Item 1. Description of Business - --------------------------------
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, 2001, the Company had total assets, deposits and equity of $660.4 million, $399.5 million, and $93.8 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.
On December 6, 2001, the Bank signed a definitive agreement with SunTrust Bank ("SunTrust") to purchase seven Florida branches from SunTrust coincident with SunTrust's acquisition of such branches from Huntington National Bank ("Huntington"). Four of the Huntington branches are located in Lakeland, Florida, and one each in Avon Park and Sebring in Highlands County, and one branch in Wildwood, Florida. The transaction will include assumption of approximately $165 million in deposits and the purchase of approximately $25 million in loans related to the seven branches.
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.
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.
----------- (1) Includes home equity lines of credit. (2) Relates to construction loans.
Loan Maturity Schedule. The following table sets forth the maturity or repricing of the Company's loan portfolio at September 30, 2001. Demand loans, loans having no stated maturity, and overdrafts are shown as due in one year or less. Amounts are in thousands.
- ------------- (1) Includes $35,516 in construction loans.
The following table sets forth the dollar amount of all loans due after September 30, 2002, which have pre-determined interest rates and which have floating or adjustable interest rates.
Floating or Fixed Rates Adjustable rates Total ----------- ---------------- ----- (In thousands) Residential ................... $265,657 $ 38,597 $304,254 Multi-family .................. 1,775 394 2,169 Commercial real estate and land 37,324 1,177 38,501 Home equity loans ............. 26,678 -- 26,678 Auto and other consumer ....... 48,356 -- 48,356 -------- -------- -------- Total ....................... $379,790 $ 40,168 $419,958 ======== ======== ========
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 currently originates shorter-term fixed-rate and adjustable-rate loans for retention in its portfolio. Longer-term fixed-rate mortgages are generally sold to correspondent lenders on a servicing released basis. 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.
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, 2001, 82% 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, 2001, approximately 18% 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 $300,000 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 $4.4 million on September 30, 2001 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.
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 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:
> credit file documentation, > analysis of the borrower's capacity to repay the loan, > adequacy of the borrower's capital and collateral, > analysis of the borrower's character, and > 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, 2001, the commercial business loans ranged from $5,000 to $2.8 million, with an average balance outstanding of $67,000. With the exception of two loans totaling $489,000, all such loans are current and have performed in accordance with their terms. The Company has provided a reserve of $98,000 for the two delinquent loans because recovery of the full loan balance is highly unlikely.
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, 2001, 69% 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.
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, 2001 was $1.9 million.
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.
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.
During the year ended September 30, 2001, approximately $65,000 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.
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, 2001 the classified assets were (in thousands):
Special mention..................... $ 1,299 Substandard......................... 2,660 Doubtful............................ -- Loss................................ -- ------- Total.......................... $ 3,959 =======
The category of substandard assets includes a $1.0 million corporate bond that has been downgraded below investment grade and the corporate entity is in Chapter 11 bankruptcy proceedings. The Company's management cannot make a specific determination what portion of the security, if any, has experienced a decline in value that is other than temporary.
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 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.
The following table sets forth information with respect to the Company's allowance for loan losses at the dates indicated:
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.
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, 2001, the Company had an investment securities portfolio of $129.5 million (19.6% 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 that 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).
Securities. The Company maintains a portfolio of securities, classified as either available for sale or held to maturity, to enhance total return on investments. At September 30, 2001, the Company's 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 47% of the Company's U.S. government agency obligations at September 30, 2001, could reduce the Company's investment yield if these securities are called prior to maturity.
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 that 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 securities) which are subject to periodic principal repayments and payoffs before contractual maturities.
Municipal Bonds. Municipal bonds have maturities from 11 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 $7.7 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.
The following table sets forth the carrying value of the Company's securities portfolio at the dates indicated.
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 securities portfolio at September 30, 2001. 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.
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 borrowings, 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 other 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 customer's 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 utilizes the services of deposit brokers to a minimal extent and management believes that an insignificant number of deposit accounts are held by non-residents of Florida.
The Company pays interest on its deposits that are competitive in its market. Interest rates on deposits are set weekly by senior management, based on a number of factors, including:
> projected cash flow; > a current survey of a selected group of competitors' rates for similar products; > external data which may influence interest rates; > investment opportunities and loan demand; and > scheduled certificate maturities and loan and investment repayments.
Because of the large percentage of certificate accounts in the deposit portfolio (70.9% at September 30, 2001), 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, 2001.
Maturity Period Certificate Accounts --------------- -------------------- Within three months................ $ 9,218 Three through six months........... 11,342 Six through twelve months.......... 25,454 Over twelve months................. 39,673 ------- Total $85,687 =======
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 that 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, securities 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, -------------------------------- 2001 2000 1999 ---- ---- ---- (Dollars in thousands) Maximum amount of borrowings outstanding at any month end: Advances from FHLB...................... $151,250 $158,000 $87,600 Approximate average borrowings outstanding with respect to: Advances from FHLB...................... $140,120 $128,523 $49,510 Approximate weighted average rate paid on: Advances from FHLB...................... 5.74% 5.93% 4.82%
See Note 7 to the consolidated financial statements for additional information.
Personnel
As of September 30, 2001 the Company had 176 full-time employees and 11 part-time employees. The employees are not represented by a collective bargaining unit. The Company believes its relationship with its employees to be satisfactory.
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.
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.
As a unitary savings and loan holding company, the Company generally is not subject to any restrictions on its business activities. While the Gramm-Leach-Bliley Act (the "GLB Act"), enacted in November 1999, terminated the "unitary thrift holding company" exemption from activity restrictions on a prospective basis, the Company enjoys grandfathered status under this provision of the GLB Act because it acquired the Bank prior to May 4, 1999. As a result, the Company's freedom from activity restrictions as a unitary savings and loan holding company was not affected by the GLB Act. However, if the Company were to acquire control of an additional savings association, its business activities would be subject to restriction under the Home Owners' Loan Act. Furthermore, if the Company were in the future to sell control of the Bank to any other company, such company would not succeed to the Company's grandfathered status under the GLB Act and would be subject to the same activity restrictions. The continuation of the Company's exemption from restrictions on business activities as a unitary savings and loan holding company is also subject to the Company's continued compliance with the Qualified Thrift Lender ("QTL") test. See "- Regulation of the Bank - Qualified Thrift Lender Test."
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 2001 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 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:
> tangible capital equal to 1.5% of total adjusted assets; > "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 > risk-based capital equal to 8% of total risk-weighted assets.
The Bank's capital ratios are set forth in Note 10 to the consolidated financial statements.
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:
> it is not eligible for expedited treatment under the applications processing rules of the OTS; > 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; > it would not adequately be capitalized after the capital distribution; or > the distribution would violate an agreement with the OTS or applicable regulation.
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:
> the savings institution would be undercapitalized following the capital distribution; > the proposed capital distribution raises safety and soundness concerns; or > 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:
> 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
> 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, 2001 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, 2001, the Bank's legal lending limit to one borrower was $10.4 million.
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.
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.
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. At September 30, 2001 the Bank was in compliance with these requirements.
Item 2.
Item 2. Description of Property - --------------------------------
The Registrant's corporate office is located at 205 East Orange Street in Lakeland, Florida and conducts its business through eleven 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.
- ---------------- (1) Five-year lease that terminates December 31, 2003, but has two three-year renewal options. (2) Annual renewable lease. (3) Ten year lease with two five year options.
As of September 30, 2001, the net book value of land, buildings, furniture and equipment owned by us, less accumulated depreciation, totaled $10.9 million. In addition, on December 6, 2001 the Bank entered into an agreement to purchase the deposits and seven branch facilities from another financial institution. The net book value of the purchased facilities and related equipment approximates $2.5 million.
Item 3.
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 is a party to any material pending legal proceeding.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------
Not applicable.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder - -------------------------------------------------------------------------------- Matters -------
Page 3 of the 2001 Annual Report to Stockholders ("Annual Report") is herein incorporated by reference.
Item 6.
Item 6. Selected Financial Data - --------------------------------
Pages 4 and 5 of the Annual Report are herein incorporated by reference.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations -------------
Pages 6 through 16 of the Annual Report are herein incorporated by reference.
Item 7a.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk - --------------------------------------------------------------------
Pages 7 through 8 of the Annual Report are herein incorporated by reference.
Item 8.
Item 8. Financial Statements and Supplementary Data - ----------------------------------------------------
Pages 18 through 42 of the Annual Report are herein incorporated by reference.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and - -------------------------------------------------------------------------------- Financial Disclosure --------------------
Information regarding the change in accountants is incorporated herein to the Form 8-K dated May 22, 2001 and filed on May 29, 2001.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------
Information concerning Directors and Executive Officers of the Registrant is incorporated herein by reference from the Company's definitive Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on January 29, 2002 ("Proxy Statement").
Item 11.
Item 11. Executive Compensation - --------------------------------
Information concerning executive compensation is incorporated herein by reference from the Company's Proxy Statement.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference to the Section captioned "Principal Holders" of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference to the sections captioned "Principal Holders" and "Proposal I -- Election of Directors" of the Proxy Statement.
(c) Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the registrant.
Item 13.
Item 13. Certain Relationships and Related Transactions - --------------------------------------------------------
The information required by this item is incorporated herein by reference to the section captioned "Certain Relationships and Related Transactions" of the Proxy Statement.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - --------------------------------------------------------------------------
(a) (1) Financial Statements:
The consolidated statements of financial condition of the Company and subsidiary as of September 30, 2001 and 2000 and the related consolidated statements of earnings, stockholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended September 30, 2001, together with the related notes and the independent auditors' report of Hacker, Johnson & Smith PA, independent certified public accountants are incorporated by reference to the Annual Report.
(a) (2) Financial Statement Schedules:
All financial statement schedules have been omitted, as the information is not required under the related instructions or is inapplicable.
(a) (3) Exhibits:
* Incorporated by reference to the Registrant's Registration Statement on Form S-1 initially filed with the Commission on September 5, 2000 (File No. 333-45150).
** Incorporated by reference to the identically numbered exhibits to the Form 10-K filed by FloridaFirst Bancorp on December 29, 1999 (File No. 0-25693).
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed by FloridaFirst Bancorp, Inc. during the period covered by this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FLORIDAFIRST BANCORP, INC.
Date: December 21, 2001 By: /s/Gregory C. Wilkes ------------------------------------- Gregory C. Wilkes President and Chief Executive Officer (Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on December 21, 2001, by the following persons on behalf of the Registrant and in the capacities indicated.