SECURITIES AND EXCHANGE COMMISSION
Washington, D.C 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002 Commission File Number 0-22608
FFLC BANCORP, INC.
------------------
(Exact name of registrant as specified in its charter)
Delaware 59-3204891
------------------------- ------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
800 North Boulevard West, Post Office Box 490420, Leesburg, Florida 34749-0420
------------------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (352) 787-3311
--------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
Indicate by check mark whether the registrant is an accelerator filer (as
defined in Rule 12b-2 of the Act). YES [X] NO[_]
The aggregate market value of the voting and nonvoting common equity held by
nonaffiliates was $74,802,790 computed by reference to the price at which the
common equity was last sold, or the average bid and asked price of such common
equity, as of June 30, 2002 the last business day of the Registrant's most
recently completed second fiscal quarter.
The Registrant had 3,584,897 shares outstanding as of March 7, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended
December 31, 2002. (Part II and IV)
2. Portions of Proxy Statement for the 2003 Annual Meeting of Stockholders.
(Part III)
INDEX
PART I Page
----
Item I. Description of Business
Business 3
Market Area and Competition 3
Market Risk 4
Lending Activities 4-9
Asset Quality 9-14
Investment Activities 15
Mortgage-Backed Securities 15
Investment Securities 15-17
Sources of Funds 18-20
Borrowings 21-22
Subsidiary Activities 22-23
Personnel 23
Regulation and Supervision 23-29
Federal and State Taxation 30-31
Item 2. Properties 32-33
Item 3. Legal Proceedings 34
Item 4. Submission of Matters to a Vote of Security Holders 34
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 34
Item 6. Selected Financial Data 34
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 34
Item 8. Financial Statements and Supplementary Data 34
Item 9. Change In and Disagreements with Accountants on
Accounting and Financial Disclosure 34
PART III
Item 10. Directors and Executive Officers of the Registrant 34
Item 11. Executive Compensation 35
Item 12. Security Ownership of Certain Beneficial Owners and Management 35
Item 13. Certain Relationships and Related Transactions 35
Item 14. Controls and Procedures 35
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 36
SIGNATURES 37
CERTIFICATIONS 37-39
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Business
FFLC Bancorp, Inc., ("FFLC" or the "Company") was incorporated in Delaware on
September 16, 1993, and acquired First Federal Savings Bank of Lake County (the
"Bank") in connection with the Bank's conversion to stock form on January 4,
1994. The Company is a savings and loan holding company subject to regulation by
the Office of Thrift Supervision ("OTS") which mainly transacts its business
through its subsidiary, the Bank. At December 31, 2002, the Company had total
assets of $915.8 million and stockholders' equity of $71.1 million.
The Bank was established in 1934 as a federally-chartered mutual savings and
loan association. The Bank is a member of the Federal Home Loan Bank ("FHLB")
System and its deposit accounts are insured to the maximum allowable amount by
the Federal Deposit Insurance Corporation ("FDIC"). At December 31, 2002, the
Bank had total assets of $915.1 million and stockholders' equity of $72.4
million.
During 2001, First Alliance Title, L.L.C. ("First Alliance"), a 90% owned
subsidiary of the Company, was formed to operate as a title agency. This
subsidiary had only a minimal amount of activity during 2001. During 2002, First
Alliance received commission income for issuing title insurance on approximately
fifty loans.
During 2002, the Holding Company formed FFLC Statutory Trust I (the "Trust"), a
wholly-owned subsidiary, for the sole purpose of issuing $5,000,000 of trust
preferred securities as more fully described in the Borrowings section.
Market Area and Competition
The Bank is a community-oriented savings institution offering a variety of
financial services to meet the needs of the communities it serves. The Bank's
deposit gathering and lending markets are primarily concentrated in the
communities surrounding its full service offices located in Lake, Sumter, Citrus
and Marion counties in central Florida. Management believes that its offices are
located in communities that generally can be characterized as rural service and
retirement communities with residential neighborhoods comprised predominately of
one-to-four-family residences. The Bank is the largest (by asset size)
locally-based financial institution in Lake County, and serves its market area
with a wide selection of residential mortgage loans and other retail financial
services. Management considers the Bank's reputation for financial strength and
customer service as a major advantage in attracting and retaining customers in
its market area and believes it benefits from its community orientation as well
as its established deposit base and level of core deposits.
The Bank's competition for loans comes principally from commercial banks,
savings institutions, and mortgage banking companies. The Bank's most direct
competition for savings has historically come from commercial banks, savings
institutions and credit unions. The Bank faces additional competition for
savings from money-market mutual funds and other corporate and government
securities funds. The Bank also faces increased competition for deposits from
other financial intermediaries such as securities brokerage firms and insurance
companies.
3
Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk arises primarily from interest-rate risk inherent in
its lending and deposit taking activities. To that end, management actively
monitors and manages its interest-rate risk exposure. The measurement of market
risk associated with financial instruments is meaningful only when all related
and offsetting on- and off-balance-sheet transactions are aggregated, and the
resulting net positions are identified. Disclosures about the fair value of
financial instruments, which reflect changes in market prices and rates, can be
found in Note 9 of Notes to Consolidated Financial Statements.
The Company's primary objective in managing interest-rate risk is to minimize
the adverse impact of changes in interest rates on the Bank's net interest
income and capital, and to adjust the Company's asset-liability structure to
obtain the maximum yield-cost spread on that structure. The Company relies
primarily on its asset-liability management to control interest-rate risk.
However, a sudden and substantial increase in interest rates may adversely
impact the Company's earnings to the extent that the interest rates borne by
assets and liabilities do not change at the same speed, to the same extent, or
on the same basis. The Company does not engage in trading activities.
Lending Activities
Loan Portfolio. The Bank's loan portfolio consists primarily of conventional
first mortgage loans secured by one-to-four-family residences. At December 31,
2002, the Bank's total gross loans outstanding were $756.6 million, of which
$395.1 million or 52.2% of the Bank's total loan portfolio were
one-to-four-family residential first mortgage loans. Of the one-to-four-family
residential mortgage loans outstanding at that date, approximately 45% were
fixed rate loans and 55% were adjustable-rate ("ARM") loans. At the same date,
commercial real estate loans and other loans on improved real estate totaled
$140.8 million, or 18.6% of the Bank's total loan portfolio; construction
(excluding construction/permanent loans) and land loans totaled $30.8 million or
4.1% of the Bank's total loan portfolio; and multi-family mortgage loans totaled
$22.8 million or 3.0% of the Bank's total loan portfolio. Consumer, commercial
and other loans held by the Bank, which principally consist of home equity
loans, deposit, consumer, commercial and other loans, totaled $167.1 million or
22.1% of the Bank's total loan portfolio at December 31, 2002.
4
The following table sets forth the composition of the Bank's loan portfolio in
dollar amounts and percentages at the dates indicated:
At December 31,
------------------------------------------------------------------------------------------------
1998 1999 2000
---- ---- ----
% of % of % of
Amount Total Amount Total Amount Total Amount
------ ----- ------ ----- ------ ----- ------
($ in thousands)
Mortgage loans:
One-to-four-family $ 283,372 70.59% $ 354,317 68.28% $ 409,600 64.97% $ 413,712
Construction and land 11,683 2.91% 11,861 2.29% 13,006 2.06% 22,951
Multi-family 8,165 2.04% 13,394 2.58% 17,602 2.79% 20,304
Commercial real estate
and other 44,211 11.01% 61,052 11.76% 79,729 12.65% 108,804
------- ------ ------- ------ -------- ------ -------
Total mortgage
loans 347,431 86.55% 440,624 84.91% 519,937 82.47% 565,771
Consumer loans 43,490 10.83% 64,042 12.34% 95,824 15.20% 119,357
Commercial loans 10,532 2.62% 14,285 2.75% 14,677 2.33% 18,814
------- ------ ------- ------ ------- ------- -------
Total loans
receivable (1) 401,453 100.00% 518,951 100.00% 630,438 100.00% 703,942
====== ====== ======
Less:
Loans in process (10,637) (15,907) (12,128) (14,310)
Net deferred loan costs 526 668 726 592
Allowance for loan losses (2,283) (2,811) (3,552) (4,289)
--------- ------- -------- --------
Loans receivable,
net $ 389,059 $ 500,901 $ 615,484 $ 685,935
======= ======= ======= =======
(1) Total loans receivable
outstanding by department
consists of the following:
Residential $ 287,874 71.71% $ 353,422 68.10% $ 404,494 64.16% $ 403,897
Commercial 70,089 17.46% 101,487 19.56% 130,120 20.64% 180,688
Consumer 43,490 10.83% 64,042 12.34% 95,824 15.20% 119,357
------- ------ ------- ------ ------- ------ -------
$ 401,453 100.00% $ 518,951 100.00% $ 630,438 100.00% $ 703,942
======= ====== ======= ====== ======= ====== =======
At December 31,
-------------------------------------------------
2001 2002
---- ----
% of % of
Total Amount Total
----- ------ -----
($ in thousands)
Mortgage loans:
One-to-four-family 58.77% $ 395,116 52.23%
Construction and land 3.26% 30,792 4.07
Multi-family 2.88% 22,796 3.01
Commercial real estate
and other 15.46% 140,770 18.61
------ ------- -------
Total mortgage
loans 80.37% 589,474 77.92
Consumer loans 16.96% 138,202 18.26
Commercial loans 2.67% 28,879 3.82
------- -------- --------
Total loans
receivable 100.00% 756,555 100.00%
====== ======
Less:
Loans in process (16,770)
Net deferred loan costs 734
Allowance for loan losses (5,181)
----------
Loans receivable,
net $ 735,338
========
(1) Total loans receivable
outstanding by department
consists of the following:
Residential 57.37% $ 385,711 50.98%
Commercial 25.67% 229,930 30.39%
Consumer 16.96% 140,914 18.63%
------ ------- ------
100.00% $ 756,555 100.00%
====== ======= ======
5
Purchase of Mortgage Loans. From time to time, the Bank purchases mortgage loans
originated by other lenders. At December 31, 2002, $5.3 million, or .7% of the
Bank's total loan portfolio consisted of purchased mortgage loans or loan
participations. Purchased or participated mortgage loans consist of
one-to-four-family residential mortgage loans and commercial real estate loans.
Secondary Market Activities. The Bank participates in the secondary market
directly and through correspondent relationships, originating loans (primarily
30-year fixed-rate loans) which are primarily funded by the Bank and then
reimbursed by the investor correspondents. Funding by the correspondent occurs
on some loans. These loans are closed on the Bank's documents with funds
provided by the investor correspondent at closing with all credit conditions
established by the investor correspondent being satisfied prior to the issuance
of a loan commitment. The Bank receives a fee for originating, processing and
closing the loans and reports the loans to the OTS as loans originated and sold.
In the year ended December 31, 2002, total loans originated by the Bank and
through the correspondents amounted to $64.7 million or 34.8% of total mortgage
loans originated.
Loan Originations, Sales and Principal Repayments. The following table sets
forth the Bank's loan originations, sales and principal repayments for the
periods indicated.
Year Ended December 31,
--------------------------------------------
2000 2001 2002
---- ---- ----
(In thousands)
Mortgage loans (gross):
At beginning of year $ 440,624 519,937 565,771
------- ------- --------
Mortgage loans originated:
One-to-four-family 106,209 101,977 114,238
Construction and land 3,457 9,314 19,875
Multi-family 3,800 4,475 1,875
Commercial real estate 9,950 12,408 50,362
------- ------- -------
Total mortgage loans originated 123,416 128,174 186,350
Mortgage loans purchased or participated - 4,134 -
------- ------- -------
Total mortgage loans originated and
purchased or participated 123,416 132,308 186,350
Transfer of loans to foreclosed assets (826) (656) (1,679)
Principal repayments (42,156) (70,892) (103,541)
Sales of loans (1) (1,121) (14,926) (57,427)
------ -------- -------
At end of year $ 519,937 565,771 589,474
======= ======= =======
Consumer loans (gross):
At beginning of year 64,042 95,824 119,357
Loans originated 60,214 68,777 69,884
Principal repayments (28,432) (45,244) (51,039)
------- ------- -------
At end of year $ 95,824 119,357 138,202
======= ======= =======
Commercial loans (gross):
At beginning of year 14,285 14,677 18,814
Loans originated 5,632 12,782 17,560
Principal repayments (5,240) (8,645) (7,495)
------- ------- -------
At end of year $ 14,677 18,814 28,879
======= ======= =======
(1) Represents loans originated for and funded by correspondents and loans
originated and sold by the Bank.
6
Maturities of Loans. The following table shows the contractual maturities of the
Bank's loan portfolio at December 31, 2002. Loans that have adjustable rates are
shown as amortizing to final maturity rather than when the interest rates are
next subject to change. The table does not include prepayments or scheduled
principal repayments. Prepayments and scheduled principal repayments on the
Bank's loans totaled $75.8 million, $124.8 million and $162.1 million for the
years ended December 31, 2000, 2001 and 2002, respectively.
Mortgage Loans
--------------
One-to- Total
Four- Commercial Consumer Loans
Family Other Loans Loans Receivable
------ ----- ----- ----- ----------
(In thousands)
Amounts due:
Within 1 year $ 3,079 28,192 4,546 6,045 41,862
--------- --------- --------- --------- ---------
1 to 3 years 1,499 24,695 6,965 27,095 60,254
3 to 5 years 3,263 26,765 6,072 49,590 85,690
5 to 10 years 7,917 24,295 3,838 17,774 53,824
10 to 20 years 75,899 71,925 7,458 37,654 192,936
Over 20 years 303,459 18,486 -- 44 321,989
--------- --------- --------- --------- ---------
Total due after 1 year 392,037 166,166 24,333 132,157 714,693
--------- --------- --------- --------- ---------
Total amounts due 395,116 194,358 28,879 138,202 756,555
Loans in process (16,770) -- -- -- (16,770)
Net deferred loan fees and costs 749 (15) -- -- 734
Allowance for loan losses (840) (2,850) (434) (1,057) (5,181)
--------- --------- --------- --------- ---------
Loans receivable, net $ 378,255 191,493 28,445 137,145 735,338
========= ========= ========= ========= =========
Loans Due After December 31, 2003. The following table sets forth at December
31, 2002, the dollar amount of all loans due or scheduled to reprice after
December 31, 2003, classified according to whether such loans have fixed or
adjustable interest rates.
Due after December 31, 2003
---------------------------
Fixed Adjustable Total
----- ---------- -----
(In thousands)
Mortgage loans:
One-to-four-family $137,423 254,614 392,037
Construction and land 17,089 12,315 29,404
Multi-family 12,227 10,164 22,391
Commercial real estate 25,840 88,531 114,371
Consumer loans 116,914 15,243 132,157
Commercial loans 13,677 10,656 24,333
-------- -------- --------
Total $323,170 391,523 714,693
======== ======== ========
One-to-Four-Family Mortgage Lending. The Bank's primary residential lending
emphasis is on the origination of first mortgage loans secured by
one-to-four-family residences within its primary lending area. Such residences
are primarily single family homes, including condominium and townhouses, that
serve as the primary residence of the owner. To a lesser degree, the Bank makes
loans on residences used as second homes or as investments. The Bank also offers
second mortgage loans which are underwritten applying the same standards as for
first mortgage loans.
7
In the years ended December 31, 2000, 2001 and 2002, the Bank's total mortgage
loan originations, including loans purchased or participated, amounted to $123.4
million, $132.3 million and $165.8 million, respectively, of which $106.2
million, $102.0 million and $93.7 million, respectively, were secured by
one-to-four-family properties.
At December 31, 2002, 52.23% of total loans consisted of one-to-four-family
residential loans, of which approximately 65% were ARM loans. The Bank's ARM
loans may carry an initial interest rate which is less than the fully indexed
rate for the loan. The initial discounted rate is determined by the Bank in
accordance with market and competitive factors. The Bank offers one-, three-,
and five-year ARM loans which adjust by a maximum of 2% per adjustment period,
with lifetime caps on increases of 5% to 6%, depending upon the program chosen.
The Bank's policy on one-to-four-family residential mortgage loans generally is
to lend up to 80% of the appraised value of property securing the loan, or up to
95% if private mortgage insurance is obtained on the amount of the loan which
exceeds 80%.
Commercial and Multi-Family Real Estate Lending. As of December 31, 2002, $140.8
million, or 18.61% of the Bank's total loan portfolio consisted of commercial
real estate loans and $22.8 million, or 3.01% of the Bank's total loan
portfolio, consisted of multi-family mortgage loans.
The commercial real estate loans in the Bank's portfolio consist of fixed-rate
and ARM loans which were originated at prevailing market rates. The Bank's
policy has been to originate commercial or multi-family loans only in its
primary market area. Commercial and multi-family mortgage loans are generally
made in amounts up to 80% of the appraised value of the property. In making such
loans, the Bank primarily considers the net operating income generated by the
real estate to support the debt service, the financial resources and income
level and managerial expertise of the borrower, the marketability of the
property and the Bank's lending experience with the borrower.
Commercial Loans. As of December 31, 2002, $28.9 million or 3.82% of the Bank's
total loan portfolio, consisted of commercial loans.
Construction and Land Loans. The Bank originates loans to finance the
construction of one-to-four-family homes and, to a much lesser extent,
originates loans for the acquisition and development of land (either unimproved
land or improved lots) on which the purchaser can then build. At December 31,
2002, construction (excluding construction/permanent loans) and land loans
totaled $30.8 million or 4.07% of the Bank's total loan portfolio.
At December 31, 2002, the Bank had loans in process (undisbursed loan proceeds
of construction loans) of $16.8 million which were mainly secured by residential
mortgages. The Bank makes residential construction loans to homeowners on a
long-term basis with amortization beginning at the conclusion of construction,
usually a period of about six months. Such loans are carried in the
one-to-four-family category and are not separately classified as construction
loans. Residential construction loans to builders are carried in the
construction and land category.
Construction and land loans also include construction loans for
one-to-four-family residential property for which the borrower will obtain
permanent financing from another lender. Such loans bear a fixed rate of
interest that equals prime plus 1.0% during the construction period. The Bank
obtains a commitment for the permanent financing from the other lender prior to
originating the construction loan.
Consumer Lending. At December 31, 2002, $138.2 million or 18.26% of the Bank's
total loan portfolio consisted of consumer loans, including home equity loans of
$40.9 million, lines of credit of $19.0 million, direct auto and truck loans of
$16.6 million, indirect auto and truck loans of $22.8 million, home improvement
loans and other secured consumer loans of $21.2 million, lot loans of $16.8
million and unsecured personal loans of $.9 million.
8
The Bank's home equity loans are originated on one-to-four-family residences,
either on a fixed-rate basis with terms of up to 15 years or as balloon loans
with terms up to five years with fifteen year amortization periods. Those loans
are generally limited to aggregate outstanding indebtedness on the property
securing the loan or 90% of the loan to value ratio. The Bank also offers home
equity lines of credit, which bear prime-based, adjustable interest rates with
terms up to fifteen years. Such loans generally require monthly payments of 1.5%
of the balance outstanding including interest.
Consumer loans are offered primarily on a fixed-rate, short-term basis. Except
for second mortgage loans, which are underwritten pursuant to the standards
applicable to one-to-four-family residential loans, the underwriting standards
employed by the Bank for consumer loans include a determination of the
applicant's payment history on other debts and an assessment of the borrower's
ability to make payments on the proposed loan and other indebtedness.
Loan Approval and Authority. Loan approval authority for loans exceeding
$1,600,000 is vested in the Loan Committee which meets weekly to consider loan
recommendations of the Loan Committee. The Loan Committee is comprised of three
outside directors, the President and the Senior Lending Officers of the Bank.
Manaagement has been delegated authority to approve mortgage loans, commercial
loans, home equity loans, home equity lines of credit and secured consumer loans
up to $1,600,000.
The Bank's policy is to require title and hazard insurance on all real estate
loans, except home equity loans for which a title search is conducted in lieu of
obtaining title insurance. Borrowers may be permitted to pay real estate taxes
and hazard insurance premiums applicable to the secured property for a mortgage
loan. In some instances, borrowers may be required to advance funds together
with each payment of principal and interest to a mortgage escrow account from
which the Bank makes disbursements for items such as real estate taxes, hazard
insurance premiums and private mortgage insurance premiums.
Asset Quality
Delinquent Loans and Nonperforming Assets. Loans are generally placed on
nonaccrual status when the collection of principal or interest is 90 days or
more past due, or earlier if collection is deemed uncertain. The Bank provides
an allowance for accrued interest deemed uncollectible. Accrued interest
receivable is reported net of the allowance for uncollected interest. Loans may
be reinstated to accrual status when all payments are brought current and, in
the opinion of management, collection of the remaining balance can be reasonably
expected.
9
At December 31, 2000, 2001 and 2002, delinquencies in the Bank's loan portfolio
were as follows:
At December 31, 2000 At December 31, 2001
--------------------------------------------------------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
------------------- ---------------------------------------- -----------------
Number Principal Number Principal Number Principal Number Principal
of Balance of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans Loans of Loans
----- -------- ----- -------- ------ --------- ------ ---------
($ in thousands)
One-to-four-family 5 $ 427 10 $ 980 4 $ 126 12 $ 1,004
Construction and land - - 2 213 - - 1 47
Multi-family - - - - - - - -
Commercial real estate - - 1 1,279 - - 2 390
--- --- --- ----- ----- --- -- --
Total mortgage loans 5 427 13 2,472 4 126 15 1,441
Consumer loans 3 32 2 8 27 391 20 472
Commercial loans 3 260 1 30 2 194 - -
-- --- --- ------ -- --- -- -------
Total loans 11 $ 719 16 $ 2,510 33 $ 711 35 $ 1,913
== === === ===== == === == =====
Delinquent loans to total loans .11% .40% .10% .27%
=== === === ===
At December 31, 2002
-------------------------------------------
60-89 Days 90 Days or More
------------------ ------------------
Number Principal Number Principal
of Balance of Balance
Loans of Loans Loans of Loans
----- -------- ----- --------
One-to-four-family 10 $ 793 27 $ 1,956
Construction and land - - - -
Multi-family - - - -
Commercial real estate - - 2 254
---- --- -- ---
Total mortgage loans 10 793 29 2,210
Consumer loans 49 584 14 152
Commercial loans - - 1 230
--- -- --
Total loans 59 $ 1,377 44 $ 2,592
== ===== == =====
Delinquent loans to total loans .19% .35%
== ==
10
Nonperforming Assets. The following table sets forth information with respect to
the Bank's nonperforming assets at
the dates indicated.
At December 31,
----------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
($ in thousands)
Nonaccrual mortgage loans $ 430 2,200 2,472 1,441 2,210
Nonaccrual commercial and consumer loans 14 162 38 472 382
--- ------ ------- ----- -------
Total nonperforming loans 444 2,362 2,510 1,913 2,592
Foreclosed assets 366 400 276 373 626
------ ------ ------ ------- -------
Total nonperforming assets $ 810 2,762 2,786 2,286 3,218
=== ===== ===== ===== ======
Nonperforming loans to total loans .11% .46% .40% .27% .35%
=== ====== ====== ====== =====
Total nonperforming assets to total assets .17% .47% .39% .28% .35%
=== ====== ===== ====== =====
At December 31, 2002, the Bank had no accruing loans which were contractually
past due 90 days or more as to principal and interest and no troubled debt
restructurings as defined by Statement of Financial Accounting Standards No. 15.
Nonaccrual loans for which interest has been reduced totaled approximately $2.6
million, $1.9 million and $2.5 million at December 31, 2002, 2001 and 2000,
respectively. For the year ended December 31, 2002, interest income that would
have been recorded under the original terms of nonaccrual loans at December 31,
2002 and interest income actually recognized is summarized below (in thousands):
Interest income that would have been recorded $ 202
Interest income recognized (96)
----
Interest income foregone $ 106
====
Classified Assets. Federal regulations and the Bank's policy require the
classification of loans and other assets, such as debt and equity securities,
considered to be of lesser quality as "substandard", "doubtful" or "loss"
assets. An asset is considered "substandard" if it is inadequately protected by
the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility" that the institution will sustain "some loss" if the
deficiencies are not corrected. Assets classified as "doubtful" have all of the
weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full", on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. In
addition, the Bank's policies require that assets which do not currently expose
the insured institution to sufficient risk to warrant classification as
substandard but possess other weaknesses are designated "special mention" by
management.
11
If an asset is classified, the estimated fair value of the asset is determined
and if that value is less than the then carrying value of the asset, the
difference is established as a specific reserve. If an asset is classified as
loss, the amount of the asset classified as loss is reserved. General reserves
or general valuation allowances represent loss allowances which have been
established to recognize the inherent risk associated with lending activities
but, unlike specific reserves, are not allocated to particular assets.
The following table sets forth information concerning the number and dollar
amount of loans and foreclosed assets classified as "special mention" or
"substandard" at the dates indicated. No loans or foreclosed assets were
classified "doubtful" or "loss" at those dates.
Special Mention Substandard
--------------- -----------
Number Amount Number Amount
------ ------ ------ ------
($ in thousands)
At December 31, 2002:
Loans 20 $5,659 54 $3,076
Foreclosed assets:
One-to-four-family properties -- -- 5 422
Other -- -- 18 204
------ ------ ------ ------
Total 20 $5,659 77 $3,702
====== ====== ====== ======
At December 31, 2001:
Loans 7 2,182 48 2,722
Foreclosed assets:
One-to-four-family properties -- -- 2 139
Other -- -- 5 234
------ ------ ------ ------
Total 7 $2,182 55 $3,095
====== ====== ====== ======
Allowance for Loan Losses. The Bank's allowance for loan losses is established
and maintained through a provision for loan losses based on management's
evaluation of the risk inherent in its loan portfolio and the condition of the
local economy in the Bank's market area. Such evaluation, which includes a
review of all loans on which full collectibility may not be reasonably assured,
considers, among other matters, the estimated fair value of the underlying
collateral, economic and regulatory conditions, and other factors that warrant
recognition in providing for an adequate loan loss allowance. Although
management believes it uses the best information available to make
determinations with respect to the Bank's allowance for loan losses, future
adjustments may be necessary if economic conditions vary substantially from the
economic conditions in the assumptions used in making the initial determinations
or if other circumstances change.
12
The following table sets forth the Bank's allowance for loan losses at the dates
indicated, the provisions made and the charge-offs and recoveries effected
during the years indicated.
At or For the Year Ended December 31,
--------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
($ in thousands)
Balance at beginning of year $ 1,684 2,283 2,811 3,552 4,289
Provision for loan losses 682 719 880 1,115 1,845
Charge-offs:
One-to-four-family (80) -- (58) (48) (93)
Construction and land -- (44) -- -- --
Multi-family -- -- -- -- --
Commercial real estate -- -- -- (90) (150)
Commercial and consumer loans (6) (166) (99) (258) (753)
------- ------- ------- ------- -------
Total charge-offs by category (86) (210) (157) (396) (996)
Recoveries 3 19 18 18 43
------- ------- ------- ------- -------
Balance at end of year $ 2,283 2,811 3,552 4,289 5,181
======= ======= ======= ======= =======
The following table sets forth the ratios of the Bank's charge-offs and
allowances for losses for the years indicated.
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Net charge-offs during the year
as a percentage of average loans
outstanding during the year .03% .04% .03% .06% .13%
Allowance for loan losses as a
percentage of gross loans receivable
at end of year .57% .54% .56% .61% .68%
Allowance for loan losses as a
percentage of total nonperforming
assets at end of year 281.85% 101.77% 127.49% 187.62% 161.00%
Allowance for loan losses as a
percentage of nonperforming loans
at end of year 514.19% 119.01% 141.51% 224.20% 199.88%
13
The following table sets forth the Bank's specific and general allowance for
possible loan losses by type of loan for the years indicated.
At December 31,
----------------------------------
1998 1999 2000 2001 2002
-----------------------------------------------------------------------------------------------
% of % of % of % of % of
Loans to Loans to Loans to Loans to Loans to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
($ in thousands)
At end of year allocated to:
One-to-four-family $ 575 70.59% $ 528 68.28% $ 609 64.97% $ 752 58.77% $ 840 52.23%
Construction and land 338 2.91 408 2.29 423 2.06 595 3.26 693 4.07
Multi-family 295 2.04 301 2.58 488 2.79 353 2.88 376 3.01
Commercial real estate 565 11.01 750 11.76 998 12.65 1,357 15.46 1,781 18.61
Consumer loans 304 10.83 447 12.34 708 15.20 895 16.96 1,057 18.26
Commercial loans 206 2.62 377 2.75 326 2.33 337 2.67 434 3.82
------ ------ ------ ------ ------ ------ ------ ------- ------ ------
Total $2,283 100.00% $2,811 100.00% $3,552 100.00% $4,289 100.00% $5,181 100.00%
====== ====== ====== ====== ====== ====== ====== ======= ====== ======
14
Investment Activities
The investment policy of the Bank, which is established by the Board of
Directors and implemented by the Chief Executive Officer who is designated as
the Investment Officer, is designed primarily to provide and maintain liquidity,
to generate a favorable return on investments without incurring undue interest
rate and credit risk, and to complement the Bank's lending activities. In
establishing its investment strategies, the Bank considers its business and
growth plans, the economic environment, the types of securities to be held and
other factors. Federally chartered savings institutions have the authority to
invest in various types of assets, including U.S. Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers acceptances, repurchase
agreements, loans on federal funds, and, subject to certain limits, commercial
paper and mutual funds.
The Company follows Statement of Financial Accounting Standards No. 115. That
statement requires investment and mortgage-backed securities that the Company
has the positive intent and ability to hold to maturity to be classified as
held-to-maturity securities and reported at amortized cost. Securities that are
held principally for selling in the near term are to be classified as trading
securities and reported at fair value, with unrealized gains and losses included
in earnings. Securities not classified as either held-to-maturity securities or
trading securities are to be classified as available-for-sale securities and
reported at fair value, with unrealized gains and losses excluded from earnings
and reported in a separate component of stockholders' equity. At December 31,
2002, all securities have been classified as available for sale by management.
Mortgage-Backed Securities
The Company's mortgage-backed securities consist of securities issued by the
Government National Mortgage Association ("GNMA"), the Federal Home Loan
Mortgage Corporation ("FHLMC") or the Federal National Mortgage Association
("FNMA"). These mortgage-backed securities totaled $22.3 million or 28.8% of
total securities.
The following table sets forth mortgage-backed security purchases, sales,
amortization and principal repayments during the periods indicated:
Year Ended December 31,
2000 2001 2002
---- ---- ----
(In thousands)
At beginning of year $ 17,490 14,394 10,943
Purchases 1,005 500 17,891
Amortization and principal repayments (4,096) (4,009) (6,665)
Change in unrealized gain (5) 58 127
-------- -------- --------
At end of year $ 14,394 10,943 22,296
======== ======== ========
Investment Securities
At December 31, 2002, the Bank held $55.0 million in investment securities
consisting of $37.6 million in U.S. Government and agency securities, $9.4
million in mutual funds and $8.0 million in other investment securities. In
addition, the Bank holds $49.2 million in interest-earning deposits and $7.7
million of FHLB of Atlanta stock.
15
The following table sets forth certain information regarding the amortized cost
and market values of the Bank's interest-earning deposits, FHLB stock and
investment securities at the dates indicated:
At December 31,
----------------------------------------------------------------------
2000 2001 2002
---- ---- ----
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
(In thousands)
Interest-earning deposits $ 14,445 14,445 30,183 30,183 49,237 49,237
====== ====== ====== ====== ====== ======
FHLB stock $ 6,150 6,150 7,700 7,700 7,700 7,700
====== ====== ====== ====== ======= =======
Investment securities-
Available-for-sale:
U.S. Government and
agency securities 17,849 17,968 32,670 33,241 36,801 37,649
Other investment securities 1,365 1,376 6,268 6,276 7,990 8,005
Investment in mutual funds 9,130 8,979 9,125 9,043 9,433 9,374
------ ------- ------ ------ ------- ------
Total available-for-sale $ 28,344 28,323 48,063 48,560 54,224 55,028
====== ====== ====== ====== ====== ======
16
The following table sets forth information concerning the amortized cost and
weighted average yields by maturity on investment securities and FHLB stock at
December 31, 2002.
Due After Due After
One Through Five Through Due After
Due Within One Year Five Years 10 Years 10 Years
------------------- ---------- ------------ ----------
Annualized Annualized Annualized Annualized
Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
---- ----- ---- ----- ---- ----- ---- -----
($ in thousands)
FHLB stock (no
defined maturity) $ 7,700 5.00% $ -- --% $-- --% $ -- --%
===== ====
Investment securities:
U.S. Government
and agency
obligations 12,531 4.46 24,270 4.49 -- -- -- --
Other investment
securities -- -- -- -- -- 7,990 3.37
Mutual funds (no
defined maturity) 9,433 2.60 -- -- -- -- -- --
----- ------ ----
Total investment
securities $21,964 3.66% $24,270 4.49% $-- --% $ 7,990 3.37%
====== ==== ====== ==== == == ===== ====
Total
-----------
Approximate
Amortized Market
Cost Value
---- -----
FHLB stock (no
defined maturity) $ 7,700 $ 7,700
===== =====
Investment securities:
U.S. Government
and agency
obligations 36,801 37,649
Other investment
securities 7,990 8,005
Mutual funds (no
defined maturity) 9,433 9,374
----- ------
Total investment
securities $54,224 $55,028
====== ======
17
Sources of Funds
General. Repayments and maturities of mortgage-backed and investment securities,
loan repayments, deposits and cash flows generated from operations are the
primary sources of the Bank's funds for use in lending, investing and for other
general purposes.
Deposits. The Bank offers a variety of deposit accounts having a range of
interest rates and terms. The Bank's deposits consist of regular savings,
non-interest-bearing checking, NOW checking, money market and certificate
accounts. Of the deposit accounts at December 31, 2002, $53.0 million or 7.9%
consist of individual retirement accounts ("IRAs").
The Bank seeks to retain core deposits consisting of passbook and statement
savings, money market, noninterest-bearing checking, and NOW accounts, which
contribute to a low cost of funds. Such core deposits represented 22.9%, 25.7%
and 27.3% of total deposits at December 31, 2000, 2001 and 2002, respectively.
The following table shows the distribution of the Bank's deposits by type at the
dates indicated and the weighted-average nominal interest rates on each category
of deposits presented at December 31, 2002 ($ in thousands).
At December 31,
-------------------------------------------------------------------------------------------
2000 2001 2002
---- ---- ----
Percent Percent Percent Weighted-
of Total of Total of Total Average
Amount Deposits Amount Deposits Amount Deposits Rate
------ -------- ------ -------- ------ -------- ----
Demand accounts:
Noninterest-bearing
checking $ 13,335 2.57% $ 14,334 2.45% $ 18,867 2.82% - %
NOW and money-
market accounts 86,509 16.67 111,961 19.13 137,858 20.64 .85
Passbook and
statement savings 19,143 3.69 24,093 4.12 25,403 3.80 .82
------- ------- ------- ------- -------- ------ ------
Total 118,987 22.93 150,388 25.70 182,128 27.26 .76
------- ------ ------- ------ ------- ------ ------
Certificate accounts:
Custom 19,141 3.69 38,854 6.64 31,600 4.73 1.61
91 day 220 .04 279 .05 209 .03 1.39
182 day 6,630 1.28 10,085 1.72 10,599 1.59 1.90
7 months 50 .01 325 .06 - - -
9 months 8,631 1.66 17,974 3.07 11,042 1.65 2.14
10 months 4,772 .92 - - - - -
12 months 32,190 6.21 55,356 9.46 62,564 9.36 2.55
13 months 61 .01 88,670 15.15 18,078 2.71 3.00
14 months 137,618 26.52 18,835 3.22 - - -
15 months - - - - 34,654 5.19 2.73
18 months 12,647 2.44 27,374 4.68 26,363 3.95 3.76
20 months 24 .00 26 .00 - - -
21 months 24,432 4.71 94,807 16.20 50,623 7.58 4.30
22 months 101,945 19.65 4,721 .81 - - -
24 months 15,784 3.04 25,414 4.34 112,025 16.77 3.88
25 months 17,609 3.39 18,193 3.11 - - -
30 months 8,869 1.71 21,471 3.67 19,202 2.87 4.55
36 months 100 .02 2,615 .45 41,388 6.20 4.08
54 months - - - - 51,537 7.71 4.51
60 months 9,175 1.77 9,741 1.67 16,046 2.40 4.97
------- ------- -------- ------- -------- ------- ----
Total 399,898 77.07 434,740 74.30 485,930 72.74 3.54
------- ------ ------- ------ ------- ------ -----
Total deposits $ 518,885 100.00% $ 585,128 100.00% $ 668,058 100.00% 2.78%
======= ====== ======= ====== ======= ====== ====
18
The following table presents the deposit activity of the Bank for the years
indicated.
Year Ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
(In thousands)
Deposits $ 1,898,638 2,394,602 3,161,518
Withdrawals (1,826,173) (2,353,541) (3,094,131)
--------- --------- ---------
Deposits in excess of withdrawals 72,465 41,061 67,387
Interest credited on deposits 17,146 25,182 15,543
---------- ---------- ---------
Total increase in deposits $ 89,611 66,243 82,930
========== ========== =========
The following table presents the amount of time deposit accounts in amounts of
$100,000 or more at December 31, 2002 maturing as follows (in thousands):
Maturity Period
---------------
One month through three months $ 25,177
Over three through six months 11,342
Over six through 12 months 29,403
Over 12 months 74,656
--------
Total $ 140,578
========
19
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at December 31, 2000, 2001 and 2002 and the
periods to maturity of the certificate accounts outstanding at December 31,
2002.
At December 31, Period to Maturity from December 31, 2002
--------------- -----------------------------------------
--------------------------------------Within 1 to 2 to 3 to 4 to
2000 2001 2002 1 Year 2 Years 3 Years 4 Years 5 Years Total
---- ---- ---- ------ ------- ------- ------- ------- -----
(In thousands)
2.00% or less $ - - 48,547 46,437 2,110 - - - 48,547
2.01% to 3.00% - 48,916 112,037 78,015 31,833 2,189 - - 112,037
3.01% to 4.00% - 92,048 122,814 64,169 33,985 17,467 256 6,937 122,814
4.01% to 5.00% 24,433 141,637 171,116 44,837 57,323 22,618 13,461 32,877 171,116
5.01% to 6.00% 128,393 68,394 30,092 17,950 2,558 974 7,075 1,535 30,092
6.01% to 8.00% 247,072 83,745 1,324 149 - 1,095 80 - 1,324
------- ------- ------- ------- ------- ------- ------ ------- -------
$ 399,898 434,740 485,930 251,557 127,809 44,343 20,872 41,349 485,930
======= ======= ======= ======= ======= ====== ====== ====== ========
20
Borrowings
Guaranteed Preferred Beneficial Interest in Junior Subordinated Debentures. On
September 26, 2002, the Trust sold adjustable-rate Trust Preferred Securities
due September 26, 2032 in the aggregate principal amount of $5,000,000 (the
"Capital Securities") in a pooled trust preferred securities offering. The
interest rate on the Capital Securities adjusts quarterly, to a rate equal to
the then current three-month London Interchange Bank Offering Rate ("LIBOR"),
plus 340 basis points. In addition, the Holding Company contributed capital of
$155,000 to the Trust for the purchase of the common securities of the Trust.
The proceeds from these sales were paid to the Holding Company in exchange for
$5,155,000 of its adjustable-rate Junior Subordinated Debentures (the
"Debentures") due September 26, 2032. The Debentures have the same terms as the
Capital Securities. The Holding Company then invested $3,000,000 as a capital
contribution in the Bank. The sole asset of the Trust, the obligor on the
Capital Securities, is the Debentures.
The Holding Company has guaranteed the Trust's payment of distributions on,
payments on any redemptions of, and any liquidation distribution with respect
to, the Capital Securities. Cash distributions on both the Capital Securities
and the Debentures are payable quarterly in arrears on March 26, June 26,
September 26 and December 26 of each year. Issuance costs of approximately
$169,000 associated with the Capital Securities have been capitalized by the
Holding Company and are being amortized over the life of the securities.
Capital
Securities Outstanding at
December 31,
------------------- Prepayment
Name 2002 2001 Option Date
---- ---- ---- -----------
(In thousands)
FFLC Statutory Trust I $ 5,000 - September 26, 2007
===== =====
The Capital Securities are subject to mandatory redemption (i) in whole, but not
in part, upon repayment of the Debentures at stated maturity or, at the option
of the Holding Company, their earlier redemption in whole upon the occurrence of
certain changes in the tax treatment or capital treatment of the Capital
Securities, or a change in the law such that the Trust would be considered an
investment company and (ii) in whole or in part at any time on or after
September 26, 2007 contemporaneously with the optional redemption by the Holding
Company of the Debentures in whole or in part. The Debentures are redeemable
prior to maturity at the option of the Holding Company (i) on or after September
26, 2007, in whole at any time or in part from time to time, or (ii) in whole,
but not in part, at any time within 90 days following the occurrence and
continuation of certain changes in the tax treatment or capital treatment of the
Capital Securities, or a change in law such that the Trust would be considered
an Investment Company, required to be registered under the Investment Company
Act of 1940.
The Company has entered into a five year interest rate swap agreement that
effectively converted the floating interest rate of these Capital Securities
into a fixed interest rate of 6.85%, thus reducing the impact of interest rate
changes on future interest expense for the five year period. In accordance with
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities," this interest rate swap qualifies as a cash
flow hedge. The fair value of this interest rate swap is recorded as an asset or
liability on the consolidated balance sheet with an offsetting entry recorded in
other comprehensive income, net of the income tax effect. At December 31, 2002,
the unrealized loss of the derivative instrument was $120,000 ($75,000 net of
tax).
21
Federal Home Loan Bank Advances and Other Borrowings
The Bank is authorized to obtain advances from the Federal Home Loan Bank
("FHLB") of Atlanta which are generally collateralized by a blanket lien against
the Bank's mortgage portfolio. Such advances may be made pursuant to several
different credit programs, each of which has its own interest rate and range of
maturities. The maximum amount that the FHLB of Atlanta will advance to member
institutions, including the Bank, for purposes other than meeting withdrawals,
fluctuates from time to time in accordance with the policies of the Federal
Housing Finance Board and the FHLB of Atlanta. At December 31, 2002, the Bank
had $149.0 million in FHLB advances outstanding.
The Bank also borrows under retail repurchase agreements with customers of the
Bank. These agreements are accounted for as borrowings and are secured by
securities owned by the Bank.
The following table sets forth certain information relating to the Bank's
borrowings at the dates indicated:
At or For the Year
Ended December 31,
------------------------------------
2000 2001 2002
---- ---- ----
($ in thousands)
FHLB advances:
Average balance outstanding $ 104,647 $ 136,041 $ 160,235
======= ======= =======
Maximum amount outstanding at any month end during the year $ 123,000 $ 154,000 $ 164,000
======= ======= =======
Balance outstanding at end of year $ 123,000 $ 154,000 $ 149,000
======= ======= =======
Weighted average interest rate during the year 6.21% 6.07% 5.62%
======= ====== =======
Weighted average interest rate at end of year 6.18% 5.73% 5.40%
======= ====== =======
Other borrowed funds:
Average balance outstanding $ 5,729 $ 11,842 $ 16,915
======== ======= =======
Maximum amount outstanding at any month end during the year $ 8,013 $ 18,427 $ 24,216
======== ======= =======
Balance outstanding at end of year $ 6,376 $ 13,327 $ 19,303
======= ======= =======
Weighted average interest rate during the year 5.11% 3.91% 2.12%
======== ======= =======
Weighted average interest rate at end of year 5,25% 2.15% 5.08%
======== ======= =======
Total borrowings:
Average balance outstanding $ 110,376 $ 147,883 $ 177,150
======= ======= =======
Maximum amount outstanding at any month end during the year $ 131,013 $ 172,427 $ 188,216
======= ======= =======
Balance outstanding at end of year $ 129,376 $ 167,327 $ 168,303
======= ======= =======
Weighted average interest rate during the year 6.15% 5.90% 5.29%
======= ======= =======
Weighted average interest rate at end of year 6.13% 5.44% 5.38%
======= ======= =======
Subsidiary Activities
The Bank has a wholly-owned subsidiary, Lake County Service Corporation
("LCSC"), originally formed to develop a 100-lot subdivision. LCSC sold the last
remaining lots during 2001. LCSC's primary activity is now investment services
for the Bank's customers. During the second quarter of 2001, the Bank introduced
an Investment Services Program through a joint venture with T.H.E. Financial
Group, Ltd., an independent securities broker-dealer firm and a member of the
National Association of Securities Dealers and the Securities Investor
Protection Corporation. Through this program, the Bank offers mutual funds,
annuities, discount brokerage and financial planing services to bank customers.
The services are offered through LCSC, which receives monthly fees on sales made
through this program. During 2002 and 2001, LCSC recognized fees of $295,000 and
$114,000 and expenses of $227,000 and $123,000 (including $37,000 of initial
start-up costs in 2001), respectively from this program.
22
During 2001, First Alliance was formed to facilitate the sale of title
insurance. This subsidiary recognized fees of $26,000 and expenses of $12,000
during 2002. They did not have a material amount of activity during 2001.
During 2002, the Trust was formed solely to issue trust preferred securities
(see Borrowings).
Personnel
As of February 13, 2003, the Bank had 234 full-time employees and 14 part-time
employees. The employees are not represented by a collective bargaining unit and
the Bank considers its relationship with its employees to be good.
REGULATION AND SUPERVISION
General
As a savings and loan holding company, the Company is required by federal law to
file reports with, and otherwise comply with, the rules and regulations of the
OTS. The Bank is subject to extensive regulation, examination and supervision by
the OTS, as its primary federal regulator, and the FDIC, as the deposit insurer.
The Bank is a member of the Federal Home Loan Bank System and, with respect to
deposit insurance, of the Savings Association Insurance Fund ("SAIF") managed by
the FDIC. The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition in addition to obtaining regulatory approvals
prior to entering into certain transactions such as mergers with, or
acquisitions of, other savings institutions. The OTS and/or the FDIC conduct
periodic examinations to test the Bank's safety and soundness and compliance
with various regulatory requirements. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the insurance fund and
depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such regulatory requirements and
policies, whether by the OTS, the FDIC or the Congress, could have a material
adverse impact on the Company, the Bank and their operations. Certain of the
regulatory requirements applicable to the Bank and to the Company are referred
to below or elsewhere herein. The description of statutory provisions and
regulations applicable to savings institutions and their holding companies set
forth in this Form 10-K does not purport to be a complete description of such
statutes and regulations and their effects on the Bank and the Company.
Holding Company Regulation
The Company is a nondiversified unitary savings and loan holding company within
the meaning of federal law. Under prior law, a unitary savings and loan holding
company, such as the Company was not generally restricted as to the types of
business activities in which it may engage, provided that the Bank continued to
be a qualified thrift lender. See "Federal Savings Institution Regulation - QTL
Test." The Gramm-Leach-Bliley Act of 1999 provides that no company may acquire
control of a savings association after May 4, 1999 unless it engages only in the
financial activities permitted for financial holding companies under the law or
for multiple savings and loan holding companies as described below. Further, the
Gramm-Leach-Bliley Act specifies that existing savings and loan holding
companies may only engage in such activities. The Gramm-Leach-Bliley Act,
however, grandfathered the unrestricted authority for activities with respect to
unitary savings and loan holding companies existing prior to May 4, 1999, such
as the Company, so long as the Bank continues to comply with the QTL Test. Upon
any non-supervisory acquisition by the Company of another savings institution or
Bank that meets the
23
qualified thrift lender test and is deemed to be a savings institution by the
OTS, the Company would become a multiple savings and loan holding company (if
the acquired institution is held as a separate subsidiary) and would generally
be limited to activities permissible for bank holding companies under Section
4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the
OTS, and certain activities authorized by OTS regulation.
A savings and loan holding company is prohibited from, directly or indirectly,
acquiring more than 5% of the voting stock of another savings institution or
savings and loan holding company, without prior written approval of the OTS and
from acquiring or retaining control of a depository institution that is not
insured by the FDIC. In evaluating applications by holding companies to acquire
savings institutions, the OTS considers the financial and managerial resources
and future prospects of the company and institution involved, the effect of the
acquisition on the risk to the deposit insurance funds, the convenience and
needs of the community and competitive factors.
The OTS may not approve any acquisition that would result in a multiple savings
and loan holding company controlling savings institutions in more than one
state, subject to two exceptions: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies and (ii) the acquisition of a
savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
Although savings and loan holding companies are not subject to specific capital
requirements or specific restrictions on the payment of dividends or other
capital distributions, federal regulations do prescribe such restrictions on
subsidiary savings institutions as described below. The Bank must notify the OTS
30 days before declaring any dividend to the Company. In addition, the financial
impact of a holding company on its subsidiary institution is a matter that is
evaluated by the OTS and the agency has authority to order cessation of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are governed
by federal law and regulations. These laws and regulations delineate the nature
and extent of the activities in which federal associations may engage. In
particular, many types of lending authority for federal association, e.g.,
commercial, non-residential real property loans and consumer loans, are limited
to a specified percentage of the institution's capital or assets.
Capital Requirements. The OTS capital regulations require savings institutions
to meet three minimum capital standards: a 1.5% tangible capital ratio, a 4%
leverage ratio (3% for institutions receiving the highest rating on the CAMELS
rating system) and an 8% risk-based capital ratio. In addition, the prompt
corrective action standards discussed below also establish, in effect, a minimum
2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving
the highest rating on the CAMEL financial institution rating system), and,
together with the risk-based capital standard itself, a 4% Tier 1 risk-based
capital standard. The OTS regulations also require that, in meeting the
tangible, leverage and risk-based capital standards, institutions must generally
deduct investments in and loans to subsidiaries engaged in activities as
principal that are not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the
24
OTS capital regulation based on the risks believed inherent in the type of
asset. Core (Tier 1) capital is defined as common stockholders' equity
(including retained earnings), certain noncumulative perpetual preferred stock
and related surplus, and minority interests in equity accounts of consolidated
subsidiaries, less intangibles other than certain mortgage servicing rights and
credit card relationships.
The components of supplementary capital currently include cumulative preferred
stock, long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock, the allowance for loan and
lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45%
of unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
The capital regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements. For the present time, the OTS has deferred implementation
of the interest rate risk capital charge. At December 31, 2002, the Bank met
each of its capital requirements.
The following table presents the Bank's capital position at December 31, 2002.
Capital Ratios
--------------
Actual Required Excess Actual Required
Capital Capital Amount Percent Percent
------- ------- ------ ------- -------
($ in thousands)
Tangible $ 71,139 13,719 57,420 7.78% 1.50%
Core (Leverage) $ 71,139 27,439 43,700 7.78 3.00
Risk-based $ 75,645 47,794 27,851 12.66 8.00
Prompt Corrective Regulatory Action. The OTS is required to take certain
supervisory actions against undercapitalized institutions, the severity of which
depends upon the institution's degree of undercapitalization. Generally, a
savings institution that has a ratio of total capital to risk weighted assets of
less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less
than 4% or a ratio of core capital to total assets of less than 4% (3% or less
for institutions with the highest examination rating) is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio
that is less than 3% is considered to be "significantly undercapitalized" and a
savings institution that has a tangible capital to assets ratio equal to or less
than 2% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the OTS is required to appoint a receiver or conservator for an
institution that is "critically undercapitalized." The regulation also provides
that a capital restoration plan must be filed with the OTS within 45 days of the
date a savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
Insurance of Deposit Accounts. The Bank is a member of the SAIF. The FDIC
maintains a risk-based assessment system by which institutions are assigned to
one of three categories based on their capitalization and one of three
subcategories based on examination ratings and other supervisory information. An
institution's assessment rate depends upon the categories to which it is
assigned.
25
Assessment rates for SAIF member institutions are determined semiannually by the
FDIC and currently range from zero basis points for the healthiest institutions
to 27 basis points for the riskiest.
In addition to the assessment for deposit insurance, institutions are required
to make payments on bonds issued in the late 1980s by the Financing Corporation
("FICO") to recapitalize the predecessor to the SAIF. By law, there has been
equal sharing of FICO payments between SAIF and BIF members since January 1,
2000.
The Bank did not pay an assessment for deposit insurance in 2002, however, its
payments toward the FICO bonds amounted to approximately $104,000. The FDIC has
authority to increase insurance assessments. A significant increase in SAIF
insurance premiums would likely have an adverse effect on the operating expenses
and results of operations of the Bank. Management cannot predict what insurance
assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the OTS. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
Loans to One Borrower. Federal law provides that savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks. A savings institution may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if secured by specified readily-marketable collateral. At December
31, 2002, the Bank's limit on loans to one borrower was $11.3 million and the
Bank's largest aggregate outstanding loans and extensions of credit to one
borrower was $9.6 million.
QTL Test. The HOLA requires savings institutions to meet a qualified thrift
lender test. Under the test, a savings association is required to either qualify
as a "domestic building and loan association" under the Internal Revenue Code or
maintain at least 65% of its "portfolio assets" (total assets less: (i)
specified liquid assets up to 20% of total assets; (ii) intangibles, including
goodwill; and (iii) the value of property used to conduct business) in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed securities) in at least 9 months
out of each 12 month period.
A savings institution that fails the qualified thrift lender test is subject to
certain operating restrictions and may be required to convert to a bank charter.
As of December 31, 2002, the Bank maintained 77% of its portfolio assets in
qualified thrift investments and, therefore, met the qualified thrift lender
test. Recent legislation has expanded the extent to which education loans,
credit card loans and small business loans may be considered "qualified thrift
investments."
Limitation on Capital Distributions. OTS regulations impose limitations upon all
capital distributions by a savings institution, including cash dividends,
payments to repurchase its shares and payments to shareholders of another
institution in a cash-out merger. Under a new regulation effective April 1,
1999, an application to and the prior approval of the OTS is required prior to
any capital distribution if the institution does not meet the criteria for
"expedited treatment" of applications under OTS regulations (i.e., generally,
examination ratings in the two top categories), the total capital distributions
for the calendar year exceed net income for that year plus the amount of
retained net income for the preceding two years, the institution would be
undercapitalized following the distribution or the distribution would otherwise
be contrary to a statute, regulation or agreement with OTS. If an application is
not required,
26
the institution must still provide prior notice to OTS of the capital
distribution if, like the Bank, it is a subsidiary of a holding company. In the
event the Bank's capital fell below its regulatory requirements or the OTS
notified it that it was in need of more than normal supervision, the Bank's
ability to make capital distributions could be restricted. In addition, the OTS
could prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice.
Assessments. Savings institutions are required to pay assessments to the OTS to
fund the agency's operations. The general assessments, paid on a semi-annual
basis, are computed upon the savings institution's total assets, including
consolidated subsidiaries, as reported in the Bank's latest quarterly thrift
financial report. The Bank was assessed approximately $164,000 for the fiscal
year ended December 31, 2002.
Transactions with Related Parties. The Bank's authority to engage in
transactions with "affiliates" (e.g., any company that controls or is under
common control with an institution, including the Company and its non-savings
institution subsidiaries) is limited by federal law. The aggregate amount of
covered transactions with any individual affiliate is limited to 10% of the
capital and surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in federal law. The
purchase of low quality assets from affiliates is generally prohibited. The
transactions with affiliates must be on terms and under circumstances, that are
at least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies. In addition, savings
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies and no savings
institution may purchase the securities of any affiliate other than a
subsidiary.
27
The recently enacted Sarbanes-Oxley Act of 2002 generally prohibits loans by the
Company to its executive officers and directors. However, that Act contains a
specific exception for loans by the Bank to its executive officers and directors
in compliance with federal banking laws. The Bank's authority to extend credit
to executive officers, directors and 10% shareholders ("insiders"), as well as
entities such persons control, is also governed by federal law. Such loans are
required to be made on terms substantially the same as those offered to
unaffiliated individuals and not involve more than the normal risk of repayment.
Recent legislation created an exception for loans made pursuant to a benefit or
compensation program that is widely available to all employees of the
institution and does not give preference to insiders over other employees. The
law limits both the individual and aggregate amount of loans the Bank may make
to insiders based, in part, on the Bank's capital position and requires certain
board approval procedures to be followed.
Enforcement. The OTS has primary enforcement responsibility over savings
institutions and has the authority to bring actions against the institution and
all institution-affiliated parties, including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers and/or directors to institution of
receivership, conservatorship or termination of deposit insurance. Civil
penalties cover a wide range of violations and can amount to $25,000 per day, or
even $1 million per day in especially egregious cases. The FDIC has the
authority to recommend to the Director of the OTS that enforcement action to be
taken with respect to a particular savings institution. If action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances. Federal law also establishes criminal penalties for certain
violations.
Standards for Safety and Soundness. The federal banking agencies have adopted
Interagency Guidelines prescribing Standards for Safety and Soundness. The
guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. If the OTS determines that a savings
institution fails to meet any standard prescribed by the guidelines, the OTS may
require the institution to submit an acceptable plan to achieve compliance with
the standard.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank ("FHLB") System, which
consists of 12 regional FHLBs. The FHLB provides a central credit facility
primarily for member institutions. In order to borrow from the FHLB, the Bank is
required to purchase shares of the FHLB's nonmarketable equity securities at
par. The Bank, as a member of the FHLB, is required to acquire and hold shares
of capital stock in that FHLB in an amount at least equal to 1.0% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB, whichever is greater. The Bank was in compliance with this
requirement with an investment in FHLB stock at December 31, 2002 of $7.7
million. For the year ended December 31, 2002, the dividend yield on FHLB stock
was 5.2%.
The FHLBs are required to provide funds for the resolution of insolvent thrifts
in the late 1980s and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. If dividends were reduced, or interest on future FHLB
advances increased, the Bank's net interest income would likely also be reduced.
Recent legislation has changed the structure of the FHLBs funding obligations
for insolvent thrifts, revised the capital structure of the FHLBs and
implemented entirely voluntary membership for FHLBs. Management cannot predict
the effect that these changes may have with respect to its FHLB membership.
28
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to maintain
non-interest earning reserves against their transaction accounts (primarily NOW
and regular checking accounts). The regulations generally provide that reserves
be maintained against aggregate transaction accounts as follows: for accounts
aggregating $42.1 million or less (subject to adjustment by the Federal Reserve
Board) the reserve requirement is 3%; and for accounts aggregating greater than
$42.1 million, the reserve requirement is $1.083 million plus 10% (subject to
adjustment by the Federal Reserve Board between 8% and 14%) against that portion
of total transaction accounts in excess of $42.1 million. The first $6.0 million
of otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) are exempted from the reserve requirements. At December 31, 2002, the
Bank complied with the foregoing requirements.
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), as implemented by Office of Thrift
Supervision regulations, a savings association has a continuing and affirmative
obligation consistent with its safe and sound operation to help meet the credit
needs of its entire community, including low and moderate income neighborhoods.
The CRA does not establish specific lending requirements or programs for
financial institutions nor does it limit an institution's discretion to develop
the types of products and services that it believes are best suited to its
particular community, consistent with the CRA. The CRA requires the Office of
Thrift Supervision, in connection with its examination of an institution, to
assess the institution's record of meeting the credit needs of its community and
to take such record into account in its evaluation of applications by such
institution. The CRA requires public disclosure of an institution's CRA rating.
The latest CRA rating of the Bank received from the Office of Thrift Supervision
was "Satisfactory."
29
Federal and State Taxation
General. The Company and the Bank report their income on a consolidated basis
using the accrual method of accounting, and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company. The Bank was last audited by the IRS for the year ended
December 31, 1996. For its 2002 taxable year, the Bank is subject to a maximum
federal income tax rate of 35%.
Bad Debt Reserves. For fiscal years beginning prior to December 31, 1995, thrift
institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code of 1986 (the "Code") were permitted to
use certain favorable provisions to calculate their deductions from taxable
income for annual additions to their bad debt reserve. A reserve could be
established for bad debts on qualifying real property loans (generally secured
by interests in real property improved or to be improved) under (i) the
Percentage of Taxable Income Method (the "PTI Method") or (ii) the Experience
Method. The reserve for nonqualifying loans was computed using the Experience
Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), which was
enacted on August 20, 1996, requires savings institutions to recapture (i.e.,
take into income) certain portions of their accumulated bad debt reserves. The
1996 Act repeals the reserve method of accounting for bad debts effective for
tax years beginning after 1995. Thrift institutions that would be treated as
small banks are allowed to utilize the Experience Method applicable to such
institutions, while thrift institutions that are treated as large banks (those
generally exceeding $500 million in assets) are required to use only the
specific charge-off method. Thus, the PTI Method of accounting for bad debts is
no longer available for any financial institution.
A thrift institution required to change its method of computing reserves for bad
debts will treat such change as a change in method of accounting, initiated by
the taxpayer, and having been made with the consent of the IRS. Any Section
481(a) adjustment required to be taken into income with respect to such change
generally will be taken into income ratably over a six-taxable year period,
beginning with the first taxable year beginning after 1995, subject to the
residential loan requirement.
Under the residential loan requirement provision, the recapture required by the
1996 Act is suspended for each of two successive taxable years, beginning with
1996, in which the Bank originates a minimum of certain residential loans based
upon the average of the principal amounts of such loans made by the Bank during
its six taxable years preceding its current taxable year. Under the 1996 Act,
for its current and future taxable years, the Bank is permitted to make
additions to its tax bad debt reserves. In addition, the Bank is required to
recapture (i.e., take into income) over a six year period the excess of the
balance of its tax bad debt reserves as of December 31, 1995 over the balance of
such reserves as of December 31, 1987. At December 31, 2002, the Bank had
approximately $111,000 of deferred tax liabilities recorded for the recapture of
its bad debt reserves.
Distributions. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) to the extent thereof, and then
from the Bank's supplemental reserve for losses on loans, to the extent thereof,
and an amount based on the amount distributed (but not in excess of the amount
of such reserves) will be included in the Bank's income. Non-dividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete
liquidation. Dividends paid out of the Bank's current or accumulated earnings
and profits will not be so included in the Bank's income.
30
The amount of additional taxable income triggered by a non-dividend is an amount
that, when reduced by the tax attributable to the income, is equal to the amount
of the distribution. Thus, if the Bank makes a non-dividend distribution to the
Company, approximately one and one-half times the amount of such distribution
(but not in excess of the amount of such reserves) would be includable in income
for federal income tax purposes, assuming a 35% federal corporate income tax
rate. The Bank does not intend to pay dividends that would result in a recapture
of any portion of its bad debt reserves.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative minimum
taxable income ("AMTI") at a rate of 20%. For fiscal years beginning prior to
January 1, 1996, the excess of the bad debt reserve deduction using the
percentage of taxable income method over the deduction that would have been
allowable under the experience method is treated as a preference item for
purposes of computing the AMTI. Only 90% of AMTI can be offset by net operating
loss carryovers. The adjustment to AMTI based on book income is an amount equal
to 75% of the amount by which a corporation's adjusted current earnings exceeds
its AMTI (determined without regard to this adjustment and prior to reduction
for net operating losses). In addition, for taxable years through 1995, an
environmental tax of .12% of the excess of AMTI (with certain modifications)
over $2.0 million is imposed on corporations, including the Bank, whether or not
an Alternative Minimum Tax ("AMT") is paid. The Bank does not expect to be
subject to the AMT.
Dividends Received Deduction and Other Matters. The Company may exclude from its
income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company and the Bank own more than 20% of the stock of a
corporation distributing a dividend, 80% of any dividends received may be
deducted.
Florida Taxation. The Bank files Florida franchise tax returns. For Florida
franchise tax purposes, savings institutions are presently taxed at a rate equal
to 5.5% of taxable income. For this purpose, "taxable income" generally means
federal taxable income, subject to certain adjustments (including the addition
of interest income on State and municipal obligations). The Bank is not
currently under audit with respect to its Florida franchise tax returns.
31
ITEM 2. PROPERTIES
The Bank conducts its business through its main office and 14 branch offices.
The following table sets forth certain information regarding the Bank's office
properties:
Net Book Value of Land
Date and Buildings at
Location Acquired December 31, 2002
-------- -------- -----------------
(In thousands)
Main Office
800 North Boulevard, West
Leesburg, Florida 34748-5053 1961 $ 2,221
Wildwood
837 South Main Street
Wildwood, Florida 34785-5302 1967 243
Main Street
1409 West Main Street
Leesburg, Florida 34748-4854 1972 336
Clermont
481 East Highway 50
Clermont, Florida 34711-4032 1982 623
Eustis
2901 South Bay Street
Eustis, Florida 32726-6551 1979 490
Fruitland Park
410 Palm Street
Fruitland Park, Florida 34731-4013 1983 450
Lady Lake
431 US Highway 441/27
Lady Lake, Florida 32159-3046 1995 1,127
Lake Square (1)
32612 Vista Avenue
Leesburg, Florida 34788-3952 2002 1,280
South Leesburg
US Highway 27
Leesburg, Florida 34748 1996 1,248
Inverness
2709 East Gulf to Lake Highway
Inverness, Florida 34453-3245 1998 798
Citrus Ridge
16550 Woodcrest Way
Clermont, Florida 34711-7004 1998 978
(continued)
32
Net Book Value of Land
Date and Buildings at
Location Acquired December 31, 2002
-------- -------- -----------------
(In thousands)
Bushnell (2)
1128 North Main Street
Bushnell, Florida 33513 1998 $ 227
Administration
715 West Oak Terrace Drive
Leesburg, Florida 34748 1961 1,811
Sumter County (3) 1999 418
Boulevard (4)
900 North Boulevard West
Leesburg, Florida 34748 2000 305
Accounting and Human Resource Offices
800 North Lee Street
Leesburg, Florida 34748 2001 220
Kings Ridge (5)
4299 South Highway 27
Clermont, Florida 34711 2001 1,539
Spruce Creek (1)
17801 SE 109th Avenue
Summerfield, Florida 34491 2002 2,027
Old Lake Square (6)
10105 U.S. Highway 441
Leesburg, Florida 34788 1995 384
Office Park (7) 2002 304
(1) Branch office acquired in 2002.
(2) Leased branch office opened May, 1999.
(3) Two parcels of land purchased by Lake County Service Corp. for future
branch office locations.
(4) Storage facility owned by the Bank.
(5) Construction completed and branch opened in 2002.
(6) Unused branch office.
(7) Building purchased in 2002 to be remodeled for future expansion of the
accounting and operations departments.
The Bank owns and operates personal computers, teller terminals and associated
equipment. At December 31, 2002, such equipment had a net book value of
$1,524,000. The Bank also had $816,000 in construction in process at December
31, 2002.
33
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which FFLC Bancorp, Inc., or
any of its subsidiaries is a party or to which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the stockholders during the fourth
quarter of the fiscal year ended December 31, 2002, through the solicitation of
proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The above-captioned information appears under "Common Stock Prices and
Dividends" in the Registrant's 2002 Annual Report to Stockholders and is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The above-captioned information appears under "Selected Consolidated Financial
Data" on page 8 and 9 of the Registrant's 2002 Annual Report to Stockholders and
is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The above-captioned information appears under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Registrant's
2002 Annual Report to Stockholders on pages 10 through 20 and is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of FFLC Bancorp, Inc. and Subsidiary,
together with the report thereon by Hacker, Johnson & Smith PA appear in the
Registrant's 2002 Annual Report to Stockholders on pages 21 through 53 and are
incorporated herein by reference.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
There have been no disagreements with the Registrant's accountants on any
matters of accounting principles or practices or financial statement
disclosures.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information related to Directors and Executive Officers of the Registrant is
incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on May 8, 2003 at pages 6 through 9.
34
ITEM 11. EXECUTIVE COMPENSATION
The information relating to executive compensation is incorporated herein by
reference to the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 8, 2003 at pages 12 through 13.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to security ownership of certain beneficial owners and
management is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 8, 2003 at
pages 5 through 8.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions is
incorporated herein by reference to pages 14 and 15 of the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 8, 2003.
ITEM 14. CONTROLS AND PROCEDURES
a. Evaluation of disclosure controls and procedures. The Company
-------------------------------------------------------
maintains controls and procedures designed to ensure that information
required to be disclosed in the reports that the Company files or
submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission.
Based upon their evaluation of those controls and procedures performed
within 90 days of the filing date of this report, the chief executive
and chief financial officers of the Company concluded that the
Company's disclosure controls and procedures were adequate.
b. Changes in internal controls. The Company made no significant changes
-----------------------------
in its internal controls or in other factors that could significantly
affect these controls subsequent to the date of the evaluation of
those controls by the Chief Executive and Chief Financial officers.
35
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements of the Company are incorporated by
reference from the following indicated pages of the 2002 Annual Report to
Stockholders.
Page
----
Independent Auditors' Report 54
Consolidated Balance Sheets as of December 31, 2002 and 2001 21
Consolidated Statements of Income for the Years Ended
December 31, 2002, 2001 and 2000 22
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 2002, 2001 and 2000 23-25
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2002, 2001 and 2000 26-27
Notes to Consolidated Financial Statements for the Years
Ended December 31, 2002, 2001 and 2000 28-53
The remaining information appearing in the Annual Report to Stockholders is
not deemed to be filed as part of this report, except as expressly provided
herein.
(2) All schedules are omitted because they are not required or applicable,
or the required information is shown in the consolidated financial
statements or the notes thereto.
(3) Exhibits
(a) The following exhibits are filed as part of this report.
3.1 Certificate of Incorporation of FFLC Bancorp, Inc.*
3.2 Bylaws of FFLC Bancorp, Inc.***
4.0 Stock Certificate of FFLC Bancorp, Inc.*
10.1 First Federal Savings Bank of Lake County Recognition and
Retention Plan**
10.2 First Federal Savings Bank of Lake County Recognition and
Retention Plan for Outside Directors**
10.3 FFLC Bancorp, Inc. Incentive Stock Option Plans for Officers
and Employees**
10.4 FFLC Bancorp, Inc. Stock Option Plan for Outside Directors**
13.0 Annual Report to Stockholders (filed herewith)
99 Proxy Statement for Annual Meeting (filed herewith)
99.1 CEO Certification required under Section 906 of
Sarbanes-Oxley Act of 2002
99.2 CFO Certification required under Section 906 of
Sarbanes-Oxley Act of 2002
* Incorporated herein by reference into this document from the Exhibits
to Form S-1, Registration Statement, initially filed on September 27,
1993, Registration No. 33-69466.
** Incorporated herein by reference into this document from the Proxy
Statement for the Annual Meeting of Stockholders held on May 12, 1994.
*** Incorporated herein by reference into this document from the September
30, 1999 Form 10-Q, filed November 3, 1999.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the
Company during the fourth quarter.
36
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
FFLC BANCORP, INC.
By: /s/ Stephen T. Kurtz
--------------------
Stephen T. Kurtz
Chief Executive Officer and President
Dated: March 13, 2003
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
Name Title Date
---- ----- ----
/s/ Claron D. Wagner Chairman of the Board March 13, 2003
--------------------
Claron D. Wagner
/s/ James P. Logan Vice Chairman of the Board March 13, 2003
------------------
James P. Logan
/s/ Joseph J. Junod Director March 13, 2003
-------------------
Joseph J. Junod
/s/ Ted R. Ostrander, Jr. Director March 13, 2003
-------------------------
Ted R. Ostrander
/s/ H.D. Robuck, Jr. Director March 13, 2003
--------------------
H.D. Robuck, Jr.
/s/ Howard H. Hewitt Director March 13, 2003
--------------------
Howard H. Hewitt
/s/ Stephen T. Kurtz Chief Executive Officer,
-------------------- President and Director March 13, 2003
Stephen T. Kurtz
/s/ Paul K. Mueller Executive Vice President, Chief
------------------- Operating Officer and Treasurer
Paul K. Mueller and Director March 13, 2003
37
CERTIFICATIONS
--------------
I, Stephen T. Kurtz, certify, that:
1. I have reviewed this annual report on Form 10-K of FFLC Bancorp, Inc.;
2. Based on my knowledge, the annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
38
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of the
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 13, 2003 By: /s/ Stephen T. Kurtz
--------------------------- --------------------------------------
Stephen T. Kurtz, President and Chief
Executive Officer
I, Paul K. Mueller, certify, that:
1. I have reviewed this annual report on Form 10-K of FFLC Bancorp, Inc.;
39
2. Based on my knowledge, the annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of the
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
the internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 13, 2003 By: /s/ Paul K. Mueller
----------------------- -----------------------------------------
Paul K. Mueller, Executive Vice President
and Treasurer
40