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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 2000
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- or -
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission Number: 000-32139
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FLORIDAFIRST BANCORP, INC.
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(Exact name of Registrant as specified in its Charter)
State of Florida 59-3662010
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
205 East Orange Street 33801-4611
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (863) 688-6811
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Securities Registered Pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $ .10 par value
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 NO X (not subject to such filing
requirements for the past 90 days)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing price of the Registrant's Common Stock as
quoted on the Nasdaq National Market, on December 22, 2000, was $62.2 million.
(The exclusion from such amount of the market value of the shares owned by any
person shall not be deemed an admission by the registrant that such person is an
affiliate of the registrant.)
As of December 22, 2000, there were issued and outstanding 5,520,000 shares of
the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
PART I
Item 1. Description of Business
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General
On April 6, 1999, FloridaFirst Bank reorganized from a mutual savings
association into a mutual holding company named FloridaFirst Bancorp MHC and
formed FloridaFirst Bancorp, a middle-tier holding company, whereby FloridaFirst
Bank became a wholly-owned subsidiary of FloridaFirst Bancorp. In connection
with the reorganization, FloridaFirst Bancorp sold 2,703,851 shares of its
Common Stock to the public and the remaining 3,049,024 shares were held by
FloridaFirst Bancorp MHC.
On December 21, 2000, FloridaFirst Bancorp, Inc. (the "Company") completed its
stock offering in connection with the conversion and reorganization of
FloridaFirst Bank (the "Bank") and its holding company, FloridaFirst Bancorp,
from the mutual holding company form of organization to a full stock company. As
part of the conversion and reorganization, the shares formerly held by
FloridaFirst Bancorp MHC were cancelled, the Company sold 3,147,952 new shares
to the public and the shares held by stockholders of FloridaFirst Bancorp were
exchanged for 2,372,048 shares of the Company.
The Company provides commercial and retail banking services, with an emphasis on
one- to four-family residential mortgage loans, home equity loans and lines of
credit and consumer loans as well as certificates of deposit, checking accounts
and savings accounts. In addition, the Company originates commercial real estate
loans and offers checking accounts and other credit facilities to businesses
within its market area. At September 30, 2000, the Company had total assets,
deposits and equity of $582.2 million, $521.1 million, and $61.1 million,
respectively.
The Company attracts deposits from the general public and uses these deposits
primarily to originate loans and to purchase investment, mortgage-backed and
other securities. The principal sources of funds for the Company's lending and
investing activities are deposits, Federal Home Loan Bank ("FHLB") advances, the
repayment and maturity of loans and sale, maturity, and call of securities. The
principal source of income is interest on loans and investment and
mortgage-backed securities. The principal expense is interest paid on deposits
and FHLB advances.
Competition
The competition for deposit products comes from other insured financial
institutions such as commercial banks, thrift institutions, credit unions, and
multi-state regional banks in the Company's market area of Polk and Manatee
Counties, Florida. Deposit competition also includes a number of insurance
products sold by local agents and investment products such as mutual funds and
other securities sold by local and regional brokers. Loan competition varies
depending upon market conditions and comes form other insured financial
institutions such as commercial banks, thrift institutions, credit unions,
multi-state regional banks, and mortgage bankers and brokers.
Lending Activities
General. The Company primarily originates one-to-four-family residential real
estate loans, commercial real estate loans, consumer loans and other loans.
Consumer loans consist primarily of direct and indirect automobile loans, home
equity loans and lines of credit, and other consumer loans. The Company's
commercial real estate loans consist primarily of mortgage loans secured by
small commercial office/retail space, warehouses, small and medium sized
apartment buildings and residential real estate acquisition and development
projects.
1
Loan Portfolio Composition. The following table analyzes the composition of the
Company's loan portfolio by loan category and in percentages of the total loan
portfolios at the dates indicated.
At September 30,
-----------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------- ------------------- ------------------ -------------------- -------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Type of Loans:
- -------------
Mortgage loans:
Residential:
Permanent.................. $304,419 66.1% $276,115 65.6% $244,667 68.3% $256,742 69.3% $247,609 73.7%
Construction............... 27,996 6.1 32,974 7.8 27,311 7.6 22,350 6.0 19,778 5.9
Multi-family................. 3,610 .8 5,787 1.4 4,464 1.2 4,154 1.1 4,564 1.4
Commercial real estate (1)... 30,709 6.6 21,157 5.0 17,217 4.8 12,282 3.3 8,562 2.5
Land......................... 12,886 2.8 9,548 2.3 6,796 1.9 6,153 1.7 779 .2
Consumer Loans:
Home equity loans (2)...... 28,926 6.3 22,545 5.4 13,137 3.7 18,310 4.9 18,361 5.5
Auto loans................. 40,717 8.8 42,181 10.0 34,795 9.7 43,504 11.7 30,911 9.2
Other...................... 11,396 2.5 10,318 2.5 9,959 2.8 7,415 2.0 5,311 1.6
------- ----- ------- ----- --------- ----- ------- ----- ------- -----
Total loans.................. 460,659 100.0% 420,625 100.0% 358,346 100.0% 370,910 100.0% 335,875 100.0%
===== ===== ===== ===== =====
Less:
Loans in process (3)....... 16,952 19,774 17,013 12,589 12,072
Deferred loan fees and
unearned interest........ - - 159 137 91
Allowance for loan losses.. 3,321 2,941 2,564 2,633 2,385
-------- -------- -------- -------- --------
Total loans, net............. $440,386 $397,910 $338,610 $355,551 $321,327
======== ======== ======== ======== ========
- --------------------
(1) Includes commercial loans of $2,533 in 2000, $1,374 in 1999, $1,083 in 1998
and $218 in 1997 which were not secured by real estate.
(2) Includes home equity lines of credit.
(3) Relates to construction loans.
2
Loan Maturity Schedule. The following table sets forth the maturity or repricing
of the Company's loan portfolio at September 30, 2000. Demand loans, loans
having no stated maturity, and overdrafts are shown as due in one year or less.
Commercial Home Auto and
Multi- real estate equity Other
Residential(1) family and land loans consumer Total
-------------- ------ -------- ----- -------- -----
(In thousands)
Amounts Due:
Within 1 Year............. $ 50,104 $ 567 $ 6,319 $ 6,369 $ 2,106 $ 65,465
-------- ------ ------- ------- ------- --------
After 1 year:
1 to 3 years............ 31,851 16 10,043 549 14,185 56,644
3 to 5 years............ 18,484 1,166 9,202 2,754 28,215 59,821
Over 5 years............ 231,976 1,861 18,031 19,254 7,607 278,729
-------- ------ ------- ------- ------- --------
Total due after one year.. 282,311 3,043 37,276 22,557 50,007 395,194
-------- ------ ------- ------- ------- --------
Total amount due.......... $332,415 $3,610 $43,595 $28,926 $52,113 $460,659
======== ====== ======= ======= ======= ========
- --------
(1) Includes $27,996 in construction loans.
The following table sets forth the dollar amount of all loans due after
September 30, 2001, which have pre-determined interest rates and which have
floating or adjustable interest rates.
Floating or
Fixed Rates Adjustable rates Total
----------- ---------------- -----
(In thousands)
Residential........................ $ 233,101 $ 49,210 $282,311
Multi-family....................... 2,676 367 3,043
Commercial real estate and land.... 32,057 5,219 37,276
Home equity loans.................. 22,557 - 22,557
Auto and other consumer............ 50,007 - 50,007
--------- -------- --------
Total............................ $ 340,398 $ 54,796 $395,194
========= ======== ========
Residential Lending. The Company's primary lending activity consists of the
origination of one-to-four family residential mortgage loans secured by property
located in the Company's market area. The Company generally originates
one-to-four family residential mortgage loans in amounts up to 80% of the lesser
of the appraised value or selling price of the mortgaged property without
requiring private mortgage insurance. The Company will originate a mortgage loan
in an amount up to 95% of the lesser of the appraised value or selling price of
a mortgaged property, however, private mortgage insurance for the borrower is
required on the amount financed in excess of 80%. The Company originates
fixed-rate and adjustable-rate loans for retention in its portfolio. A mortgage
loan originated by the Company, whether fixed-rate or adjustable-rate, can have
a term of up to 30 years. Adjustable-rate loans limit the periodic interest rate
adjustment and the minimum and maximum rates that may be charged over the term
of the loan.
3
The majority of the Company's one-to-four family residential loans (both fixed
rate and adjustable rate) are underwritten in accordance with Fannie Mae
guidelines, regardless of whether they will be sold in the secondary market.
Substantially all of the Company's residential mortgages include "due on sale"
clauses, which give the Company the right to declare a loan immediately payable
if the borrower sells or otherwise transfers an interest in the property to a
third party.
Property appraisals on real estate securing the Company's single-family
residential loans are made by state certified and licensed independent
appraisers approved by the Board of Directors. Appraisals are performed in
accordance with applicable regulations and policies. The Company obtains title
insurance policies on all first mortgage real estate loans originated. Borrowers
generally advance funds, with each monthly payment of principal and interest, to
a loan escrow account from which the Company makes disbursements for such items
as real estate taxes and hazard insurance premiums and mortgage insurance
premiums as they become due.
Construction Lending. The Company is an active lender in the construction of
one- to four-family homes. The residential construction loans are made both to
individual homeowners for the construction of their primary residence and to
local builders for the construction of pre-sold houses or houses that are being
built for speculative purposes.
As of September 30, 2000, 80% of all the Company's residential construction
loans were made to individual homeowners. After the house is constructed, the
loan terms are modified to terms that apply to permanent residential loans. The
underwriting guidelines for the construction to permanent loans are the same as
the permanent loans, but additional construction administration procedures and
inspections are followed during the construction process to assure that
satisfactory progress is being made prior to funding the construction draw
requests.
Construction lending is generally considered to involve a higher degree of
credit risk than long term financing of residential properties. The Company's
risk of loss on a construction loan depends largely on the accuracy of the
initial estimate of the property's value at completion of construction and the
estimated cost of construction. If the estimate of construction cost and the
marketability of the property after the project is completed prove to be
inaccurate, we may be compelled to advance additional funds to complete the
construction. Furthermore, if the final value of the completed property is less
than the estimated amount, the value of the property might not be sufficient to
assure the repayment of the loan.
The Company limits its exposure for construction loans made to local builders
through periodic credit analysis on the individual builder and a series of
inspections throughout the construction phase. In addition, the Company limits
the amount and number of loans made to an individual builder for the
construction of pre-sold and speculative houses based on the financial strength
of the builder. At September 30, 2000, approximately 20% of the Company's
construction loans are to local builders.
Commercial Real Estate and Other Loans. The Company originates commercial real
estate mortgage loans and loans on multi-family dwellings and developed and
undeveloped land. The Company's commercial real estate mortgage loans are
primarily permanent loans secured by improved property such as office buildings,
retail stores, commercial warehouses and apartment buildings. The terms and
conditions of each loan are tailored to the needs of the borrower and based on
the financial strength of the project and any guarantors. The average loan size
is approximately $260,000 and typically are made at fixed rates of interest with
five to ten year maturities, at which point the loan is repaid or the terms and
conditions are renegotiated. Essentially all originated commercial real estate
loans are within the Company's market area and all are within the State of
Florida. The Company's largest commercial real estate loan had a balance of $1.6
million on September 30, 2000 and was secured by a warehouse building.
Typically, commercial real estate loans are originated in amounts up to 80% of
the appraised value of the mortgaged property.
4
Commercial real estate, multi-family and land loans generally have a
significantly greater risk than that which is involved with single family real
estate lending. The repayment of these loans typically depends on the successful
operations and income stream of the commercial real estate and the borrower.
Such risks can be significantly affected by economic conditions. In addition,
commercial real estate lending generally requires substantially greater
oversight efforts compared to residential real estate lending.
Commercial Banking. To accomplish its mission to become a full service community
bank, the Company has expanded its products and services offerings to the small
to medium size businesses within its market area. Experienced personnel have
been added within the past year and the Company's plans call for the hiring of
additional personnel over the next few years to assist in reaching its
objectives. New sales call programs, credit analysis guidelines, loan grading
systems, technology upgrades and new products and services either have been
implemented or are in the process of implementation. The Company plans to
satisfy not only the borrowing needs of new prospective business customers, but
plans to have the full complement of deposit services and customer services
related to the checking, savings, and cash management needs of these businesses.
Unlike residential mortgage loans, which generally are made on the basis of the
borrower's ability to make repayment from his or her employment and other income
and which are secured by real property with a value that tends to be more easily
ascertainable, commercial business loans typically are made on the basis of the
borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself, which is likely to be dependent upon the general economic environment.
The Company's commercial business loans are sometimes, but not always, secured
by business assets, such as accounts receivable, equipment and inventory, as
well as real estate. However, the collateral securing the loans may depreciate
over time, may be difficult to appraise, and may fluctuate in value based on the
success of the business.
The Company recognizes the generally increased risks associated with commercial
business lending. The Company's commercial business lending policy emphasizes
the following:
o credit file documentation,
o analysis of the borrower's capacity to repay the loan,
o adequacy of the borrower's capital and collateral,
o analysis of the borrower's character, and
o evaluation of the industry conditions affecting the borrower.
Analysis of the borrower's past, present and future cash flows is also an
important aspect of the Company's credit analysis. The Company plans to expand
its commercial business lending, subject to market conditions.
The Company generally obtains annual financial statements from borrowers for
commercial business loans. These statements are analyzed to monitor the quality
of the loan. As of September 30, 2000, the commercial business loans ranged from
$2,000 to $4.0 million, with an average balance outstanding of $35,000. With the
exception of two loans totaling $45,000, all such loans are current and have
performed in accordance with their terms. The Company has provided a specific
reserve for $45,000 for the two delinquent loans because recovery of any amount
is highly unlikely.
5
Consumer Loans. Consumer loans consist primarily of direct and indirect auto
loans and home equity loans and credit lines. The Company also originates
unsecured lines of credit, loans secured by savings accounts and other consumer
loans. Consumer loans are originated in the Company's market area and generally
have maturities of up to 10 years. For savings account loans, the Company will
lend up to 90% of the account balance.
Consumer loans have a shorter term and generally provide higher interest rates
than residential loans. The consumer loan market can be helpful in improving the
spread between average loan yield and costs of funds and at the same time
improve the matching of the rate sensitive assets and liabilities.
Consumer loans entail greater risks than one- to four-family residential
mortgage loans, particularly consumer loans secured by rapidly depreciable
assets such as automobiles or loans that are unsecured. In such cases, any
repossessed collateral for a defaulted loan may not provide an adequate source
of repayment of the outstanding loan balance, since there is a greater
likelihood of damage, loss or depreciation of the underlying collateral.
Further, consumer loan collections depend on the borrower's continuing financial
stability, and therefore are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Even for consumer loans secured by real
estate the risk to the Company is greater than that inherent in the single
family loan portfolio in that the security for consumer loans is generally not
the first lien on the property and ultimate collection of amounts due may depend
on whether any value remains after collection by a holder with a higher priority
than the Company. Finally, the application of various federal laws, including
federal and state bankruptcy and insolvency laws, may limit the amount which can
be recovered on such loans after a default.
At September 30, 2000, 59% of the Company's automobile loans outstanding were
loans originated through local automobile dealerships. Although this type of
lending generally carries a greater risk factor, the Company has experienced
personnel to handle this type of lending. The dealer arrangements are limited
primarily to a few local dealers where long term relationships have been
established and the loans acquired typically are those made to higher credit
quality borrowers.
The underwriting standards employed by the Company for consumer loans include a
determination of the applicant's credit history and an assessment of the
applicant's ability to meet existing obligations and payments on the proposed
loan. The stability of the applicant's monthly income may be determined by
verification of gross monthly income from primary employment, and additionally
from any verifiable secondary income. Creditworthiness of the applicant is of
primary consideration; however, the underwriting process also includes a
comparison of the value of the collateral in relation to the proposed loan
amount.
Loan Solicitation and Processing. The Company's customary sources of mortgage
loan applications include repeat customers, walk-ins, and referrals from home
builders and real estate brokers. Commercial customer relationships are
developed through the officer call program and from referrals developed through
the branch network.
After receiving a loan application from a prospective borrower, a credit report
and verifications are ordered to confirm specific information relating to the
loan applicant's employment, income and credit standing. An appraisal of the
real estate intended to secure the proposed loan is undertaken by an independent
fee appraiser. In connection with the loan approval process, the Company's staff
analyze the loan applications and the property involved. Officers and lenders
are granted lending authority based on the loan types that they work with and
their level of experience. Generally, a management loan committee approves loans
exceeding individual authorities, with the Executive Committee approving loans
between $500,000 and $1 million, and the full Board of Directors approving loans
in excess of $1 million.
6
Loan applicants are promptly notified of the decision of the Company by a letter
setting forth the terms and conditions of the decision. If approved, these terms
and conditions include the amount of the loan, interest rate basis, amortization
term, a brief description of real estate to be mortgaged to the Company, tax
escrow and the notice of requirement of insurance coverage to be maintained to
protect the Company's interest. The Company requires title insurance on first
mortgage loans and fire and casualty insurance on all properties securing loans,
which insurance must be maintained during the entire term of the loan.
Loan Commitments. The Company generally grants commitments to fund fixed and
adjustable-rate single family mortgage loans for periods of 60 days at a
specified term and interest rate. The total amount of the Company's commitments
to extend credit as of September 30, 2000 was $886,000.
Loan Origination and Other Fees. In addition to interest earned on loans, the
Company may charge loan origination and commitment fees for originating or
purchasing certain loans. Since most loans are originated without points being
charged, the Company has assessed customers certain fees related to underwriting
and document preparation. The Company believes these fees are just slightly
above the costs to originate the loans. Therefore, the net deferred fees are
minimal and deferrals have an immaterial effect on operating results.
The Company also receives other fees and charges relating to existing loans,
which include late charges and fees collected in connection with a change in
borrower or other loan modifications. These fees and charges have not
constituted a material source of income.
Non-performing Loans and Problem Assets
Collection Procedures. The Company's collection procedures provide that when a
loan is 15 days delinquent, the borrower is notified. If the loan becomes 30
days delinquent, the borrower is sent a written delinquency notice requiring
payment. If the delinquency continues, subsequent efforts are made to contact
the delinquent borrower. In certain instances, the Company may modify the loan
or grant a limited moratorium on loan payments to enable the borrower to
reorganize his financial affairs and the Company attempts to work with the
borrower to establish a repayment schedule to cure the delinquency. As to
mortgage loans, if the borrower is unable to cure the delinquency or reach a
payment agreement with the Company within 90 days, the Company will institute
foreclosure actions. If a foreclosure action is taken and the loan is not
reinstated, paid in full or refinanced, the property is sold at judicial sale at
which the Company may be the buyer if there are no adequate offers to satisfy
the debt. Any property acquired as the result of foreclosure or by deed in lieu
of foreclosure is classified as real estate owned ("REO") until such time as it
is sold or otherwise disposed of by the Company. When REO is acquired, it is
recorded at the lower of the unpaid principal balance of the related loan or its
fair market value less estimated selling costs. The initial writedown of the
property is charged to the allowance for loan losses.
As to commercial related loans, the main thrust of the Company's collection
efforts is through telephone contact and a sequence of collection letters. If
the Company is unable to resolve the delinquency within 90 days or in some
situations shorter time periods, the Company will pursue all available legal
remedies. The Company's commercial lenders are required to evaluate each
assigned account on a case-by-case basis, within the parameters of the Company's
policies.
Loans are reviewed on a regular basis and are placed on a non-accrual status
when they are more than 90 days delinquent. Loans may be placed on a non-accrual
status at any time if, in the opinion of management, the collection of
additional interest is doubtful. Interest accrued and unpaid at the time a loan
is placed on non-accrual status is charged against interest income. Subsequent
payments are either applied to the outstanding principal balance or recorded as
interest income, depending on the assessment of the ultimate collectibility of
the loan.
7
Non-Performing Assets. The following table provides information
regarding the Company's non-performing loans and other non-performing assets as
of the end of each of the last five fiscal years. As of each of the dates
indicated, the Company did not have any troubled debt restructurings within the
meaning of Statement of Financial Accounting Standards ("SFAS") No. 15.
At September 30,
-----------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
Residential ............................. $ 33 $ 581 $ 445 $1,624 $ 654
Multi-family ............................ - - - - -
All other mortgage loans ................ 638 103 - 491 491
Commercial loans .......................... 45 - - - -
Consumer loans:
Home equity loans ....................... - - - - -
Other consumer .......................... 46 146 391 199 39
------ ------ ------ ------ ------
Total ..................................... $ 762 $ 830 $ 836 $2,314 $1,184
====== ====== ====== ====== ======
Accruing loans which are contractually past
Due 90 days or more:
Mortgage loans:
Residential ............................. - - - - -
Multi-family ............................ - - - - -
All other mortgage loans ................ - - - - -
Consumer loans:
Home equity and second mortgages ........ - - - - -
Other consumer .......................... - - - - -
------ ------ ------ ------ ------
Total ..................................... $ - $ - $ - $ - $ -
====== ====== ====== ====== ======
Total non-performing loans ................ $ 762 $ 830 $ 836 $2,314 $1,184
====== ====== ====== ====== ======
Real estate owned ......................... $ 113 $ 15 $ 403 $ 67 $ 8
====== ====== ====== ====== ======
Other non-performing assets ............... $ 90 $ 188 $ 91 $ 104 $ 42
====== ====== ====== ====== ======
Total non-performing assets ............... $ 965 $1,033 $1,330 $2,485 $1,234
====== ====== ====== ====== ======
Total non-performing loans to net loans ... .17% .21% .25% .65% .37%
====== ====== ====== ====== ======
Total non-performing loans to total assets .13% .17% .20% .49% .27%
====== ====== ====== ====== ======
Total non-performing assets to total assets .17% .21% .32% .53% .28%
====== ====== ====== ====== ======
During the year ended September 30, 2000, approximately $29,000 of interest
would have been recorded on loans accounted for on a non-accrual basis if such
loans had been current according to the original loan agreements for the entire
period.
8
Classified Assets. Management, in compliance with regulatory guidelines, has
instituted an internal loan review program whereby loans are classified as
special mention, substandard, doubtful or loss. When a loan is classified as
substandard or doubtful, management is required to establish a valuation reserve
for loan losses in an amount that is deemed prudent. When management classifies
a loan as a loss asset, a reserve equal to 100% of the loan balance is required
to be established or the loan is to be charged-off. This allowance for loan
losses is composed of an allowance for both inherent risk associated with
lending activities and particular problem assets.
An asset is considered "substandard" if it is inadequately protected by the
paying capacity and net worth of the borrower or the collateral pledged, if any.
Substandard assets include those characterized by the distinct possibility that
the insured institution will sustain some loss if the deficiencies are not
corrected. Assets classified as doubtful have all of the weaknesses inherent in
those classified substandard, with the added characteristic that the weaknesses
present make collection or liquidation in full, highly questionable and
improbable, on the basis of currently existing facts, conditions, and values.
Assets classified as loss are those considered uncollectible and of such little
value that their continuance as assets without the establishment of a loss
reserve is not warranted. Assets which do not currently expose the insured
institution to a sufficient degree of risk to warrant classification in one of
the aforementioned categories but possess credit deficiencies or potential
weaknesses are required to be designated special mention by management. In
addition, each loan that exceeds $500,000 and each group of loans to one
borrower that exceeds $500,000 is monitored more closely due to the potentially
greater losses from such loans.
Management's evaluation of the classification of assets and the adequacy of the
allowance for loan losses is reviewed by the Board on a regular basis and by the
regulatory agencies as part of their examination process. At September 30, 2000
the classified assets were (in thousands):
Special mention.......................... $ 689
Substandard.............................. 1,388
Doubtful................................. -
Loss..................................... 45
------
Total............................... $2,122
======
Other Real Estate Owned. Real estate acquired by the Company as a result of
foreclosure or by deed in lieu of foreclosure is classified as other real estate
owned until such time as it is sold. When other real estate owned is acquired,
it is recorded at the lower of the unpaid balance of the related loan or its
fair value less disposal costs. Any write-down of other real estate owned is
charged to operations.
Allowance for Losses on Loans. It is the policy of management to provide for
losses on unclassified loans in its portfolio in addition to classified loans. A
provision for loan losses is charged to operations based on management's
evaluation of the potential losses that may be incurred in the Company's loan
portfolio. Management also periodically performs valuations of other real estate
owned and establishes allowances to reduce book values of the properties to
their net realizable values when necessary.
Management will continue to review the entire loan portfolio to determine the
extent, if any, to which further additional loan loss provisions may be deemed
necessary. There can be no assurance that the allowance for loan losses will be
adequate to cover losses which may be realized in the future. In addition, there
can be no assurance that additional provisions for losses on loans and other
real estate owned will not be required.
9
The following table sets forth information with respect to the Company's
allowance for loan losses at the dates indicated:
At September 30,
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
(Dollars in thousands)
Allowance balance, beginning of period ...... $ 2,941 $ 2,564 $ 2,633 $ 2,385 $ 1,902
--------- --------- --------- --------- ---------
Provision for loan losses ................... 630 540 405 317 600
--------- --------- --------- --------- ---------
Charge-offs:
Residential ............................... (32) (37) (218) (19) (70)
Commercial real estate .................... - - (146) (12) -
Consumer .................................. (256) (214) (110) (38) (49)
--------- --------- --------- --------- ---------
Total charge-offs ........................... (288) (251) (474) (69) (119)
Recoveries .................................. 38 88 - - 2
--------- --------- --------- --------- ---------
Net (charge-offs) recoveries ................ (250) (163) (474) (69) (117)
--------- --------- --------- --------- ---------
Allowance balance, end of period ............ $ 3,321 $ 2,941 $ 2,564 $ 2,633 $ 2,385
========= ========= ========= ========= =========
Total loans outstanding ..................... $ 440,386 $ 397,910 $ 338,610 $ 355,551 $ 321,327
========= ========= ========= ========= =========
Average loans outstanding ................... $ 423,409 $ 368,513 $ 339,218 $ 339,992 $ 288,901
========= ========= ========= ========= =========
Allowance for loan losses as a percent of
total loans outstanding ................. .75% .74% .76% .74% .74%
Net loans charged off as a percent of average
loans outstanding ....................... .06% .04% .14% .02% .04%
10
Allocation of Allowance for Loan Losses. The following table sets forth the
allocation of the Company's allowance for loan losses by loan category and the
percent of loans in each category to total loans receivable, net, at the dates
indicated. The portion of the allowance for loan losses allocated to each loan
category does not represent the total available for future losses which may
occur within the loan category since the total allowance for loan losses is a
valuation allowance applicable to the entire loan portfolio.
At September 30,
--------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------------- ------------------- ----------------------- -------------------- ------------------
Percent of Percent of Percent of Percent of Percent of
loans to Loans to loans to loans to loans to
Amount total loans Amount Total loans Amount total loans Amount total loans Amount total loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------------------
(Dollars in thousands)
At end of period
allocated to:
Residential........ $ 1,804 72.2% $ 1,689 73.4% $ 1,564 75.9% $ 1,523 75.3% $ 1,491 79.6%
Multi-family....... 27 .8 37 1.4 33 1.2 31 1.1 34 1.4
Commercial real
estate and land.... 566 8.9 289 7.3 206 6.7 251 5.0 234 2.7
Consumer........... 924 18.1 926 17.9 761 16.2 828 18.6 626 16.3
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total allowance.... $ 3,321 100.00% $ 2,941 100.00% $ 2,564 100.00% $ 2,633 100.00% $ 2,385 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
11
Investment Activities
General. Federally chartered savings banks have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various Federal agencies (including securities collateralized by
mortgages), certain certificates of deposits of insured banks and savings
institutions, municipal securities, corporate debt securities and loans to other
banking institutions.
The Company maintains liquid assets which may be invested in specified
short-term securities and certain other investments. Liquidity levels may be
increased or decreased depending on the yields on investment alternatives and
upon management's judgment as to the attractiveness of the yields then available
in relation to other opportunities and its expectation of future yield levels,
as well as management's projections as to the short-term demand for funds to be
used in the Company's loan origination and other activities. At September 30,
2000, the Company had an investment securities portfolio of $106.3 million
(18.3% of total assets).
Investment Policies. The investment policy of the Company, which is established
by the Board of Directors, is designed to foster earnings and liquidity within
prudent interest rate risk guidelines, while complementing the Company's lending
activities. The policy provides for available for sale, held to maturity and
trading classifications. However, the Company does not currently use a trading
classification and does not anticipate doing so in the future. The policy
permits investments in high credit quality instruments with diversified cash
flows while permitting the Company to maximize total return within the
guidelines set forth in the Company's interest rate risk and liquidity
management policy. Permitted investments include but are not limited to U. S.
government obligations, government agency or government-sponsored agency
obligations, state, county and municipal obligations, mortgage-backed securities
and collateralized mortgage obligations guaranteed by government or
government-sponsored agencies, investment grade corporate debt securities, and
commercial paper. The Company also invests in FHLB overnight deposits and
federal funds, but these instruments are not considered part of the investment
portfolio.
The policy also includes several specific guidelines and restrictions to insure
adherence with safe and sound activities. The policy prohibits investments in
high risk mortgage derivative products (as defined within its policy) without
prior approval from the Board of Directors. Management must demonstrate the
business advantage of such investments. In addition, the policy limits the
maximum amount of the investment in a specific investment category. The Company
does not participate in hedging programs, interest rate swaps, or other
activities involving the use of off-balance sheet derivative financial
instruments. Further, the Company does not invest in securities which are not
investment grade.
The Board through its Investment and Asset Liability Committee ("ALCO") has
charged the Chief Financial Officer to implement the policy. All transactions
are reported to the Board of Directors monthly, with the entire portfolio
reported quarterly, including market values and unrealized gains (losses).
Investment Securities. The Company maintains a portfolio of investment
securities, classified as either available for sale or held to maturity, to
enhance total return on investments. At September 30, 2000, the Company's
investment securities included U.S. government agency obligations with varying
characteristics as to rate, maturity and call provisions, corporate bonds, and
municipal bonds. Callable agency securities, representing 52% of the Company's
U.S. government agency obligations at September 30, 2000, could reduce the
Company's investment yield if these securities are called prior to maturity.
12
Mortgage-backed Securities. The Company invests in mortgage-backed securities to
provide earnings, liquidity, cash flows, and diversification to the Company's
overall balance sheet. These mortgage-backed securities are classified as
available for sale. These securities are participation certificates issued and
guaranteed by the Ginnie Mae, the Fannie Mae and the Freddie Mac and secured by
interests in pools of mortgages. Mortgage-backed securities typically represent
a participation interest in a pool of single-family or multi-family mortgages,
although the Company focuses its investments on mortgage-backed securities
secured by single-family mortgages.
Mortgage-backed securities typically are issued with stated principal amounts.
The securities are backed by pools of mortgages that have loans with interest
rates that are within a set range and have varying maturities. The underlying
pool of mortgages can be composed of either fixed-rate or adjustable rate
mortgage loans. The interest rate risk characteristics of the underlying pool of
mortgages (i.e., fixed-rate or adjustable-rate) and the prepayment risk, are
passed on to the security holder. The life of a mortgage-backed pass-through
security is equal to the life of the underlying mortgages.
Collateralized Mortgage Obligations ("CMOs"). The Company also invests in CMOs,
issued or sponsored by Fannie Mae, Freddie Mac or private issuers. CMOs are a
type of debt security that aggregates pools of mortgages and mortgage-backed
securities and creates different classes of CMO securities with varying
maturities and amortization schedules as well as a residual interest with each
class having different risk characteristics. The cash flows from the underlying
collateral are usually divided into "tranches" or classes whereby tranches have
descending priorities with respect to the distribution of principal and interest
repayment of the underlying mortgages and mortgage-backed securities as opposed
to mortgage-backed securities where cash flows are distributed pro rata to all
security holders. Unlike mortgage-backed securities from which cash flow is
received and prepayment risk is shared pro rata by all securities holders, cash
flows from the mortgages and mortgage-backed securities underlying CMOs are paid
in accordance with a predetermined priority to investors holding various
tranches of such securities or obligations. A particular tranche or class may
carry prepayment risk which may be different from that of the underlying
collateral and other tranches. Investing in CMOs allows the Company to moderate
reinvestment risk resulting from unexpected prepayment activity associated with
conventional mortgage-backed securities. Management believes these securities
represent attractive alternatives relative to other investments due to the wide
variety of maturity, repayment and interest rate options available.
Corporate Bonds. Corporate bonds (including capital trust securities) generally
have long-term maturities, but include call provisions at earlier dates
(generally after seven to ten years). The call provisions usually contain a
premium price to exercise the call feature. The Company has invested in these
longer maturity bonds and securities with fixed rates of interest to provide
higher yields to protect part of its assets from the possible decline in
interest rates over the life of the bond. Although interest rates may rise over
the life of these securities, management believes these securities provide a
good complement to those assets (loans and investments) which are subject to
periodic principal repayments and payoffs before contractual maturities.
Municipal Bonds. Municipal bonds have maturities from 12 to 20 years with
premium call provisions after seven to ten years. These bonds are exempt from
federal income taxes, therefore, have lower stated interest rates. All municipal
bonds owned by the bank have fixed rates of interest. The yields included in the
investment tables reflect the tax equivalent yields for the municipal bonds.
Other Securities. Other securities owned by the Company, but not included in the
investment portfolio, consist of equity securities, interest-bearing deposits
and federal funds sold. Equity securities owned consist primarily of a $7.9
million investment in FHLB of Atlanta common stock (this amount is not shown in
the securities portfolio). As a member of the FHLB of Atlanta, ownership of FHLB
of Atlanta common shares is required. The remaining securities provide
diversification and complement the Company's overall investment strategy.
13
The following table sets forth the carrying value of the Company's securities
portfolio at the dates indicated.
At September 30,
---------------------------
2000 1999 1998
-------- ------- -------
(In thousands)
Securities held to maturity:
----------------------------
U.S. government agency securities.............. $ 1,000 $4,000 $8,998
Collateralized mortgage obligations............ 8,687 8,724 9,738
-------- ------- -------
Total securities held to maturity.............. 9,687 12,724 18,736
-------- ------- -------
Securities available for sale (at fair value):
----------------------------------------------
U.S. government agency securities .............. 19,357 20,513 24,711
Collateralized mortgage obligations............. 18,072 7,420 3,229
Mortgage-backed securities...................... 29,650 28,316 14,285
Corporate bonds................................. 20,186 6,718 -
Municipal bonds................................. 9,396 5,185 -
-------- ------- -------
Total securities available for sale............. 96,661 68,152 42,225
-------- ------- -------
Total ......................................... $106,348 $80,876 $60,961
======== ======= =======
14
The following table sets forth certain information regarding the carrying
values, weighted average yields and maturities (or repricing terms for variable
rate securities) of the Company's investment securities portfolio at September
30, 2000. Expected maturities will differ from contractual maturities due to
scheduled repayments and because borrowers may have the right to call or prepay
obligations with or without prepayment penalties.
At September 30, 2000
-------------------------------------------------------------------------------------------------------
More than
One Year or Less One to Five Years Five to Ten Years Ten Years Total Investment Securities
---------------- ----------------- ----------------- ------------------- ---------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
value yield value yield value yield value yield value yield value
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
U.S. government agency
Securities................. $ 1,000 5.54% $ 7,225 6.04% $10,185 6.98% $ 1,947 8.00% $ 20,357 6.68% $ 20,357
Collateralized mortgage
obligations.................. 8,687 6.59 - - 42 2.80 18,030 7.70 26,759 7.34 26,463
Mortgage-backed securities... - - - - 4,668 6.20 24,982 7.20 29,650 7.04 29,650
Corporate bonds.............. 990 6.63 7,345 7.50 3,906 8.08 7,945 8.31 20,186 7.90 20,186
Municipal bonds.............. - - - - - - 9,396 5.07 9,396 5.07 9,396
------- ---- ------- ---- ------- ---- ------- ---- -------- ---- --------
Total...................... $10,677 6.50% $14,570 6.77% $18,801 7.00% $62,300 7.19% $106,348 7.03% $106,052
======= ==== ======= ==== ======= ==== ======= ==== ======== ==== ========
15
Sources of Funds
General. Deposits are the major source of the Company's funds for lending and
other investment purposes. Borrowings (principally from the FHLB) are used to
compensate for reductions in the availability of funds from other sources. In
addition to deposits and borrowing, the Company derives funds from loan and
mortgage-backed securities principal repayments, and proceeds from the maturity,
call and sale of mortgage-backed securities and investment securities. Loan and
mortgage-backed securities payments are a relatively stable source of funds,
while deposit inflows are significantly influenced by general interest rates and
money market conditions.
Deposits. The Company offers a variety of deposit accounts, although a majority
of deposits are in fixed-term, market-rate certificate accounts. Deposit account
terms vary, primarily as to the required minimum balance amount, the amount of
time that the funds must remain on deposit and the applicable interest rate.
The Company's current deposit products include certificate accounts ranging in
terms from 90 days to five years as well as checking, savings and money market
accounts. Individual retirement accounts (IRAs) are included in these accounts,
depending on the customers investment preference.
Deposits are obtained primarily from residents of Polk and Manatee Counties. The
Company attracts deposit accounts by offering outstanding service, competitive
interest rates, and convenient locations and service hours. The Company uses
traditional methods of advertising to attract new customers and deposits,
including radio, cable television, direct mail and print media advertising. The
Company does not utilize the services of deposit brokers and management believes
that an insignificant number of deposit accounts are held by non-residents of
Florida.
The Company pays interest on its deposits which are competitive in its market.
Interest rates on deposits are set weekly by senior management, based on a
number of factors, including:
o projected cash flow;
o a current survey of a selected group of competitors' rates for similar
products;
o external data which may influence interest rates;
o investment opportunities and loan demand; and
o scheduled certificate maturities and loan and investment repayments.
Because of the large percentage of certificate accounts in the deposit portfolio
(71.4% at September 30, 2000), the Company's liquidity could be reduced if a
significant amount of these accounts, maturing within a short period of time,
were not renewed. A significant portion of the certificate accounts remain with
the Company after they mature and the Company believes that current renewal
patterns will continue. However, the need to retain these accounts could result
in an increase in the Company's cost of funds.
The following table shows the amount (in thousands) of the Company's certificate
accounts of $100,000 or more by time remaining until maturity as of September
30, 2000.
Certificate
Maturity Period Accounts
--------------- --------
Within three months................................ $ 9,418
Three through six months........................... 10,476
Six through twelve months.......................... 20,679
Over twelve months................................. 16,775
-------
$57,348
=======
16
Borrowings. Deposits are the primary source of funds of the Company's lending
and investment activities and for general business purposes. The Company, as the
need arises or in order to take advantage of funding opportunities, may borrow
funds in the form of advances from the FHLB to supplement its supply of lendable
funds and to meet deposit withdrawal requirements. Advances from the FHLB are
typically secured by stock in the FHLB and a portion of the Company's
residential mortgage loans and may be secured by other assets, principally
securities which are obligations of or guaranteed by the U.S. Government. The
Company typically has funded loan demand and investment opportunities out of
current loan and mortgage-backed securities repayments, investment maturities
and new deposits. However, in recent years the Company has utilized FHLB
advances to supplement these sources and as a match against certain assets in
order to better manage interest rate risk. The following table sets forth the
maximum month-end balance and the average balance of Federal Home Loan Bank
advances for the periods indicated.
For the Year Ended September 30,
2000 1999 1998
---- ---- ----
(Dollars in thousands)
Maximum amount of borrowings outstanding at any month end:
Advances from FHLB........................... $158,000 $87,600 $21,000
Approximate average borrowings outstanding with respect to:
Advances from FHLB........................... $128,523 $49,510 $ 2,647
Approximate weighted average rate paid on:
Advances from FHLB........................... 5.93% 4.82% 5.10%
See Note 7 to the consolidated financial statements for additional information.
Personnel
As of September 30, 2000 the Company had 159 full-time employees and 13
part-time employees. The employees are not represented by a collective
bargaining unit. The Company believes its relationship with its employees to be
satisfactory.
17
Regulation
Set forth below is a brief description of certain laws relating to the
regulation of the Company and the Bank. The description does not purport to be
complete and is qualified in its entirety by reference to applicable laws and
regulations.
Financial Modernization Legislation
On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley
Financial Services Modernization Act (the GLB Act"), which repealed the
prohibitions against bank affiliations with securities and insurance firms. The
GLB Act authorizes qualifying bank holding companies to become financial holding
companies and thereby affiliate with securities firms and insurance companies
and engage in other activities that are financial in nature. Additionally, the
GLB Act defines financial in nature to include securities underwriting, dealing
and market making; sponsoring mutual funds and investment companies; insurance
underwriting and agency; merchant banking activities, and activities that the
Federal Reserve Board has determined to be closely related to banking. A
qualifying national bank also may engage, subject to limitations on investment,
in activities that are financial in nature, other than insurance underwriting,
insurance company portfolio investment, real estate development, and real estate
investment, through a financial subsidiary of the bank.
The GLB Act repeals the "unitary savings and loan holding company exemption"
from the restrictions imposed by the Home Owners' Loan Act on the business
activities of savings and loan holding companies. However, the GLB Act
grandfathers from this provision companies that were already unitary savings and
loan holding companies before May 4, 1999 or that result from an internal
reorganization of such preexisting unitary holding companies. Grandfathered
unitary savings and loan holding companies have no restrictions on their
activities at the holding company level. However, non-grandfathered unitary
savings and loan holding companies may engage only in activities authorized for
savings and loan holding companies under the Home Owners' Loan Act and in
banking, securities, insurance and merchant banking activities permitted for
financial holding companies under the GLB Act. Since the Company was a unitary
savings and loan holding company before May 4, 1999, the Company expects to be a
grandfathered unitary savings and loan holding company. However, there is no
assurance that the Office of Thrift Supervision ("OTS") will consider the
Company a grandfathered holding company, since the Company has not requested an
opinion from the OTS regarding its status under the GLB Act's grandfathered
provisions.
The GLB Act imposes significant new financial privacy obligations and reporting
requirements on all financial institutions, including federal savings
associations. Specifically, the statute, among other things, will require
financial institutions to:
o establish privacy policies and disclose them to customers both at the
commencement of a customer relationship and on an annual basis; and
o permit customers to opt out of a financial institution's disclosure of
financial information to nonaffiliated third parties.
The federal financial regulators have promulgated final regulations implementing
these provisions, which will become effective July 1, 2001.
The GLB Act also enacts significant changes to the FHLB System. The GLB Act
expands the permissible uses of FHLB advances by community financial
institutions, under $500 million in assets, to include funding loans to small
businesses, small farms and small agricultural businesses. In addition, the GLB
Act makes membership in a regional FHLB voluntary for federal savings
associations.
18
Regulation of the Company
General. The Company is registered as a savings and loan holding company with
the OTS. The Company will be required to file reports with the OTS and will be
subject to supervision and periodic examination by the OTS. In addition, the OTS
will have enforcement authority over the Company and any non-savings institution
subsidiaries. The OTS can restrict or prohibit activities that it determines to
be a serious risk to the Company. OTS regulations are intended primarily for the
protection of the depositors and not for the benefit of the Company's
stockholders.
Activities Restrictions. Because FloridaFirst Bancorp, the former mid-tier
holding company, was a unitary savings and loan holding company prior to May 4,
1999, the Company expects it will be a grandfathered unitary savings and loan
holding company under the GLB Act. If the Company is a grandfathered unitary
holding company, there would be generally no restrictions on its business
activities. However, there is no assurance of the type of activities the Company
will be permitted to engage in, since the Company has not requested an opinion
from the OTS as to whether any restrictions will apply. Additionally, if the
Bank were to fail to meet the Qualified Thrift Lender Test, then the Company
would become subject to the activities restrictions of the Home Owners' Loan Act
applicable to multiple holding companies. See "Regulation of FloridaFirst Bank
- -- Qualified Thrift Lender Test."
If the Company were to acquire control of another savings institution, the
Company would lose its grandfathered status under the GLB Act and the Company's
business activities would be restricted to certain activities specified by OTS
regulation, which include performing services and holding properties used by a
savings institution subsidiary, certain activities authorized for savings and
loan holding companies as of March 5, 1987, and nonbanking activities
permissible for bank holding companies pursuant to the Bank Holding Company Act
of 1956 or authorized for financial holding companies pursuant to the GLB Act.
Furthermore, no company may acquire control of the Company or the Bank unless
the company was a unitary savings and loan holding company on May 4, 1999, or
became a unitary savings and loan holding company pursuant to an application
pending as of that date, or the company is only engaged in activities that are
permitted for multiple savings and loan holding companies or for financial
holding companies under the Bank Holding Company Act as amended by the GLB Act.
Mergers and Acquisitions. The Company must obtain approval from the OTS before
acquiring more than 5% of the voting stock of another savings institution or
savings and loan holding company or acquiring such an institution or company by
merger, consolidation or purchase of its assets. In evaluating an application
for the Company to acquire control of a savings institution, the OTS would
consider the financial and managerial resources and future prospects of the
Company and the target institution, the effect of the acquisition on the risk to
the insurance funds, the convenience and the needs of the community and
competitive factors.
19
Regulation of the Bank
General. As a federally chartered, insured savings association of the Savings
Association Insurance Fund ("SAIF"), the Bank is subject to extensive regulation
by the OTS and the Federal Deposit Insurance Corporation ("FDIC"). Lending
activities and other investments must comply with federal statutory and
regulatory requirements. The Bank is also subject to reserve requirements of the
Federal Reserve System. Federal regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the SAIF and depositors. This
regulatory structure gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination
policies, including policies regarding the classification of assets and the
establishment of an adequate allowance for loan losses.
The OTS regularly examines the Bank and prepares reports to Bank's board of
directors on deficiencies, if any, found in its operations. The Bank's
relationship with its depositors and borrowers is also regulated by federal law,
especially in such matters as the ownership of savings accounts and the form and
content of the Bank's mortgage documents.
The Bank must file reports with the OTS and the FDIC concerning its activities
and financial condition, and must obtain regulatory approvals prior to entering
into certain transactions such as mergers with or acquisitions of other
financial institutions. Any change in applicable statutory and regulatory
requirements, whether by the OTS, the FDIC or the United States Congress, could
have a material adverse impact on the Bank or the Company, and their operations.
Insurance of Deposit Accounts. The FDIC administers two separate deposit
insurance funds. Generally, the Bank Insurance Fund ("BIF") insures the deposits
of commercial banks and the SAIF insures the deposits of savings institutions.
The FDIC is authorized to increase deposit insurance premiums if it determines
such increases are appropriate to maintain the reserves of either the SAIF or
the BIF or to fund the administration of the FDIC. In addition, the FDIC is
authorized to levy emergency special assessments on BIF and SAIF members. The
FDIC has set the deposit insurance assessment rates for SAIF member institutions
for the first six months of 2000 at 0% to .027% of insured deposits on an
annualized basis, with the assessment rate for most savings institutions set at
0%.
In addition, all insured institutions of the FDIC are required to pay
assessments to the corporation at an annual rate of approximately .0212% of
insured deposits to fund interest payments on bonds issued by the Financing
Corporation, an agency of the Federal government established to recapitalize the
predecessor to the SAIF. These assessments will continue until the Financing
Corporation bonds mature in 2017.
Regulatory Capital Requirements. OTS capital regulations require savings
institutions to meet three capital standards:
o tangible capital equal to 1.5% of total adjusted assets;
o "Tier 1" or "core" capital equal to at least 3% of total adjusted assets
for savings institutions that receive the highest supervisory rating for
safety and soundness and 4% of total adjusted assets for all other thrifts;
and
o risk-based capital equal to 8% of total risk-weighted assets.
The Bank's capital ratios are set forth in Note 11 to the consolidated financial
statements.
20
For purposes of the OTS capital regulations, tangible capital is defined as core
capital less all intangible assets except for certain mortgage servicing rights.
Tier 1 and core capital are defined as common stockholders' equity,
noncumulative perpetual preferred stock and related surplus, minority interests
in the equity accounts of consolidated subsidiaries, certain nonwithdrawable
accounts and pledged deposits of mutual savings associations and qualifying
supervisory goodwill. Tier 1 and core capital are reduced by an institution's
intangible assets, with limited exceptions for certain mortgage and nonmortgage
servicing rights and purchased credit card relationships. Both core and tangible
capital are further reduced by an amount equal to the savings institution's debt
and equity investments in "nonincludable" subsidiaries engaged in activities not
permissible to national banks other than subsidiaries engaged in activities
undertaken as agent for customers or in mortgage banking activities and
subsidiary depository institutions or their holding companies.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital of 8% of risk-weighted assets.
Risk-based capital is comprised of core and supplementary capital. The
components of supplementary capital include, among other items, cumulative
perpetual preferred stock, perpetual subordinated debt, mandatory convertible
subordinated debt, intermediate-term preferred stock, and the portion of the
allowance for loan losses not designated for specific loan losses. The portion
of the allowance for loan and lease losses includable in supplementary capital
is limited to a maximum of 1.25% of risk-weighted assets. Overall, supplementary
capital is limited to 100% of core capital. A savings institution's risk-based
capital is reduced by the amount of capital instruments held by other depository
institutions pursuant to reciprocal arrangements and by the amount of the
institution's equity investments, other than those deducted from core and
tangible capital, and its high loan-to-value ratio land loans and
non-residential construction loans.
A savings institution's risk-based capital requirement is measured against
risk-weighted assets, which equal the sum of each on-balance-sheet asset and the
credit-equivalent amount of each off-balance-sheet item after being multiplied
by an assigned risk weight. These risk weights range from 0% for cash to 100%
for delinquent loans, property acquired through foreclosure, commercial loans,
and other assets.
OTS rules require a deduction from capital for savings institutions with certain
levels of interest rate risk. The OTS calculates the sensitivity of an
institution's NPV based on data submitted by the institution in a schedule to
its quarterly Thrift Financial Report ("TFR") and using the interest rate risk
measurement model adopted by the OTS. The amount of the interest rate risk
component, if any, deducted from an institution's total capital is based on the
institution's TFR filed two quarters earlier. The OTS has indefinitely postponed
implementation of the interest rate risk component, and the Bank has not been
required to determine whether it will be required to deduct an interest rate
risk component from capital.
Dividend and Other Capital Distribution Limitations. The OTS imposes various
restrictions or requirements on the ability of savings institutions to make
capital distributions, including cash dividends.
A savings institution that is a subsidiary of a savings and loan holding
company, such as the Bank, must file an application or a notice with the OTS at
least 30 days before making a capital distribution. A savings institution must
file an application for prior approval of a capital distribution if:
o it is not eligible for expedited treatment under the applications
processing rules of the OTS;
o the total amount of all capital distributions, including the proposed
capital distribution, for the applicable calendar year would exceed an
amount equal to the savings bank's net income for that year to date plus
the institution's retained net income for the preceding two years;
o it would not adequately be capitalized after the capital distribution; or
o the distribution would violate an agreement with the OTS or applicable
regulation.
21
The Bank will be required to file a capital distribution notice or application
with the OTS before paying any dividend to the Company. However, capital
distributions by the Company, as a savings and loan holding company, will not be
subject to the OTS capital distribution rules. The OTS may disapprove a notice
or deny an application for a capital distribution by the Bank if:
o the savings institution would be undercapitalized following the capital
distribution;
o the proposed capital distribution raises safety and soundness concerns; or
o the capital distribution would violate a prohibition contained in any
statute, regulation or agreement. In addition, a federal savings
institution cannot distribute regulatory capital that is required for its
liquidation account.
Qualified Thrift Lender Test. Federal savings institutions must meet a qualified
thrift lender test or they become subject to the business activity restrictions
and branching rules applicable to national banks. To qualify as a qualified
thrift lender, a savings institution must either:
o be deemed a "domestic building and loan association" under the Internal
Revenue Code by maintaining at least 60% of its total assets in specified
types of assets, including cash, certain government securities, loans
secured by and other assets related to residential real property,
educational loans and investments in premises of the institution; or
o satisfy the statutory qualified thrift lender test set forth in the Home
Owners' Loan Act by maintaining at least 65% of its "portfolio assets" in
certain qualified thrift investments, defined to include residential
mortgages and related equity investments, certain mortgage-related
securities, small business loans, student loans and credit card loans, and
50% of certain community development loans. For purposes of the statutory
qualified thrift lender test, portfolio assets are defined as total assets
minus intangible assets, property used by the institution in conducting its
business, and liquid assets equal to 10% of total assets. A savings
institution must maintain its status as a qualified thrift lender on a
monthly basis in at least nine out of every 12 months. The Bank met the
qualified thrift lender test as of September 30, 2000 and in each of the
last 12 months and, therefore, qualifies as a qualified thrift lender.
Loans to One Borrower. Under federal law, savings institutions have, subject to
certain exemptions, lending limits to one borrower in an amount equal to the
greater of $500,000 or 15% of the institution's unimpaired capital and surplus.
As of September 30, 2000, the Bank's legal lending limit to one borrower was
$8.0 million.
Liquidity Requirements. All federal savings institutions are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowing payable in one year or less. Depending on economic conditions and
savings flows of all savings institutions, the OTS can vary the liquidity
requirement from time to time between 4% and 10%. Monetary penalties may be
imposed on institutions for liquidity requirement violations.
FHLB System. The Bank is a member of the FHLB of Atlanta, which is one of 12
regional FHLBs. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from funds deposited by
financial institutions and proceeds derived from the sale of consolidated
obligations of the FHLB system. It makes loans to members pursuant to policies
and procedures established by the board of directors of the FHLB.
22
As a member, the Bank is required to purchase and maintain stock in the FHLB of
Atlanta in an amount equal to the greater of 1% of our aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of FHLB advances. The Bank is in compliance
with this requirement. The FHLB imposes various limitations on advances such as
limiting the amount of certain types of real estate related collateral generally
to 30% of a member's capital and limiting total advances to a member.
The FHLBs are required to provide funds for the resolution of troubled savings
institutions and to contribute to affordable housing programs through direct
loans or interest subsidies on advances targeted for community investment and
low- and moderate-income housing projects. These contributions have adversely
affected the level of dividends paid by the FHLBs and could continue to do so in
the future.
Federal Reserve System. The Federal Reserve System requires all depository
institutions to maintain non-interest-bearing reserves at specified levels
against their checking accounts and non- personal certificate accounts. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve System may be used to satisfy the OTS liquidity requirements.
Savings institutions have authority to borrow from the Federal Reserve System
"discount window," but Federal Reserve System policy generally requires savings
institutions to exhaust all other sources before borrowing from the Federal
Reserve System.
Item 2. Description of Property
- --------------------------------
Our corporate offices are located at 205 East Orange Street in Lakeland,
Florida. We conduct our business through nine offices, which are located in Polk
and Manatee Counties in Florida. The following table sets forth the location of
each of our offices, the year the office was opened and the net book value (in
thousands) of each office and its related equipment.
23
Year facility
opened or Leased or Net book value at
Building/Office Location acquired Owned September 30, 2000
------------------------ -------- ----- ------------------
Downtown/Corporate Headquarters 1957 Owned $2,208
Branch Offices:
Grove Park 1961 Owned 357
Highlands 1972 Owned 580
Interstate 1985 Owned 467
Winter Haven North 1978 Owned 535
Winter Haven South 1995 Owned 889
West Bradenton 1989 Owned 783
Cortez (Bradenton) 1972 Leased (1) 119
Scott Lake 1997 Owned 594
Operations Center 1964 Owned 289
Residential Lending Office 1999 Leased (2) 10
New branch/land 1,199(3)
Other projects in progress 905(3)
- --------------------
(1) Five-year lease that terminates December 31, 2003, but has two three-year
renewal options.
(2) Six-month renewable lease.
(3) In fiscal 2001 and 2002, the Bank plans to open approximately three de novo
branches in Polk and Manatees Counties, Florida. See "Management Discussion
and Analysis of Financial Condition and Results of Operations -- Comparison
of Operating Results for the Year Ended September 30, 2000 and September
30, 1999 -- Other Expenses."
As of September 30, 2000, the net book value of land, buildings, furniture and
equipment owned by us, less accumulated depreciation, totaled $8.9 million.
In March 1999, the Bank sold a former branch site. In connection with the sale
of this property, the Bank agreed to indemnify the purchaser for the costs of
obtaining closure with state environmental authorities regarding the necessity
of further remediation of certain environmental contamination on the sites due
to outside sources. The Company anticipates that any costs related to obtaining
closure with the state environmental authorities should occur in fiscal year
2001. Any costs incurred will be applied against the deferred gain, then the
remaining gain will be reflected in the consolidated statement of earnings. A
deferred gain of $190,000 related to the sale of this property is included in
Other Liabilities in the consolidated statement of financial condition pending
resolution of this matter. The Company does not currently anticipate that it
will incur additional material expense associated with the sale of this
property.
24
Item 3. Legal Proceedings
- --------------------------
From time to time the Company and the Bank are involved as plaintiff or
defendant in various legal actions arising in the normal course of business.
Presently, neither the Company nor the Bank are a party to any material pending
legal proceeding.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
On December 18, 2000 FloridaFirst Bancorp held a meeting of stockholders to
approve the conversion and reorganization. The proposal was approved by the
following votes:
For Against Withheld
-------------- ------------------ -----------------
4,297,130 4,096 11,243
25
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
- --------------------------------------------------------------------------------
Since its issuance on April 6, 1999, the Company's common stock has traded on
the Nasdaq National Market under the symbol FFBK. Upon completion of the
conversion and reorganization on December 21, 2000, the common stock continues
to trade on the Nasdaq National Market under the same symbol, FFBK. The
following table sets forth dividend information and market price information,
based on closing prices, as reported by the Nasdaq National Market for the
common stock high and low sales prices for the periods indicated. See Note 19 of
the consolidated financial statements for a summary of quarterly financial data.
Cash Dividends
High Low Per Share Declared
---- --- ------------------
Fiscal 2000
First Quarter...................................... $9.38 $8.50 $.04
Second Quarter..................................... 8.88 7.31 .04
Third Quarter...................................... 8.25 7.25 .04
Fourth Quarter..................................... 12.25 7.88 .04
Fiscal 1999
Third Quarter (April 6, 1999 - June 30, 1999)...... 9.50 7.88 --
Fourth Quarter..................................... 9.50 8.38 .04
The ability to pay dividends to stockholders is dependent upon the dividends it
receives from the Bank. The Bank may not declare or pay a cash dividend on any
of its stock if the effect of such payment would cause its regulatory capital to
be reduced below the regulatory requirements imposed by the OTS.
The number of stockholders of record of common stock as of December 22, 2000 was
approximately 1,560, which do not include the number of persons or entities who
held stock in nominee or "street" name through various brokerage firms.
26
Item 6. Selected Financial Data
- --------------------------------
Selected Financial Highlights
-----------------------------
(In thousands except share data)
At September 30: 2000 1999 1998 (2) 1997 1996 (3)
-------- -------- -------- --------- --------
Assets................................... $ 582,180 $ 498,358 $ 414,472 $ 466,765 $ 440,294
Loans receivable, net.................... 440,386 397,910 338,610 355,551 321,327
Investment securities.................... 106,348 80,876 60,961 74,573 99,841
Cash and cash equivalents................ 6,734 2,598 647 21,842 3,885
Deposits................................. 354,554 339,224 352,180 429,714 404,184
FHLB advances and other borrowings....... 160,937 92,472 21,000
Stockholders' equity..................... 61,081 61,337 36,107 33,588 30,569
Actual number (not in thousands):
Real estate loans outstanding............ 4,615 4,696 4,433 5,149 5,461
Deposit accounts......................... 36,747 38,409 38,409 46,012 43,002
Full service offices..................... 9 9 9 14 13
For the year ended September 30:
Interest income.......................... $ 39,840 $ 32,648 $ 32,141 $ 33,865 $ 31,694
Interest expense......................... 23,575 17,128 18,966 19,702 18,961
-------- -------- -------- -------- --------
Net interest income...................... 16,265 15,520 13,175 14,163 12,733
Provision for loan losses................ 630 540 405 317 600
-------- -------- -------- -------- --------
Net interest income after provision
For loan losses..................... 15,635 14,980 12,770 13,846 12,133
Other income............................. 2,114 1,473 4,347 1,189 1,546
Other expenses........................... 11,813 11,448 13,581 11,209 13,382
-------- -------- -------- -------- --------
Income before income taxes .............. 5,936 5,005 3,536 3,826 297
Income taxes............................. 2,094 1,748 1,151 1,299 44
-------- -------- -------- -------- --------
Net income............................... $ 3,842 $ 3,257 $ 2,385 $ 2,527 $ 253
======== ======== ======== ======== ========
Basic earnings per share (1)............. $ .73 $ .34 - - -
======== ========
Diluted earnings per share (1)........... $ .72 $ .34 - - -
======== ========
Weighted average common and common equivalent
shares outstanding: (1)
Basic 5,256 5,549 - - -
Diluted 5,345 5,549 - - -
- -----------------
(1) Years 2000 and 1999 include $25.7 million in net proceeds from the
reorganization on April 6, 1999. Prior to April 6, 1999, the Bank was a
mutual institution. Therefore, earnings per share and weighted average
shares outstanding in 1999 are for the six months ended September 30, 1999
(period subsequent to the reorganization.)
(2) During fiscal year 1998, the Bank sold five branches (and $55.5 million in
related deposits) that were not contiguous to its primary market area for a
pre-tax gain of $3.0 million. In connection with the sale of branches, the
Bank transferred $44.6 million in loans. In addition, other expenses
includes special benefit plan adjustments of $2.2 million.
(3) 1996 includes a $2.5 million one-time special assessment to recapitalize
the Savings Association Insurance Fund.
27
Selected Financial Ratios
-------------------------
At or For the Year Ended September 30,
---------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Performance Ratios:
Return on average assets (net income
divided by average total assets)........ .70% .72% .55% .56% .06%
Return on average equity (net income
divided by average equity).............. 6.43 6.65 6.55 7.71 .79
Net interest rate spread.................... 2.54 2.95 2.65 2.87 2.68
Net interest margin on average
interest-earnings assets................ 3.13 3.56 3.10 3.23 3.03
Average interest-earning assets to
average interest-bearing liabilities.... 113 116 110 108 108
Efficiency ratio (noninterest expense,
other than the $2.5 million SAIF
special assessment in 1997, divided
by the sum of net interest income and
noninterest income)...................... 64 67 78 74 76
Asset Quality Ratios:
Non-performing loans to total loans, net .17 .21 .25 .65 .37
Non-performing assets to total assets.... .17 .21 .32 .53 .28
Net charge-offs to average loans
outstanding............................ .06 .04 .14 .02 .04
Allowance for loan losses to total loans.... .75 .74 .76 .74 .74
Capital Ratios:
Average equity to average assets
(average equity divided by average 10.94 10.84 8.31 7.25 7.41
total assets).........................
Equity to assets at period end.............. 10.49 12.31 8.62 7.20 6.94
Dividend payout ratio....................... 22 12 - - -
28
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
The following discussion should be read in conjunction with the Selected
Financial Highlights and Selected Financial Ratios and the Consolidated
Financial Statements and related notes appearing elsewhere in this Form 10-K.
General
On April 6, 1999, FloridaFirst Bank reorganized from a mutual savings
association into a mutual holding company named FloridaFirst Bancorp MHC and
formed FloridaFirst Bancorp, a middle-tier holding company, whereby FloridaFirst
Bank became a wholly-owned subsidiary of FloridaFirst Bancorp. In connection
with the reorganization, FloridaFirst Bancorp sold 2,703,851 shares of its
Common Stock to the public and the remaining 3,049,024 shares were held by
FloridaFirst Bancorp MHC.
On December 21, 2000, FloridaFirst Bancorp, Inc. (the "Company") completed its
stock offering in connection with the conversion and reorganization of
FloridaFirst Bank (the "Bank") and its holding company, FloridaFirst Bancorp,
from the mutual holding company form of organization to a full stock company. As
part of the conversion and reorganization, the shares formerly held by
FloridaFirst Bancorp MHC were cancelled, the Company sold 3,147,952 new shares
to the public and the shares held by stockholders of FloridaFirst Bancorp were
exchanged for 2,372,048 shares of the Company. The conversion and reorganization
will be accounted for in a manner similar to a pooling of interests, whereby the
assets and liabilities of FloridaFirst Bancorp will become the Company's assets
and liabilities.
Forward-Looking Statements
The following discussions contain forward-looking statements that are based on
assumptions and describe future plans, strategies, and expectations of the Bank
and the Company. These forward-looking statements are generally identified by
use of the words "believe," "expect," "intend," "anticipate," "estimate,"
"project," or similar expressions. The Company's ability to predict results or
the actual effect of future plans or strategies is inherently uncertain. Factors
that could have a material adverse effect on the operations of the Company and
its subsidiaries include, but are not limited to, changes in interest rates,
general economic conditions, legislative/regulatory changes, monetary and fiscal
policies of the U.S. Government, including policies of the U.S. Treasury and the
Federal Reserve Board, the quality and composition of the loan and investment
portfolios, demand for loan products, deposit flows, competition, demand for
financial services in the Company's market area, and changes in relevant
accounting principles. These risks and uncertainties should be considered in
evaluating forward-looking statements and undue reliance should not be placed on
such statements. The Company does not undertake--and specifically disclaims--any
obligation to publicly release the results of any revisions after the date of
the statements or to reflect the occurrence of anticipated or unanticipated
events.
29
Business Strategy
The Board of Directors and management have developed expansion plans that
includes three de novo retail sales offices within its existing market areas and
deployment of a strategic plan. By seeking to broaden the range of its products
and services offered, the Company believes its strategies will offset the
declining margins in the competitive market for one- to four-family residential
mortgage loans. The strategic plan includes:
o increasing the percentage of higher yielding and more interest sensitive
assets;
o increasing the percentage of commercial and consumer loans and commercial
deposit accounts, among other products;
o increasing alternative sources of cash at reasonable rates;
o increasing sources of non-interest income;
o installing a new customer delivery software to enhance the sales efforts;
o upgrading our computer network for enhanced service and security features;
and
o investigation of alternative delivery systems, including an Internet
banking solution and enhanced call center strategy.
The Company is leasing one of the new retail sales offices and has purchased
land to construct buildings for two offices. The estimated capital expenditures
for all three locations, including land, building and equipment are $4.2
million. One location will have excess office space that will be leased to other
tenants. The second location has excess land that will be sold after the Company
determines the actual land needed for the office.
Highlights of the business strategy are as follows:
Community-Oriented Institution. Based on total assets, the Bank is the largest
independent financial institution headquartered in Polk County, Florida. The
Bank is committed to meeting the financial needs of the communities in which it
operates. Management believes that the Bank is large enough to provide a full
range of personal and business financial services, and yet is small enough to
provide such services in a personalized and efficient manner. The Bank has
recently added several convenience services to enhance its capabilities as a
full service community bank, including the issuance of debit cards and placing
automated teller machines at all of the branches. It is the Bank's current plan
to deliver the products and services that meet the needs of its customers,
including Internet banking.
Market Focus. The Bank continues to review all opportunities that may benefit
its business in its current market areas. In 2001 and 2002, the Bank will open a
total of three de novo branches in Polk and Manatee Counties, Florida. See "--
Comparison of Operating Results for the Years Ended September 30, 2000 and
September 30, 1999 -- Other Expenses."
Commercial Banking. The Bank continues to expand its lending programs for
commercial business and commercial real estate loans in an effort to satisfy a
perceived need within its market area and increase its loan portfolio. The Bank
continues to realize a positive impact on its net interest margin since
commercial customers generally provide a higher loan yield and a source of lower
cost funds. The risks of commercial lending relate to the source of repayment of
the loan which is weighted toward the ability to repay versus being primarily
collateral dependent.
In 1998, the Bank hired a senior commercial loan officer to head up the lending
and credit activities and two additional commercial loan staff members were
added to support its increased activities in this area. To further enhance its
transition to a full service community bank, the Bank recently hired two
additional lenders experienced in commercial lending and plans to increase its
marketing efforts on smaller businesses operating in its market areas.
30
Management of Interest Rate Risk and Market Risk
Qualitative Analysis. Because the majority of the Company assets and liabilities
are sensitive to changes in interest rates, its most significant form of market
risk is interest rate risk, or changes in interest rates. The Company is
vulnerable to an increase in interest rates to the extent that interest-bearing
liabilities mature or reprice more rapidly than interest-earning assets. Its
lending activities have historically emphasized the origination of long-term,
fixed-rate loans secured by single-family residences. The primary source of
funds has been deposits with substantially shorter maturities. While having
interest-bearing liabilities that reprice more frequently than interest-earning
assets is generally beneficial to net interest income during a period of
declining interest rates, such an asset/liability mismatch is generally
detrimental during periods of rising interest rates.
The Board of Directors has established an asset/liability committee that
consists of the Company's president and senior banking officers. The committee
meets on a monthly basis to review loan and deposit pricing and production
volumes, interest rate risk analysis, liquidity and borrowing needs, and a
variety of other asset and liability management issues.
To reduce the effect of interest rate changes on net interest income, the
Company has adopted various strategies to improve the matching of
interest-earning asset maturities to interest-bearing liability maturities. The
principal elements of these strategies include:
o the origination of commercial and consumer loans with adjustable rate
features or fixed rate loans with shorter term maturities;
o lengthening the maturities of liabilities when deemed cost effective
through the pricing and promotion of certificates of deposit and
utilization of Federal Home Loan Bank advances;
o attracting low cost checking and transaction accounts which tend to be less
sensitive to rising rates; and
o when market conditions permit, to originate and hold in its portfolio
adjustable rate mortgage loans which have periodic interest rate
adjustments. The Company also maintains an investment portfolio that
provides a stable cash flow, thereby providing investable funds in varying
interest rate cycles.
The Company has also made a significant effort to maintain its level of lower
cost deposits as a method of enhancing profitability. At September 30, 2000, the
Company had 28.6% of its deposits in savings, checking and money market
accounts. These deposits have traditionally remained relatively stable and are
expected to be only moderately affected in a period of rising interest rates.
This stability has enabled the Company to offset the impact of rising rates in
other deposit accounts.
Quantitative Analysis. Exposure to interest rate risk is actively monitored by
management. The Company's objective is to maintain a consistent level of
profitability within acceptable risk tolerances across a broad range of
potential interest rate environments. The Company uses the OTS Net Portfolio
Value ("NPV") Model to monitor its exposure to interest rate risk, which
calculates changes in NPV. The NPV Model measures interest rate risk by
computing estimated changes in the NPV of cash flow from assets, liabilities and
off-balance sheet items in the event of a range of assumed changes in market
interest rates. The NPV Model shows the degree to which balance sheet line items
and NPV are potentially affected by a 100 to 300 basis point change. One basis
point equals 1/100th of a percentage point. Reports generated by the NPV Model
are reviewed by the Asset/Liability Management Committee and reported to the
Board of Directors quarterly.
The NPV Model uses an option-based pricing approach to value one- to
four-family mortgages, mortgages serviced by or for others, and firm commitments
to buy, sell, or originate mortgages. This approach makes use of an interest
rate simulation program to generate numerous random interest rate paths that, in
conjunction with a prepayment model, are used to estimate mortgage cash flows.
Prepayment options and interest rate caps and floors contained in mortgages and
mortgage-related securities introduce significant uncertainty in estimating the
timing of cash flows for these instruments that warrants the use of this
sophisticated methodology. All other financial instruments are valued using a
static discounted cash flow
31
method. Under this approach, the present value is determined by discounting the
cash flows the instrument is expected to generate by the yields currently
available to investors from an instrument of comparable risk and duration.
Future interest rates and their effects on NPV and net interest income are not
predictable. Computations of prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including relative levels of market
interest rates, prepayments, and deposit run-offs, and should not be relied upon
as indicative of actual results. Certain shortcomings are inherent in such
computations. Although certain assets and liabilities may have similar maturity
or periods of repricing, they may react at different times and in different
degrees to changes in the market interest rates. The interest rate on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while rates on other types of assets and liabilities may lag
behind changes in market interest rates. Certain assets, such as adjustable rate
mortgages, generally have features that restrict changes in interest rates on a
short-term basis and over the life of the asset. After a change in interest
rates, prepayments and early withdrawal levels could deviate significantly from
those assumed in making calculations set forth above. Additionally, an increased
credit risk may result if our borrowers are unable to meet their repayment
obligations as interest rates increase.
The following table presents our NPV as of September 30, 2000. The NPV was
calculated by the OTS, based upon the above model assumptions and financial
information provided by the Company. As illustrated in the table, the
calculations show that the Company would be adversely affected by increases in
interest rates and favorably affected by decreases in interest rates.
NPV as % of Present
Net Portfolio Value ("NPV") Value of Assets
---------------------------------- -----------------------
Change Basis Point
In Rates $ Amount $ Change % Change NPV Ratio Change
-------- -------- -------- -------- --------- ------
(Dollars in thousands)
+300 bp 13,308 -39,906 -75% 2.51% -668 bp
+200 bp 26,303 -26,911 -51% 4.81% -437 bp
+100 bp 39,711 -13,504 -25% 7.06% -213 bp
0 bp 53,214 9.19%
-100 bp 65,194 +11,980 +23% 10.97% +178 bp
-200 bp 74,084 +20,869 +39% 12.21% +303 bp
-300 bp 82,582 +29,368 +55% 13.35% +416 bp
The OTS defines the sensitivity measure as the change in NPV ratio with a 200
basis point shock. Our sensitivity measure reflects a 437 basis point decline in
NPV ratio as of September 30, 2000 compared to a sensitivity measure of 280
basis points as of September 30, 1999. The decline in our sensitivity measure at
September 30, 2000 primarily reflects the significant increase in short-term
borrowing interest rates from September 30, 1999. See "Business of FloridaFirst
Bank -- Borrowings."
Our strategies for addressing the sensitivity measure indicators are as follows:
o Reviewing the average lives and durations of our loans and investment
securities;
o Reviewing deposit offerings and alternative funding sources to better match
the durations of the assets;
o Providing an additional capital contribution from the Company to the Bank;
and
o Performing, on a quarterly basis, a business simulation that more clearly
reflects an on-going business assumption, rather than relying solely on the
OTS model which more closely approximates a liquidation value model.
32
Comparison of Financial Condition at September 30, 2000 and September 30, 1999
Assets. Total assets increased $83.8 million, or 16.8%, to $582.2 million at
September 30, 2000 from $498.4 million at September 30, 1999. The increase in
total assets resulted primarily from an $42.5 million, or a 10.7% annualized
increase in the loan portfolio attributable to steady loan demand in our market
areas, a slow down in loan prepayments and funding of construction loans. In
addition, investment securities increased $25.5 million. Management plans to
focus on loan growth to effectively leverage its cap