for
Outside Directors (incorporated by
reference from Form 10-K filed
December 26, 1996, File No.
0-21942).
10.30 First Palm Beach Bancorp, Inc.
Retirement Plan for Outside
Directors (filed herewith).
10.31 Amended and Restated Employee Stock
Ownership Plan (filed herewith).
10.32 First Amendment to Amended and
Restated Employee Stock Ownership
Plan (filed herewith).
10.33 Second Amendment to Amended and
Restated Employee Stock Ownership
Plan (filed herewith).
10.34 ESOP Loan Documents (incorporated
by reference to Exhibits to Form
S-1 Registration Statement filed
June 9, 1993, Registration No.
33-64164).
10.35 Registration Rights Agreement dated
June 30, 1997 by and between First
Palm Beach Bancorp, Inc. and Keefe
Bruyette & Woods, Inc.
(incorporated by reference from the
Exhibits to Form S-4 Registration
Statement filed on September 11,
1997, Registration No. 333-35431).
11 Computation of earnings per share
as shown in Item 8, page 78.
109
112
21 Subsidiary information -
incorporated by reference from
subsidiary activities described in
"Part I - Subsidiaries" on page 27
of this Form 10-K.
23 Independent Auditors' Consent
(filed herewith).
27 Financial Data Schedule (filed
herewith).
(b) Reports on Form 8-K
Report on Form 8-K dated June 30, 1997
relating to issuance of 10.35% Senior
Debentures Due 2002.
110
113
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 23, 1997
Pursuant to the requirements of the Securities 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 December 23, 1997
- ---------------------------------------
William W. Lynch Chairman of the Board
/s/ R. Randy Guemple December 23, 1997
- ---------------------------------------
R. Randy Guemple Director, Chief Financial Officer
and Treasurer
/s/ Elizabeth A. Koester December 23, 1997
- ---------------------------------------
Elizabeth A. Koester Controller
/s/ Edward M. Eissey December 23, 1997
- ---------------------------------------
Edward M. Eissey Vice Chairman of the Board
/s/ Fred A. Greene December 23, 1997
- ---------------------------------------
Fred A. Greene Director
/s/ Robert P. Miller December 23, 1997
- ---------------------------------------
Robert P. Miller Director
/s/ Holly W. Hadley, M.D. December 23, 1997
- ---------------------------------------
Holly W. Hadley, M.D. Director
/s/ Daniel O. Sokoloff, M.D. December 23, 1997
- ---------------------------------------
Daniel O. Sokoloff, M.D. Director
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