<PAGE> 1
Filed pursuant to rule 424(b)(4)
Registration Statement Nos. 333-56095
and 333-56095-01
PROSPECTUS
$15,000,000
ABI CAPITAL TRUST
[AMERICAN BANCSHARES, INC. LOGO]
8.50% PREFERRED SECURITIES
(LIQUIDATION AMOUNT $10 PER PREFERRED SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED HEREIN, BY
AMERICAN BANCSHARES, INC.
------------------------------------------------------
The Preferred Securities offered hereby represent preferred undivided
beneficial interests in the assets of ABI Capital Trust, a statutory business
trust created under the laws of the State of Delaware (the "Issuer Trust").
American Bancshares, Inc. (the "Company") will initially be the holder of all
the beneficial interests represented by common securities of the Issuer Trust
(the "Common Securities" and, together with the Preferred Securities, the "Trust
Securities"). (Continued on Next Page)
------------------------------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE PREFERRED SECURITIES
OFFERED HEREBY.
------------------------------------------------------
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR SAVINGS ACCOUNTS AND ARE
NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
================================================================================
<TABLE>
<CAPTION>
UNDERWRITING
PRICE DISCOUNTS AND PROCEEDS TO
TO PUBLIC(1) COMMISSIONS(2) ISSUER TRUST(3)(4)
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Per Preferred Security.............................. $10.00 (4) $10.00
- ----------------------------------------------------------------------------------------------------------
Total(5)............................................ $15,000,000 (4) $15,000,000
==========================================================================================================
</TABLE>
(1) Plus accrued Distributions, if any, from July 7, 1998.
(2) The Company and the Issuer Trust have each agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(3) Before deducting offering expenses payable by the Company estimated at
$336,000.
(4) In view of the fact that the proceeds from the sale of the Preferred
Securities will be used to purchase Junior Subordinated Debentures, the
Company has agreed to pay the Underwriter, as compensation for arranging the
investment therein of such proceeds, $0.40 per Preferred Security (or
$600,000 in the aggregate). The Underwriter will receive a supplemental
advisory fee of $25,000 payable upon consummation of the offering. See
"Underwriting".
(5) The Company has granted to the Underwriter a 30-day option to purchase up to
an additional $2,250,000 in aggregate liquidation amount of the Preferred
Securities, on the same terms and conditions set forth above, solely to
cover over-allotments, if any. If such option is exercised in full, the
total Price to Public and Proceeds to Issuer Trust will be $17,250,000 and
$17,250,000, respectively. See "Underwriting".
------------------------------------------------------
The Preferred Securities are offered by the Underwriter named herein,
subject to prior sale, when, as, and if delivered to and accepted by the
Underwriter. The Underwriter reserves the right to withdraw, cancel, or modify
this offering without notice and to reject any order in whole or in part. It is
expected that delivery of Preferred Securities will be made in book-entry form
through the book-entry facilities of The Depository Trust Company on or about
July 7, 1998.
ADVEST, INC.
THE DATE OF THIS PROSPECTUS IS JUNE 30, 1998
<PAGE> 2
(Cover Page Continued)
The Issuer Trust exists for the sole purpose of issuing the Trust
Securities and investing the proceeds thereof in 8.50% Junior Subordinated
Deferrable Interest Debentures (the "Junior Subordinated Debentures," and
together with the Trust Securities, the "Securities") to be issued by the
Company. The Junior Subordinated Debentures will mature on June 30, 2028, which
date may be shortened (such date, as it may be shortened, the "Stated Maturity")
to a date not earlier than June 30, 2003, if certain conditions are met
(including the Company having received the prior approval of the Board of
Governors of the Federal Reserve Systems (the "FRB"), if then required under
applicable capital guidelines or policies of the FRB (such shortening of the
maturity date, the "Maturity Adjustment")). The Preferred Securities will have a
preference under certain circumstances over the Common Securities with respect
to cash distributions and amounts payable on liquidation, redemption, or
otherwise. See "Description of Preferred Securities -- Subordination of Common
Securities."
The Preferred Securities will be represented by one or more global
securities registered in the name of a nominee of The Depository Trust Company,
as depositary ("DTC"). Beneficial interests in the global securities will be
shown on, and transfer thereof will be effected only through, records maintained
by DTC and its participants. Except as described under "Description of Preferred
Securities," Preferred Securities in definitive form will not be issued and
owners of beneficial interests in the global securities will not be considered
holders of the Preferred Securities. The Preferred Securities have been approved
for quotation on the Nasdaq National Market. Settlement for the Preferred
Securities will be made in immediately available funds. The Preferred Securities
will trade in DTC's Same-Day Funds Settlement System, and secondary market
trading activity for the Preferred Securities will therefore settle in
immediately available funds.
Holders of the Preferred Securities will be entitled to receive
preferential cumulative cash distributions, at the annual rate of 8.50% of the
liquidation amount of $10 per Preferred Security (the "Liquidation Amount"),
accruing from July 7, 1998, and payable quarterly in arrears on March 31, June
30, September 30, and December 31 of each year commencing on September 30, 1998
("Distributions"). The Company has the right, so long as no Debenture Event of
Default (as defined herein) has occurred or is continuing, to defer payment of
interest on the Junior Subordinated Debentures at any time or from time to time
for a period not exceeding 20 consecutive quarterly periods with respect to each
deferral period (each, an "Extension Period"), provided that no Extension Period
may extend beyond the Stated Maturity of the Junior Subordinated Debentures. No
interest shall be due and payable during any Extension Period, except at the end
thereof. Upon the termination of any such Extension Period and the payment of
all amounts then due, the Company may elect to begin a new Extension Period
subject to the requirements set forth herein. If interest payments on the Junior
Subordinated Debentures are so deferred, Distributions on the Preferred
Securities will also be deferred and the Company will not be permitted, subject
to certain exceptions described herein, to declare or pay any cash distributions
with respect to the Company's capital stock or with respect to debt securities
of the Company that rank pari passu in all respects with or junior to the Junior
Subordinated Debentures. During an extension period, interest on the Junior
Subordinated Debentures will continue to accrue (and the amount of distributions
to which holders of the preferred securities are entitled will accumulate) at
the rate of 8.50% per annum, compounded quarterly, and holders of preferred
securities will be required to accrue interest income for United States Federal
Income Tax purposes in advance of the receipt of cash distributions with respect
to such deferred interest payment. See "Description of Junior Subordinated
Debentures -- Option to Extend Interest Payment Period" and "Certain Federal
Income Tax Consequences -- Interest Income and Original Issue Discount." The
Company has no current intention of exercising its right to defer payments of
interest by extending the interest payment period on the Junior Subordinated
Debentures.
The Company has, through the Guarantee, the Trust Agreement, the Junior
Subordinated Debentures, and the Junior Subordinated Indenture (each as defined
herein), taken together, fully, irrevocably and unconditionally guaranteed all
the Issuer Trust's obligations under the Preferred Securities as described
below. See "Relationship Among the Preferred Securities, the Junior Subordinated
Debentures, and the Guarantee -- Full and Unconditional Guarantee." The
Guarantee of the Company guarantees the payment of
2
<PAGE> 3
Distributions and payments on liquidation or redemption of the Preferred
Securities, but only in each case to the extent of funds held by the Issuer
Trust, as described herein (the "Guarantee"). See "Description of Guarantee." If
the Company does not make payments on the Junior Subordinated Debentures held by
the Issuer Trust, the Issuer Trust will have insufficient funds to pay
Distributions on the Preferred Securities. The Guarantee does not cover payment
of Distributions when the Issuer Trust does not have sufficient funds to pay
such Distributions. In such event, a holder of Preferred Securities may
institute a legal proceeding directly against the Company to enforce payment of
such Distributions to such holder. See "Description of Junior Subordinated
Debentures -- Enforcement of Certain Rights by Holders of Preferred Securities."
The obligations of the Company under the Guarantee and the Preferred Securities
are subordinate and junior in right of payment to all Senior Indebtedness (as
defined in "Description of Junior Subordinated Debentures -- Subordination") of
the Company.
The Preferred Securities are subject to mandatory redemption (i) in whole,
but not in part, upon repayment of the Junior Subordinated Debentures at Stated
Maturity or, at the option of the Company, their earlier redemption in whole
upon the occurrence of a Tax Event, an Investment Company Event, or a Capital
Treatment Event (each as defined herein) and (ii) in whole or in part at any
time on or after June 30, 2003 contemporaneously with the optional redemption by
the Company of the Junior Subordinated Debentures in whole or in part. The
Junior Subordinated Debentures are redeemable prior to maturity at the option of
the Company (i) on or after June 30, 2003, 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 a Tax Event, Investment Company
Event, or Capital Treatment Event, in each case at a redemption price set forth
herein, which includes the accrued and unpaid interest on the Junior
Subordinated Debentures so redeemed to the date fixed for redemption. The
ability of the Company to exercise its rights to redeem the Junior Subordinated
Debentures or to cause the redemption of the Preferred Securities prior to the
Stated Maturity may be subject to prior regulatory approval by the FRB, if then
required under applicable FRB capital guidelines or policies. See "Description
of Junior Subordinated Debentures -- Redemption" and "Description of Preferred
Securities -- Liquidation Distribution Upon Dissolution."
The Company, as the holder of all of the outstanding Common Securities, has
the right at any time to dissolve the Issuer Trust and, after satisfaction of
liabilities to creditors of the Issuer Trust as provided by applicable law, to
cause the Junior Subordinated Debentures to be distributed to the holders of the
Preferred Securities and Common Securities in liquidation of the Issuer Trust.
The ability of the Company, as holder of the Common Securities, to dissolve the
Issuer Trust may be subject to prior regulatory approval of the FRB, if then
required under applicable FRB capital guidelines or policies. See "Description
of Preferred Securities -- Liquidation Distribution Upon Dissolution."
In the event of the dissolution of the Issuer Trust, after satisfaction of
liabilities to creditors of the Issuer Trust as provided by applicable law, the
holders of the Preferred Securities will be entitled to receive a Liquidation
Amount of $10 per Preferred Security plus accumulated and unpaid Distributions
thereon to the date of payment, subject to certain exceptions, which may be in
the form of a distribution of such amount in Junior Subordinated Debentures. See
"Description of Preferred Securities -- Liquidation Distribution Upon
Dissolution."
The Junior Subordinated Debentures are unsecured and subordinated to all
Senior Indebtedness (as defined herein) of the Company. See "Description of
Junior Subordinated Debentures -- Subordination."
Prospective purchasers must carefully consider the information set forth in
"Certain ERISA Considerations."
THE JUNIOR SUBORDINATED DEBENTURES ARE DIRECT AND UNSECURED OBLIGATIONS OF
THE COMPANY, DO NOT EVIDENCE DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER INSURER OR GOVERNMENT AGENCY.
3
<PAGE> 4
(MAP)
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE PREFERRED
SECURITIES OFFERED HEREBY, INCLUDING OVER-ALLOTTING SHARES OF PREFERRED
SECURITIES, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING TRANSACTIONS, AND
PENALTY BIDS. SUCH TRANSACTIONS MAY BE EFFECTED THROUGH THE NASDAQ NATIONAL
MARKET, IN THE OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING".
4
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and consolidated financial
statements and notes thereto appearing elsewhere in this Prospectus. Prospective
investors should read this Prospectus in its entirety.
This Prospectus contains certain "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995, such as
statements relating to the financial condition and prospects, loan loss reserve
adequacy, Year 2000 readiness, simulation of changes in interest rates, results
of operations, plans for future business development activities, capital
spending and financing sources, capital structure, the effects of regulation and
competition, and the business of the Company. Where used in this Prospectus, the
words "anticipate", "believe", "estimate", "expect", "intend", and similar words
and expressions, as they relate to the Issuer Trust, the Company, or the
management of the Company, identify forward-looking statements. Such
forward-looking statements reflect the current views of the Issuer Trust and the
Company and are based on information currently available to the management of
the Company and upon current expectations, estimates, and projections about the
Issuer Trust, the Company and its industry, management's beliefs with respect
thereto, and certain assumptions made by management. These forward-looking
statements are not guarantees of future performance and are subject to risks,
uncertainties, and other factors which could cause actual results to differ
materially from those expressed or implied by such forward-looking statements as
a result of various factors. Potential risks and uncertainties include, but are
not limited to: (i) competitive pressure in the banking and financial services
industries increasing significantly; (ii) changes in the interest rate
environment which reduce margins; (iii) changes in political conditions or
changes occurring in the legislative or regulatory environment; (iv) general
economic conditions, either nationally or regionally, becoming less favorable
than expected resulting in, among other things, a deterioration in credit
quality; (v) changes occurring in business conditions and inflation; (vi)
acquisitions and integration of acquired businesses or assets; (vii) changes in
technology; (viii) changes in monetary and tax policies, (ix) changes occurring
in the securities markets; and (x) other risks and uncertainties detailed from
time to time in the filings of the Company with the Commission.
THE COMPANY AND THE BANK
AMERICAN BANCSHARES, INC.
The Company is a Florida corporation and a bank holding company registered
under the Bank Holding Company Act of 1956, as amended (the "BHCA"),
headquartered in Bradenton, Florida. The Company's primary subsidiary and
principal asset is American Bank (the "Bank"). Through its ownership of the
Bank, the Company is engaged in a general commercial banking and related
business. In addition to the Bank, the Company also owns a finance company
subsidiary which only recently has commenced operations. Unless the context
otherwise requires, references to the Company herein include the Company and the
Bank on a consolidated basis. The principal executive offices of the Company is
located at 4502 Cortez Road West, Bradenton, Florida 34210, and its telephone
number is (941) 795-3050.
AMERICAN BANK
The Bank, which commenced operations in May 1989 as a Florida
state-chartered banking corporation, was formed by local business persons who
identified the need for a consumer-oriented independent community bank in
Manatee County, Florida to serve its growing population and expanding business
base. It was their belief that the large banking institutions located in this
area were inflexible, slow in their decision-making processes, and not meeting
the banking needs of individuals and small-to-medium sized businesses. They
recognized the opportunity to build a profitable banking business through the
establishment of a local banking institution operated by local business persons
and by experienced banking personnel who are familiar with the community and are
dedicated to providing fast, efficient, and personalized service to the market
area. Consistent with this objective, the Bank sought after and attracted
experienced bank personnel, most of whom reside in the area, know the Bank's
customers, and are able to provide them with personalized service. Further,
5
<PAGE> 6
the Board of Directors of both the Company and the Bank have been comprised of
local business persons who actively promote the Bank in the community.
As a result of the implementation of this strategy, the Bank experienced
rapid growth which was financed through a series of equity offerings primarily
supported by local investors who, in turn, provided additional capital to the
Bank, broadened the community's awareness of the Bank, and attracted new
business. In 1994, the Bank added a mortgage banking division to originate,
close, and service fixed and adjustable rate construction-to-permanent
residential real estate mortgage loans which are generally sold in the secondary
mortgage market. In late 1995, the Bank implemented a growth strategy to expand
its operations geographically, to expand its product and services and to
penetrate additional segments of the financial services market. In order to
finance this growth strategy, the Company was formed for the purpose of owning
the Bank and conducting a public offering of the Company's common stock, which
offering was completed in early 1996. Since its initial public offering, the
Company has implemented its growth strategy by:
- Adding 4 new branch locations which has expanded the Bank's operations
within Manatee County and into Hillsborough County.
- Palma Sola branch (Manatee) was opened in March 1996
- Whitfield branch (Manatee) was opened in September 1996
- Palmetto branch (Manatee) was opened in June 1997
- Ruskin branch (Hillsborough) was opened in April 1998
- Acquiring DesChamps & Gregory, Inc. ("DesChamps") in January 1997, a
Bradenton-based mortgage brokerage company which originates retail
residential mortgage loans.
- Entering into an arrangement with Advest, Inc. in March 1997 to make
trust services available to the Bank's customers.
- Acquiring Murdock Florida Bank, a Florida state banking corporation
("Murdock") in March 1998, which has been converted into a branch of
the Bank and has expanded the Bank's operations into Charlotte County.
- Forming and, in March 1998, commencing the operations of Freedom
Finance Company, a Florida corporation and wholly-owned subsidiary of
the Company ("Finance Company") to provide consumer finance products
and services.
- Making available to its customers computer-based home banking services
commencing in September 1997.
The Company also has constructed a new administrative office facility to
centralize its operations by combining in one location the Company's
administrative personnel, its consumer lending operations, the mortgage banking
and residential lending operations, and its credit card and human resources
departments. The Company has achieved its growth while maintaining its credit
quality standards, as is reflected by its low ratios of delinquencies and losses
to total loan portfolio and to assets.
As a result of the successful implementation of its strategies, the Company
has established a special niche in its market area which fills the needs of a
significant segment of that market. The consumer-oriented community banking
focus of the Bank provides customers with locally-based decision makers who are
familiar with their customers, their business environment, and competitive
demands, who are able to quickly evaluate and respond to loan applications, and
who have the ability to craft personalized banking solutions to the customer's
needs without extensive bureaucratic delays. Due to the growth of the Bank, it
is able to extend larger credits than other community-based financial
institutions.
From its eight retail banking branches located in Manatee, Charlotte, and
Hillsborough counties in Florida, the Bank offers a broad range of corporate and
personal banking services to individuals and small to mid-sized businesses. The
Bank places a special emphasis on the importance of individualized attention to
its
6
<PAGE> 7
customers by offering loan and deposit products tailored to meet the needs of
its customers. In addition, the Bank offers customized accounts receivable
financing and billing services, and credit card merchant services.
The Bank's deposits are insured up to the applicable limits by the Federal
Deposit Insurance Corporation (the "FDIC") and the Bank is a member of the
Federal Home Loan Bank of Atlanta ("FHLB"). The principal executive office of
the Bank is 4702 Cortez Road West, Bradenton, 34210, and its telephone number is
(941) 795-3050.
GROWTH AND EXPANSION
At December 31, 1995, the quarter-end prior to the Company's initial public
offering, and at March 31, 1998, the Company had total assets of approximately
$219.0 and $379.2 million, respectively, or a 73% increase, net portfolio loans
of approximately $138.1 and $230.5 million, respectively, or a 67% increase,
total deposits of approximately $186.7 and $316.6 million, respectively, or a
70% increase, and shareholders' equity of approximately $14.6 and $26.4 million,
respectively, or an 81% increase. The Company intends to continue its geographic
and product expansion while maintaining its community banking focus and
preserving its market niche. The Company also will seek opportunities to further
expand its operations into other segments of the financial services markets that
it believes will be beneficial to its growth strategy. The Company intends to
expand its presence along the west coast of Florida through internal growth,
branching, and strategic acquisitions. Management believes that there are
branching and acquisition opportunities available for further expansion of its
geographic market both in the areas existing between its current branches and in
other areas along the west coast of Florida. Of course, branching activities and
acquisitions involve certain upfront start-up and acquisition related expenses
which are not recovered until several months after the opening of the branch or
consummation of the acquisition. Accordingly, the Company's short-term
profitability and efficiency ratios have been adversely affected by its growth
strategy. As these branches recover such upfront costs, profitability
measurements should improve and, as a result of the Bank's increasing asset
base, each additional branch established by the Bank should have less impact on
the short-term profitability of the Company as a whole.
ABI CAPITAL TRUST
The Issuer Trust is a statutory business trust created under Delaware law
on May 21, 1998. The Issuer Trust will be governed by a trust agreement ("Trust
Agreement"), as amended and supplemented from time to time, among the Company,
as Depositor, Bankers Trust (Delaware), as Delaware trustee ("Delaware
Trustee"), and Bankers Trust Company, as property trustee ("Property Trustee")
(the Delaware Trustee and Property Trustee together, the "Trustees"). The Issuer
Trust exists for the exclusive purpose of (i) issuing and selling the Trust
Securities, (ii) using the proceeds from the sale of the Trust Securities to
acquire the Junior Subordinated Debentures issued by the Company, and (iii)
engaging in only those other activities necessary, convenient, or incidental
thereto (such as registering the transfer of the Trust Securities). Accordingly,
the Junior Subordinated Debentures will be the sole assets of the Issuer Trust,
and payments under the Junior Subordinated Debentures will be the sole source of
revenue of the Issuer Trust. The Issuer Trust has a term of 31 years unless
earlier terminated as provided in the Trust Agreement. The principal executive
offices of the Issuer Trust is 4502 Cortez Road West, Bradenton, Florida 34210,
and its telephone number is (941) 795-3050.
THE OFFERING
Securities Offered......... $15,000,000 aggregate Liquidation Amount of
Preferred Securities representing preferred
undivided beneficial interests in the Issuer
Trust's assets, which will consist solely of the
Junior Subordinated Debentures. The Issuer Trust
has granted the Underwriter an option, exercisable
within 30 days after the date of this Prospectus,
to purchase up to an additional $2,250,000
aggregate Liquidation Amount of Preferred
Securities at the offering price, solely to cover
over-allotments, if any.
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<PAGE> 8
Offering Price............. $10 per Preferred Security (Liquidation Amount
$10), plus accumulated Distributions, if any, from
July 7, 1998.
Distributions.............. The Distributions payable on each Preferred
Security will be fixed at a rate per annum of 8.50%
of the stated Liquidation Amount per Preferred
Security. Such distributions will be cumulative,
will accrue from July 7, 1998 (the date of issuance
of the Preferred Securities), and will be payable
quarterly in arrears on March 31, June 30,
September 30, and December 31 of each year,
commencing September 30, 1998. See "Description of
Preferred Securities -- Distributions".
Preferred Securities
Rank..................... The Preferred Securities will rank pari passu, and
payments thereon, will be made pro rata, with the
Common Securities except as described under
"Description of Preferred
Securities -- Subordination of Common Securities".
Junior Subordinated
Debentures............... The Issuer Trust will invest the proceeds from the
issuance of the Preferred Securities and Common
Securities in an equivalent amount of 8.50% Junior
Subordinated Debentures of the Company. The Junior
Subordinated Debentures will mature on June 30,
2028, subject to the Maturity Adjustment. The
Junior Subordinated Debentures will rank
subordinate and junior in right of payment to all
Senior Indebtedness of the Company. In addition,
the Company's obligations under the Junior
Subordinated Debentures will be structurally
subordinated to all existing and future liabilities
and obligations of the Company's subsidiaries.
Guarantee.................. Under the terms of the Guarantee, the Company has
guaranteed the payment of Distributions and
payments on liquidation or redemption of the
Preferred Securities, but only in each case to the
extent of funds held by the Issuer Trust, as
described herein. The Company and the Issuer Trust
believe that the obligations of the Company under
the Guarantee, the Trust Agreement, the Junior
Subordinated Debentures, and the Junior
Subordinated Indenture, when taken together, fully,
irrevocably, and unconditionally guarantee all of
the Issuer Trust's obligations relating to the
Preferred Securities. The obligations of the
Company under the Guarantee and the Preferred
Securities are subordinate and junior in right of
payment to all Senior Indebtedness. See
"Description of Guarantee".
Right to Defer Interest.... The Company has the right, at any time, so long as
no Debenture Event of Default has occurred and is
continuing, to defer payments of interest on Junior
Subordinated Debentures for a period not exceeding
20 consecutive quarters; provided, that no
Extension Period may extend beyond the Stated
Maturity of the Junior Subordinated Debentures. As
a consequence of the Company's extension of the
interest payment period, quarterly Distributions on
the Preferred Securities will be deferred (though
such Distributions would continue to accrue with
interest thereon compounded quarterly, since
interest will continue to accrue and compound on
the Junior Subordinated Debentures during any such
Extension Period). During an Extension Period, the
Company will be prohibited, subject to certain
exceptions described herein, from declaring or
paying any cash distributions with respect to its
capital stock or debt securities that rank pari
passu with or junior to the Junior Subordinated
Debentures. Upon the termination of any Extension
Period and the
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<PAGE> 9
payment of all amounts then due, the Company may
commence a new Extension Period, subject to the
foregoing requirements. See "Description of Junior
Subordinated Debentures -- Option to Extend
Interest Payment Period".
In the event that an Extension Period should occur,
Preferred Security holders will continue to include
interest income (and de minimis original issue
discount, if any) for United States federal income
tax purposes in advance of receipt of the cash
distributions with respect to such deferred
interest payments. See "Certain Federal Income Tax
Consequences -- Interest Income and Original Issue
Discount". The Company has no current intention of
exercising its right to defer payments of interest
by extending the interest payment period of the
Junior Subordinated Debentures.
Redemption................. The Preferred Securities are subject to mandatory
redemption (i) in whole, but not in part, at the
Stated Maturity upon repayment of the Junior
Subordinated Debentures, (ii) in whole, but not in
part, contemporaneously with the optional
redemption at any time by the Company of the Junior
Subordinated Debentures upon the occurrence and
continuation of a Tax Event, Investment Company
Event, or Capital Treatment Event, and (iii) in
whole or in part at any time on or after June 30,
2003, contemporaneously with the optional
redemption by the Company of the Junior
Subordinated Debentures in whole or in part, in
each case at the applicable Redemption Price. See
"Description of Preferred
Securities -- Redemption".
Liquidation of the
Issuer Trust............. The Company, as holder of the Common Securities,
has the right at any time to dissolve the Issuer
Trust and cause the Junior Subordinated Debentures
to be distributed to holders of Preferred
Securities in liquidation of the Issuer Trust,
subject to the Company having received prior
approval of the FRB to do so if then required under
applicable capital guidelines or policies of the
FRB. See "Description of Preferred
Securities -- Liquidation Distribution Upon
Dissolution".
Voting Rights.............. Generally, except in limited circumstances, the
holders of the Preferred Securities will not have
any voting rights. See "Description of Preferred
Securities -- Voting Rights; Amendment of Trust
Agreement" and "Risk Factors -- Risk Factors
Relating to the Offering -- Limited Voting Rights".
Use of Proceeds............ All of the net proceeds to the Issuer Trust from
the sale of the Preferred Securities offered hereby
will be used by the Issuer Trust to purchase the
Junior Subordinated Debentures issued by the
Company. The net proceeds received by the Company
from the sale of the Junior Subordinated Debentures
will be used for general corporate purposes which
may include, among other things, contributions to
the Bank to support its growth, branch
acquisitions, acquisitions of other financial
institutions by either the Company or the Bank,
acquisitions of other financial service companies,
and for working capital. In addition, a portion of
the proceeds may be contributed through investments
in or advances to the Bank or other subsidiaries of
the Company to support mutual growth opportunities.
It also is anticipated that a portion of the
proceeds will be used to retire all or a part of
the Company's outstanding indebtedness under a
9
<PAGE> 10
line of credit used to finance the construction of
its administrative offices. As of May 31, 1998,
approximately $2.55 million has been borrowed under
this credit facility. The Trust Securities will
qualify as Tier 1 or core capital of the Company,
subject to the 25% Capital Limitation (as defined
herein), under the risk-based capital guidelines of
the FRB. The portion of the Trust Securities that
exceeds the 25% Capital Limitation will qualify as
Tier 2 or supplemental capital of the Company. See
"Use of Proceeds".
ERISA Considerations....... Prospective purchasers must carefully consider the
information set forth under "Certain ERISA
Considerations".
Nasdaq National
Market Symbol............ The Preferred Securities have been approved for
quotation on the Nasdaq National Market under the
symbol "ABANP".
RISK FACTORS
Prospective investors should carefully consider the matters set forth under
"Risk Factors", beginning on page 12.
10
<PAGE> 11
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table presents selected financial information for the Company.
The selected financial information is based on, derived from, and should be read
in conjunction with, the consolidated financial statements of the Company and
the related notes beginning on page F-1. The consolidated selected financial
data have been restated to include the accounts and operations of Murdock for
all periods. The selected financial information provided for the three months
ended March 31, 1998 and 1997 have been derived from unaudited interim financial
statements of the Company, which include all adjustments, consisting of the
restatement for the Murdock acquisition and other normal recurring accruals,
which the Company and the Bank consider necessary for a fair presentation of the
financial position and results of operations for those periods. Results for the
three months ended March 31, 1998 are not necessarily indicative of results that
can be expected for any other interim period or for the entire fiscal year
ending December 31, 1998.
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS ENDED
MARCH 31, AT OR FOR THE
(UNAUDITED) YEAR ENDED DECEMBER 31,
------------------------ --------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
AMERICAN BANCSHARES, INC. -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATIONS DATA:
Interest income....................... $ 7,101 $ 5,552 $ 24,631 $ 19,431 $ 15,826 $ 11,187 $ 9,253
Interest expense...................... 3,583 2,878 12,917 9,965 8,452 5,558 4,474
-------- -------- -------- -------- -------- -------- --------
Net interest income................... 3,518 2,674 11,714 9,466 7,374 5,629 4,779
Provision for loan losses............. 124 171 921 515 702 291 710
-------- -------- -------- -------- -------- -------- --------
Net interest income after provision
for loan losses..................... 3,394 2,503 10,793 8,951 6,672 5,338 4,069
Non-interest income................... 1,103 672 4,156 2,148 2,086 1,124 1,000
Non-interest expenses................. 3,876 2,630 11,912 9,856 7,437 5,354 4,104
Provision for income taxes............ 217 212 1,117 461 471 396 248
-------- -------- -------- -------- -------- -------- --------
Net Income...................... $ 404 $ 333 $ 1,920 $ 782 $ 850 $ 712 $ 717
======== ======== ======== ======== ======== ======== ========
CONSOLIDATED PER SHARE DATA:
Net income:
Basic............................... $ 0.08 $ 0.07 $ 0.38 $ 0.17 $ 0.27 $ 0.26 $ 0.30
Diluted............................. 0.08 0.07 0.38 0.17 0.27 0.26 0.30
Book value, end of period............. 5.28 4.77 5.22 4.77 4.40 3.80 5.08
SELECTED BALANCE SHEET DATA:
Total assets.......................... 379,179 298,006 353,901 273,630 218,993 183,901 135,755
Cash (including interest bearing
accounts)........................... 20,660 12,739 18,396 23,563 11,230 7,762 5,911
Loans receivable, net................. 230,535 200,096 213,405 175,265 138,086 107,370 90,437
Mortgage loans held for sale.......... 49,718 10,321 39,588 20,351 21,011 21,640 0
Investment securities and other
interest-bearing assets............. 62,266 62,385 68,664 43,509 40,423 36,746 31,317
Deposits.............................. 316,595 254,356 302,746 232,433 186,727 165,608 120,428
Borrowed funds........................ 32,715 18,490 23,028 16,413 16,067 5,977 5,264
Shareholders' equity.................. $ 26,378 $ 23,803 $ 26,079 $ 23,504 $ 14,632 $ 11,484 $ 9,167
SELECTED FINANCIAL RATIOS AND OTHER
DATA:
Return on average assets.............. 0.44%(2) 0.47%(2) 0.61% 0.32% 0.42% 0.43% 0.55%
Return on average equity.............. 6.55(2) 6.76(2) 9.03 3.63 6.58 6.91 8.59
Net interest margin................... 4.13(2) 4.02(2) 3.98 4.13 3.90 3.85 3.83
Asset quality ratio(1)................ 0.32 0.59 0.43 0.57 1.15 1.82 1.25
Average equity to average total
assets.............................. 6.76 6.92 6.76 8.76 6.38 6.48 6.39
Risk-based capital ratios:
Tier 1 capital...................... 10.12 12.41 10.11 10.82 10.02 10.41 10.52
Total risk based capital........ 10.99 13.12 10.90 11.60 10.97 11.58 11.91
Leverage ratio(3)..................... 7.15 8.54 6.87 7.31 6.69 6.67 6.89
Efficiency ratio(4)................... 83.88 78.60 75.06 84.86 78.62 79.28 71.02
Allowance for loan losses to portfolio
loans............................... 0.98 0.87 1.07 1.00 1.16 1.27 1.30
Allowance for loan losses to
non-performing loans................ 2.67 3.95 1.38 1.29 1.29 1.25 0.84
Net charge-offs to average loans,
net................................. 0.28(2) 0.36(2) 0.21 0.23 0.37 0.14 0.69
RATIOS OF EARNINGS TO FIXED CHARGES(5):
Excluding interest on deposits........ 2.81(2) 3.75(2) 4.00 3.54 4.62 6.33 10.19
Including interest on deposits........ 1.17(2) 1.19(2) 1.24 1.12 1.16 1.20 1.22
</TABLE>
- ---------------
(1) Non-performing loans and other real estate owned to total assets.
Non-performing loans consist of non-accrual loans and accruing loans
contractually past due 90 days or more.
(2) Annualized.
(3) Leverage ratio is Tier 1 Capital to average total assets.
(4) Non-interest expense divided by net interest income plus non-interest
income.
(5) The consolidated ratio of earnings to fixed charges has been computed by
dividing income before income taxes, and fixed charges by fixed charges.
Fixed charges represent all interest expense (ratios are presented both
excluding and including interest on deposits). There was no amortization of
notes expense nor was any portion of net rental expense deemed to be
equivalent to interest on debt. Interest expense (other than on deposits)
includes interest on notes, federal funds purchased, securities sold under
agreements to repurchase, and other funds borrowed.
11
<PAGE> 12
RISK FACTORS
In addition to the other information in this Prospectus, a prospective
investor should review and consider carefully the following factors in
evaluating an investment in the Preferred Securities offered hereby. To the
extent any of the information contained in this Prospectus constitutes
forward-looking information, the risk factors set forth below are cautionary
statements identifying important factors that could cause the Company's actual
results for various financial reporting periods to differ materially from those
expressed in any forward-looking statements made by or on behalf of the Company
or the Issuer Trust.
RISK FACTORS RELATING TO THE OFFERING
RANKING OF SUBORDINATED OBLIGATIONS UNDER THE GUARANTEE AND THE JUNIOR
SUBORDINATED DEBENTURES. The obligations of the Company under the Guarantee
issued by the Company for the benefit of the holders of Preferred Securities and
under the Junior Subordinated Debentures are subordinate and junior in right of
payment to all Senior Indebtedness. At March 31, 1998, the Senior Indebtedness
of the Company aggregated $1.45 million. None of the Junior Subordinated
Indenture, the Guarantee, or the Trust Agreement places any limitation on the
amount of secured or unsecured debt, including Senior Indebtedness, that may be
incurred by the Company. See "Description of Guarantee -- Status of the
Guarantee" and "Description of Junior Subordinated Debentures -- Subordination".
The ability of the Issuer Trust to pay amounts due on the Preferred
Securities is solely dependent upon the Company's making payments on the Junior
Subordinated Debentures as and when required.
OPTION TO EXTEND INTEREST PAYMENT PERIOD; TAX CONSEQUENCES. So long as no
Event of Default (as defined in the Junior Subordinated Indenture) has occurred
and is continuing with respect to the Junior Subordinated Debentures (a
"Debenture Event of Default"), the Company has the right under the Junior
Subordinated Indenture to defer the payment of interest on the Junior
Subordinated Debentures at any time or from time to time for a period not
exceeding 20 consecutive quarterly periods with respect to each Extension
Period; provided that no Extension Period may extend beyond the Stated Maturity
of the Junior Subordinated Debentures. See "Description of Junior Subordinated
Debentures -- Debenture Events of Default". As a consequence of any such
deferral, quarterly Distributions on the Preferred Securities by the Issuer
Trust will be deferred during any such Extension Period. Distributions to which
holders of the Preferred Securities are entitled will accumulate additional
Distributions thereon during any Extension Period at the rate of 8.50% per
annum, compounded quarterly from the relevant payment date for such
Distributions, computed on the basis of a 360-day year of twelve 30-day months
and the actual days elapsed in a partial month in such period. Additional
Distributions payable for each full Distribution period will be computed by
dividing the rate per annum by four. The term "Distribution" as used herein
shall include any such additional Distributions. During any such Extension
Period, the Company may not (i) declare or pay any dividends or distributions
on, or redeem, purchase, acquire, or make a liquidation payment with respect to,
any of the Company's capital stock, or (ii) make any payment of principal of or
interest or premium, if any, on or repay, repurchase, or redeem any debt
securities of the Company that rank pari passu in all respects with or junior in
interest to the Junior Subordinated Debentures (other than (a) repurchases,
redemptions, or other acquisitions of shares of capital stock of the Company in
connection with any employment contract, benefit plan, or other similar
arrangements with or for the benefit of any one or more employees, officers,
directors, or consultants, in connection with a dividend reinvestment or
stockholder stock purchase plan or in connection with the issuance of capital
stock of the Company (or securities convertible into or exercisable for such
capital stock) as consideration in an acquisition transaction entered into prior
to the applicable Extension Period, (b) as a result of a reclassification or an
exchange or conversion of any class or series of the Company's capital stock (or
any capital stock of a subsidiary of the Company) for any class or series of the
Company's capital stock or any class or series of the Company's indebtedness for
any class or series of the Company's capital stock, (c) the purchase of
fractional interests in shares of the Company's capital stock pursuant to the
conversion or exchange provisions of such capital stock or the security being
converted or exchanged, (d) any declaration of a dividend in connection with any
stockholder's rights plan, or the issuance of rights, stock, or other property
under any stockholder's rights plan, or the redemption or repurchase of rights
pursuant thereto, or (e) any dividend in the form of stock, warrants, options,
or other rights where the dividend stock or the
12
<PAGE> 13
stock issuable upon exercise of such warrants, options, or other rights is the
same stock as that on which the dividend is being paid or ranks pari passu with
or junior to such stock). Prior to the termination of any such Extension Period,
the Company may further defer the payment of interest, provided that no
Extension Period may exceed 20 consecutive quarterly periods or extend beyond
the Stated Maturity of the Junior Subordinated Debentures. Upon the termination
of any Extension Period and the payment of all interest then accrued and unpaid
(together with interest thereon at the annual rate of 8.50%, compounded
quarterly, to the extent permitted by applicable law), the Company may elect to
begin a new Extension Period subject to the above conditions. No interest shall
be due and payable during an Extension Period, except at the end thereof. The
Company must give the Issuer Trustees notice of its election to begin an
Extension Period at least one Business Day prior to the earlier of (i) the date
the Distributions on the Preferred Securities would have been payable but for
the election to begin such Extension Period and (ii) the date the Property
Trustee is required to give notice to holders of the Preferred Securities of the
record date or the date such Distributions are payable, but in any event not
less than one Business Day prior to such record date. The Property Trustee will
give notice of the Company's election to begin a new Extension Period to the
holders of the Preferred Securities. Subject to the foregoing, there is no
limitation on the number of times that the Company may elect to begin an
Extension Period. See "Description of Preferred Securities -- Distributions" and
"Description of Junior Subordinated Debentures -- Option to Extend Interest
Payment Period".
In the event an Extension Period should occur, a holder of Preferred
Securities will continue to accrue and recognize income (in the form of original
issue discount ("OID")) for United States federal income tax purposes in respect
of its pro rata share of the Junior Subordinated Debentures held by the Issuer
Trust, which will include a holder's pro rata share of both the stated interest
and de minimis OID, if any, on the Junior Subordinated Debentures. As a result,
a holder of Preferred Securities will include such OID in gross income for
United States federal income tax purposes in advance of the receipt of cash, and
will not receive the cash related to such income from the Issuer Trust if the
holder disposes of the Preferred Securities prior to the record date for the
payment of Distributions. See "Certain Federal Income Tax
Consequences -- Interest Income and Original Issue Discount" and "-- Sales of
Preferred Securities".
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Junior
Subordinated Debentures. However, if the Company should elect to exercise such
right in the future, the market price of the Preferred Securities is likely to
be adversely affected. A holder that disposes of his, her, or its Preferred
Securities during an Extension Period, therefore, might not receive the same
return on his, her, or its investment as a holder that continues to hold its
Preferred Securities. In addition, as a result of the existence of the Company's
right to defer interest payments, the market price of the Preferred Securities
(which represent preferred undivided beneficial interest in the assets of the
Issuer Trust) may be more volatile than the market price of other securities on
which original issue discount or interest accrues that are not subject to such
deferrals.
REDEMPTION DUE TO TAX EVENT, INVESTMENT COMPANY EVENT, OR CAPITAL TREATMENT
EVENT. Upon the occurrence and during the continuation of a Tax Event,
Investment Company Event, or Capital Treatment Event, the Company has the right
to redeem the Junior Subordinated Debentures in whole, but not in part, at any
time within 90 days following the occurrence of such Tax Event, Investment
Company Event, or Capital Treatment Event and thereby cause a mandatory
redemption of the Preferred Securities. Any such redemption shall be at a price
equal to the Liquidation Amount of the Preferred Securities, together with
accumulated Distributions to, but excluding the date fixed for redemption. The
ability of the Company to exercise its right to redeem the Junior Subordinated
Debentures prior to the Stated Maturity may be subject to prior regulatory
approval by the FRB, if then required, as it currently is, under applicable FRB
capital guidelines or policies. See "Description of Junior Subordinated
Debentures -- Redemption" and "Description of Preferred
Securities -- Liquidation Distribution Upon Dissolution".
A "Tax Event" means the receipt by the Issuer Trust of an opinion of
counsel to the Company experienced in such matters to the effect that, as a
result of any amendment to, or change (including any announced prospective
change) in, the laws (or any regulations thereunder) of the United States or any
political subdivision or taxing authority thereof or therein, or as a result of
any official or administrative pronouncement or action or judicial decision
interpreting or applying such laws or regulations, which
13
<PAGE> 14
amendment or change is effective or which pronouncement or decision is announced
on or after the date of issuance of the Preferred Securities, there is more than
an insubstantial risk that (i) the Issuer Trust is, or will be within 90 days of
the delivery of such opinion, subject to United States federal income tax with
respect to income receive or accrued on the Junior Subordinated Debentures, (ii)
interest payable by the Company on the Junior Subordinated Debentures is not, or
within 90 days of the delivery of such opinion will not be, deductible by the
Company, in whole or in part, for United States federal income tax purposes, or
(iii) the Issuer Trust is, or will be within 90 days of the delivery of the
opinion, subject to more than a de minimis amount of other taxes, duties or
other governmental charges. See "Certain Federal Income Tax
Consequences -- Pending Tax Litigation Affecting the Preferred Securities" for a
discussion of pending United States Tax Court litigation that, if decided
adversely to the taxpayer, could give rise to a Tax Event, which may permit the
Company to redeem the Junior Subordinated Debentures prior to June 30, 2003.
"Investment Company Event" means the receipt by the Issuer Trust of an
opinion of counsel to the Company experienced in such matters to the effect
that, as a result of the occurrence of a change in law or regulation or a
written change (including any announced prospective change) in interpretation or
application of law or regulation by any legislative body, court, governmental
agency, or regulatory authority, there is more than an insubstantial risk that
the Issuer Trust is or will be considered an "investment company" that is
required to be registered under the Investment Company Act of 1940, as amended
(the "Investment Company Act"), which change or prospective change becomes
effective or would become effective, as the case may be, on or after the date of
the issuance of the Preferred Securities.
A "Capital Treatment Event" means the reasonable determination by the
Company that, as a result of the occurrence of any amendment to, or change
(including any announced prospective change) in, the laws (or any rules or
regulations thereunder) of the United States or any political subdivision
thereof or therein, or as a result of any official or administrative
pronouncement or action or judicial decision interpreting or applying such laws
or regulations, which amendment or change is effective or such pronouncement,
action or decision is announced on or after the date of issuance of the
Preferred Securities, there is more than an insubstantial risk that the Company
will not be entitled to treat an amount equal to the Liquidation Amount of the
Preferred Securities as "Tier 1 Capital" (or the then equivalent thereof) except
as otherwise restricted under the 25% Capital Limitation (as defined herein),
for purposes of the risk-based capital adequacy guidelines of the FRB, as then
in effect and applicable to the Company.
EXCHANGE OF PREFERRED SECURITIES FOR JUNIOR SUBORDINATED DEBENTURES. The
Company, as holder of all the outstanding Common Securities, has the right at
any time to dissolve the Issuer Trust and, after satisfaction of liabilities to
creditors of the Issuer Trust as provided by applicable law, cause the Junior
Subordinated Debentures to be distributed to the holders of the Preferred
Securities and Common Securities in liquidation of the Issuer Trust. The ability
of the Company, as holder of the Common Securities, to dissolve the Issuer Trust
may be subject to prior regulatory approval of the FRB, if then required under
applicable FRB capital guidelines or policies. See "Description of Preferred
Securities -- Liquidation Distribution Upon Dissolution."
Under current United States federal income tax law and interpretation and
assuming, as expected, that the Issuer Trust will not be taxable as a
corporation, a distribution of the Junior Subordinated Debentures upon a
liquidation of the Issuer Trust will not be a taxable event to holders of
Preferred Securities. However, if a Tax Event were to occur that would cause the
Issuer Trust to be subject to United States federal income tax with respect to
income received or accrued on the Junior Subordinated Debentures, a distribution
of the Junior Subordinated Debentures by the Issuer Trust would be a taxable
event to the Issuer Trust and the holders of the Preferred Securities. See
"Certain Federal Income Tax Consequences -- US Holders -- Receipt of Junior
Subordinated Debentures or Cash Upon Liquidation of the Issuer Trust".
RIGHTS UNDER THE GUARANTEE. Bankers Trust Company will act as the trustee
under the Guarantee (the "Guarantee Trustee") and will hold the Guarantee for
the benefit of the holders of the Preferred Securities. Bankers Trust Company
also will act as Debenture Trustee for the Junior Subordinated Debentures and as
Property Trustee under the Trust Agreement. Bankers Trust (Delaware) will act as
Delaware Trustee under the Trust Agreement. The Guarantee guarantees to the
holders of the Preferred Securities the following
14
<PAGE> 15
payments, to the extent not paid by or on behalf of the Issuer Trust: (i) any
accumulated and unpaid Distributions required to be paid on the Preferred
Securities, to the extent that the Issuer Trust has funds on hand available
therefor at the payment date, (ii) the Redemption Price with respect to any
Preferred Securities called for redemption, to the extent that the Issuer Trust
has funds on hand available therefor at such time, and (iii) upon a voluntary or
involuntary dissolution, winding up, or liquidation of the Issuer Trust (unless
the Junior Subordinated Debentures are distributed to holders of the Preferred
Securities), the lesser of (a) the aggregate of the Liquidation Amount and all
accumulated and unpaid Distributions to the date of payment, to the extent that
the Issuer Trust has funds on hand available therefor at such time, and (b) the
amount of assets of the Issuer Trust remaining available for distribution to
holders of the Preferred Securities on liquidation of the Issuer Trust. The
Guarantee is subordinated as described under "-- Ranking of Subordinated
Obligations Under the Guarantee and the Junior Subordinated Debentures" and
"Description of Guarantee -- Status of the Guarantee." The holders of not less
than a majority in aggregate Liquidation Amount of the outstanding Preferred
Securities have the right to direct the time, method, and place of conducting
any proceeding for any remedy available to the Guarantee Trustee in respect of
the Guarantee or to direct the exercise of any trust power conferred upon the
Guarantee Trustee under the Guarantee. Any holder of the Preferred Securities
may institute a legal proceeding directly against the Company to enforce its
rights under the Guarantee without first instituting a legal proceeding against
the Issuer Trust, the Guarantee Trustee, or any other person or entity.
If the Company were to default on its obligation to pay amounts payable
under the Junior Subordinated Debentures, the Issuer Trust may lack funds for
the payment of Distributions or amounts payable on redemption of the Preferred
Securities or otherwise, and, in such event, holders of the Preferred Securities
would not be able to rely upon the Guarantee for payment of such amounts.
Instead, if a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of the Company to pay any amounts payable
in respect of the Junior Subordinated Debentures on the payment date on which
such payment is due and payable, then a holder of Preferred Securities may
institute a legal proceeding directly against the Company for enforcement of
payment to such holder of any amounts payable in respect of such Junior
Subordinated Debentures having a principal amount equal to the aggregate
Liquidation Amount of the Preferred Securities of such holder (a "Direct
Action"). The exercise by the Company of its right, as described herein, to
defer the payment of interest on the Junior Subordinate Debentures does not
constitute a Debenture Event of Default. In connection with such Direct Action,
the Company will have a right of set-off under the Junior Subordinated Indenture
to the extent of any payment made by the Company to such holder of Preferred
Securities in the Direct Action. Except as described herein, holders of
Preferred Securities will not be able to exercise directly any other remedy
available to the holders of the Junior Subordinated Debentures or assert
directly any other rights in respect of the Junior Subordinated Debentures. See
"Description of Junior Subordinated Debentures -- Enforcement of Certain Rights
by Holders of Preferred Securities," "-- Debenture Events of Default" and
"Description of Guarantee." The Trust Agreement provides that each holder of
Preferred Securities by acceptance thereof agrees to the provisions of the
Guarantee and the Junior Subordinated Indenture.
LIMITED VOTING RIGHTS. Holders of Preferred Securities will have limited
voting rights relating generally to the modification of the Preferred Securities
and the Guarantee and the exercise of the Issuer Trust's rights as holder of
Junior Subordinated Debentures. Holders of Preferred Securities will not be
entitled to appoint, remove, or replace the Property Trustee or the Delaware
Trustee except upon the occurrence of certain events specified in the Trust
Agreement. The Property Trustee and the holders of all the Common Securities
may, subject to certain conditions, amend the Trust Agreement without the
consent of holders of Preferred Securities to cure any ambiguity or make other
provisions not inconsistent with the Trust Agreement or to ensure that the
Issuer Trust (i) will not be taxable as a corporation for United States federal
income tax purposes, or (ii) will not be required to register as an "investment
company" under the Investment Company Act. See "Description of Preferred
Securities -- Voting Rights; Amendment of Trust Agreement" and "-- Removal of
Issuer Trustees; Appointment of Successors."
ABSENCE OF MARKET. The Preferred Securities are a new issue of securities
with no established trading market. The Preferred Securities have been approved
for quotation on the Nasdaq National Market, but
15
<PAGE> 16
the Nasdaq National Market maintenance standards require the existence of two
market makers for continued listing. Although the Company has been advised that
certain firms intend to make a market in the Preferred Securities, such firms
are not obligated to do so and such market making may be interrupted or
discontinued at any time without any notice at their sole discretion. Moreover,
there can be no assurance that an established and liquid trading market will
develop or, if developed, will be sustained following the issuance of the
Preferred Securities.
MARKET PRICES. There can be no assurance as to the market prices for
Preferred Securities, or the market prices for Junior Subordinated Debentures
that may be distributed in exchange for Preferred Securities if a liquidation of
the Issuer Trust occurs. Accordingly, the Preferred Securities or the Junior
Subordinated Debentures that a holder of Preferred Securities may receive on
liquidation of the Issuer Trust may trade at a discount to the price that the
investor paid to purchase the Preferred Securities offered hereby. Because
holders of Preferred Securities may receive Junior Subordinated Debentures on
termination of the Issuer Trust, prospective purchasers of Preferred Securities
are also making an investment decision with regard to the Junior Subordinated
Debentures and should carefully review all the information regarding the Junior
Subordinated Debentures contained herein. See "Description of Junior
Subordinated Debentures."
SECURITIES ARE NOT INSURED. Neither the Preferred Securities nor the
Junior Subordinated Debentures are insured by the FDIC or by any other
governmental agency or any private insurer.
RISK FACTORS RELATING TO THE COMPANY
STATUS OF THE COMPANY AS A BANK HOLDING COMPANY. The Company is a legal
entity separate and distinct from the Bank. The ability of the Company to pay
the interest on, and principal of, the Junior Subordinated Debentures will be
significantly dependent on the ability of the Bank to pay dividends to the
Company in amounts sufficient to service the Company's debt obligations. Payment
of dividends by the Bank is restricted by various legal and regulatory
limitations. In general, as a Florida state-chartered banking corporation, the
amount of cash dividends that may be paid by the Bank is based on the Bank's net
profits of the current year combined with its net retained profits of the
preceding two years. See "Supervision and Regulation -- Bank
Regulation -- Dividend Restrictions and Transfers of Funds".
The right of the Company to participate in the assets of any subsidiary
upon the latter's liquidation, reorganization, or otherwise (and thus the
ability of the holders of Preferred Securities to benefit indirectly from any
such distribution) will be subject to the claims of the subsidiaries' creditors,
which will take priority except to the extent that the Company may itself be a
creditor with a recognized claim. At March 31, 1998, the Company's subsidiaries
had indebtedness and other liabilities of approximately $352.8 million.
The Bank also is subject to restrictions under federal law which limit the
transfer of funds by it to the Company, whether in the form of loans, extensions
of credit, investments, asset purchases, or otherwise. Such transfers by the
Bank to the Company or any nonbank subsidiary of the Company are limited in
amount to 10% of the bank's capital and surplus and, with respect to the Company
and all its nonbank subsidiaries, to an aggregate of 20% of the bank's capital
and surplus. Furthermore, such loans and extensions of credit are required to be
secured in specified amounts. Federal law also prohibits banks from purchasing
"low-quality" assets from affiliates.
GROWTH AND ACQUISITION STRATEGIES; RISK OF EXPANSION. The Company has
pursued, and intends to continue to pursue, a plan to expand its presence along
the west coast of Florida through internal growth, branching, and strategic
acquisitions. The net proceeds from the sale of the Junior Subordinated
Debentures will be used for general corporate purposes, which may include
possible funding of future acquisitions. Acquisitions of branches or financial
institutions such as bank holding companies, banks, thrifts, or companies deemed
closely related to banking, or managing or controlling banks or thrifts are
subject to a number of conditions including availability, price, and regulatory
approvals. There can be no assurance that potential acquisitions that meet the
Company's investment criteria will be available or that the required regulatory
approvals for any such acquisitions will be obtained. Competition for
acquisitions on the west coast of Florida, including the Company's market area,
is highly competitive, and the Company may not be able to acquire
16
<PAGE> 17
other institutions on attractive terms. The Company currently has no plans,
understandings, arrangements, or agreements, written or oral, with respect to
any specific acquisition prospect.
In addition, acquisitions may involve a number of special risks, including
adverse short-term effects on the Company's reported operating results,
diversion of management's attention, difficulties in the integration of acquired
operations, dependance on retaining, hiring, and training key personnel, risks
associated with unanticipated problems or legal liabilities, taxes and
accounting issues, and amortization of acquired intangible assets, some or all
of which could have a material adverse effect on the Company's operations or
financial performance. Accordingly, the Company's growth and financial
performance will depend to a significant degree on the ability of management to
manage the growth and expansion resulting from such acquisitions.
The success of the Company's internal growth strategy will depend primarily
on its ability to generate an increasing level of loans and deposits at
acceptable risk levels and terms without significant increases in noninterest
expenses relative to revenues generated. There is no assurance that the Company
will be successful in implementing its internal growth strategy. The Company's
financial performance also depends, in part, on the Company's ability to manage
its various portfolios and the Company's ability to successfully introduce
additional financial products and services. There can be no assurance that
additional financial products and services will be introduced or, if introduced,
that such financial products and services will be successful. Furthermore, the
success of the Company's growth strategy will depend on maintaining sufficient
regulatory capital levels and on economic conditions. See "Supervision and
Regulation".
INTEREST RATE RISK. The consolidated net income of the Company depends to
a substantial extent on its net interest income, which reflects the difference
between the interest income the Bank receives from interest-earning assets (such
as loans and investments) and the interest expense on interest-bearing
liabilities (such as deposits, borrowings, and other sources of funds).
Accordingly, like most financial institutions, the operations and profitability
of the Bank are largely impacted by changes in interest rates and management's
ability to control interest rate sensitivity of the Bank's assets and
liabilities and manage its interest rate risk. Although the Bank manages other
risks in the normal course of business, such as credit and liquidity risks,
management considers interest rate risk to be its most significant market risk
and could potentially have the largest material effect on the Bank's financial
condition and results of operations. Interest rates are highly sensitive to many
factors which are beyond the Bank's control, including, general economic
conditions and the policies of various governmental regulatory authorities.
Interest rate risk arises from mismatches (i.e., interest rate sensitivity gap)
between the dollar amount of repricing or maturing assets and liabilities, and
is measured in terms of the interest rate sensitivity gap to total assets. More
assets repricing or maturing than liabilities over a given time frame is
considered asset-sensitive and is reflected as a positive gap, and more
liabilities repricing or maturing over a given time frame is considered
liability-sensitive and is reflected as a negative gap. An asset-sensitive
position (i.e., positive gap) will generally enhance earnings in a rising
interest rate environment and will negatively impact earnings in a falling
interest rate environment, while a liability-sensitive position (i.e., negative
gap) will generally enhance earnings in a falling interest rate environment and
negatively impact earnings in a rising interest rate environment. Fluctuations
in interest rates are not predictable or controllable. The Company has attempted
to structure its asset and liability strategies to mitigate the impact on net
interest income of changes in market interest rates. In this regard, at December
31, 1997, the Company had a one-year cumulative negative gap of 15.16% which
suggests that the Bank's net interest yield could be adversely affected during
periods of rising interest rates. Management, however, believes that its asset
liability strategy reduces the Bank's risk exposure due to interest rate
fluctuations. There can be no assurance that the Bank's strategy will be
successful. Despite implementation of strategies to a better match repricing or
maturing assets and liabilities, the Bank's results of operations will remain
subject to the level and movement of interest rates. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Asset/Liability Management".
ADEQUACY OF ALLOWANCE FOR LOSSES ON LOANS. In originating loans, there is
a substantial likelihood that loan losses will be experienced. The risk of loss
will vary with, among other things, general economic conditions, the type of
loan being made, the creditworthiness of the borrower over the term of the loan
and, in the case of a collateralized loan, the quality of the collateral for the
loan. The Company maintains an
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<PAGE> 18
allowance for losses on loans at a level considered adequate by management to
cover losses that are currently anticipated based on, among other things,
management's experience, past loan loss experience, an evaluation of general
economic conditions, information about specific loan relationships, including
financial position and collateral values, regular reviews of delinquencies and
loan portfolio quality, and other factors and estimates that are subject to
change over time. Based upon such factors, management makes various assumptions
and judgments about the ultimate collectibility of the loan portfolio and
provides an allowance for potential loan losses based on a percentage of
outstanding loan balances and for specific loans when their ultimate
collectibility is considered questionable. Since certain lending activities
involve greater risks, the percentage applied to specific loan types may vary.
The amount of future losses is susceptible to changes in economic, operating,
and other conditions beyond the Company's control, and such losses may exceed
the Company's current allowance for loan losses.
At March 31, 1998, the Company had total non-performing loans of
approximately $848,200, which represented approximately 0.30% of total portfolio
loans. As of that same date, the Company's allowance for losses on loans was
$2,268,000, or approximately 0.98% of total portfolio loans and approximately
267% of total non-performing loans. The Bank actively manages its past due and
non-performing loans in an effort to minimize loan losses and monitors its asset
quality to maintain an adequate allowance for losses on loans. Although
management believes that its allowance for losses on loans is adequate, there
can be no assurance that the allowance will be adequate to cover actual losses.
Furthermore, although management uses the best information available to make
determinations with respect to the allowance for losses on loans, future
adjustments may be necessary if economic conditions differ substantially from
the assumptions used or adverse developments arise with respect to the Bank's
non-performing or performing loans. Material additions to the Bank's allowance
for losses on loans would result in a decrease of the Bank's net income and
capital of the Company and the Bank, and could result in the Bank's inability to
pay dividends, among other adverse consequences, which in turn would adversely
affect the Company's ability to pay interest on the Junior Subordinated
Debentures. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Allowance for Loan Losses".
COMPETITION. The banking business is highly competitive and the
profitability of the Company depends principally upon its ability to compete in
its market area in the State of Florida. The Company competes with other
commercial banks, savings and loan associations, credit unions, finance
companies, mutual funds, insurance companies, brokerage and investment banking
firms, asset-based nonbank lenders, and governmental organizations that may
offer subsidized financing at lower rates than those offered by the Company. The
Company not only competes with financial institutions headquartered in the State
of Florida, but also competes with a number of financial institutions
headquartered outside the State of Florida who are active in the state. Many of
those competitors have significantly greater resources (financial and other) and
lending limits than the Company and may offer certain services that the Bank
does not provide at this time. Although the Company has been able to compete
effectively in the past, no assurance can be given that the Company will be able
to compete effectively in the future. Various legislative acts and regulatory
rules and interpretations in recent years have led to increased competition
among financial institutions. There can be no assurance that the United States
Congress will not enact legislation that may further increase competitive
pressures on the Company. Competition from both financial and non-financial
institutions is expected to continue. See "Business -- Competition" and
"Supervision and Regulation".
EXPOSURE TO LOCAL ECONOMIC CONDITIONS. The success of the Company and the
Bank are dependent to a certain extent upon general economic conditions and the
geographic markets served by the Bank. Since the Bank's lending activities are
conducted primarily on the west coast of Florida, any adverse economic changes
in this geographic market may have a material adverse effect on the Company's
results of operations, financial condition, and cash flow. The Bank's market
area is particularly dependent on service, retail, manufacturing businesses, and
tourism. The banking industry in Florida is affected by general economic
conditions such as inflation, recession, unemployment, and other factors beyond
the Company's control. Economic recession over a prolonged period of time in the
Bank's geographic markets would likely cause significant increases in
nonperforming assets, thereby causing operating losses, impairing liquidity, and
eroding capital.
18
<PAGE> 19
DEVELOPMENTS IN TECHNOLOGY. The market for financial services, including
banking services and consumer finance services, is increasingly affected by
advances in technology, including developments in telecommunications, data
processing, computers, automation, Internet-based banking, telebanking, debit
cards, and so-called "smart" cards. The ability of the Company, including the
Bank and the Finance Company, to compete successfully in its markets may depend
on the extent to which it is able to exploit such technological changes.
However, there can be no assurance that the development of these or any other
new technologies, or the Company's success or failure in anticipating or
responding to such developments, will materially affect the Company's business,
financial condition, and operating results.
YEAR 2000 ISSUES. The "Year 2000" issue is the result of computer programs
and equipment which are dependent on "embedded chip technology" using two digits
rather than four to define the applicable year. Any of the Company's computer
programs or equipment that are date dependent may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, a temporary inability to
process transactions, send invoices, or engage in similar normal business
activity. Most of the Company's data processing is provided by third-party
vendors who have indicated that their software, systems, and equipment will be
made Year 2000 complaint in a timely manner. However, the Company has no control
over the effective implementation of such vendors' Year 2000 compliance programs
and there can be no assurance that such vendors will make the necessary
modifications, conversions, or equipment replacements in a timely fashion. The
failure of its vendors to be Year 2000 compliant in a timely fashion could have
a material adverse impact on the Company.
RISKS ASSOCIATED WITH FINANCE COMPANY OPERATIONS. The Company has recently
commenced the operation of the Finance Company, a company which will provide a
full range of consumer financing products and services. The Finance Company will
have the ability to extend financing to individuals and entities unable to
satisfy the Bank's underwriting requirements and loan standards, and is expected
to do so. Since the underwriting criteria for loans originated by the Finance
Company will generally be less stringent than those historically adhered to by
the Bank, such loans also carry a higher level of credit risk which the Finance
Company intends to mitigate through larger and more frequently incurred late
charges and higher interest rates. These portfolios also will represent an
increased risk of loss in the event of adverse economic developments such as a
recession. Although the lending criteria required by the Finance Company may be
less stringent than the Bank, the Finance Company intends to selectively approve
extensions of credit and occasionally package such credits for sale in the
secondary market. The Company believes that an important determinant of success
by the Finance Company will be its familiarity with, and its evaluation of, the
creditworthiness of the borrowers and the maintenance of an active program to
monitor performance and collect payments. Such loans are inherently more risky
than traditional lending and there can be no assurance that all appropriate
underwriting criteria have been identified or weighted properly in the
assessment of credit risk, or will afford adequate protection against the higher
risks inherent in lending to such borrowers.
Customers of consumer finance companies are typically unable or unwilling
to secure credit from traditional lending services. In making a credit decision,
in addition to the size of the obligation, the Finance Company is expected to
consider the Company's prior and current relationship with such customer and its
knowledge of the customer's creditworthiness, and a customer's income level,
type and length of employment, stability of resident, personal references,
purpose of loan, available collateral, overall credit rating and prior credit
history with the Company, the Bank, and the Finance Company. The Finance
Company, however, will be more susceptible to the risk that its customers will
not satisfy their repayment obligations than the Bank which has more stringent
underwriting criteria. Since the Finance Company has only recently commenced
operations, it has no historical results to evaluate to determine the
effectiveness of its underwriting criteria or the profitability of its
operations. There can be no assurance that the Finance Company will not
experience substantial delinquencies or net write-offs adversely affecting the
results of its operations.
SUPERVISION AND REGULATION. Bank holding companies and banks operate in a
highly regulated environment and are subject to the supervision of federal and
state regulatory agencies. As a bank holding company, the Company is subject to
regulation, examination, and supervision by the FRB, and the Bank is subject to
regulation and examination by the FDIC and by the Florida Department of Banking
and Finance (the "Department"). These laws and regulations govern matters
ranging from the regulation of certain debt
19
<PAGE> 20
obligations, changes of control and mergers, and the maintenance of adequate
capital to the general business operations and financial condition of the Bank,
including permissible types, amounts, and terms of loans and investments, the
amount of reserves against deposits, restrictions on dividends, establishment of
branch offices, and subsidiary investments and activities. These regulations are
intended primarily for the protection of depositors, rather than the benefit of
investors, and they restrict the manner by which the Company and the Bank may
conduct their business and obtain financing. The Company and the Bank are
subject to changes in federal and state law, as well as regulation and
governmental policies, income tax laws, and accounting principles. The effects
of any potential changes cannot be predicted but could adversely affect the
business and operations of the Company and the Bank in the future. See
"Supervision and Regulation".
Consumer finance loans are subject to numerous Federal and state consumer
protection laws which impose requirements on the solicitation, making,
enforcement and collection of consumer loans. Such laws, as well as any new laws
or rulings which may be adopted may adversely affect the Finance Company's
ability to collect on the loans or attain the anticipated level of periodic
finance charges and other fees. In addition, failure by the Finance Company to
comply with such requirements could adversely affect its ability to enforce the
loans. Congress and the states may enact new laws and amendments to existing
laws to regulate further the consumer finance industry, or to reduce finance
charges or other fees or charges applicable to the accounts. The potential
effect of any such legislation could be to reduce the total revenues related to
yield on the loans.
DEPENDENCE ON KEY PERSONNEL. The Company and the Bank are dependent on the
services and performance of Gerald L. Anthony, their President and Chief
Executive Officer, and certain other executive officers. If the services of Mr.
Anthony or any of such executive officers should become unavailable for any
reason, a failure to replace them promptly could have a material adverse effect
on the Company. The Bank and the Company have entered into employment agreements
with Mr. Anthony and other senior executive officers. See "Management".
ABI CAPITAL TRUST
The Issuer Trust is a statutory business trust created under Delaware law
pursuant to the filing of a Certificate of Trust with the Delaware Secretary of
State on May 21, 1998. The Issuer Trust will be governed by the Trust Agreement
among the Company, as Depositor, Bankers Trust (Delaware), as Delaware Trustee,
and Bankers Trust Company, as Property Trustee (together with the Delaware
Trustee, the "Issuer Trustees"). Two individuals will be selected by the holder
of the Common Securities to act as administrators with respect to the Issuer
Trust (the "Administrators"). The Company, while holder of the Common
Securities, intends to select two individuals who are employees or officers of
or affiliated with the Company to serve as the Administrators. See "Description
of Preferred Securities -- Miscellaneous". The Issuer Trust exists for the
exclusive purposes of (i) issuing and selling the Trust Securities, (ii) using
the proceeds from the sale of the Trust Securities to acquire the Junior
Subordinated Debentures and (iii) engaging in only those other activities
necessary, convenient or incidental thereto (such as registering the transfer of
the Trust Securities). Accordingly, the Junior Subordinated Debentures will be
the sole assets of the Issuer Trust, and payments under the Junior Subordinated
Debentures will be the sole source of revenue of the Issuer Trust.
All the Common Securities will initially be owned by the Company. The
Common Securities will rank pari passu, and payments will be made thereon pro
rata, with the Preferred Securities, except that upon the occurrence and during
the continuation of a Debenture Event of Default arising as a result of any
failure by the Company to pay any amounts in respect of the Junior Subordinated
Debentures when due, the rights of the holder of the Common Securities to
payment in respect of Distributions and Payments upon liquidation, redemption or
otherwise will be subordinated to the rights of the holders of the Preferred
Securities. See "Description of Preferred Securities -- Subordination of Common
Securities". The Company will acquire Common Securities in an aggregate
liquidation amount equal to 3% of the total capital of the Issuer Trust. The
Issuer Trust has a term of 31 years, but may terminate earlier as provided in
the Trust Agreement. The address of the Delaware Trustee is Bankers Trust
(Delaware), 1101 Centre Road, Suite 200, Trust Department, Wilmington, Delaware
19805, telephone number (302) 636-3301. The address of the Property
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<PAGE> 21
Trustee, the Guarantee Trustee and the Debenture Trustee is Bankers Trust
Company, Four Albany Street, 4th Floor, New York, New York 10006, telephone
number (212) 250-2500.
USE OF PROCEEDS
All the net proceeds to the Issuer Trust from the sale of the Preferred
Securities will be invested by the Issuer Trust in the Junior Subordinated
Debentures. The proceeds from the sale of the Preferred Securities are expected
to qualify as Tier 1 or core capital with respect to the Company under the
risk-based capital guidelines established by the FRB, however capital received
from the proceeds of the sale of the Preferred Securities, when taken together
with all cumulative preferred stock of the Company, if any, cannot constitute
more than 25% of the total Tier 1 capital of the Company (the "25% Capital
Limitation"). Amounts in excess of the 25% Capital Limitation will constitute
Tier 2, or supplementary capital, of the Company. The net proceeds to be
received by the Company from the sale of the Junior Subordinated Debentures will
be used for general corporate purposes which may include, among other things,
contributions to the Bank to support its branch acquisitions, acquisitions of
other financial institutions, acquisitions of other financial services
companies, and for working capital. In addition, a portion of the proceeds is
likely to be contributed to the Bank and to the Finance Company to support
internal growth opportunities. It also is anticipated that a portion of the net
proceeds will be used by the Company to retire all or part of its outstanding
indebtedness under a $5 million Commercial Revolving Line of Credit (the
"Barnett Credit Line") from Nationsbank, N.A. (formerly Barnett Banks, N.A.
South Florida) which was used, in part, to finance the construction of the
Company's new administrative offices. As of May 31, 1998, approximately $2.55
million has been borrowed under this credit facility. Interest on this credit
line is calculated quarterly on either a one or three months LIBOR, plus 175
basis points. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Financial Condition -- Deposit Activities and Other
Sources of Funds -- Borrowings". Pending any such use, the net proceeds may be
invested in short-to-medium-term investments. The precise amounts and timing of
the application of proceeds will depend upon the funding requirements of the
Company and its subsidiaries and the availability of other funds.
MARKET FOR THE PREFERRED SECURITIES
The Preferred Securities are a new issue of securities and prior to this
offering there has been no established public market for the Preferred
Securities. The Preferred Securities have been approved for quotation on the
Nasdaq Stock Market's National Market under the symbol ABANP. Although the
certain firms have informed the Company that they presently intend to make a
market in the Preferred Securities, such firms are not obligated to do so and
any such market making may be discontinued at any time. Accordingly, there is no
assurance that an active and liquid trading market will develop or, if
developed, that such a market will be sustained. The offering price and
distribution rate have been determined by negotiations among representatives of
the Company and the Underwriter, and the offering price of the Preferred
Securities may not be indicative of the market price following the offering. See
"Underwriting".
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<PAGE> 22
CAPITALIZATION
The following table sets forth the consolidated capitalization and certain
capital ratios of the Company as of March 31, 1998 and as adjusted to give
effect to the consummation of the offering of the Preferred Securities offered
hereby and the application by the Issuer Trust of the net proceeds therefrom to
the purchase of the Junior Subordinated Debentures and the repayment of the
$1.45 million line of credit from the proceeds.
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------------
ACTUAL AS ADJUSTED(1)
--------- --------------
(DOLLARS IN THOUSANDS,
EXCEPT RATIOS)
<S> <C> <C>
Line of credit.............................................. $ 1,450 $ 0
======= =======
Guaranteed preferred beneficial interest in the Company's
subordinated debt(2)...................................... $ 0 $15,000
------- -------
SHAREHOLDERS' EQUITY:
Common Stock, $1.175 par value, 20,000,000 shares
authorized and 4,994,483 shares issued and
outstanding............................................ 5,869 5,869
Preferred Stock, 5,000,000 shares, $1.175 par value
authorized; none issued................................ 0 0
Additional paid-in capital................................ 15,937 15,937
Unrealized gain on investment securities available for
sale, net.............................................. 34 34
Retained earnings......................................... 4,538 4,538
------- -------
Total shareholders' equity........................ 26,378 26,378
------- -------
Total capitalization.............................. $26,378 $41,378
======= =======
COMPANY CAPITAL RATIOS:
Equity to total assets.................................... 6.96% 6.72%
Tier 1 risk-based capital ratio(3)(4)..................... 10.12% 12.58%
Total risk-based capital(4)............................... 10.99% 13.65%
Leverage ratio............................................ 7.15% 8.59%
</TABLE>
- ---------------
(1) The amount and ratios reflected assumes that the over-allotment option
granted to the Underwriter is not exercised.
(2) Preferred Securities representing beneficial interests in the aggregate
principal amount of $15,000,000 of the 8.50% Junior Subordinated Debentures
of the Company. The Junior Subordinated Debentures will mature on June 30,
2028.
(3) FRB guidelines for calculation of Tier 1 capital limit the amount of
cumulative preferred stock which can be included in Tier 1 capital to 25% of
total Tier 1 capital.
(4) Assumes net proceeds of the offering of Preferred Securities are invested in
assets with zero risk weighting under the risk-based capital rules of the
FRB.
ACCOUNTING TREATMENT
For financial reporting purposes, the Issuer Trust will be treated as a
subsidiary of the Company and, accordingly, the accounts of the Issuer Trust
will be included in the consolidated financial statements of the Company. The
Preferred Securities will be included in the consolidated balance sheets of the
Company and appropriate disclosures about the Preferred Securities, the
Guarantee, and the Junior Subordinated Debentures will be included in the notes
to the consolidated financial statements of the Company. For financial reporting
purposes, Distributions on the Preferred Securities will be recorded as interest
expense in the consolidated statements of earnings of the Company.
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<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's principal asset is its ownership of the Bank. Accordingly,
the Company's results of operations is primarily dependent on the results of the
operations of the Bank. The Bank conducts a commercial banking business which
consists of attracting deposits from the general public and applying those funds
to the origination of loans for commercial, consumer, and real estate loans
(including commercial loans collateralized by real estate). The Bank's
profitability depends primarily on net interest income, which is the difference
between interest income generated from interest-earning assets (i.e., loans and
investments) less the interest expense incurred on interest-bearing liabilities
(i.e., customer deposits and borrowed funds). Net interest income is affected by
the relative amounts of interest-earning assets and interest-bearing
liabilities, and the interest rate paid on these balances.
Net interest income is dependent upon the Bank's interest rate spread,
which is the difference between the average yield earned on its interest-earning
assets and the average rate paid on its interest-bearing liabilities. When
interest-earning assets approximate or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income. The interest
rate spread is impacted by interest rates, deposit flows, and loan demands.
Additionally, and to a lesser extent, the Bank's profitability is affected by
such factors as the level of non-interest income and expenses, the provision for
loan losses, and the effective tax rate. Non-interest income consists primarily
of loan and other fees and income from the sale of loans, servicing rights, and
investment securities. Non-interest expenses consist of compensation and
benefits, occupancy related expenses, deposit insurance premiums paid to the
FDIC, expenses of opening branch offices, and other operating expenses.
The Bank enjoys an excellent reputation in its market areas and strives to
provide quality personalized services to its customers. In recent years the
Company has implemented a growth strategy to expand the geographic market area
of the Bank and to expand the products and services that it offers to its
customers. From the beginning of 1996, through the date of this Prospectus, the
Company has opened four new branch offices, acquired Murdock and DesChamps, and
commenced the operations of the Finance Company. The Company also has added
several new products and services. From the beginning of 1996 through March 31,
1998, the Company's assets, deposits, and loan portfolio have increased
$160,186,000, $129,868,000, and $92,449,000, respectively, or 73%, 70%, and 67%,
respectively. However, the opening of new branches, the start-up of new
operations, the development and marketing of new products, and acquisitions
involve substantial upfront costs and expenses which have depressed net yields
and net income of the Company. With respect to the new branches, it is
anticipated that as they gain critical mass they will begin to recover upfront
costs and eventually become profitable, thereby reducing their negative impact
on the Company's profitability. Similarly, the Finance Company only recently
commenced operations and, although it has incurred and is continuing to incur
operating costs, it has not yet begun to generate any significant revenues. With
respect to Murdock, as the Company begins to realize the cost savings from the
acquisition of Murdock, such acquisition is expected to be accretive to the
Company's earnings. Furthermore, the Company believes that the addition of its
commercial lending operations at the Murdock location which had previously been
residential real estate loan oriented provides the Bank with an opportunity to
significantly increase the revenues generated at that location.
The Company intends to continue to expand its presence along the west coast
of Florida through internal growth, branching, and strategic acquisitions.
Accordingly, such growth activities may continue to have an adverse impact on
short-term profitability. However, as the Bank grows in the aggregate, each new
branch should have less of a negative impact on the Company's overall
profitability.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations presents a review of the consolidated operating results
and financial condition of the Company for the three-month periods ended March
31, 1998, and 1997 and for the fiscal years ended December 31, 1997, 1996, and
1995. This discussion and analysis is intended to assist in understanding the
financial condition and results of
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<PAGE> 24
operation of the Company and the Bank. This section should be read in
conjunction with the consolidated financial statements and the related notes and
the other statistical information contained herein.
RESULTS OF OPERATIONS
COMPARISON OF QUARTERS ENDED MARCH 31, 1998 AND 1997
The Company's net income for the quarter ended March 31, 1998 was $404,000
or $0.08 per share, compared to net income of $333,000 or $0.07 per share for
the same period for 1997, a 21% increase. Earnings were affected by the costs
incurred in the first quarter of 1998 related to the acquisition of Murdock
Florida Bank. Net interest income increased $844,000 to $3,518,000 for the
quarter ended March 31, 1998, over the same quarter in 1997, as a result of the
increase in interest earning assets. Non-interest income increased from $672,000
for the quarter ended March 31, 1997 to $1,103,000 for the same period in 1998.
The increase in non-interest income is primarily attributable to increases in
service charges on deposits and fees of $99,000, an increase of $58,000 on the
sale of mortgage loans, an increase of $120,000 on gain on sale of securities,
an increase in credit card merchant services of $63,000 and an increase of
$115,000 in other income.
Total general and administrative expense for the quarter ended March 31,
1998 increased $1,246,000 over the same period of 1997. This increase was due
primarily to the growth in the Company's assets, including the opening of a new
branch in Ruskin, Florida. This growth is reflected in an increase in salary
expense of $300,000 and an increase of $193,000 in data processing costs due
primarily to the conversion of Murdock systems with and into the Bank's system.
In addition, professional fees associated with the Murdock acquisition and
start-up costs of the Finance Company contributed to the increase in total
general and administrative costs. The provision for loan loss expense decreased
from $171,000 for the three month period ended March 31, 1997 to $124,000 for
the same period in 1998 due to a reduction in write-offs and management's review
of the Bank's loan portfolio. Management evaluates on a monthly basis the
adequacy of the allowance based on its estimates of potential losses in the loan
portfolio.
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1997 AND 1996
For the year ended December 31, 1997, the Company reported net income of
$1,920,000, or $0.38 per share, as compared to net income of $782,000 or $0.17
per share for 1996. This increase is due primarily to growth in the Company's
net interest earning-assets and in the Company's non-interest income, primarily
service fees and mortgage loan activity. From 1996 to 1997, net interest income
increased by $2,248,000 and non-interest income increased by $2,008,000. The
increase in non-interest income from 1996 to 1997 is primarily attributable to
increases in collection of service charges on deposits of $620,000, credit card
merchant fee income of $217,000, and gains on sale of loan servicing of
$250,000. These changes contributing to income were offset by increases in
start-up costs in the form of general and administrative expenses associated
with the opening of a new full service branch in early 1997 and an increase of
$406,000 in the provision for loan losses. Management believes the long term
benefits associated with the new branch will provide additional income which
will contribute to the growth and profitability of the Bank.
The Company's total assets at December 31, 1997 were $353,901,000, an
increase of $80,271,000 or approximately 29% from December 31, 1996. The
majority of the increase was invested in loans receivable and in U.S. government
agency securities. Asset growth was funded by an increase in deposits from the
opening of new branches as well as continued growth at existing branches.
The Company's loans at December 31, 1997 totalled $252,991,000, net, or
approximately 71% of total assets. Of this total, portfolio loans consisted of
$50,104,000 in commercial loans, $61,935,000 in commercial real estate,
$54,243,000 in residential real estate, and $48,827,000 in consumer loans, net
of deferred costs, and allowance for loan losses of $1,704,000. Loans held for
sale were $21,127,000 in residential real estate loans and $18,461,000 in real
estate construction loans. The allowance for loan losses increased from
$1,761,000 at December 31, 1996 to $2,311,000 at December 31, 1997 due primarily
to the growth in loans. The allowance for loan losses represents 1.07% of
portfolio loans at December 31, 1997, as compared to 1.00% at December 31, 1996.
24
<PAGE> 25
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1996 AND 1995
For the year ended December 31, 1996, the Company reported net income of
$782,000 or $0.17 per share, as compared to net income of $850,000 or $0.27 per
share for 1995. Per share results reflect the effect of the 67% increase in the
weighted average number of shares outstanding resulting from the initial public
offering completed in February 1996. From 1995 to 1996, net interest income
increased by $2,092,000 and non-interest income increased by $62,000. The
increase in non-interest income from 1995 to 1996 is primarily attributable to
increases in collection of service charges on deposits of $155,000, decrease of
gains on loans held for sale of $131,000, and increased gains on sale of
securities of $65,000. In addition, loan loss provision decreased by $187,000
from 1995 to 1996. These changes contributing to income were offset by increases
in start-up costs in the form of general and administrative expenses associated
with two new full service branches which were opened by the Bank in March and
September of 1996.
The Company's total assets at December 31, 1996 were $273,630,000, an
increase of $54,637,000 or approximately 25% from December 31, 1995. This
increase was due primarily to the increase in loans originated by the Bank.
The Company's loans at December 31, 1996 totalled $195,616,000, net, or
approximately 71% of total assets. Of this total, portfolio loans consisted of
$41,382,000 in commercial loans, $40,790,000 in commercial real estate,
$49,575,000 in residential real estate, and $44,691,000 in consumer loans, net
of deferred costs and allowance for loan losses of $1,174,000. Loans held for
sale were $4,335,000 in residential real estate loans and $16,016,000 in real
estate construction loans. The allowance for loan losses increased from
$1,609,000 at December 31, 1995 to $1,761,000 at December 31, 1996. The
allowance for loan losses represented approximately 1.00% of portfolio loans at
December 31, 1996 as compared to 1.16% of portfolio loans at December 31, 1995.
NET INTEREST INCOME
Net interest income, which constitutes the principal source of income for
the Company, represents the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
The principal interest-earning assets are loans made to businesses and
individuals. Interest-bearing liabilities primarily consist of time deposits,
interest-paying check accounts ("NOW Accounts"), retail savings deposits, and
money market accounts. Funds deposited to these interest-bearing liabilities are
invested in interest-earning assets. Accordingly, net interest income depends on
the volume of average interest-earning assets and average interest-bearing
liabilities and the interest rates earned or paid on them.
Net interest income for the three month period ended March 31, 1998 was
approximately $3,518,000, an increase of $844,000 over the $2,674,000 of net
interest income recorded for the same three month period in 1997. The primary
reasons for the increase in net interest income was from the growth of loans.
Total interest income increased to $7,101,000 for the three month period ended
March 31, 1998 from the $5,552,000 for the same period in 1997. Interest income
from loans during the three month periods ended March 31, 1998 and 1997
comprised 81.8% and 80.2%, respectively, of the total interest income and earned
an average yield of 8.83% and 8.90%, respectively. Interest income from
investments and federal funds sold earned an average of 6.67% and 6.63% for the
three months ended March 31, 1998 and 1997, respectively. Total interest expense
for the three month period ended March 31, 1998 was $3,583,000, compared to
interest expense of $2,878,000 for the same period in 1997. The average cost of
interest-bearing liabilities for the three months ended March 31, 1998 and 1997
was 4.95% and 5.03%, respectively. The Company has experienced an increase in
the annualized net yield on average earning assets to 4.13% for the three month
period ended March 31, 1998 from 4.02% for the same period in 1997, due
primarily to a reduction in the average rate paid on its certificates of
deposit.
The Company has experienced a steady increase in total income and net
interest income during the past three fiscal years primarily as a result of the
growth of loans. Net interest income for the fiscal year ended December 31,
1997, 1996, and 1995 was $11,714,000, $9,466,000, and $7,374,000, respectively,
on average outstanding balances of interest-earning assets of $294,634,000,
$229,103,000, and $189,058,000, respectively. Total interest income for the
fiscal years ended December 31, 1997, 1996, 1995, was $24,632,000,
25
<PAGE> 26
$19,431,000, and $15,826,000, respectively. Interest income from loans for the
fiscal years 1997, 1996, and 1995 comprised approximately 81.6%, 83.1%, and
82.7%, respectively, of the total interest income and earned an average yield of
8.89%, 9.05%, and 8.99%, respectively. Interest income from investments and
federal funds sold earned an average yield of 6.70%, 6.47%, and 6.30%,
respectively. Total interest expense for fiscal years 1997, 1996, and 1995 was
$12,917,000, $9,965,000, and $8,452,000, respectively, on outstanding balances
of interest-bearing liabilities of $253,255,000, $196,712,000, and $169,530,000,
respectively. The average cost of interest-bearing liabilities for 1997, 1996,
and 1995 was 5.10%, 5.07%, and 4.99%, respectively. Average interest-earning
assets to average interest-bearing liabilities for the years ended December 31,
1997, 1996, and 1995 were 1.16, 1.16, and 1.12, respectively. The Company's net
yield on average earning assets was 3.98%, 4.13%, and 3.90% for 1997, 1996, and
1995, respectively. The decrease in net yield on average earning assets from
1996 to 1997 was due, in part, to a decrease in average yield on
interest-earning assets as a result of interest rate changes in the marketplace.
26
<PAGE> 27
COMPARATIVE AVERAGE BALANCES, INTEREST, AND AVERAGE YIELDS
The following tables show for each category of interest-earning assets and
interest-bearing liabilities, the average amount outstanding, the interest
earned or paid on such amount, and the average rate earned or paid for the three
months ended March 31, 1998 and 1997, and for the years ended December 31, 1997,
1996, and 1995. These tables also show the average rate earned on all
interest-earning assets, the average rate paid on all interest-bearing
liabilities, and the net yield on average interest-earning assets for the same
periods.
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------------------------------------------
1998 1997
------------------------------- -------------------------------
INTEREST INTEREST
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE(1) EXPENSE RATE(2) BALANCE(1) EXPENSE RATE(2)
---------- -------- ------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Cash and due from banks................... $ 11,265 $ 8,160
Bank premises and equipment, net.......... 7,010 6,495
Other assets.............................. 5,702 3,869
-------- --------
Total non-interest earning assets.... 23,977 18,524
-------- --------
INTEREST-EARNING ASSETS:
Federal funds sold........................ $ 9,687 $ 143 5.90% $ 11,557 $ 150 5.19%
Investment securities(3).................. 67,685 1,148 6.78 54,824 950 6.93
Loans, net(4)(5).......................... 263,218 5,810 8.83 200,003 4,452 8.90
-------- ------ ---- -------- ------ ----
Total interest-earning assets/interest
income/average rates earned............. $340,590 $7,101 8.34% $266,384 $5,552 8.34%
======== ====== ==== ======== ====== ====
Total assets.............................. $364,567 $284,908
======== ========
Total non-interest bearing liabilities.... $ 50,528 $ 36,432
-------- --------
INTEREST-BEARING LIABILITIES:
NOW....................................... $ 26,717 $ 163 2.44% $ 22,097 $ 137 2.48%
Money market.............................. 66,284 670 4.04 52,378 585 4.47
Savings................................... 14,092 78 2.21 12,080 72 2.38
Time...................................... 156,840 2,329 5.94 126,024 1,886 5.99
-------- ------ ---- -------- ------ ----
Total interest-bearing deposits...... 263,933 3,240 4.91 212,579 2,680 5.04
Securities sold under agreement to
repurchase.............................. 19,959 258 5.17 10,660 113 4.24
FHLB advances............................. 5,491 85 6.19 5,529 85 6.15
-------- ------ ---- -------- ------ ----
Total interest-bearing
liabilities/interest expense/average
rate paid............................... $289,383 $3,583 4.95% $228,768 $2,878 5.03%
======== ====== ==== ======== ====== ====
Total liabilities......................... $339,911 $265,200
Shareholders' equity...................... 24,656 19,708
-------- --------
Total liabilities and shareholders'
equity.................................. $364,567 $284,908
======== ========
Net interest income....................... $3,518 $2,674
====== ======
Net yield on average earning assets(6).... 4.13% 4.02%
==== ====
</TABLE>
- ---------------
(1) Average balances represent the average daily balance year to date.
(2) Annualized for comparability with full year data.
(3) Principally taxable. The yield information does not give effect to changes
in fair value that are reflected as a component of shareholders' equity.
(4) Non-accruing loans included in computation of average balance.
(5) Interest income on loans includes fees of $112,000 in 1998 and $105,000 in
1997.
(6) The net yield on average earning assets is the net interest income divided
by average interest earning assets.
27
<PAGE> 28
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ------------------------------ ------------------------------
INTEREST INTEREST INTEREST
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE(1) EXPENSE RATE BALANCE(1) EXPENSE RATE BALANCE(1) EXPENSE RATE
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and due from banks........ $ 8,938 $ 7,989 $ 8,179
Bank premises and equipment,
net.......................... 6,869 5,902 3,882
Other assets................... 4,438 2,335 1,570
-------- -------- --------
Total non-interest earning
assets................... 20,245 16,226 13,631
-------- -------- --------
INTEREST-EARNING ASSETS:
Federal funds sold and other
interest-earning assets...... $ 9,459 $ 535 5.66% $ 5,842 $ 336 5.75% $ 5,113 $ 285 5.57%
Investment securities(2)....... 58,119 3,996 6.88 44,898 2,946 6.56 38,271 2,449 6.40
Loans, net(3)(4)............... 227,055 20,101 8.89 178,363 16,150 9.05 145,674 13,092 8.99
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-earning
assets/interest/ income
average rates earned......... $294,634 $24,632 8.36% $229,103 $19,431 8.48% $189,058 $15,826 8.37%
======== ======= ==== ======== ======= ==== ======== ======= ====
Total assets................... $314,879 $245,329 $202,689
======== ======== ========
Total non-interest bearing
liabilities.................. $ 40,351 $ 27,082 $ 20,234
-------- -------- --------
INTEREST-BEARING LIABILITIES:
NOW............................ $ 22,901 $ 433 1.89% $ 19,161 $ 368 1.92% $ 15,636 $ 338 2.16%
Money market................... 59,466 2,773 4.66 36,692 1,720 4.69 32,371 1,457 4.50
Savings........................ 12,773 304 2.38 12,682 312 2.46 13,193 331 2.51
Time........................... 137,986 8,395 6.08 117,407 7,075 6.03 99,887 5,962 5.97
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing
deposits................. 233,126 11,905 5.11 185,942 9,475 5.10 161,087 8,088 5.02
Securities sold under agreement
to repurchase................ 14,374 653 4.54 8,628 352 4.08 7,123 293 4.11
Federal funds purchased........ 77 4 5.19 47 3 6.38 630 37 5.87
FHLB advances.................. 5,678 355 6.25 2,095 136 6.49 691 34 4.92
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities/
interest/expense/average rate
paid......................... $253,255 $12,917 5.10% $196,712 $ 9,965 5.07% $169,530 $ 8,452 4.99%
======== ======= ==== ======== ======= ==== ======== ======= ====
Total liabilities.............. $293,606 $223,794 $189,765
Shareholders' equity........... 21,273 21,535 12,924
-------- -------- --------
Total liabilities and
shareholders' equity......... $314,879 $245,329 $202,689
======== ======== ========
Net interest income............ $11,715 $ 9,466 $ 7,374
======= ======= =======
Net yield on average earning
assets(5).................... 3.98% 4.13% 3.90%
==== ==== ====
</TABLE>
- ---------------
(1) Average balances represent the average daily balance year to date.
(2) Principally taxable. The yield information does not give effect to changes
in fair value that are reflected as a component of shareholders equity.
(3) Non-accruing loans included in computation of average balance.
(4) Interest income on loans includes fees of $352,000 in 1997, $525,000 in
1996, and $131,000 for 1995.
(5) The net yield on average earning assets is the net interest income divided
by average interest-earning assets.
The effect on interest income, interest expense, and net interest income
for the periods indicated, of changes in average balance and rate, is shown
below for the Company. The effect of a change in average balance has been
determined by applying the average rate at the year-end for the earlier period
to the change
28
<PAGE> 29
in average balance at the year-end for the later period. Changes resulting from
average balance/rate variances are included in changes resulting from volume.
RATE/VOLUME INTEREST ANALYSIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1997 COMPARED TO 1996 1996 COMPARED TO 1995
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
CHANGE IN: CHANGE IN:
---------------------------- ----------------------------
AVERAGE AVERAGE TOTAL AVERAGE AVERAGE TOTAL
VOLUME(1) RATE CHANGE VOLUME(1) RATE CHANGE
--------- ------- ------ --------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold....................... $ 208 $ (9) $ 199 $ 41 $ 10 $ 51
Investment securities.................... 867 184 1,051 424 72 496
Loans, net(2)............................ 4,409 (458) 3,951 2,938 120 3,058
------ ----- ------ ------ ---- ------
Total interest income............ $5,484 $(283) $5,201 $3,403 $202 $3,605
====== ===== ====== ====== ==== ======
INTEREST-BEARING LIABILITIES:
NOW...................................... $ 72 $ (7) $ 65 $ 76 (40) 30
Money market............................. 1,067 (13) 1,054 194 68 262
Savings.................................. 2 (10) (8) (13) (6) (19)
Time..................................... 1,240 80 1,320 1,046 67 1,113
------ ----- ------ ------ ---- ------
Total interest on deposits....... 2,381 50 2,431 1,303 83 1,386
Securities sold under agreement to
repurchase and borrow funds.............. 427 94 521 100 27 127
------ ----- ------ ------ ---- ------
Total interest expense........... $2,808 $ 144 $2,952 $1,403 $110 $1,513
====== ===== ====== ====== ==== ======
Change in net interest income.... $2,676 $(427) $2,249 $2,000 $ 92 $2,092
====== ===== ====== ====== ==== ======
</TABLE>
- ---------------
(1) Non-accruing loans are excluded form the average volumes used in calculating
this table.
(2) Includes loan fees of $352,000 in 1997 and $525,000 in 1996.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three month period ended March 31,
1998, was $124,000, compared to $171,000 recorded during the first three months
of 1997. The decrease is a result of management's estimate of the required
allowance coupled with a reduction of loans written off the first quarter of
1998 as compared to the first quarter of 1997. The allowance represented 0.98%
and 0.87% of portfolio loans as of March 31, 1998 and 1997, respectively.
For the years ended December 31, 1997, 1996, and 1995, the loan loss
provisions recorded were in the amounts of $921,000, $515,000, and $702,000,
respectively. The allowance for loan losses represented 1.07%, 1.00%, and 1.16%
of portfolio loans as of December 31, 1997, 1996, and 1995, respectively.
NON-INTEREST INCOME
For the three month periods ended March 31, 1998, and 1997, non-interest
income totalled $1,103,000 and $672,000, respectively, an increase of
approximately 64%. This increase is primarily attributed to increases in service
charges on deposits and fees of $99,000, an increase of $58,000 on the sale of
mortgage loans, an increase of $120,000 on the gain on sale of securities, an
increase in credit card merchant services of $63,000, and an increase of
$115,000 in other income.
29
<PAGE> 30
For the years ended December 31, 1997, 1996, and 1995, non-interest income
totalled $4,156,000, $2,148,000 and $2,086,000, respectively, an increase of
approximately 93% from 1996 to 1997, and 3% from 1995 to 1996. During 1997,
service fees on customer deposits contributed $1,812,000, mortgage banking
operations (including brokered loan fees and gains on the sale of loans and
servicing rights) contributed $1,198,000, fees on credit card merchant services
contributed $479,000, gains from sales of securities contributed $140,000, and
other income increased to $343,000. For the year ended 1996, service fees on
customer deposits contributed $1,192,000, mortgage banking operations
contributed $546,000, fees on credit card merchant services $262,000, and
miscellaneous other income $136,000. The increase in non-interest income in 1997
as compared to 1996 reflects the Company's increase in its mortgage banking
operations through its acquisition of DesChamps in early 1997, a full year of
credit card merchant service fees in 1997 versus a partial year in 1996, and
continued sales of both its mortgage loans held for sale and the mortgage
servicing rights. Non-interest income increased approximately 3% in 1996 from
the amounts generated in 1995 resulting primarily as the result of increases in
collection service charges on deposits of $154,000, decrease of gains on loans
hold for sale of $130,000, and increased gains on sales of securities of
$65,000.
The following table summarizes the major components of non-interest income
for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS YEARS ENDED
ENDED MARCH 31, DECEMBER 31,
--------------- ------------------------
1998 1997 1997 1996 1995
------- ----- ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Service charges and fees.................... $ 421 $322 $1,812 $1,192 $1,038
Gain on sale of mortgage loans.............. 62 4 297 191 321
Gain on sale of securities.................. 122 2 140 107 42
Gain on sale of servicing................... 22 52 573 323 210
Broker loan fees............................ 54 48 327 32 38
Merchant fees............................... 187 124 479 262 97
Other income................................ 235 120 528 41 340
------ ---- ------ ------ ------
Total............................. $1,103 $672 $4,156 $2,148 $2,086
====== ==== ====== ====== ======
</TABLE>
NON-INTEREST EXPENSE
For the three month periods ended March 31, 1998 and 1997, non-interest
expense totalled $3,876,000 and $2,630,000, respectively, an increase of
approximately 47%. This increase is primarily due to increases in other
operating expenses related to the growth in the Company's assets, the number of
Bank branches, the acquisition of Murdock, and the start-up of the Finance
Company. Specifically, salary expense increased by $300,000 and data processing
increased by $193,000, mainly due to the conversion of Murdock systems onto the
same computer system as the Bank. Other expenses increased by $687,000 due to
continued asset growth, professional fees associated with the Murdock
acquisition, and the start-up costs of the Finance Company. Through the three
month periods ending March 31, 1998 and 1997, non-interest expenses were 4.25%
and 3.69%, respectively, of average assets on an annualized basis.
Non-interest expense for the years ended December 31, 1997, 1996, and 1995
totaled $11,912,000, $9,856,000, and $7,437,000, respectively, substantially all
of which was general and administrative expenses. The increase in non-interest
expense in 1997 was due primarily to the opening of the new full service banking
office in Palmetto replacing the prior drive-thru facility located there, hiring
of additional lending staff and support staff for backroom operations, and the
related costs associated with these areas. The increase in 1996 and 1995 was due
to increases in start-up costs in the form of non-interest expenses associated
with two new full service branches which opened in March and September 1996. For
the years ended December 31, 1997, 1996, and 1995, non-interest expenses were
3.78%, 4.02%, and 3.67%, respectively, of average assets. The largest component,
salaries and employee benefits, amounted to $5,181,000 or 43% in 1997, and
$4,361,000 or 44%, in 1996, and $3,165,000 or 43% in 1995, respectively, of
total other expenses for the years ended 1997, 1996, and 1995. Management
continuously monitors non-interest expenses and the efficiency ratio to maintain
non-interest expenses at a level within industry standards.
30
<PAGE> 31
The following table summarizes the various categories of non-interest
expense for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
--------------- -------------------------
1998 1997 1997 1996 1995
------ ------ ------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits............... $1,510 $1,210 $ 5,181 $4,361 $3,165
Net occupancy and equipment expense.......... 434 368 1,627 1,184 1,044
Data processing fees......................... 351 158 917 925 584
Other expenses............................... 1,581 894 4,187 3,386 2,644
------ ------ ------- ------ ------
Total.............................. $3,876 $2,630 $11,912 $9,856 $7,437
====== ====== ======= ====== ======
</TABLE>
INCOME TAX EXPENSE
For the three month period ended March 31, 1998, an income tax provision
totalling $217,000 was recorded, compared to a $212,000 provision for the same
three month period in 1997. The effective tax rates for those periods was were
35% and 39%, respectively.
For the year ended December 31, 1997, 1996, and 1995 income tax provisions
totaling $1,117,000, $461,000, and $471,000 were recorded. The increase in 1997
from 1996, and from 1996 to 1995, are a result of increased earnings during each
succeeding period. The effective tax rate was 37% for the years ended 1995,
1996, and 1997.
ASSET/LIABILITY MANAGEMENT
One of the Company's primary objectives is to control fluctuations in net
interest income caused by changes in interest rates. To manage interest rate
risk, the Company's Board of Directors has established interest rate risk
policies and procedures which delegate to the Asset/Liability Management
Committee ("ALCO") the responsibility to monitor and report on interest rate
risk, devise strategies to manage interest rate risk, monitor loan origination
and deposit activity, and approve all pricing strategies.
The management of interest rate risk is one of the most significant factors
affecting the Company's ability to achieve future earnings. The principal
measure of the Company's exposure to interest rate risk is the difference
between interest rate sensitive assets and liabilities for the periods being
measured, commonly referred to as the "gap" for such period. An asset or
liability is considered interest rate sensitive if it will reprice or mature
within the time period being analyzed. Controlling the maturity or repricing of
an institution's liabilities and assets in order to minimize interest rate risk
is commonly referred to as gap management. A gap is considered positive when the
amount of interest rate sensitive assets exceed the amount of interest rate
sensitive liabilities. When the opposite occurs, the gap is considered to be
negative. During periods of increasing interest rates, negative gap would tend
to adversely affect income while a positive gap would tend to result in net
interest income. During periods of decreasing interest rates, the inverse would
tend to occur. If the maturities of interest rate sensitive assets and
liabilities were equally flexible and moved concurrently, the impact of any
material or prolonged increase or decrease in interest rates or net interest
income on existing assets or liabilities would be minimal. It is common to focus
on the one year gap, which is the difference between the dollar amount of assets
and the dollar amount of liabilities maturing or repricing within the next
twelve months.
ALCO uses an external asset/liability modeling service to analyze the
Company's current financial position and develop strategies prior to
implementation. The systems attempt to simulate the Company's asset and
liability base and project future operating results under several interest rate
and spread assumptions. Management utilizes a simulation model, complete with
rate shock scenarios, to determine the Company's sensitivity to rate changes.
Using historical data and prepayment assumptions, management places each
category of asset and liability in a time frame that it expects its assets and
liabilities to reprice.
31
<PAGE> 32
Under asset/liability management guidelines, the Company's policy is to
maintain a cumulative one-year gap of no more than 15% of total assets,
primarily by managing the maturity distribution of its investment portfolio and
emphasizing loan originations tied to interest sensitive indices. Additionally,
the Bank has joined the FHLB to enhance its liquidity position and provide the
ability to utilize fixed rate advances to improve the match between
interest-earning assets and interest-bearing liabilities in certain periods.
The Company's cumulative one year gap at December 31, 1997 was a negative
$53,639,000 (or -15.16%, expressed as a percentage of total assets). This
represents a significant shift from the positive cumulative one year gap at
December 31, 1996 of $7,750,000. This $61,389,000 shift is reflected primarily
in the $32,000,000 increase in certificates of deposits which mature in 1 year
or less and the increase in NOW and money market accounts of $21,000,000.
Management believes its negative gap position is mitigated by its $86,000,000 in
NOW and money market accounts, the majority of which it considers to be core
deposits.
The following table presents the interest rate-sensitive assets and
liabilities of the Bank at December 31, 1997, which are expected to mature or
are subject to repricing in each of the time periods indicated. The tables may
not be indicative of the Company's rate sensitive position at other points in
time. The balances have been derived based on the financial characteristics of
the various assets and liabilities. Adjustable and floating rate assets are
included in the period in which interest rates are next scheduled to adjust
rather than their scheduled maturity dates. Fixed rate loans are shown in the
periods in which they are scheduled to be repaid. Repricing of time deposits is
based on their scheduled maturities. Deposits without a stated maturity are
shown as repricing within ninety (90) days.
INTEREST RATE SENSITIVITY ANALYSIS AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
TERM TO REPRICING
----------------------------------------------------------------------------------------
90-180 181 DAYS 1-2 2-3 3-4 4+
90 DAYS DAYS TO 365 DAYS YEARS YEARS YEARS YEARS TOTAL
-------- -------- ----------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal funds sold....... $ 5,120 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 5,120
Interest-bearing due from
banks.................. 3,727 0 0 0 0 0 0 3,727
Fixed rate loans......... 36,047 11,624 6,658 8,505 17,982 21,484 53,661 155,961
Variable rate loans...... 55,613 12,293 15,046 4,176 4,848 941 5,819 98,736
Treasuries............... 0 0 1,002 2,032 1,005 0 0 4,039
Governmental agencies.... 0 500 923 4,082 5,084 7,237 43,926 61,752
State and municipal...... 0 0 501 663 0 0 0 1,164
Federal Home Loan Bank
Stock.................. 1,709 0 0 0 0 0 0 1,709
-------- -------- ----------- -------- -------- -------- -------- --------
Total interest-
earning
assets........ 102,216 24,417 24,130 19,458 28,919 29,662 103,406 331,885
NOW...................... 24,390 0 0 0 0 0 0 24,390
Money market............. 61,998 0 0 0 0 0 0 61,996
Savings.................. 8,543 199 397 645 645 422 2,407 13,258
Certificates/IRA's <
$100,000............... 22,783 17,623 34,506 29,760 9,812 20,941 7,631 143,056
Certificates/IRA's > =
$100,000............... 3,916 2,336 5,183 2,976 584 930 0 15,925
Securities sold under
agreements to
repurchase............. 17,528 0 0 0 0 0 0 17,528
Federal Home Loan Bank
advances............... 0 0 5,000 0 0 0 0 5,000
-------- -------- ----------- -------- -------- -------- -------- --------
Total interest-
bearing
liabilities... 139,158 20,158 45,086 33,381 11,041 22,293 10,038 281,155
-------- -------- ----------- -------- -------- -------- -------- --------
Interest sensitivity
gap.................... $(36,942) $ 4,259 $ (20,956) $(13,923) $ 17,878 $ 7,369 $ 93,368 $ 51,053
======== ======== =========== ======== ======== ======== ======== ========
Cumulative gap........... $(36,942) $(32,683) $ (53,639) $(67,562) $(49,684) $(42,315) $ 51,053
======== ======== =========== ======== ======== ======== ========
Cumulative gap ratio..... 0.73 0.79 0.74 0.72 0.80 0.81 1.18
======== ======== =========== ======== ======== ======== ========
Cumulative gap as a
percentage of total
assets................. -10.44% -9.24% -15.16% -19.09% -14.04% -11.96% 14.43%
======== ======== =========== ======== ======== ======== ========
</TABLE>
32
<PAGE> 33
FINANCIAL CONDITION
The Company had total assets of $379,179,000 and $353,901,000 at March 31,
1998 and December 31, 1997, respectively, an increase of 7%. Since the last full
quarter prior to its public offering in 1996 through March 31, 1998, the
Company's assets have increased from $218,993,000 to $379,179,000, or 73%, total
deposits have increased from $186,727,000 to $316,595,000, or 70%, and its loan
portfolio has increased from $138,086,000 to $230,535,000, or 67%. This growth
is attributable to opening of new branches and expansion within its market-area,
internal growth at existing branches, expansion into new market areas, and the
introduction of new consumer products and services. Branches opened since
January 1, 1996, have contributed $128,237,000 in deposits. Net income of the
Company has been negatively impacted due to the start-up costs related to the
new branches.
LENDING ACTIVITIES
The Company offers a broad range of personal and business loans and
mortgage loan products. The Company aggressively pursues quality indirect
lending through local automobile dealerships, small to medium sized commercial
business loans, and direct residential loans. Also, through the Bank's Mortgage
Banking Division (the "Mortgage Banking Division"), the Company has focused
efforts on residential loan originations that can be sold in the secondary
market while it retains or packages for sale the servicing rights. The Mortgage
Banking Division maintains relationships with correspondent lenders throughout
the State of Florida, ensuring continued lending efforts without a concentration
in any one area. Management believes this to be a prudent practice in the
mortgage banking area as it minimizes risks associated with the localized
economic downturns. The Mortgage Banking Division originates primary
construction-to-permanent financing loans, which are considered to have less
risk of nonpayment than construction only financings. In addition, with its
acquisition in early 1997 of DesChamps, a Bradenton based residential mortgage
brokerage company, the Company also increased its origination of residential
mortgage loans in Manatee and Sarasota counties.
LOAN PORTFOLIO COMPOSITION. At March 31, 1998 and December 31, 1997, total
loans included portfolio loans of approximately $230.5 million and $213.4
million, net, respectively, and loans held for sale of approximately $49.7
million and $39.6 million, respectively. Total loans represent approximately 74%
and 71% of the Company's total assets at March 31, 1998 and December 31, 1997,
respectively. Management's objective is to maintain its one-to-four family
residential and construction loans at 30% of total loans. At March 31, 1998,
approximately 37%, or $105 million, of its total loans were in one-to-four
family residential and construction loans, including approximately $31 million
in mortgage loans held for sale and $18 million of construction loans held for
sale.
The following table summarizes the composition of Bank's loan portfolio
(excluding loans held for sale) by type of loan on the dates indicated.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
---------------- ------------------------------------------------------
1998 1997 1996 1995
---------------- ---------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TYPE OF LOAN:
Residential mortgage(1)....... $ 54,642 23.5% $ 54,243 25.2% $ 49,575 28.1% $ 46,032 33.1%
Commercial(2)................. 123,200 53.1 112,039 52.1 82,172 46.6 61,064 43.8
Consumer and other loans(3)... 54,274 23.4 48,827 22.7 44,691 25.3 32,169 23.1
-------- ----- -------- ----- -------- ----- -------- -----
Total loans............. $232,116 100.0% $215,109 100.0% $176,438 100.0% $139,265 100.0%
===== ===== ===== =====
LESS:
Allowance for loan losses..... (2,268) (2,311) (1,761) (1,609)
Net deferred costs (fees)..... 687 607 588 430
-------- -------- -------- --------
Total loans, net........ $230,535 $213,405 $175,265 $138,086
======== ======== ======== ========
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1993
---------------- ---------------
AMOUNT % AMOUNT %
-------- ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
TYPE OF LOAN:
Residential mortgage(1)....... $ 37,041 34.2% $37,551 41.0%
Commercial(2)................. 46,774 43.2 39,826 43.4
Consumer and other loans(3)... 24,479 22.6 14,300 15.6
-------- ----- ------- -----
Total loans............. $108,294 100.0% $91,677 100.0%
===== =====
LESS:
Allowance for loan losses..... (1,374) (1,191)
Net deferred costs (fees)..... 450 (50)
-------- -------
Total loans, net........ $107,370 $90,437
======== =======
</TABLE>
- ---------------
(1) Substantially all single family loans. Real estate construction loans are
included in loans held for sale.
(2) Commercial consists of commercial real estate and other commercial loans.
(3) Includes consumer installment loans.
33
<PAGE> 34
Real Estate Loans. This category of loans is comprised of mainly 1 to 4
single family residential loans. The increase in this category of loans during
the period covered by the table, is due to the growing housing market in
Florida, especially the west coast region. The loans held as portfolio loans are
primarily variable rate loans.
Commercial Loans. This category of loans is comprised of commercial and
commercial real estate loans to local businesses involved primarily in light
manufacturing, service, retail, and wholesale activities. The growth in these
loans is attributable to the continued economic growth of the region and the
Bank's solicitation efforts in this area.
Consumer Loans. This category of loans is comprised of consumer and other
loans that include automobile, personal lines of credit, boat, and credit cards.
The increase in these loans is primarily due to the Bank's continued branching
activities and solicitation of local automobile dealers.
LOAN MATURITY SCHEDULE. The following table sets forth the maturities of
loans outstanding as of December 31, 1997.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
----------------------------------------------------
DUE AFTER 1
DUE IN 1 YEAR BUT DUE AFTER
YEAR OR LESS BEFORE 5 YEARS 5 YEARS TOTAL
------------ -------------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1-4 Family Residential............................ $12,143 $11,189 $26,335 $ 49,667
Other loans collateralized by real estate......... 10,198 24,587 22,874 57,659
Commercial and consumer loans..................... 38,761 56,520 12,502 107,783
------- ------- ------- --------
Total loans(1).......................... $61,102 $92,296 $61,711 $215,109
======= ======= ======= ========
</TABLE>
- ---------------
(1) Excluding deferred fees, allowance for loan losses, and loans held for sale.
SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES. The following table
sets forth as of March 31, 1998 and December 31, 1997, the dollar amounts of
loans due after one year which had predetermined interest rates and loans due
after one year which had floating or adjustable interest rates.
<TABLE>
<CAPTION>
DOLLAR AMOUNT OF LOANS
----------------------
DECEMBER 31,
1997
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Type of Interest Rate:
Predetermined rate, maturity greater than one year........ $102,076
Floating or adjustable rate due after one year............ 51,931
--------
Total............................................. $154,007
========
</TABLE>
LOAN CLASSIFICATION
Management seeks to maintain a level of high quality assets through
conservative underwriting and sound lending practices. Management intends to
follow this policy even though it may result in foregoing the funding of higher
yielding loans. Approximately 44% of the Company's loan portfolio, including
loans held for sale, is collateralized by first liens on primarily
owner-occupied residential homes which have historically carried a relatively
low credit risk. The Company also maintains a commercial real estate portfolio
comprised primarily of owner-occupied commercial businesses.
In an effort to maintain the quality of the loan portfolio, management
seeks to minimize higher risk types of lending and additional precautions have
been taken when such loans are made in order to reduce the Company's risk of
loss. Generally, construction loans present a higher degree of risk to a lender
depending upon, among other things, whether the borrower has permanent financing
at the end of the loan period, whether the project is an income producing
transaction in the interim, and the nature of changing economic conditions
including changing interest rates. While there is no assurance that the Company
will not suffer losses on its construction loans or its commercial real estate
loans, management believes that it has reduced the risks associated therewith
because, among other things, primarily all such loans relate to owner-occupied
34
<PAGE> 35
projects where the borrower has demonstrated to the Company's management that
its business will generate sufficient income to repay the loan. The Company
primarily enters into agreements with individuals who are familiar to Bank
personnel, are residents of the Company's primary market area and are believed
by management to be good credit risks.
Commercial and financial loans also entail certain risks since they usually
involve large loan balances to single borrowers or a related group of borrowers,
resulting in a more concentrated loan portfolio. Further, since their repayment
is usually dependent upon the successful operation of the commercial enterprise,
they also are subject to adverse conditions in the economy. Commercial loans are
generally riskier than residential mortgages because they are typically made on
the basis of the ability to repay from the cash flow of a business rather than
on the ability of the borrower or guarantor to repay. Further, the collateral
underlying commercial loans may depreciate over time, and occasionally cannot be
appraised with as much precision as residential real estate, and may fluctuate
in value based on the success of the business.
While there is no assurance that the Company will not suffer any losses on
its construction loans or its commercial real estate loans, management believes
that it has reduced the risks associated therewith because, among other things,
substantially all of such loans relate to owner-occupied projects, projects
where the borrower has received permanent financing commitments from which the
Company will be repaid, and projects where the borrower has demonstrated to
management that its business will generate sufficient income to repay the loan.
In addition to maintaining high quality assets, management attempts to
limit the Company's risk exposure to any one borrower or borrowers with similar
or related entities. As of March 31, 1998, the Bank has extended credit in
excess of $1.5 million to 20 borrowers.
Loan concentrations are defined as amounts loaned to a number of borrowers
engaged in similar activities which would cause them to be similarly impacted by
economic or other conditions. The Company, on a routine basis, evaluates these
concentrations in order to make necessary adjustments in its lending practices
that most clearly reflect the economic times, loan to deposit ratios, and
industry trends. As of March 31, 1998, total loans to any particular group of
customers engaged in similar activities or having similar economic
characteristics did not exceed 10% of total loans.
The Board of Directors of the Company concentrates its efforts and
resources, and that of its senior management and lending officials, on loan
review and underwriting procedures. The Company utilizes the services of an
independent consultant to perform periodic loan documentation and compliance
reviews as well as deposit and operations compliance reviews. Internal controls
include a loan review specialist employed by the Company, who performs on-going
reviews of new and existing loans to monitor documentation and ensure the
existence and valuations of collateral. Senior loan officers have established a
review process with the objective of quickly identifying, evaluating, and
initiating necessary corrective action for substandard loans. The goal of the
loan review process is to address the watch list, and substandard and
non-performing loans as early as possible. Combined, these components are
integral elements of the Company's loan program which has resulted in its loan
portfolio performance to date. Nonetheless, management maintains a cautious
outlook in anticipating the potential effects of uncertain economic conditions
(both locally and nationally) and the possibility of more stringent regulatory
standards.
Loans, including impaired loans, are generally classified by the Company as
non-accrual loans if they are past due as to maturity or payment of principal or
interest for a period of more than ninety days, unless such loans are well
collateralized and in the process of collection. If a loan or a portion of a
loan is classified as doubtful or is partially charged off, the loan is
classified as a non-accrual loan. Loans that are on a current payment status or
past due less than ninety days may also be classified as non-accrual if
repayment in full of principal and/or interest is in doubt. Loans are not
returned to accrual status until the principal and interest payments are brought
current and future payments appear certain.
Interest accrued and unpaid at the time a loan is placed in non-accrual
status is charged against interest income. While a loan is classified as
non-accrual and the future collectibility of the recorded loan balance is
doubtful, collections of interest and principal are generally applied as a
reduction to principal outstanding. When the future collectibility of the
recorded loan balance is expected, interest income may be recognized on a cash
basis. In the case where a non-accrual loan had been partially charged off,
recognition of interest on a
35
<PAGE> 36
cash basis is limited to that which would have been recognized on the recorded
loan balance at the contractual interest rate. Cash interest receipts in excess
of that amount are recorded as recoveries to the allowance for loan losses until
prior charge-offs have been fully recovered.
Real estate acquired by the Company as a result of foreclosure or
acceptance of deeds in lieu of foreclosure is classified as foreclosed real
estate. These properties are recorded on the date acquired at the lower of fair
value less estimated selling costs or the recorded investment in the related
loan. If the fair value after deducting the estimated selling costs of the
acquired property is less than the recorded investment in the related loan, the
estimated loss is charged to the allowance for loan losses at that time. The
resulting carrying value established at the date of foreclosure becomes the new
cost basis for subsequent accounting. After foreclosure, if the fair value less
estimated selling costs of the property becomes less than its cost, the
deficiency is charged to the provision for losses on foreclosed real estate.
Costs relating to the developmental improvement of the property are capitalized,
whereas those relating to holding the property for sale are charged as an
expense.
As of March 31, 1998, the Company had 26 loans on non-accrual status
totaling $709,000, or 0.30% of total loans, and at December 31, 1997, the
Company had 23 loans on non-accrual status totalling $986,000, or 0.46% of total
loans. At March 31, 1998 and December 31, 1997, the Company had other real
estate owned ("OREO") of approximately $364,000, which consisted of four single
family residences.
In addition, the Company performs ongoing reviews of its new and existing
loans to identify, evaluate, and initiate corrective action for substandard
loans. As of March 31, 1998, the Company has identified 121 loans to 81
borrowers to be monitored on its watch list and substandard list of loans,
representing aggregate borrowings of approximately $7,047,000. Of this aggregate
amount, management has assessed the maximum risk of loss to be $785,000 based on
management's assessment of the ability of such borrowers to comply with their
present loan repayment terms and assuming that the collateral for such loans
must be liquidated. These loans have been considered by management in its
assessment of the allowance for loan losses and none of these borrowers have
failed to comply with their present loan repayment terms.
The following table sets forth certain information, as of the date
indicated, regarding non-accrual loans, restructured loans, and loans 90 days or
more past due.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
------------ ------------------------------------------
1998 1997 1996 1995 1994 1993
------------ ------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
NON-ACCRUAL LOANS:
Residential mortgage..................... $ 487 $ 762 $ 934 $ 130 $ 685 $ 280
Commercial and commercial real estate.... 129 153 133 1,017 341 1,137
Consumer................................. 93 71 67 96 71 4
------ ------ ------ ------ ------ ------
Total non-accrual loans.......... 709 986 1,134 1,243 1,097 1,421
TOTAL NON-PERFORMING LOANS(1).............. 139 687 229 0 0 0
RESTRUCTURED LOANS......................... 2,229 22 24 0 0 0
------ ------ ------ ------ ------ ------
Total............................ $3,077 $1,695 $1,387 $1,243 $1,097 $1,421
====== ====== ====== ====== ====== ======
Percentage non-accrual, non-performing
and restructured loans to total
loans................................. 1.3% 0.8% 0.8% 0.9% 1.0% 1.6%
</TABLE>
- ---------------
(1) Accruing loans which are contractually past due 90 days or more as to
principal or interest.
ALLOWANCE FOR LOAN LOSSES
In originating loans, the Company recognizes that loan losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan and, in the case of a collateralized loan, the quality of the
collateral for the loan as well as general economic conditions. It is
management's policy to maintain an adequate allowance for loan losses
36
<PAGE> 37
based on, among other things, the Company's historical loan loss experience,
evaluation of economic conditions and regular reviews of delinquencies and loan
portfolio quality.
Management continues to actively monitor the Company's asset quality and to
charge-off loans against the allowance for loan losses when appropriate or to
provide specific loss allowances when necessary. Although management believes it
uses the best information available to make determinations with respect to the
allowance for loan losses, future adjustments may be necessary if economic
conditions differ from the economic conditions in the assumptions used in making
the initial determinations.
The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Total loans at end of period(1)............ $232,116 $201,907 $215,109 $176,438 $139,265 $108,294 $ 91,677
======== ======== ======== ======== ======== ======== ========
Allowance at beginning of period........... $ 2,311 $ 1,761 $ 1,609 $ 1,374 $ 1,191 $ 1,021
-------- -------- -------- -------- -------- -------- --------
Loans charged-off during the period........ (174) (211) (471) (412) (534) (165) (595)
Recoveries of loans previously
charged-off.............................. 7 31 100 49 67 57 55
-------- -------- -------- -------- -------- -------- --------
Net loans charged-off during the period.... (167) (180) (371) (363) (467) (108) (540)
-------- -------- -------- -------- -------- -------- --------
Provisions charged to income............... 124 171 921 515 702 291 710
-------- -------- -------- -------- -------- -------- --------
Allowance at end of period................. $ 2,268 $ 1,752 $ 2,311 $ 1,761 $ 1,609 $ 1,374 $ 1,191
======== ======== ======== ======== ======== ======== ========
Ratio of net charge-offs to average loans
outstanding.............................. 0.07% 0.09% 0.21% 0.23% 0.37% 0.14% 0.69%
======== ======== ======== ======== ======== ======== ========
Allowance as a percentage of total
portfolio loans.......................... 0.98% 0.87% 1.07% 1.00% 1.16% 1.27% 1.30%
======== ======== ======== ======== ======== ======== ========
Allowance as a percentage of non-performing
and non-accrual loans.................... 267.5% 395.5% 138.1% 129.2% 129.4% 125.2% 84.8%
</TABLE>
- ---------------
(1) Excludes loans held for sale.
The following table sets forth a breakdown of the allowance for loan losses
by loan category for the periods indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of an allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in
any other category.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
----------------- ------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ----------------- ----------------- ----------------- ------
% OF % OF % OF % OF
LOANS TO LOANS TO LOANS TO LOANS TO
TOTAL TOTAL TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
------ -------- ------ -------- ------ -------- ------ -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential
mortgage(1).......... $ 745 25.3% $ 773 25.2% $ 615 28.1% $ 468 33.1% $ 463
Commercial and
commercial real
estate............... 870 53.0 861 52.1 773 46.6 630 43.8 512
Consumer loans......... 617 21.7 641 22.7 342 25.3 233 23.1 251
Unallocated............ 36 0.0 36 0.0 31 0.0 278 0.0 148
------ ----- ------ ----- ------ ----- ------ ----- ------
Total allowance
for loan
losses....... $2,268 100.0% $2,311 100.0% $1,761 100.0% $1,609 100.0% $1,374
====== ===== ====== ===== ====== ===== ====== ===== ======
<CAPTION>
AT DECEMBER 31,
----------------------------
1994 1993
-------- -----------------
% OF % OF
LOANS TO LOANS TO
TOTAL TOTAL
LOANS AMOUNT LOANS
-------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Residential
mortgage(1).......... 34.2% $ 422 41.0%
Commercial and
commercial real
estate............... 43.2 469 43.4
Consumer loans......... 22.6 235 15.6
Unallocated............ 0.0 65 0.0
----- ------ -----
Total allowance
for loan
losses....... 100.0% $1,191 100.0%
===== ====== =====
</TABLE>
- ---------------
(1) No allowance has been allocated to real estate construction since the amount
such loans held in the Bank's loan portfolio at the periods indicated was
not material.
37
<PAGE> 38
The measurement of impaired loans is based on the fair value of the loan's
collateral. The measurement of non-collateral dependent loans is based on the
present value of expected future cash flows discounted at the historical
effective interest rate. The components for the allowance for loan losses are as
follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------------------- ------------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Impaired loans............... $1,479,000 $ 537,000 $ 246,000 $ 331,400 $ 493,000
Other........................ 789,000 1,215,000 2,065,000 1,429,600 1,116,000
---------- ---------- ---------- ---------- ----------
$2,268,000 $1,752,000 $2,311,000 $1,761,000 $1,609,000
========== ========== ========== ========== ==========
</TABLE>
INVESTMENT ACTIVITIES
At March 31, 1998 and at December 31, 1997, 1996, and 1995, the Company's
investment portfolio totalled $62,266,000, $68,664,000, $43,509,000, and
$40,423,000, respectively. The investment portfolio consists of U.S. Treasury
and federal agency securities, municipal bonds, and FHLB stock. Maturities range
from three months to fifteen years with a portfolio average maturity of
approximately 5 years.
Funds generated by the Bank as a result of increases in deposits or
decreases in loans which are not immediately used by the Bank are invested in
securities held in its investment portfolio. The investment portfolio is used as
a source of liquidity for the Bank. The investment portfolio is structured so
that it provides for an ongoing source of funds for meeting loan and deposit
demands and for reinvestment opportunities to take advantage of changes in the
interest rate environment.
The following table summarizes the Company's investment portfolio as of the
dates indicated.
INVESTMENT SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
------------ ---------------------------
1998 1997 1996 1995
------------ ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE(1):
U.S. Treasury securities.......................... $ 4,047 $ 4,039 $ 7,425 $13,114
U.S. Government Agencies.......................... 54,217 55,847 22,080 13,120
State and municipal............................... 1,125 1,164 1,034 1,160
------- ------- ------- -------
Total debt securities..................... 59,389 61,050 30,539 27,394
FHLB stock (restricted)........................... 1,709 1,709 1,075 1,066
Mortgage-backed securities........................ 1,168 5,905 11,895 11,963
------- ------- ------- -------
Total available for sale(2):.............. $62,266 $68,664 $43,509 $40,423
======= ======= ======= =======
</TABLE>
- ---------------
(1) Carried at estimated market value. The Company does not have any securities
being held to maturity.
(2) Cost of such securities ($ in thousands) was $62,211 as of March 31, 1998,
$68,438 as of December 31, 1997, $43,664 as of December 31, 1996, and
$40,138 as of December 31, 1995.
38
<PAGE> 39
The following table summarizes the Company's securities (excluding the
restricted FHLB Stock and mortgage-backed securities) by maturity and weighted
average yields at March 31, 1998 and December 31, 1997. Yields on tax exempt
securities are stated at their nominal rates and have not been adjusted for tax
rate differences.
<TABLE>
<CAPTION>
AFTER ONE YEAR AFTER FIVE YEARS
BUT WITHIN BUT WITHIN
WITHIN ONE YEAR 5 YEARS 10 YEARS AFTER 10 YEARS TOTAL
---------------- --------------- ----------------- -------------- ---------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------- ------ ------- ----- -------- ------ ------ ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AT MARCH 31, 1998:
U.S. Treasury
securities............ $1,506 5.17% $ 2,016 5.31% $ 525 6.38% $ 0 0.00% $ 4,047 5.39%
U.S. Government
agencies.............. 1,496 5.33 15,612 6.29 33,133 6.92 3,976 7.16 54,217 6.71
State and municipals.... 500 5.76 0 0.00 515 8.66 110 5.50 1,125 6.77
------ ---- ------- ---- ------- ---- ------ ---- ------- ----
$3,502 5.32% $17,628 6.16% $34,173 6.93% $4,086 7.10% $59,389 6.60%
====== ==== ======= ==== ======= ==== ====== ==== ======= ====
AT DECEMBER 31, 1997:
U.S. Treasury
securities............ $1,003 5.19% $ 2,516 5.31% $ 520 6.38% $ 0 0.00% $ 4,039 5.40%
U.S. Government
agencies.............. 1,096 5.24 18,099 6.35 34,654 6.93 1,998 7.39 55,847 6.71
State and municipals.... 501 5.75 0 0.00 514 8.66 149 5.40 1,164 6.69
------ ---- ------- ---- ------- ---- ------ ---- ------- ----
$2,600 5.31% $20,615 6.20% $35,688 6.94% $2,147 7.21% $61,050 7.18%
====== ==== ======= ==== ======= ==== ====== ==== ======= ====
</TABLE>
DEPOSIT ACTIVITIES AND OTHER SOURCE OF FUNDS
GENERAL. Deposit accounts are the primary source of funds of the Company
for use in lending and other investment purposes. In addition to deposits, the
Company draws funds from interest payments, loan principal payments, loan and
security sales, and funds from operations (including various types of loan
fees). Scheduled loan payments of principal and interest are a relatively stable
source of funds, while deposit inflows and outflows are significantly influenced
by general interest rates and money market conditions. The Company may use
borrowings on a short-term basis, if necessary, to compensate for reductions in
the availability of other sources of funds, or borrowings may be used on a
longer term basis for general business purposes.
DEPOSIT ACTIVITIES. Deposits are attracted principally from within the
Company's primary market area through the offering of a broad variety of deposit
instruments, including checking accounts, money market accounts, savings
accounts, certificates of deposit (including jumbo certificates in denominations
of $100,000 or more), and retirement savings plans. Total deposits were
$316,595,000 at March 31, 1998, compared to $302,746,000, $232,433,000, and
$186,727,000 at December 31, 1997, 1996, and 1995, respectively. The
introduction of new products and the continued focus on quality customer service
have contributed to strong deposit growth. The Company continues to develop
consumer and commercial deposit relationships through referrals and additional
contacts within its market area. As of March 31, 1998, and December 31, 1997,
1996, and 1995, jumbo certificates accounted for $33,639,000, $36,170,000,
$24,702,000, and $17,738,000, respectively, of the Company's deposits. The
Company has not aggressively attempted to obtain large denomination, high
interest-bearing certificates except to address a particular funding need. In an
effort to fund the rapid growth of the loan volume originated by the Mortgage
Banking Division during the fourth quarter of 1994, the Bank offered a five year
certificate of deposit and money market product at above market rates at that
time. In addition, in an effort to fund strong loan demand during 1996, the
Company offered a five year certificate and money market product at above market
rates at that time. Although all of such deposits were originated within the
Company's market area and substantially all were not jumbo products, the
regulators required the Company to classify these deposits as brokered deposits
because the rate exceeded 75 basis points over the then existing market rate.
Maturity terms, service fees, and withdrawal penalties are established by
the Company on a periodic basis. The determination of rates and terms is
predicated on funds acquisition and liquidity requirements, rates paid by
competitors, growth goals and federal regulations.
39
<PAGE> 40
DEPOSIT FLOWS AND AVERAGE BALANCE AND RATES. The following table sets
forth the average balance and weighted average rates for the Bank's categories
of deposits for the period indicated.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
----------------------------- -------------------------------------------------------------
1998 1997 1996
----------------------------- ----------------------------- -----------------------------
AVERAGE AVERAGE % OF AVERAGE AVERAGE % OF AVERAGE AVERAGE % OF
BALANCE RATE DEPOSITS BALANCE RATE DEPOSITS BALANCE RATE DEPOSITS
-------- ------- -------- -------- ------- -------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest checking...... $ 47,404 0.00% 15 $ 38,753 0.00% 14 $ 25,787 0.00% 12
Interest checking and Money
Market................... 93,001 3.58% 30 82,367 3.90% 30 55,853 3.74% 26
Savings.................... 14,092 2.21% 5 12,773 2.38% 5 12,682 2.46% 6
Certificates of deposit.... 156,840 5.94% 50 137,986 6.08% 51 117,407 6.03% 56
-------- --- -------- --- -------- ---
Total.............. $311,337 100 $271,879 100 $211,729 100
======== === ======== === ======== ===
<CAPTION>
AT DECEMBER 31,
-----------------------------
1995
-----------------------------
AVERAGE AVERAGE % OF
BALANCE RATE DEPOSITS
-------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Non-interest checking...... $ 20,176 0.00% 11
Interest checking and Money
Market................... 48,007 3.74% 27
Savings.................... 13,193 2.51% 7
Certificates of deposit.... 99,887 5.97% 55
-------- ---
Total.............. $181,265 100
======== ===
</TABLE>
CERTIFICATES OF DEPOSIT. At March 31, 1998, certificates of deposit
represented approximately 50.4% of the Company's total deposits, as compared to
50.8% of total deposits at December 31, 1997. The Company does not have a
concentration of deposits from any one source, the loss of which would have a
material adverse effect on the business of the Company. Management believes that
substantially all of the Company's depositors are residents, either full or part
time, in its primary market area.
The following table summarizes the amount of the Company's certificates of
deposit of $100,000 or more by time remaining until maturity at March 31, 1998
and December 31, 1997.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
MATURITY PERIOD 1998 1997
- --------------- ------------ ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Less than three months...................................... $ 5,136 $ 6,486
Over three months through six months........................ 6,012 5,197
Over six months through twelve months....................... 8,476 10,208
Over twelve months.......................................... 14,015 14,279
------- -------
Totals............................................ $33,639 $36,170
======= =======
</TABLE>
DEPOSIT ACTIVITY. The following table sets forth the deposit flows of the
Bank during the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31,
----------------- ---------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net increase before interest credited............ $10,706 $19,333 $58,717 $35,966 $12,805
Net credited..................................... 3,143 2,690 11,596 9,740 8,314
------- ------- ------- ------- -------
Net deposit increase................... $13,849 $22,023 $70,313 $45,706 $21,119
======= ======= ======= ======= =======
</TABLE>
BORROWINGS. The Company has borrowed funds during the past to fund
short-term cash requirements. None of such funds were used to fund loan
activity. In the future, if there are periods when the supply of funds from
deposits cannot meet the demand for loans, the Company has the ability to seek a
portion of the needed funds through loans (advances) from the FHLB of Atlanta
where the Company currently has a $25,000,000 line of credit. As of March 31,
1998, $5,000,000 had been borrowed on the line.
In addition, the Company has obtained the Barnett Credit Line. Although
this credit facility has been used in part to fund the construction of the
Company's new administrative offices, the Company also has utilized the credit
facility for other general corporate purposes. At March 31, 1998, approximately
$1,450,000 has been drawn on this credit facility. A portion of the proceeds
from this offering may be used to retire the obligations thereunder. This
Barnett Credit Line is collateralized with the all of the capital stock of the
Bank. Interest is calculated quarterly on either a one or three month LIBOR plus
175 basis points. After two years the loan is converted into a ten-year term
note with a five-year balloon payment.
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<PAGE> 41
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is defined as the ability of the Company to generate sufficient
cash to fund current loan demand, deposit withdrawals, other cash demands and
disbursement needs, and otherwise to operate on an ongoing basis. The Company's
principal sources of funds are deposits, principal and interest payments on
loans, sale of loans, interest on investments and the sale of investments.
During the three month period ended March 31, 1998, and the fiscal year ended
December 31, 1997, the Company received $14 million and $70 million,
respectively, from deposit growth, $20 million and $18 million, respectively,
from the sale of investments, and $0 and $14 million, respectively, from
maturing investments. In addition, the Company also has the ability to borrow
from the FHLB to supplement its liquidity needs. At both March 31, 1998 and
December 31, 1997, the Company had outstanding borrowings of approximately $5
million under its line of credit with the FHLB. The Company's liquidity needs
and funding are provided through the sale of its equity securities and through
borrowings from a nonaffiliated correspondent bank. As of March 31, 1998, the
Company had drawn approximately $1,450,000 under the $5 million Barnett Credit
Line.
At March 31, 1998, shareholders' equity was approximately $26,378,000, or
6.96% of total assets, as compared to $26,079,000 at December 31, 1997, or 7.37%
of total assets. At March 31, 1998 and December 31, 1997, respectively, the
Company's Tier 1 leverage ratio was 6.77% and 7.28%, the Tier 1 risk-based
capital ratio was 9.81% and 8.81%, and the total risk-based capital ratio was
10.48% and 10.67%, all in excess of FDIC guidelines for a "well capitalized"
bank.
At March 31, 1998 and at December 31, 1997, the liquidity ratio of the
Company was 33.37% and 35.79%, respectively, well in excess of regulatory
requirements.
Management believes that there are adequate funding sources to meet its
future liquidity needs for the foreseeable future. Primary among these funding
sources are the repayment of principal and interest on loans, the renewal of
time deposits, and the growth in the deposit base. Management does not believe
that the terms and conditions that will be present at the renewal of these
funding sources will significantly impact the Company's operations, due to its
management of the maturities of its assets and liabilities. However, in order to
finance the continued growth of the Bank at current levels, additional funds may
be necessary in order to provide sufficient capital to fund loan growth. In this
regard, the Company will receive the net proceeds from this offering which will
be available for, among other things, general corporate purposes, including
contributions to the capital of the Bank. Further, the Company may from time to
time consider and evaluate a variety of additional sources of funds, including
other debt financing vehicles, sales of equity securities, and other financing
alternatives. There can be no assurance that the Company will be able to obtain
such additional financing, if needed, or, if available, that it can be obtained
on terms favorable to the Company.
RETURN ON EQUITY AND ASSETS
The following table sets forth certain selected performance ratios of the
Company for the periods indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT MARCH 31, --------------------
1998(1) 1997 1996 1995
------------ ---- ---- ----
<S> <C> <C> <C> <C>
Return on average assets............................ 0.44% 0.61% 0.32% 0.42%
Return on average equity............................ 6.53% 9.03% 3.63% 6.58%
Dividend payout ratios.............................. (2) (2) (2) (2)
Average equity to average assets.................... 6.76% 6.76% 8.76% 6.38%
</TABLE>
- ---------------
(1) Annualized
(2) The Company has not paid any dividends since its inception.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related financial data presented herein
concerning the Company have been prepared in accordance with generally accepted
accounting principles, which require the measurement of
41
<PAGE> 42
financial position and operating results in terms of historical dollars, without
considering changes in the relative purchasing power of money over time due to
inflation. The primary impact of inflation on the operations of the Company is
reflected in increased operating costs. Unlike most industrial companies,
virtually all of the assets and liabilities of a financial institution are
monetary in nature. As a result, changes in interest rates have a more
significant impact on the performance of the Company than do the effects of
changes in the general rate of inflation and changes in prices. Interest rates
do not necessarily move in the same direction or in the same magnitude as the
prices of goods and services.
FUTURE ACCOUNTING REQUIREMENTS
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). This statement establishes new standards for reporting and disclosure of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is defined as the change in equity
during a period from transactions and other events and circumstances from
non-shareholder sources, such as changes in net unrealized securities gain. It
includes all changes in equity during a period except those resulting from
investments by shareholders and distributions to shareholders. This statement is
effective for the Company's fiscal year ending December 31, 1998. Application of
this statement will not impact amounts previously reported for net income or
affect the comparability of previously issued financial statements.
The FASB also has issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). This statement establishes standards for the reporting of
financial information from operating segments in annual and interim financial
statements. It requires that financial information be reported on the same basis
that it is reported internally for evaluating segment performance and deciding
how to allocate resources to segments. Because this statement addresses how
supplemental financial information is disclosed in annual and interim reports,
the adoption will have no material impact on the financial statements. This
statement is effective for the Company's fiscal year ending December 31, 1998.
YEAR 2000 COMPLIANCE
The Company utilizes and is dependent upon data processing systems and
software to conduct its business. The data processing systems and software
include those developed and maintained by the Company's third-party data
processing vendor and purchased software which is run on in-house computer
networks. In 1997, the Bank initiated a review and assessment of all hardware
and software to confirm that it will function properly in the Year 2000. To
date, those vendors which have been contacted have indicated that their hardware
or software is or will be Year 2000 compliant in time frames that meet
regulatory requirements. The costs associated with the compliance efforts are
not expected to have significant impact on the Company's ongoing results of
operations. See "Risk Factors -- Risk Factors Relating to the Company -- Year
2000 Issues".
42
<PAGE> 43
BUSINESS
GENERAL
The Company, organized on June 30, 1995, is a bank holding company
registered under the BHCA, and, on December 1, 1995, became the bank holding
company for the Bank. The Bank is the largest independent bank in Manatee
County, Florida, based on 1997 year-end asset size. The Bank, whose capital
stock is wholly-owned by the Company, is the Company's primary subsidiary and
principal asset. Through its ownership of the Bank, the Company is engaged in a
general commercial banking business and its primary source of earnings is
derived from income generated by the Bank. The Company also recently commenced
the operation of the Finance Company. As of March 31, 1998, the Company, on a
consolidated basis, had total assets of approximately $379.2 million, net
portfolio loans of approximately $230.5 million, total deposits of approximately
$316.6 million, and shareholders' equity of approximately $26.4 million.
The Bank, which commenced operations in 1989, is a Florida state-chartered
banking corporation and is not a member of the Federal Reserve System. The Bank
is engaged in general commercial banking activities and provides a variety of
corporate and personal banking services to consumers and small to mid-sized
businesses in its primary market areas from eight banking offices located in
Manatee, Charlotte, and Hillsborough counties, Florida. The Bank is operated by
local business persons and by experienced bank personnel who are familiar with
the community and are dedicated to providing fast, efficient, and flexible
personalized services to the market area. As a result of the Bank's
community-oriented philosophy to fulfill the banking needs of individuals and
small-to-medium sized businesses which it believed were not being adequately
served by the large banking institutions located in its market area, the Bank
grew rapidly. This growth was financed through a series of equity offerings
purchased by local investors who provided further support for the Bank and
attracted additional new business. In 1994, the Bank commenced the operation of
its Mortgage Banking Division and in late 1995 formed the Company. The Company
was formed as part of an overall strategy to expand the Bank's operations
geographically and to expand its products and services. The Company acquired the
Bank and conducted a public offering of the Company's common shares in early
1996. Since the public offering, the Company has added 4 branches and expanded
its geographic base. In 1997, the Bank's operations were conducted only through
the banking offices located in Manatee County, Florida. During the first quarter
of 1998, the Company expanded its operations in the State of Florida to
Charlotte County through the acquisition of Murdock. On March 23, 1998, the
Company acquired Murdock in a transaction pursuant to which Murdock was merged
into the Bank and its sole office was converted into a branch of the Bank. As
part of the merger transaction, the Bank changed its name from the "American
Bank of Bradenton" to "American Bank". Under the terms of the merger, 924,024 of
the Company's common shares were issued in exchange for all the outstanding
common stock of Murdock (an exchange ratio of 2.4 of the Company's common shares
for each share of Murdock common stock). The Bank has undertaken further Florida
expansion to Hillsborough County through its opening of a full service branch in
Ruskin, Florida during the second quarter of 1998.
In February 1997, the Bank acquired a Bradenton based mortgage brokerage
company, DesChamps, which originates residential mortgage loans with business
operations concentrated in Manatee and Sarasota Counties. DesChamps, which is
now the Retail Residential Lending Division, generated loans in principal amount
of $37,290,000 and $17,367,000, during the fiscal year 1997 and the three month
period ended March 31, 1998, respectively.
The business of the Bank consists of attracting deposits from the general
public in areas served by its banking offices and using those deposits, together
with funds derived from other sources, to originate a variety of commercial,
consumer, and residential real estate loans. In addition, the Bank offers
customized accounts receivable financing and billing services, and credit card
merchant services. Such services are provided selectively to quality credit
risks who normally have another relationship or credit history with the Bank.
The Bank presently does not provide fiduciary, trust, or appraisal services. The
Bank, however, has entered into an arrangement with Advest, Inc. whereby its
customers may obtain trust services. The Bank also has recently begun to offer
computer-based home banking services.
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<PAGE> 44
The Mortgage Banking Division generates, closes, and services single family
residential home mortgages. Its primary function is to originate fixed and
adjustable rate construction-to-permanent residential real estate mortgage loans
which fit the needs of borrowers for the purchase and construction of homes.
These loans are originated, approved, and serviced from the Bank's Mortgage
Banking Division offices located in Bradenton, Florida. Since the establishment
of the Mortgage Banking Division in 1994, the Bank has substantially expanded
its mortgage banking operations by emphasizing the origination of
construction-to-permanent residential real estate mortgage loans for sale in the
secondary mortgage market while retaining or packaging for sale the fee
generating mortgage servicing rights associated with such loans. A majority of
the mortgage loans made by the Bank since 1994 have been sold in the secondary
market to the Federal National Mortgage Association ("FNMA") and other
institutional investors. Consideration may be given to making such sales to
other governmental agencies in the future. Similarly, most of the associated
mortgage servicing rights also have been sold to third parties.
During the fiscal year ended December 31, 1997, the Mortgage Banking
Division originated approximately $58,452,000 in mortgage loans and sold in the
secondary market approximately $44,113,000 of such loans, including those held
in inventory from the previous year. Servicing fee income was $63,000. During
1997, the Bank also packaged and sold mortgage servicing rights with respect to
approximately $20.6 million in unpaid principal amount FNMA loans originated by
the Bank for approximately $411,000, or a 2.0% premium on the unpaid balance of
the loan portfolio servicing rights sold.
As a result of the successful implementation of its strategies, the Company
has established a special niche in its market area which fills the needs of a
significant segment of that market. The consumer-oriented community banking
focus of the Bank provides customers with locally-based decision makers who are
familiar with their customers, their business environment, and competitive
demands, who are able to quickly evaluate and respond to loan applications, and
who have the ability to craft personalized banking solutions to the customer's
needs without extensive bureaucratic delays. Due to the growth of the Bank, it
is able to extend much larger credits than other community-based financial
institutions.
The revenues of the Bank are primarily derived from interest on, and fees
received in connection with, real estate and other loans, from the sales of
loans, and from interest and dividends from investment securities and short-term
investments. The principal sources of funds for the Bank's lending activities
are its deposits, amortization and prepayment of loans, sales of loans, and the
sale of investment securities. The principal expenses of the Bank are the
interest paid on deposits and operating and general administrative expenses.
As is the case with banking institutions generally, the Bank's operations
are materially and significantly influenced by general economic conditions and
by related monetary and fiscal policies of financial institution regulatory
agencies, including the FRB and the FDIC. Deposit flows and cost of funds are
influenced by interest rates on competing investments and general market rates
of interest. Lending activities are affected by the demand for financing of real
estate and other types of loans, which in turn is affected by the interest rates
at which such financing may be offered and other factors affecting local demand
and availability of funds.
GROWTH STRATEGY
At December 31, 1995, the quarter-end prior to the Company's initial public
offering, and as of March 31, 1998, the Company had total assets of $219.0 and
$379.2 million, respectively, net portfolio loans of $138.1 and $230.5,
respectively, total deposits of $186.7 and $316.6 million, respectively, and
shareholders equity of $14.6 and $26.4 million, respectively. The Company
intends to continue its geographic and product expansion while maintaining its
community banking focus and preserving its market niche. The Company intends to
expand its presence along the west coast of Florida through internal growth,
branching, and strategic acquisitions. The Company will continue to evaluate and
identify areas into which it can further expand its operations and improve
market share and, in the future, may consider further strategic expansion
through branching and/or acquisitions of banks or banking assets in those
geographic areas that management believes will complement its existing business
and would most effectively achieve market penetration within its primary market
areas or expand its existing markets. The Company believes that it can continue
to improve its market share and long-term profitability by identifying locations
for opening or acquiring additional branch offices.
44
<PAGE> 45
Further, the Company will consider and evaluate potential strategic market
expansion and acquisitions which are brought to its attention to determine
whether such opportunities are in the best interests of the Company and should
be pursued. Management believes that there are branching and acquisition
opportunities available for further expansion of its geographic market both in
the areas existing between its current branches and in other areas along the
west coast of Florida. Although the Company has identified certain financial
institutions that it believes would be suitable acquisition candidates, it does
not have any understandings, arrangements, or agreements, whether written or
oral, with respect to any specific acquisition prospects. There is no assurance
that any acquisition candidate will be interested in such a transaction, and if
not, that the Company will be able to identify any additional acquisition
candidates, or to the extent that suitable acquisition candidates have been or
are identified, that an acquisition will receive regulatory approval or be
consummated.
MARKET AREA
The Company's primary market areas now consists of the Florida counties of
Manatee, Charlotte, and Hillsborough. Six of the eight banking offices of the
Bank currently are located in Manatee County, and its Murdock branch is located
in Charlotte County. These market areas have all experienced substantial growth
during recent decades. This population growth has resulted in continued
construction of residential housing and related commercial support facilities.
While changing conditions involving the infrastructure requirements of various
geographic locations around the country have limited economic growth and
population expansion, management believes that the Bank's primary market areas
have continued to grow because of the ability of Florida, and these areas in
particular, to attract new residents to its favorable year round climate and its
relatively stable economic environment. Although the major economic bases in the
primary market areas are service, retail, and manufacturing, there also has been
a growth of tourism. The Company believes that it is situated to take advantage
of the expected economic and demographic growth in the Bank's primary market
areas.
MARKET FOR SERVICES
Management believes that the Bank's principal markets are: (i) the
established and expanding commercial and small-to-medium sized businesses within
its primary market areas; (ii) the real estate mortgage market within the
primary market areas for retail lending and throughout Florida and parts of
Georgia for wholesale lending; and (iii) the growing consumer loan market.
Businesses are solicited through the personal efforts of the Bank's
directors and officers. Management believes a locally-based independent bank is
often perceived by the local business community as possessing a clearer
understanding of local commerce and its needs. Consequently, the Company expects
that the Bank will be able to make prudent lending decisions quickly and more
equitably than its competitors without compromising asset quality or the Bank's
profitability.
The Bank focuses on the smaller commercial customer because management
believes that this segment offers the greatest concentration of potential
business. Also, the small to mid-size commercial market segment has historically
shown a willingness to borrow and carry larger balances. Finally, the Company
believes that this market segment tends to be more loyal in its banking
relationships.
LENDING ACTIVITIES
GENERAL. The primary source of income generated by the Bank is from the
interest earned from both the loan and investment portfolios. The Bank maintains
diversification when considering investments and the granting of loan requests.
Lending activities include commercial and consumer loans, and loans for
residential purposes. Commercial loans are originated for commercial
construction, acquisition, remodeling, and general business purposes. In this
regard, the Bank, among other things, also originates loans to small businesses
in association with the Small Business Administration. In addition, the Bank
offers customized accounts receivable financing and billing services that enable
customers to convert their receivables into cash on a daily basis and eliminate
the expense of billing. Consumer loans include those for the purchase of
automobiles, boats, home improvements
45
<PAGE> 46
and personal investments. The Bank also offers credit card merchant services
which are competitive with credit card agencies, but provide the merchant with
the local attention of the Bank's representatives. Residential loans include the
origination of conventional mortgages and residential acquisition, development,
and construction loans for the purchase or construction of single-family homes.
The Bank primarily enters into lending arrangements for its portfolio loans
with individuals who are familiar to the Bank and are residents of the Bank's
primary market areas. Emphasis is placed on the borrower's ability to generate
cash flow to supports its debt obligations and other cash related expenses. The
Bank aggressively pursues quality indirect lending through local automobile
dealerships, small to medium sized commercial business loans, and direct
residential loans. Also, through its Mortgage Banking Division, the Bank has
focused efforts on residential loan originations that can be sold in the
secondary market while it retains or packages for sale the servicing rights. The
Mortgage Banking Division of the Bank maintains relationships with correspondent
lenders throughout the State of Florida, ensuring continued lending efforts
without a concentration in any one area. Management believes this to be a
prudent practice in the mortgage banking area as it minimizes risks associated
with the localized economic downturns. The Mortgage Banking Division originates
primary construction-to-permanent financing loans, which are considered to have
less risk of nonpayment than construction only financings.
At March 31, 1998, the Bank's total loans included portfolio loans of
approximately $232.1 million, representing approximately 61% of its total
assets. As of such date, the loan portfolio consisted of 53% commercial and
commercial real estate loans, 24% residential real estate mortgage loans, and
23% consumer installment loans. In addition, at March 31, 1998, approximately
$50 million of residential real estate mortgage loans were being held for sale.
COMMERCIAL LENDING. The Bank offers a variety of commercial loan services
including term loans, lines of credit, and equipment receivables financing. A
broad range of short-to-medium term commercial loans, both collateralized and
uncollateralized, are made available to businesses for working capital
(including inventory and receivables), business expansion (including
acquisitions of real estate and improvements), and the purchase of equipment and
machinery. The purpose of a particular loan generally determines its structure.
The Bank's commercial loans primarily are underwritten in the Bank's
primary market area on the basis of the borrowers' ability to service such debt
from income. As a general practice, the Bank takes as collateral a security
interest in any available real estate, equipment, or other chattel, although
such loans may be made on an uncollateralized basis. Collateralized working
capital loans are primarily collateralized by short term assets whereas term
loans are primarily collateralized by long term assets.
Unlike residential mortgage loans, which generally are made on the basis of
the borrower's ability to make repayment from his employment and other income
and which are collateralized by real property whose value tends to be easily
ascertainable, commercial loans typically are made on the basis of the
borrower's ability to make repayment from the cash flow of their business and
generally are collateralized by business assets, such as accounts receivable,
equipment, and inventory. As a result, the availability of funds for the
repayment of commercial loans may be substantially dependent on the success of
the business itself. Further, the collateral underlying the loans, which may
depreciate over time, occasionally cannot be appraised with as much precision as
residential real estate, and may fluctuate in value based on the success of the
business.
RESIDENTIAL LENDING. A large portion of the Bank's lending activities
consist of the origination of single-family residential mortgage loans
collateralized by owner-occupied property located in the Bank's primary service
areas. The Bank also offers adjustable rate mortgages ("ARMs") and either
retains these ARMs in its portfolio or sells them in the secondary market. The
ability to retain the ARMs in the Bank's portfolio allows the Bank the
opportunity to originate loans to borrowers who may not meet the underwriting
criteria of strict secondary market standards (but are still quality credits).
The Bank offers one-year ARMs with rate adjustments tied to the weekly
average rate of U.S. Treasury securities adjusted to a constant one-year
maturity with specified minimum and maximum interest rate adjustments. The
interest rates on a majority of these mortgages are adjusted yearly with
limitations on upward adjustments of 2% per adjustment period and 6% over the
life of the loan. The Bank also originates 15-
46
<PAGE> 47
year and 30-year fixed-rate mortgage loans on single-family residential real
estate. The Bank generally charges a higher interest rate if the property is not
owner-occupied. Fixed-rate mortgage loans are generally underwritten according
to FNMA or Federal Home Loan Mortgage Corporation ("FHLMC") guidelines so that
the loans qualify for sale in the secondary market to FNMA or FHLMC. It has been
the Bank's experience that the proportion of fixed-rate and adjustable-rate loan
originations depend in large part on the level of interest rates. As interest
rates fall, there is generally a reduced demand for ARMs and, as interest rates
rise, there is generally an increased demand for ARMs.
Fixed rate and adjustable rate mortgage loans collateralized by single
family residential real estate generally have been originated in amounts of no
more than 80% of appraised value. The Bank may, however, lend up to 95% of the
value of the property collateralizing the loan, but if such loans are required
to be made in excess of 80% of the value of the property, they must be insured
by private or federally guaranteed mortgage insurance. In the case of mortgage
loans, the Bank will procure mortgagee's title insurance to protect against
defects in its lien on the property which may collateralize the loan. The Bank
in most cases requires title, fire, and extended casualty insurance to be
obtained by the borrower, and, where required by applicable regulations, flood
insurance. The Bank maintains its own errors and omissions insurance policy to
protect against loss in the event of failure of a mortgagor to pay premiums on
fire and other hazard insurance policies. Although the contractual loan payment
period for single-family residential real estate loans is generally for a 15 to
30 year period, such loans often remain outstanding for significantly shorter
periods than their contractual terms. In addition, the Bank charges no penalty
for prepayment of mortgage loans. Mortgage loans originated by the Bank
customarily include a "due on sale" clause giving the Bank the right to declare
a loan immediately due and payable in the event, among other matters, that the
borrower sells or otherwise disposes of the real property subject to a mortgage.
In general, the Bank enforces due on sale clauses. Borrowers are typically
permitted to refinance or prepay loans at their option without penalty.
CONSUMER LOANS. Consumer loans made by the Bank have included automobiles,
recreation vehicles, boats, second mortgages, home improvements, home equity
lines of credit, personal (collateralized and uncollateralized), and deposit
account collateralized loans. The Bank's consumer loan portfolio consists
primarily of loans to individuals for various consumer purposes, but includes
some business purpose loans which are payable on an installment basis. A
majority of these loans are for terms of less than 60 months and although
generally collateralized by liens on various personal assets of the borrower may
be made uncollateralized. Consumer loans are made at fixed and variable interest
rates and may be made based on up to a 10 year amortization schedule.
Consumer loans are attractive to the Bank because they typically have a
shorter term and carry higher interest rates than that charged on other types of
loans. Consumer loans, however, do pose additional risks of collectibility when
compared to traditional types of loans granted by commercial banks such as
residential mortgage loans. In many instances, the Bank is required to rely on
the borrower's ability to repay since the collateral may be of reduced value at
the time of collection. Accordingly, the initial determination of the borrower's
ability to repay is of primary importance in the underwriting of consumer loans.
CONSTRUCTION LOANS. The Bank originates residential construction
contractor loans to finance the construction of single-family dwellings. Most of
the residential construction loans are made to individuals who intend to erect
owner-occupied housing on a purchased parcel of real estate. The Bank's
construction loans to individuals typically range in size from $100,000 to
$200,000. Construction loans also are made to contractors to erect single-family
dwellings for resale. Construction loans are generally offered on the same basis
as other residential real estate loans, except that a larger percentage down
payment is typically required.
The Bank may also make residential construction loans to real estate
developers for the acquisition, development, and construction of residential
subdivisions. The Bank has limited involvement with this type of loan. Such
loans may involve additional risk attributable to the fact that funds will be
advanced to fund the project under construction, which is of uncertain value
prior to completion and because it is relatively difficult to evaluate
accurately the total amount of funds required to complete a project.
The Bank finances the construction of individual, owner-occupied houses on
the basis of written underwriting and construction loan management guidelines.
Construction loans are structured either to be
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<PAGE> 48
converted to permanent loans with the Bank at the end of the construction phase
or to be paid off upon receiving financing from another financial institution.
Construction loans on residential properties are generally made in amounts up to
80% of appraised value. Construction loans to developers generally have terms of
up to 12 months. Loan proceeds on builders' projects are disbursed in increments
as construction progresses and as inspections warrant. The maximum loan amounts
for construction loans are based on the lesser of the current appraisal value or
the purchase price for the property.
Construction loans are generally considered to involve a higher degree of
risk than long-term financing collateralized by improved, occupied real estate.
A lender's risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at the completion of
construction and estimated cost (including interest) of construction. If the
estimate of construction cost proves to be inaccurate, the lender could be
required to advance funds beyond the amount originally committed in order to
permit completion of the project. If the estimate of anticipated value proves to
be inaccurate, the lender may have collateral which has value insufficient to
assure full repayment.
Loans collateralized by subdivisions and multi-family residential real
estate generally are larger than loans collateralized by single-family,
owner-occupied housing and also generally involve a greater degree of risk.
Payments on these loans depend to a large degree on the results of operations
and management of the properties, and repayment of such loans may be more
subject to adverse conditions in the real estate market or the economy.
LOAN SOLICITATION AND PROCESSING
Loan originations are derived from a number of sources. Residential loan
originations can be attributed to real estate broker referrals, mortgage loan
brokers, direct solicitation by the Bank's loan officers, present savers and
borrowers, builders, attorneys, walk-in customers and, in some instances, other
lenders. Loan applications, whether originated through the Bank or through
mortgage brokers, are underwritten and closed based on the same standards, which
generally meet FNMA underwriting guidelines. Consumer and commercial real estate
loan originations emanate from many of the same sources. The legal lending limit
of the Bank, as of March 31, 1998, was $6.2 million.
The loan underwriting procedures followed by the Bank conform to regulatory
specifications and are designed to assess with the borrower's ability to make
principal and interest payments and the value of any assets or property serving
as collateral for the loan. Generally, as part of the process, a bank loan
officer meets with each applicant to obtain the appropriate employment and
financial information as well as any other required loan information. Upon
receipt of the borrower's completed loan application, the Bank then obtains
reports with respect to the borrower's credit record, and orders and reviews an
appraisal of any collateral for the loan (prepared for the Bank through an
independent appraiser). The loan information supplied by the borrower is
independently verified. Loan officers or other loan production personnel in a
position to directly benefit monetarily through loan solicitation fees from
individual loan transactions do not have approval authority. Once a loan
application has been completed and all information has been obtained and
verified, the loan request is submitted to a final review process. As part of
the loan approval process, all uncollateralized loans of $100,000 or more and
all collateralized loans of $500,000 or more require preapproval by the Bank's
loan committee, which is currently comprised of five directors of the Bank and
meets on such basis as is deemed necessary to promptly service loan demand. All
loans of $2 million or more require preapproval by the Bank's Board of
Directors, and borrowers requesting amounts which will result in a loan
relationship of $2 million or more also must be approved by the Board of
Directors of the Bank.
Loan applicants are notified promptly of the decision of the Bank by
telephone and a letter. If the loan is approved, the commitment letter specifies
the terms and conditions of the proposed loan including the amount of the loan,
interest rate, amortization term, a brief description of the required
collateral, and required insurance coverage. Prior to closing any long-term
loan, the borrower must provide proof of fire and casualty insurance on the
property serving as collateral which insurance must be maintained during the
full term of the loan. Title insurance is required on loans collateralized by
real property. Interest rates on committed loans are
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<PAGE> 49
normally locked in at the time of application for a 30 to 45 day period. The
commitment issued at the time of approval will be for the time remaining, based
on the application date.
MORTGAGE BANKING AND RESIDENTIAL LENDING OPERATIONS
The Company provides mortgage banking services through the Bank's Mortgage
Banking Division and residential lending services from its Retail Residential
Lending Division. The Retail Residential Lending Division was formed in
connection with the acquisition of DesChamps in 1997. Both the Mortgage Banking
Division and the Retail Residential Lending Division were established for the
purpose of increasing the Bank's residential loan portfolio and resulting
interest income, and to increase non-interest income through sales of loans in
the secondary market and the retention or sale of the fee generating mortgage
servicing rights. The Bank also established the Mortgage Banking Division in an
effort to pursue the strong residential mortgage loan demand that management
believes exists outside of its primary market areas in Florida and established
the Retail Residential Lending Division to pursue the residential mortgage loan
demand that the Bank believes exists in its primary market areas.
The Mortgage Banking Division's lending efforts are widely disbursed
throughout Florida and parts of Georgia and are not reliant on a specific
region. Management considers this to be a prudent business practice by reducing
risks inherent in localized economic down turns or adverse weather conditions.
Such loans are originated through a variety of contacts that the staff has in
the mortgage banking industry throughout Florida and parts of Georgia.
Furthermore, the Mortgage Banking Division is not dependent on any single source
for a significant portion of its volume of loan originations. This division
originates, underwrites, closes, and services a broad line of residential
mortgage loan products, including construction-to-permanent mortgages, both for
the Bank's loan portfolio and for resale in the secondary mortgage market. The
division's primary function is to originate fixed and adjustable rate
construction-to-permanent residential real estate mortgage loans which fit the
needs of borrowers for the purchase and construction of homes. These loans are
originated, approved, and serviced from the Mortgage Banking Division's offices
in Bradenton.
The Mortgage Banking Division has expanded significantly during the past
three years by emphasizing the origination of loans for sale in the secondary
market while retaining or packaging for sale the fee generating mortgage
servicing rights associated with such loans. A majority of the mortgage loans
made by the Bank since 1994 have been sold in the secondary market to FNMA and
other institutional investors. The Bank is an approved lender and seller
servicer for FNMA. Consideration may be given to making sales of such loans to
other governmental agencies in the future.
The construction phase of loans made by the Mortgage Banking Division has
certain risks, including the viability of the contractor, the contractor's
ability to complete the project and changes in interest rates. The goal of the
Mortgage Banking Division is to take a residential mortgage loan from the
construction stage to permanent financing with a fixed interest rate, then to
sell the permanent financing in the secondary market. The sale of the loans in
the secondary market allows the Bank to hedge against the interest rate risks
related to such lending operations. Since the Bank intends to sell these loans
in the secondary market upon conversion to permanent financing, these
construction loans have been included in the classification "loans held for
sale" on the Company's balance sheet.
In addition to the fees collected at the closing of a loan, the Bank
attempts to sell the loan for a gain at completion of construction. Such a
brokerage arrangement permits the Bank to accommodate its client's demands while
eliminating the interest rate risk for the fixed 15-to-30 year term of the loan.
By selling the mortgage while retaining the servicing rights, the Bank will
receive servicing fees and ancillary fees associated with the servicing rights.
The Bank has elected to group the servicing rights of a selection of loans
together and sell those rights for a lump sum periodically throughout the year.
In addition to interest earned on loans and fees generated from mortgage
servicing activities, the Bank receives loan origination fees or "points" for
originating loans. Origination fees are calculated as a percentage of the
principal amount of the mortgage loan and are charged to the borrower for
creation of the loan. Loan origination fees are volatile sources of income, and
are affected by the volume and types of loans and
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<PAGE> 50
commitments made, competitive conditions in the mortgage markets, and the demand
for and availability of money.
All Mortgage Banking Division loans of $250,000 to $500,000 must be
approved by the President or Senior Vice President of Lending for the Bank. Such
loans of $500,000 to $2 million must be approved by the Bank's loan committee,
and such loans over $2 million must be approved by the Bank's Board of
Directors. The Bank does not intend to significantly increase the size of its
Mortgage Banking Division operations, but intends to continue to originate a
significant volume of loans for sale in the secondary market.
FINANCE COMPANY OPERATIONS
The Company recently has organized a wholly-owned Florida subsidiary
corporation, Freedom Finance Company (referred to herein as the Finance Company)
pursuant to which it has begun to engage in full service consumer financing. The
Finance Company commenced preliminary operations at the end of March 1998. In
order to provide the Finance Company with the funds necessary to commence full
scale operations, the Company made a small capital contribution and the Bank
extended a $2.4 million line of credit to the Finance Company in April 1998.
This loan was made on substantially the same terms and conditions, including
interest rates and collateral on loans, as those prevailing for comparable
transactions with unrelated third parties. It is anticipated that the Finance
Company will offer consumer-driven products and services ranging from mortgages
to automobile loans, home equity loans, and education financing. The Finance
Company will have the ability to extend financing to individuals and entities
which may not be able to satisfy the Bank's underwriting requirements or loan
standards. However, the Finance Company is expected to provide such loans on a
selective basis to customers that the Company believes are quality credits. Such
customers will likely consist of those individuals or entities which have
another banking or credit relationship with the Company or the Bank. Such
operations may have greater risks of collection then those of the Bank. See
"Risk Factors -- Risks Relating to the Company -- Risks Associated with the
Finance Company Operations".
COMPETITION
The Bank encounters strong competition both in making loans and attracting
deposits. The deregulation of the banking industry and the widespread enactment
of state laws which permit multi-bank holding companies as well as the
availability of nationwide interstate banking has created a highly competitive
environment for financial services providers in the Bank's primary service
areas. In one or more aspects of its business, the Bank competes with other
commercial banks, savings and loan associations, credit unions, finance
companies, mutual funds, insurance companies, brokerage and investment banking
companies, and other financial intermediaries operating in the Bradenton area
and elsewhere. Most of the Bank's primary competitors, some of which are
affiliated with large bank holding companies, have substantially greater
resources and lending limits, and may offer certain services, such as trust
services, that the Bank does not currently provide. In addition, many of the
Company's non-bank competitors are not subject to the same extensive federal
regulations that govern bank holding companies and state chartered and federally
insured banks.
Management believes that the Company and the Bank are well positioned to
compete successfully in their primary market areas, although no assurances can
be given. Competition among financial institutions generally is based upon
interest rates offered on deposit accounts, interest rates charged on loans and
other credit and service charges, the quality of the services rendered, the
convenience of banking facilities, and, in the case of loans to commercial
borrowers, relative lending limits. Management believes that the Bank's
commitment to personal service, innovation, and involvement in the community and
its primary market areas, as well as its commitment to quality, are factors that
contribute to the Bank's competitiveness.
EMPLOYEES
At March 31, 1998, the Company and the Bank together employed 179 full-time
and 12 part-time employees. None of these employees are covered by a collective
bargaining agreement and the Company believes that its employee relations are
good.
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PROPERTY OF THE COMPANY
The principal executive offices of the Bank are located at 4702 Cortez Road
West, Bradenton, Florida 34210 and consist of approximately 7,700 square feet on
two floors, containing a lobby, executive and customer service offices, teller
stations, safe deposit booths and related non-vault area and vault operations. A
drive through facility and adequate paved parking also is on the premises. Both
the land and all improvements are owned by the Company.
The Bank has eight banking office locations. Four of these offices, the
main office, two full service branches and a drive-thru branch, are in
Bradenton. The Bank also maintains a separate office for its Mortgage Banking
Division in Bradenton. The remaining offices include a full service branch in
Palmetto and in Ellenton, both in Manatee County, the recently acquired branch
in Murdock, Florida which is located in Charlotte County, and the recently
opened branch in Ruskin, Florida located in Hillsborough County. All of the
branch offices and the Mortgage Banking Division offices are owned in fee simple
by the Bank, with the exception of the Murdock branch. In connection with the
acquisition of Murdock, the Bank assumed Murdock's lease. The Murdock facility,
consisting of approximately 10,300 square feet, is subject to a lease which
expires on July 31, 2000, with an option to renew the lease for two additional
five-year terms. The Murdock lease requires rental payments of $145,000 per
year.
The Company recently completed construction of a new 30,000 square foot
administrative office building located on two acres of land adjacent to the
Bank's main office at 4502 Cortez Road West, Bradenton, Florida, which office
now serves as the Company's administrative offices. In an effort to centralize
administrative and backroom operations of the Bank, the accounting and
operations department, the Mortgage Banking Division, and the Retail Residential
Lending Divisions have been relocated to the new offices. Management also
anticipates leasing space to other subsidiaries and unrelated third parties. The
Company currently is considering the transfer of this building improvements,
together with the real property to the Bank. The location which previously
housed the Mortgage Banking Division also is owned by the Bank in fee simple and
it is anticipated that the Bank will seek approval to convert the vacated
facility into a new full service branch location.
The Finance Company has recently assumed a lease for a 1,700 square foot
facility located in Bradenton from which it will conduct its operations. The
Finance Company lease, which was assumed as of February 10, 1998, expires on
April 1, 2002, with an option to renew the lease for two additional three-year
terms, and requires an annual rent of $16,662 payable in monthly installments.
Management believes that each of its banking locations provides sufficient
parking for its customers as well as visibility from highly travelled
thoroughfares.
LEGAL PROCEEDINGS
The Company and the Bank are periodically parties to or otherwise involved
in legal proceedings arising in the normal course of business, such as claims to
enforce liens, foreclose on loan defaults, claims involving the making and
servicing of real property loans, and other issues incident to the Bank's
business. Management does not believe that there is any proceeding threatened or
pending against the Company or the Bank which, if determined adversely, would
have a material effect on the business or financial position of the Company or
the Bank.
RECENT ACQUISITION
In accordance with the terms of an Agreement and Plan of Merger, dated
September 23, 1997, as amended on October 8, 1997 (the "Merger Agreement"), the
Company acquired Murdock and merged it with and into the Bank. Pursuant to the
merger, stockholders of Murdock received 2.4 common shares of the Company for
each share of Murdock common stock held by them. In lieu of the issuance of
fractional common shares, cash was paid for each such fraction. In addition, the
14,000 outstanding options to acquire Murdock common stock existing prior to the
merger have been converted at the same exchange ratio into options to acquire
the Company's common shares, with the exercise prices adjusted accordingly. The
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Company's consolidated financial statements and related management's discussion
and analysis of financial condition and results of operations included herein
give retroactive effect to the Merger using the pooling of interests method of
accounting.
MANAGEMENT
DIRECTOR AND EXECUTIVE OFFICERS
The directors and executive officers of the Company, their ages, and
positions with the Company and the Bank are set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY AND BANK
- ---- --- ------------------------------
<S> <C> <C>
J. Gary Russ.............................. 48 Chairman of the Board, Director
Gerald L. Anthony......................... 55 President, Chief Executive Officer, and Director(1)
Samuel S. Aidlin.......................... 84 Director
Philip W. Coon............................ 44 Senior Vice President, Mortgage Banking Division of
Bank
Andrea M. Franco.......................... 49 Vice President, Credit Cards and Marketing for Bank
Stuart M. Gregory......................... 39 Senior Vice President, Retail Residential Lending
for Bank
Ronald L. Larson.......................... 54 Director
Michael R. Lewis.......................... 50 Senior Vice President, Consumer Lending for Bank
David R. Mady............................. 36 Vice President, Secondary Market Manager for Bank
Timothy I. Miller......................... 58 Director
Dan E. Molter............................. 46 Director
Kirk D. Moudy............................. 46 Director
John S. Nash.............................. 38 Senior Vice President, Senior Commercial Lending
Officer for Bank
Lindell W. Orr............................ 54 Director
Lynn B. Powell, III....................... 61 Director
Walter L. Presha.......................... 52 Director
R. Jay Taylor............................. 42 Director
Brian M. Watterson........................ 40 Senior Vice President, Chief Financial Officer,
Secretary, and Chief Operations Officer(1)
Edward D. Wyke............................ 77 Director
</TABLE>
- ---------------
(1) Each of these individuals serve both the Company and the Bank in the same
capacities as indicated above.
All directors of the Company hold office until the earlier of the next
annual meeting of the shareholders and until their successors have been duly
elected and qualified, or their death, resignation, or removal. Officers of the
Company and the Bank are elected annually by the respective Boards of Directors
of the Company and the Bank to hold office until the earlier of their death,
resignation, or removal.
Set forth below is a description of the business experience during the past
five years or more and other biographical information for the directors and
executive officers identified above.
J. GARY RUSS has been Chairman of the Board of Directors of the Company and
the Bank since 1995, and has been a director of the Bank since 1989. Mr. Russ is
the principal owner of Russ Citrus Groves, Ltd. and a 50% partner of
Edwards-Russ Groves.
GERALD L. ANTHONY has been President, Chief Executive Officer, and a
director of the Company since its inception in 1995, and has also served in
these three capacities for the Bank since 1989.
SAMUEL S. AIDLIN has served as a director of the Company since 1995, and as
a director of the Bank since 1989. Mr. Aidlin was the Chairman of the Board and
Chief Executive Officer of Aidlin Automation Corporation and Automated
Recycling, Inc. from 1945 until its sale in 1997.
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PHILIP W. COON has been the Senior Vice President, Mortgage Banking
Division of the Bank since the start-up of the Bank's mortgage banking
operations in 1994. Mr. Coon has engaged in mortgage banking activities for the
past 17 years. He was employed as Director of Residential Lending with Key
Florida Bank, Bradenton from 1991 to 1994, as Regional Manager with Southeast
Mortgage Company, Tampa from 1985 to 1991, as a Branch Manager with Collateral
Mortgage Company from 1984 to 1985, and as a Loan Officer with Cameron-Brown
Company in Charlotte, North Carolina and Tampa, Florida from 1979 to 1984.
ANDREA M. FRANCO has been the Vice President, Credit Cards and Marketing of
the Bank since 1994. Previously, Ms. Franco was the District Manager of
Financial Alliance, an independent sales organization for credit card sales,
from 1992 to 1994; Vice President of Credit Card operations for First Florida
Banks from 1982 to 1992; credit card sales for Telecredit, a credit card
processing company, from 1978 to 1982; and credit card processing for First
National Bank of Ft. Myers, Florida from 1972 to 1978.
STUART M. GREGORY has been the Senior Vice President, Residential Real
Estate since January 1997. Previously, Mr. Gregory was the founder and President
of DesChamps & Gregory Mortgage Company, Inc. ("DesChamps"), a Bradenton based
mortgage brokerage company originating residential mortgage loans, from 1991
until its acquisition by the Bank in 1997. Prior to forming DesChamps, Mr.
Gregory served for eleven years as a Senior Account Executive for Republic
Mortgage Insurance Company and General Electric Capital Corporation in the State
of Florida. Both companies specialize in high loan to value risk insurance for
residential mortgage loans. Mr. Gregory is a graduate of Florida Southern
College with a bachelor of science degree in Sports Administration.
RONALD L. LARSON has been a director of the Company since 1995, and a
director of the Bank since 1989. He currently serves as the President and owner
of Ron Larson & Associates, Inc., a consulting engineer company which was
organized in early 1997. From 1994 to 1997, Mr. Larson was the Senior Project
Manager at Larson Engineering, a division of Kimley Horn & Associates, Inc.
Prior to 1994, Mr. Larson was the President and owner of Larson Engineering.
MICHAEL R. LEWIS has been the Senior Vice President, Consumer Lending of
the Bank since 1993. Previously, Mr. Lewis has worked as Vice President,
Consumer Lending, at Barnett Bank, Tallahassee (1969-75), as Vice President,
Consumer Lending at Southeast Bank, Bradenton (1975-80), as Business Manager for
Sands Toyota, Bradenton (1980-83), as a Consumer Lending Officer at Island Bank,
Bradenton (1983-84), and a Director of Indirect Consumer Lending at Barnett
Bank, Bradenton (1985-93). Mr. Lewis attended Florida State University and is a
graduate of the University of Oklahoma Banking School.
DAVID R. MADY has been the Vice President, Secondary Market Manager of the
Bank since the start-up of the Bank's mortgage banking operations in 1994.
Previously, Mr. Mady served as the Secondary Market Manager for Key Florida
Bank, F.S.B., from 1991 to 1994. From 1990 to 1991, he was employed by First
Union Bank of Florida in charge of its residential lending operations for
Hillsborough County, Florida, and from 1984 to 1989, Mr. Mady served as a loan
officer for Southeast Mortgage. Mr. Mady is a graduate of the University of
Connecticut with a bachelor of science degree in finance.
TIMOTHY I. MILLER has been a director of the Company since 1995, and a
director of the Bank since 1989. Mr. Miller is the President of Miller
Insulation & Acoustics, Inc.
DAN E. MOLTER has been a director of the Company since 1995, and a director
of the Bank since 1992. Mr. Molter has been the President and Chief Executive
Officer of Molter Termite & Pest Control since 1976 and since 1994 he also has
served as President and Chief Executive Officer of Extend-O Drain Inc., a
product manufacturer.
KIRK D. MOUDY has been a director of the Company since 1995, and a director
of the Bank since 1994. Mr. Moudy has been the President and Chief Executive
Officer of General Mortgage Corporation of America, a mortgage broker, since
1985.
JOHN S. NASH has been the Senior Vice President, Senior Commercial Lending
Officer of the Bank since 1989. Prior to joining the Bank, from 1982 to 1989,
Mr. Nash worked with Barnett Bank in Bradenton as a consumer lending officer,
corporate lending officer and finally as Branch Manager/Commercial Officer in
the
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downtown office of Barnett Bank in Bradenton. He holds a bachelor of science
degree in business administration, conferred by the University of Florida in
1981.
LINDELL W. ORR has been a director of the Company and the Bank since 1995.
Mr. Orr has been the President and Chief Executive Officer of Columbia Blake
Medical Center since 1995. From 1993 to 1995 he was the Chief Executive Officer
of the Columbia Ed White Hospital and from 1988 to 1993 Mr. Orr was the District
Vice President for Hospital Corporation of America responsible for the
management of 14 hospitals located in Florida, Georgia, and South Carolina.
LYNN B. POWELL, III has been a director of the Company since 1995, and a
director of the Bank since 1989. Mr. Powell has been the owner of Powell Motor
Company since 1992. Prior to 1992, Mr. Powell was the owner of Cortez Motors.
WALTER L. PRESHA has been a director of the Company since 1995, and a
director of the Bank since 1989. Mr. Presha is the Executive Director for
Manatee County Rural Health Services.
R. JAY TAYLOR has been a director of the Company and the Bank since 1995.
Mr. Taylor is the President of Taylor & Fulton Packing Company.
BRIAN M. WATTERSON has been the Chief Operations Officer of the Company and
the Bank since January 15, 1996, and in February 1997 Mr. Watterson took over
the responsibilities of the Chief Financial Officer of the Company and the Bank,
and was named Senior Vice President of both. Previously, Mr. Watterson served as
a Senior Vice President and Chief Financial Officer at SouthTrust Bank,
Sarasota, Florida from August 1995 to December 1995. Senior Vice President and
Chief Financial Officer at Key Florida Bank, F.S.B., Bradenton, Florida from
September 1992 to July 1995; insurance agent for Nationwide Insurance and
Metropolitan Insurance Company, Bradenton from September 1990 to February 1992;
Vice President, Chief Financial Officer, and Cashier at Southtrust Bank,
Sarasota, Florida from February 1992 to August 1992; and as Assistant Controller
at Barnett Bank of Manatee County, N.A. from July 1979 to May 1990. Mr.
Watterson graduated in 1981 from the University of South Florida with a degree
in Business Administration. He also graduated form the Florida School of Banking
at the University of Florida, Gainesville, Florida in 1985 and from the B.A.I.
School for Banking Administration at the University of Wisconsin, Madison,
Wisconsin in 1989.
EDWARD D. WYKE has been a director of the Company since 1995 and a director
of the Bank since 1989. Mr. Wyke is a retired architect.
There is no family relationship between any of the Company's directors or
executive officers.
COMPENSATION OF DIRECTORS
Directors of the Company also are directors of the Bank, and receive $600
per month for their services to the Company and the Bank regardless of the
number of regular or special Board meetings they attend and an additional $100
for each committee meeting that they attend. The Chairman of the Board of the
Company also is the Chairman of the Board for the Bank, and receives $1500 per
month for services rendered to the Company and the Bank. The Company also has
approved and adopted the "American Bancshares, Inc. Directors' Non-Qualified
Stock Option Plan of 1997" (the "1997 Plan"). No options have been granted under
the 1997 Plan.
EXECUTIVE COMPENSATION
The following summary compensation table sets forth the cash and non-cash
compensation paid to or accrued for the past three fiscal years for the
Company's Chief Executive Officer, and all other executive
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<PAGE> 55
officers whose total compensation exceeded $100,000 for fiscal year 1997
(collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ------------
FISCAL ------------------- STOCK OPTION ALL OTHER
NAME AND PRINCIPAL OCCUPATION YEAR SALARY BONUS AWARDS COMPENSATION(1)
- ----------------------------- ------ -------- ------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Gerald L. Anthony..................... 1997 $136,267 $10,000 6,000 $ 880
President and Chief 1996 135,000 0 0 992
Executive Officer 1995 98,333 8,000 0 917
Phillip W. Coon....................... 1997 $ 84,133 $53,156(2) 0 $ 880
Senior Vice President 1996 85,228 40,226(2) 0 851
Mortgage Banking Division 1995 72,950 17,378(2) 0 67,424
Stuart M. Gregory..................... 1997(3) $ 67,968 $53,467(4) 0 $ 301
Senior Vice President
Retail Residential Lending
David R. Mady......................... 1997 $ 66,506 $53,156(2) 0 $ 834
Vice President, Secondary 1996 66,770 40,226(2) 0 588
Market Manager 1995 54,662 17,378(2) 0 67,105
John S. Nash.......................... 1997 $ 86,204 $10,000 5,000 $ 577
Senior Vice President 1996 78,140 0 0 537
Senior Commercial 1995 68,916 0 0 589
Lending Officer
</TABLE>
- ---------------
(1) Represents Company contributions to its 401(k) Plan on behalf of each
employee for the periods indicated, except that the amounts for Messrs. Coon
and Mady in 1995 also includes $66,500 paid to each of them for the release
of their employment contracts entered into in May 1994.
(2) Commission paid based on aggregate principal balance of wholesale
residential mortgage loans originated by Mortgage Banking Division and sold
in the secondary mortgage market.
(3) Mr. Gregory was not an employee of the Company in 1995 or 1996.
(4) Includes commission of $12,536 and a bonuses of $40,931.
SHARE OPTIONS GRANTED
As of December 31, 1997, the Company did not have any long term incentive
plans nor had it awarded any restricted shares. The table set forth below
contains information with respect to the award of stock options during the
fiscal year ended December 31, 1997 to the Named Executive Officers covered by
the Summary Compensation Table.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------ POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
OPTIONS ANNUAL RATES OF
GRANTED STOCK PRICE
NUMBER OF TO APPRECIATION FOR
SECURITIES EMPLOYEES EXERCISE OPTION TERMS(2)
UNDERLYING IN PRICE OR EXPIRATION ---------------------
OPTIONS GRANTED 1997(1) BASE PRICE DATE 5% 10%
--------------- ---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Gerald L. Anthony................ 6,000(3) 20.0% $8.375 4/15/07 $31,602 $80,086
John S. Nash..................... 5,000(3) 16.7% $8.375 4/15/07 $26,335 $66,738
</TABLE>
- ---------------
(1) Employees of the Company were granted an aggregate of 30,000 options during
1997 under the Company's 1996 Incentive Stock Option Plan. Options were not
granted under any other plans.
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<PAGE> 56
(2) Amounts reflect hypothetical gains that could be achieved for the options if
they are exercised at the end of the option term. Those gains are based on
assumed rates of stock appreciation of 5% and 10% compounded annually from
the date the option was granted through the expiration date.
(3) These options were granted on April 15, 1997 under the Company's 1996
Incentive Stock Option Plan. These options vest and become exercisable in
three equal installments beginning on April 15, 1998.
AGGREGATED OPTIONS EXERCISED IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
No stock options or SARs were exercised in 1997 by the Named Executive
Officers covered by the Summary Compensation Table. The following table sets
forth, for each of the Named Executive Officers in the Summary Compensation
Table above who holds stock options, the number of the stock options held at
December 31, 1997, and the realizable gain of the stock options that are
"in-the-money". The in-the-money stock options and SARs are those with exercise
prices that are below the year-end stock price because the stock value grew
since the date of the grant.
FISCAL YEAR-END OPTIONS VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED AT FISCAL YEAR END AT FISCAL YEAR END(1)
ON VALUE --------------------------------- ---------------------------------
EXERCISED(#) REALIZED EXERCISABLE(#) UNEXERCISABLE(#) EXERCISABLE($) UNEXERCISABLE($)
------------ -------- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Gerald L. Anthony.... 0 0 0 6,000 $0 $26,250
John S. Nash......... 0 0 0 5,000 $0 $21,875
</TABLE>
- ---------------
(1) Based upon the closing price of the Common Shares as quoted on the Nasdaq
National Market on December 30, 1997 of $12.75 per share.
EMPLOYMENT AGREEMENTS
The Company, believing that the continued services and contributions of
certain key executives is critical to the Company's prospects and in the best
interest of its shareholders, has caused the Bank to enter into employment
agreements with such executives under the terms and conditions set forth below.
The Bank has entered into an employment agreement with Gerald L. Anthony,
President and Chief Executive Officer of the Company and the Bank, which
commenced on December 1, 1995. The agreement is for a period of three years, at
the end of which, the agreement is automatically renewed on an annual basis. The
agreement provides, among other things, for an initial annual base salary of
$135,000, which salary is subject to annual increases and the payment of
performance bonuses if the Bank achieves certain target goals with respect to
projected yearly returns on assets. Under the agreement, Mr. Anthony is provided
an automobile, and also is eligible to receive any other benefits provided to
the Bank's executive employees. The agreement further provides that if Mr.
Anthony's employment is terminated within 120 days after a "change of control"
(as that term is defined therein) for other than "just cause" (as that term is
defined therein), Mr. Anthony shall be entitled to an amount equal to twice his
then existing annual compensation, as well as his salary through the last day of
the month of termination. In the event that Mr. Anthony is not terminated within
120 days after the "change of control", but Mr. Anthony or the Board of
Directors opposes the "change of control" within 120 days after its occurrence,
and Mr. Anthony ends his employment within that time period, Mr. Anthony is
entitled to receive an amount equal to twice his then existing annual salary.
The Bank also has entered into employment agreements with John S. Nash and
Brian M. Watterson, which commenced in January 1996 and in February 1998,
respectively. Each agreement is for a three year term, with automatic annual
renewals thereafter. The initial annual base salaries for Messrs. Nash and
Watterson, as provided under their respective agreements, are $78,000 and
$90,000, respectively. These base salaries are subject to merit-based increases,
which are determined by the President and Chief Executive Officer, as well as
increases based on the amount of any annual increase in the Consumer Price
Index. These officers may also earn a performance bonus based upon achievement
of quantified goals related to the Bank's
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<PAGE> 57
profitability. Messrs. Nash and Watterson also are eligible to receive any other
benefits provided to the Bank's executive employees. Each of the agreements with
Messrs. Nash and Watterson provide that the employee will be entitled to twelve
months salary as severance pay should the employee be involuntarily terminated
within 90 days prior to or after a "change of control" (as that term is defined
therein).
In connection with its acquisition of DesChamps, the Bank entered into an
employment agreement with Mr. Stuart M. Gregory which commenced on January 22,
1997. Mr. Gregory's employment agreement has a three year term, with automatic
renewals thereafter. The base salary under the agreement is $75,000 per year and
provided for an initial bonus of $25,000. In addition to base salary, Mr.
Gregory's employment agreement provides for the payment of a quarterly bonus
based on the aggregate principal balance of all residential loans for which Mr.
Gregory and the loan officers under his supervision generate and close during
the quarter. The employment agreement also provides for the payment of a
commission as incentive compensation based on the achievement of quantifiable
goals related to residential loan productivity.
The Board of Directors of the Bank entered into employment agreements with
Mr. Philip W. Coon and Mr. David Mady, of the Mortgage Banking Division,
effective June 30, 1995. Each contract is for a four year term, with automatic
annual renewal thereafter. These agreements provide for a base salary which is
subject to annual increases based upon annual increases, if any, in the Consumer
Price Index. The initial base salaries were $79,233 and $59,850 for Messrs. Coon
and Mady, respectively. In addition to the base salary, the contracts provide
for a commission based on the aggregate principal balance of wholesale
residential mortgage loans originated by the Mortgage Banking Division and sold
in the secondary market. The agreements further entitle the officers to earn
incentive compensation based upon achievement of quantified goals related to the
Bank's profitability.
In connection with the recent settlement of a lawsuit against the Company
by James J. Bazata, a former employee who had alleged various employment
discrimination claims under the Americans with Disabilities Act, the Company has
agreed to enter into a consulting agreement with Mr. Bazata's corporation until
December 31, 2000, and has further agreed to pay his attorneys' fees and costs
in connection with the lawsuit; the total payments due through the end of 2000
under the consulting agreement, and fees and costs, aggregate $525,000.
401(K) PLAN
The Board of Directors of the Bank approved a tax-deferred investment plan
(the "401(k) Plan") effective January 1, 1994. All employees who work at least
250 hours per quarter and are at least 21 years of age may elect to participate
in the 401(k) Plan once he or she has completed one year of service. Under the
401(k) Plan, a participating employee is given an opportunity to make an
elective contribution under a salary deferral savings arrangement of up to a
maximum of 15% of the participant's pre-tax compensation up to a maximum of
$9,500 per year. Each such contribution is fully vested in the participant. In
addition, the Bank may make a separate matching contribution in an amount based
upon its annual profitability, which will be allocated proportionally among the
participants and vested on a five year schedule. In 1997, Messrs. Anthony, Coon,
Gregory, Mady, and Nash participated in the 401(k) Plan at 6.9%, 6.9%, 2.7%,
7.5%, and 6.0% of their salaries respectively.
STOCK OPTION PLANS
Employee Incentive Share Option Plan. American Bancshares, Inc. and
American Bank of Bradenton Incentive Stock Option Plan of 1996 ("ISO Plan")
approved by the Company's shareholders in 1996 provides options ("ISO options")
which may be granted by the Company's Board of Directors to key employees to
purchase up to an aggregate of 150,000 Common Shares. Key employees eligible to
participate in the ISO Plan include any person in the regular full-time
employment of the Company or any subsidiary as an executive or non-executive
officer thereof, who in the opinion of the Board of Directors, is or is expected
to be primarily responsible for the management, growth, or protection of some
part or all of the business of the Company.
The ISO Plan is designed to qualify as an "incentive stock option plan"
under Section 422 of the Code and it is administered by the Company's Board of
Directors. The Board of Directors has the power and
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<PAGE> 58
authority to administer, construe, and interpret the ISO Plan and to make rules
for carrying it out and to make changes in such rules. Except for options
granted to 10% shareholders, the exercise price of the options must not be less
than the fair market value of the Company's Common Shares on the date of grant,
as determined by the Board of Directors in conformity with Treasury regulations.
In order for options granted to shareholders possessing more than 10% of the
combined voting power of all classes of the Company's stock (or persons to whom
such ownership is attributed on the date of the grant) to constitute incentive
stock options, the exercise price of such options must not be less than 110% of
such fair market value and must be exercised within five years from the date of
grant. Options must be granted within ten years from the date of adoption of the
ISO Plan. Except for ISO options granted to 10% shareholders, each option
granted under the ISO Plan must be exercised, if at all, within ten years from
the date of grant, unless by their terms the options expire sooner. Options are
cancelled three months following termination of employment, unless termination
is due to death or permanent disability. The Board of Directors may impose
additional or more restricted terms and conditions on any ISO option.
Thirty thousand (30,000) options were granted under the ISO Plan during
1997 at an option price of $8.375 per share. Of this amount, 11,000 options were
granted to the Named Executive Officers covered by the Summary Compensation
Table and 18,500 options were issued to all the executive officers as a group
(including the Named Executive Officers' options). In connection with the
acquisition of Murdock, options to purchase 14,000 shares of Murdock common
stock were converted into options to purchase 33,600 shares of the Company's
common stock. Such options were issued under the ISO Plan. None of these options
has been exercised.
Non-Employee Director Share Option Plan. The 1997 Plan approved by the
Company's shareholders in 1997 provides options which may be granted to
directors of the Company or any subsidiary who are otherwise not employees of
the Company or any subsidiary to purchase up to an aggregate of 75,000 Common
Shares. The 1997 Plan is administered by the Board of Directors and, as such,
the Board of Directors has the power and authority to construe, interpret, and
make rules for carrying out its administration of the 1997 Plan, and to make
changes to such rules. The exercise price of the options granted under the 1997
Plan shall not be less then the fair market value of the Common Shares on the
date of the grant. Fair market value for purposes of the 1997 Plan is the
closing sales price of the Common Shares as reported on Nasdaq National Market
on the date of grant. Each option granted under the 1997 Plan must be exercised,
if at all, within the earlier of ten years from the date of grant or immediately
after termination of the director for cause, unless by their terms the options
expire sooner. The exercise price may be paid in cash, by delivery of Common
Shares, or a combination thereof as the Board of Directors may determine.
Options granted under the 1997 Plan are not transferrable except by laws of
descent and distribution. Unless sooner terminated, the 1997 Plan will expire on
its tenth anniversary. The termination of the 1997 Plan, however, will not
affect the validity of options granted prior to the date of its termination. To
date, no options have been granted under the 1997 Plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank has had, and expects to have in the future, various loans and
other banking transactions in the ordinary course of business with the
directors, executive officers, and principal shareholders of the Bank and the
Company (or associate of such person). All such transactions: (i) have been and
will be made in the ordinary course of business; (ii) have been and will be made
on substantially the same terms, including interest rates and collateral on
loans, as those prevailing at the time for comparable transactions with
unrelated persons; and (iii) in the opinion of management do not and will not
involve more than the normal risk of collectibility or present other unfavorable
features. At December 31, 1997 and 1996, the total dollar amount of extensions
of credit to directors and executive officers identified above and principal
shareholders of the Company identified below, and their associates (excluding
extensions of credit which were less than $60,000 to any one such person and
their associates) were $6,164,157 and $5,963,312, respectively, which
represented approximately 28.5% and 32.0%, respectively, of total shareholders'
equity.
Outside of normal customer relationships, none of the directors or officers
of the Company, and no shareholder holding over 5% of the Company's Common Stock
and no corporations or firms with which such persons or entities are associated,
currently maintains or has maintained since the beginning of the last fiscal
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<PAGE> 59
year, any significant business or personal relationship with the Company or the
Bank, other than such as arises by virtue of such position or ownership interest
in the Company or the Bank.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding common shares as of March 31, 1998, by:
(i) each director and each executive officer of the Company named in the Summary
Compensation Table and (ii) all directors and executive officers of the Company
as a group. No person is known to the Company to be the beneficial owner of more
than 5% of the outstanding common shares. Except as otherwise indicated, the
persons named in the table have sole voting and investment power with respect to
all of the common shares owned by them.
<TABLE>
<CAPTION>
CURRENT BENEFICIAL OWNERSHIP
-------------------------------
NUMBER PERCENT
NAME OF BENEFICIAL OWNER OF SHARES(1) OF CLASS(2)
- ------------------------ ------------- ------------
<S> <C> <C>
DIRECTORS AND CERTAIN EXECUTIVE OFFICERS
J. Gary Russ................................................ 192,708(3) 3.86%
Samuel S. Aidlin............................................ 67,408(4) 1.35
Gerald L. Anthony........................................... 18,479(5) *
Philip W. Coon.............................................. -- *
Ronald L. Larson............................................ 48,624(6) *
David R. Mady............................................... 80 *
Timothy I. Miller........................................... 41,229(7) *
Dan E. Molter............................................... 16,335 *
Kirk D. Moudy............................................... 23,600(8) *
John S. Nash................................................ 3,036(9) *
Lindell W. Orr.............................................. 1,000 *
Lynn B. Powell, III......................................... 16,000 *
Walter L. Presha............................................ 18,947 *
R. Jay Taylor............................................... -- *
Edward D. Wyke.............................................. 35,632 *
All directors and executive officers as a group (19
persons).................................................. 487,650(10) 9.75%
</TABLE>
- ---------------
* Less than 1%
(1) In accordance with Rule 13d-3 promulgated pursuant to the Securities
Exchange Act of 1934, a person is deemed to be the beneficial owner of a
security for purposes of the rule if he or she has or shares voting power
or dispositive power with respect to such security or has the right to
acquire such ownership within sixty days. As used herein, "voting power" is
the power to vote or direct the voting of shares, and "dispositive power"
is the power to dispose or direct the disposition of shares, irrespective
of any economic interest therein.
(2) In calculating the percentage ownership for a given individual or group,
the number of common shares outstanding includes unissued shares subject to
options, warrants, rights or conversion privileges exercisable within sixty
days held by such individual or group, but are not deemed outstanding by
any other person or group.
(3) Includes 57,479 common shares owned by Russ Citrus Groves, Ltd., a Florida
limited partnership in which Mr. Russ is the general partner; and, by
reason of his position, Mr. Russ may be deemed the beneficial owner of
these shares.
(4) Includes 441 common shares held by Mr. Aidlin's spouse.
(5) Includes 2,000 common shares which may be acquired pursuant to currently
exercisable warrants, 4,500 shares held by Mr. Anthony's spouse, and 920
shares held by his stepson.
(6) Includes 26,624 common shares held by Mr. Larson's spouse as to which Mr.
Larson disclaims beneficial ownership.
(7) Includes 2,205 common shares held by Mr. Miller's spouse as to which Mr.
Miller disclaims beneficial ownership.
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<PAGE> 60
(8) Includes 23,600 common shares held by General Mortgage Corporation, of
which Mr. Moudy is President and majority owner; and, by reason of his
position and ownership, Mr. Moudy may be deemed the beneficial owner of
these shares.
(9) Includes 1,667 common shares which may be acquired pursuant to currently
exercisable options and 150 shares held in trust for Mr. Nash's daughter.
(10) Includes 6,667 common shares which may be acquired pursuant to currently
exercisable options.
DESCRIPTION OF PREFERRED SECURITIES
Pursuant to the terms of the Trust Agreement for the Issuer Trust, the
Issuer Trust will issue the Preferred Securities and the Common Securities. The
Preferred Securities will represent preferred undivided beneficial interests in
the assets of the Issuer Trust and the holders thereof will be entitled to a
preference in certain circumstances with respect to Distributions and amounts
payable on redemption or liquidation over the Common Securities, as well as
other benefits as described in the Trust Agreement. This summary of certain
provisions of the Preferred Securities and the Trust Agreement does not purport
to be complete and is subject to, and qualified in its entirety by reference to,
all the provisions of the Trust Agreement, including the definitions therein of
certain terms. Wherever particular defined terms of the Trust Agreement are
referred to herein, such defined terms are incorporated herein by reference. A
copy of the form of the Trust Agreement is available upon request from the
Issuer Trustees.
GENERAL
The Preferred Securities will be limited to $15,000,000 aggregate
Liquidation Amount outstanding (which amount may be increased by up to
$2,250,000 aggregate Liquidation Amount of Preferred Securities for exercise of
the Underwriter's over-allotment option). See "Underwriting." The Preferred
Securities will rank pari passu, and payments will be made thereon pro rata,
with the Common Securities except as described under "-- Subordination of Common
Securities." The Junior Subordinated Debentures will be registered in the name
of the Issuer Trust and held by the Property Trustee in trust for the benefit of
the holders of the Preferred Securities and Common Securities. The Guarantee
will be a guarantee on a subordinated basis with respect to the Preferred
Securities but will not guarantee payment of Distributions or amounts payable on
redemption or liquidation of such Preferred Securities when the Issuer Trust
does not have funds on hand available to make such payments. See "Description of
Guarantee."
DISTRIBUTIONS
The Preferred Securities represent preferred undivided beneficial interests
in the assets of the Issuer Trust, and Distributions on each Preferred Security
will be payable at the annual rate of 8.50% of the stated Liquidation Amount of
$10, payable quarterly in arrears on March 31, June 30, September 30 and
December 31 of each year (each a "Distribution Date"), to the holders of the
Preferred Securities at the close of business on 15th day of March, June,
September and December (whether or not a Business Day (as defined below)) next
preceding the relevant Distribution Date. Distributions on the Preferred
Securities will be cumulative. Distributions will accumulate from July 7, 1998.
The first Distribution Date for the Preferred Securities will be September 30,
1998. The amount of Distributions payable for any period less than a full
Distribution period will be computed on the basis of a 360-day year of twelve
30-day months and the actual days elapsed in a partial month in such period.
Distributions payable for each full Distribution period will be computed by
dividing the rate per annum by four. If any date on which Distributions are
payable on the Preferred Securities is not a Business Day, then payment of the
Distributions payable on such date will be made on the next succeeding day that
is a Business Day (without any additional Distributions or other payment in
respect of any such delay), with the same force and effect as if made on the
date such payment was originally payable, except that, if such Business Day
falls in the next calendar year, such payment will be made on the immediately
preceding Business Day.
So long as no Debenture Event of Default has occurred and is continuing,
the Company has the right under the Junior Subordinated Indenture to defer the
payment of interest on the Junior Subordinated
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<PAGE> 61
Debentures at any time or from time to time for a period not exceeding 20
consecutive quarterly periods with respect to each Extension Period, provided
that no Extension Period may extend beyond the Stated Maturity of the Junior
Subordinated Debentures. As a consequence of any such deferral, quarterly
Distributions on the Preferred Securities by the Issuer Trust will be deferred
during any such Extension Period. Distributions to which holders of the
Preferred Securities are entitled will accumulate additional Distributions
thereon at the rate of 8.50% per annum, compounded quarterly from the relevant
payment date for such Distributions, computed on the basis of a 360-day year of
twelve 30-day months and the actual days elapsed in a partial month in such
period. Additional Distributions payable for each full Distribution period will
be computed by dividing the rate per annum by four. The term "Distributions" as
used herein shall include any such additional Distributions. During any such
Extension Period, the Company may not (i) declare or pay any dividends or
distributions on, or redeem, purchase, acquire or make a liquidation payment
with respect to, any of the Company's capital stock or (ii) make any payment of
principal of or interest or premium, if any, on or repay, repurchase or redeem
any debt securities of the Company that rank pari passu in all respects with or
junior in interest to the Junior Subordinated Debentures (other than (a)
repurchases, redemptions or other acquisitions of shares of capital stock of the
Company in connection with any employment contract, benefit plan or other
similar arrangement with or for the benefit of any one or more employees,
officers, directors or consultants, in connection with a dividend reinvestment
or stockholder stock purchase plan or in connection with the issuance of capital
stock of the Company (or securities convertible into or exercisable for such
capital stock) as consideration in an acquisition transaction entered into prior
to the applicable Extension Period, (b) as a result of an exchange or conversion
of any class or series of the Company's capital stock (or any capital stock of a
subsidiary of the Company) for any class or series of the Company's capital
stock or of any class or series of the Company's indebtedness for any class or
series of the Company's capital stock, (c) the purchase of fractional interests
in shares of the Company's capital stock pursuant to the conversion or exchange
provisions of such capital stock or the security being converted or exchanged,
(d) any declaration of a dividend in connection with any stockholder's rights
plan, or the issuance of rights, stock or other property under any stockholder's
rights plan, or the redemption or repurchase of rights pursuant thereto, or (e)
any dividend in the form of stock, warrants, options or other rights where the
dividend stock or the stock issuable upon exercise of such warrants, options or
other rights is the same stock as that on which the dividend is being paid or
ranks pari passu with or junior to such stock). Prior to the termination of any
such Extension Period, the Company may further defer the payment of interest,
provided that no Extension Period may exceed 20 consecutive quarterly periods or
extend beyond the Stated Maturity of the Junior Subordinated Debentures. Upon
the termination of any such Extension Period and the payment of all amounts then
due, the Company may elect to begin a new Extension Period. No interest shall be
due and payable during an Extension Period, except at the end thereof. The
Company must give the Issuer Trustees notice of its election of such Extension
Period at least one Business Day prior to the earlier of (i) the date the
Distributions on the Preferred Securities would have been payable but for the
election to begin such Extension Period and (ii) the date the Property Trustee
is required to give notice to holders of the Preferred Securities of the record
date or the date such Distributions are payable, but in any event not less than
one Business Day prior to such record date. The Property Trustee will give
notice of the Company's election to begin a new Extension Period to the holders
of the Preferred Securities. Subject to the foregoing, there is no limitation on
the number of times that the Company may elect to begin an Extension Period. See
"Description of Junior Subordinated Debentures -- Option To Extend Interest
Payment Period" and "Certain Federal Income Tax Consequences -- Interest Income
and Original Issue Discount."
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Junior
Subordinated Debentures.
The revenue of the Issuer Trust available for distribution to holders of
the Preferred Securities will be limited to payments under the Junior
Subordinated Debentures in which the Issuer Trust will invest the proceeds from
the issuance and sale of the Preferred Securities. See "Description of Junior
Subordinated Debentures." If the Company does not make payments on the Junior
Subordinated Debentures, the Issuer Trust may not have funds available to pay
Distributions or other amounts payable on the Preferred Securities. The payment
of Distributions and other amounts payable on the Preferred Securities (if and
to the extent the
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<PAGE> 62
Issuer Trust has funds legally available for and cash sufficient to make such
payments) is guaranteed by the Company on a limited basis as set forth herein
under "Description of Guarantee."
REDEMPTION
Upon the repayment or redemption, in whole or in part, of the Junior
Subordinated Debentures, whether at maturity or upon earlier redemption as
provided in the Junior Subordinated Indenture, the proceeds from such repayment
or redemption shall be applied by the Property Trustee to redeem a Like Amount
(as defined below) of the Preferred Securities, upon not less than 30 nor more
than 60 days' notice, at a redemption price (the "Redemption Price") equal to
the aggregate Liquidation Amount of such Preferred Securities plus accumulated
but unpaid Distributions thereon to the date of redemption (the "Redemption
Date") and the related amount of the premium, if any, paid by the Company upon
the concurrent redemption of such Junior Subordinated Debentures. See
"Description of Junior Subordinated Debentures -- Redemption." If less than all
the Junior Subordinated Debentures are to be repaid or redeemed on a Redemption
Date, then the proceeds from such repayment or redemption shall be allocated to
the redemption pro rata of the Preferred Securities and the Common Securities.
The amount of premium, if any, paid by the Company upon the redemption of all or
any part of the Junior Subordinated Debentures to be repaid or redeemed on a
Redemption Date shall be allocated to the redemption pro rata of the Preferred
Securities and the Common Securities.
The Company has the right to redeem the Junior Subordinated Debentures (i)
on or after June 30, 2003, 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 during the continuation of a Tax Event, Investment Company Event,
or Capital Treatment Event (each as defined below), in each case subject to
possible regulatory approval. See "-- Liquidation Distribution Upon
Dissolution." A redemption of the Junior Subordinated Debentures would cause a
mandatory redemption of a Like Amount of the Preferred Securities and Common
Securities at the Redemption Price.
"25% Capital Limitation" means the limitation imposed by the FRB that the
proceeds of certain qualifying securities like the Trust Securities will qualify
as Tier 1 capital of the Company up to an amount not to exceed, when taken
together with all cumulative preferred stock of the Company, if any, 25% of the
Company's Tier 1 capital, or any subsequent limitation adopted by the FRB.
"Business Day" means a day other than (i) a Saturday or Sunday, (ii) a day
on which banking institutions in the State of Florida or the City of New York
are authorized or required by law or executive order to remain closed, or (iii)
a day on which the Property Trustee's Corporate Trust Office or the Corporate
Trust Office of the Debenture Trustee is closed for business.
"Like Amount" means (i) with respect to a redemption of Trust Securities,
Trust Securities having a Liquidation Amount (as defined below) equal to that
portion of the principal amount of Junior Subordinated Debentures to be
contemporaneously redeemed in accordance with the Junior Subordinated Indenture,
allocated to the Common Securities and to the Preferred Securities based upon
the relative Liquidation Amounts of such classes and (ii) with respect to a
distribution of Junior Subordinated Debentures to holders of Trust Securities in
connection with a dissolution or liquidation of the Issuer Trust, Junior
Subordinated Debentures having a principal amount equal to the Liquidation
Amount of the Trust Securities of the holder to whom such Junior Subordinated
Debentures are distributed.
"Liquidation Amount" means the stated amount of $10 per Trust Security.
"Tax Event" means the receipt by the Issuer Trust of an opinion of counsel
to the Company experienced in such matters to the effect that, as a result of
any amendment to, or change (including any announced prospective change) in, the
laws (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein, or as a result of any
official or administrative pronouncement or action or judicial decision
interpreting or applying such laws or regulations, which amendment or change is
effective or which pronouncement or decision is announced on or after the date
of issuance of the Preferred Securities, there is more than an insubstantial
risk that (i) the Issuer Trust is, or will be within 90 days of the
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<PAGE> 63
delivery of such opinion, subject to United States federal income tax with
respect to income received or accrued on the Junior Subordinated Debentures,
(ii) interest payable by the Company on the Junior Subordinated Debentures is
not, or within 90 days of the delivery of such opinion, will not be, deductible
by the Company, in whole or in part, for United States federal income tax
purposes or (iii) the Issuer Trust is, or will be within 90 days of the delivery
of such opinion, subject to more than a de minimis amount of other taxes, duties
or other governmental charges. See "Certain Federal Income Tax
Consequences-Pending Tax Litigation Affecting the Preferred Securities" for a
discussion of pending United States Tax Court litigation that, if decided
adversely to the taxpayer, could give rise to a Tax Event, which may permit the
Company to redeem the Junior Subordinated Debentures prior to June 30, 2003.
"Investment Company Event" means the receipt by the Issuer Trust of an
opinion of counsel to the Company experienced in such matters to the effect
that, as a result of the occurrence of a change in law or regulation or a
written change (including any announced prospective change) in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulatory authority, there is more than an insubstantial risk that
the Issuer Trust is or will be considered an "investment company" that is
required to be registered under the Investment Company Act, which change or
prospective change becomes effective or would become effective, as the case may
be, on or after the date of the issuance of the Preferred Securities.
"Capital Treatment Event" means the reasonable determination by the Company
that, as a result of the occurrence of any amendment to, or change (including
any announced prospective change) in, the laws (or any rules or regulations
thereunder) of the United States or any political subdivision thereof or
therein, or as a result of any official or administrative pronouncement or
action or judicial decision interpreting or applying such laws or regulations,
which amendment or change is effective or such pronouncement, action or decision
is announced on or after the date of issuance of the Preferred Securities, there
is more than an insubstantial risk that the Company will not be entitled to
treat an amount equal to the Liquidation Amount of the Preferred Securities as
"Tier 1 Capital" (or the then equivalent thereof), except as otherwise
restricted under the 25% Capital Limitation, for purposes of the risk-based
capital adequacy guidelines of the FRB, as then in effect and applicable to the
Company.
If a Tax Event described in clause (i) or (iii) of the definition of Tax
Event above has occurred and is continuing and the Issuer Trust is the holder of
all the Junior Subordinated Debentures, the Company will pay Additional Sums (as
defined below), if any, on the Junior Subordinated Debentures.
"Additional Sums" means the additional amounts as may be necessary in order
that the amount of Distributions then due and payable by the Issuer Trust on the
outstanding Preferred Securities and Common Securities of the Issuer Trust will
not be reduced as a result of any additional taxes, duties and other
governmental charges to which the Issuer Trust has become subject as a result of
a Tax Event.
REDEMPTION PROCEDURES
Preferred Securities redeemed on each Redemption Date shall be redeemed at
the Redemption Price with the applicable proceeds from the contemporaneous
redemption of the Junior Subordinated Debentures.
Redemptions of the Preferred Securities shall be made and the Redemption Price
shall be payable on each Redemption Date only to the extent that the Issuer
Trust has funds on hand available for the payment of such Redemption Price. See
also "-- Subordination of Common Securities."
If the Issuer Trust gives a notice of redemption in respect of the
Preferred Securities, then, by 12:00 noon, New York City time, on the Redemption
Date, to the extent funds are available, in the case of Preferred Securities
held in book-entry form, the Property Trustee will deposit irrevocably with DTC
funds sufficient to pay the applicable Redemption Price and will give DTC
irrevocable instructions and authority to pay the Redemption Price to the
beneficial owners of the Preferred Securities. With respect to Preferred
Securities not held in book-entry form, the Property Trustee, to the extent
funds are available, will irrevocably deposit with the paying agent for the
Preferred Securities funds sufficient to pay the applicable Redemption Price and
will give such paying agent irrevocable instructions and authority to pay the
Redemption Price to the holders thereof upon surrender of their certificates
evidencing the Preferred Securities. Notwithstanding the foregoing,
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Distributions payable on or prior to the Redemption Date for any Preferred
Securities called for redemption shall be payable to the holders of the
Preferred Securities on the relevant record dates for the related Distribution
Dates. If notice of redemption shall have been given and funds deposited as
required, then upon the date of such deposit all rights of the holders of such
Preferred Securities so called for redemption will cease, except the right of
the holders of such Preferred Securities to receive the Redemption Price, but
without interest on such Redemption Price, and such Preferred Securities will
cease to be outstanding. If any date fixed for redemption of Preferred
Securities is not a Business Day, then payment of the Redemption Price payable
on such date will be made on the next succeeding day which is a Business Day
(without any interest or other payment in respect of any such delay), except
that, if such Business Day falls in the next calendar year, such payment will be
made on the immediately preceding Business Day. In the event that payment of the
Redemption Price in respect of Preferred Securities called for redemption is
improperly withheld or refused and not paid either by the Issuer Trust or by the
Company pursuant to the Guarantee as described under "Description of Guarantee,"
Distributions on such Preferred Securities will continue to accumulate at the
then applicable rate, from the Redemption Date originally established by the
Issuer Trust for such Preferred Securities to the date such Redemption Price is
actually paid, in which case the actual payment date will be the date fixed for
redemption for purposes of calculating the Redemption Price.
Subject to applicable law (including, without limitation, United States
federal securities laws), the Company or its affiliates may at any time and from
time to time purchase outstanding Preferred Securities by tender, in the open
market or by private agreement, and may resell such securities.
If less than all the Preferred Securities and Common Securities are to be
redeemed on a Redemption Date, then the aggregate Liquidation Amount of such
Preferred Securities and Common Securities to be redeemed shall be allocated pro
rata to the Preferred Securities and the Common Securities based upon the
relative Liquidation Amounts of such classes. The particular Preferred
Securities to be redeemed shall be selected on a pro rata basis not more than 60
days prior to the Redemption Date by the Property Trustee from the outstanding
Preferred Securities not previously called for redemption, or if the Preferred
Securities are then held in the form of a Global Preferred Security (as defined
below), in accordance with DTC's customary procedures. The Property Trustee
shall promptly notify the securities registrar for the Trust Securities in
writing of the Preferred Securities selected for redemption and, in the case of
any Preferred Securities selected for partial redemption, the Liquidation Amount
thereof to be redeemed. For all purposes of the Trust Agreement, unless the
context otherwise requires, all provisions relating to the redemption of
Preferred Securities shall relate, in the case of any Preferred Securities
redeemed or to be redeemed only in part, to the portion of the aggregate
Liquidation Amount of Preferred Securities which has been or is to be redeemed.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the Redemption Date to each registered holder of Preferred
Securities to be redeemed at its address appearing on the securities register
for the Trust Securities. Unless the Company defaults in payment of the
Redemption Price on the Junior Subordinated Debentures, on and after the
Redemption Date interest will cease to accrue on the Junior Subordinated
Debentures or portions thereof (and, unless payment of the Redemption Price in
respect of the Preferred Securities is withheld or refused and not paid either
by the Issuer Trust or the Company pursuant to the Guarantee, Distributions will
cease to accumulate on the Preferred Securities or portions thereof) called for
redemption.
SUBORDINATION OF COMMON SECURITIES
Payment of Distributions on, and the Redemption Price of, and the
Liquidation Distribution in respect of, the Preferred Securities and Common
Securities, as applicable, shall be made pro rata based on the Liquidation
Amount of such Preferred Securities and Common Securities. However, if on any
Distribution Date or Redemption Date a Debenture Event of Default has occurred
and is continuing as a result of any failure by the Company to pay any amounts
in respect of the Junior Subordinated Debentures when due, no payment of any
Distribution on, or Redemption Price of, or Liquidation Distribution in respect
of, any of the Common Securities, and no other payment on account of the
redemption, liquidation or other acquisition of such Common Securities, shall be
made unless payment in full in cash of all accumulated and unpaid Distributions
on all the outstanding Preferred Securities for all Distribution periods
terminating on or prior
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thereto, or in the case of payment of the Redemption Price the full amount of
such Redemption Price on all the outstanding Preferred Securities then called
for redemption, shall have been made or provided for, and all funds available to
the Property Trustee shall first be applied to the payment in full in cash of
all Distributions on, or Redemption Price of, the Preferred Securities then due
and payable.
In the case of any Event of Default (as defined below) resulting from a
Debenture Event of Default, the holders of the Common Securities will be deemed
to have waived any right to act with respect to any such Event of Default under
the Trust Agreement until the effects of all such Events of Default with respect
to such Preferred Securities have been cured, waived or otherwise eliminated.
See "-- Events of Default; Notice" and "Description of Junior Subordinated
Debentures -- Debenture Events of Default." Until all such Events of Default
under the Trust Agreement with respect to the Preferred Securities have been so
cured, waived or otherwise eliminated, the Property Trustee will act solely on
behalf of the holders of the Preferred Securities and not on behalf of the
holders of the Common Securities, and only the holders of the Preferred
Securities will have the right to direct the Property Trustee to act on their
behalf.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
The amount payable on the Preferred Securities in the event of any
liquidation of the Issuer Trust is $10 per Preferred Security plus accumulated
and unpaid Distributions, subject to certain exceptions, which may be in the
form of a distribution of such amount in Junior Subordinated Debentures.
The holders of all the outstanding Common Securities have the right at any
time to dissolve the Issuer Trust and, after satisfaction of liabilities to
creditors of the Issuer Trust as provided by applicable law, cause the Junior
Subordinated Debentures to be distributed to the holders of the Preferred
Securities and Common Securities in liquidation of the Issuer Trust.
The FRB's risk-based capital guidelines currently provide that redemptions
of permanent equity or other capital instruments before stated maturity could
have a significant impact on a bank holding company's overall capital structure
and that any organization considering such a redemption should consult with the
FRB before redeeming any equity or capital instrument prior to maturity if such
redemption could have a material effect on the level or composition of the
organization's capital base (unless the equity or capital instrument were
redeemed with the proceeds of, or replaced by, a like amount of a similar or
higher quality capital instrument and the FRB considers the organization's
capital position to be fully adequate after the redemption).
In the event the Company, while a holder of Common Securities, dissolves
the Issuer Trust prior to the Stated Maturity of the Preferred Securities and
the dissolution of the Issuer Trust is deemed to constitute the redemption of
capital instruments by the FRB under its risk-based capital guidelines or
policies, the dissolution of the Issuer Trust by the Company may be subject to
the prior approval of the FRB. Moreover, any changes in applicable law or
changes in the FRB's risk-based capital guidelines or policies could impose a
requirement on the Company that it obtain the prior approval of the FRB to
dissolve the Issuer Trust.
Pursuant to the Trust Agreement, the Issuer Trust will automatically
dissolve upon expiration of its term or, if earlier, will dissolve on the first
to occur of: (i) certain events of bankruptcy, dissolution or liquidation of the
Company or the holder of the Common Securities, (ii) the distribution of a Like
Amount of the Junior Subordinated Debentures to the holders of the Trust
Securities, if the holders of Common Securities have given written direction to
the Property Trustee to dissolve the Issuer Trust (which direction, subject to
the foregoing restrictions, is optional and wholly within the discretion of the
holders of Common Securities), (iii) the repayment of all the Preferred
Securities in connection with the redemption of all the Trust Securities as
described under "-- Redemption" and (iv) the entry of an order for the
dissolution of the Issuer Trust by a court of competent jurisdiction.
If dissolution of the Issuer Trust occurs as described in clause (i), (ii),
or (iv) above, the Issuer Trust will be liquidated by the Property Trustee as
expeditiously as the Property Trustee determines to be possible by distributing,
after satisfaction of liabilities to creditors of the Issuer Trust as provided
by applicable law, to the holders of such Trust Securities a Like Amount of the
Junior Subordinated Debentures, unless such distribution is not practical, in
which event such holders will be entitled to receive out of the assets of the
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Issuer Trust available for distribution to holders, after satisfaction of
liabilities to creditors of the Issuer Trust as provided by applicable law, an
amount equal to, in the case of holders of Preferred Securities, the aggregate
of the Liquidation Amount plus accumulated and unpaid Distributions thereon to
the date of payment (such amount being the "Liquidation Distribution"). If such
Liquidation Distribution can be paid only in part because the Issuer Trust has
insufficient assets available to pay in full the aggregate Liquidation
Distribution, then the amounts payable directly by the Issuer Trust on its
Preferred Securities shall be paid on a pro rata basis. The holders of the
Common Securities will be entitled to receive distributions upon any such
liquidation pro rata with the holders of the Preferred Securities, except that
if a Debenture Event of Default has occurred and is continuing as a result of
any failure by the Company to pay any amounts in respect of the Junior
Subordinated Debentures when due, the Preferred Securities shall have a priority
over the Common Securities. See "-- Subordination of Common Securities."
After the liquidation date fixed for any distribution of Junior
Subordinated Debentures (i) the Preferred Securities will no longer be deemed to
be outstanding, (ii) DTC or its nominee, as the registered holder of Preferred
Securities, will receive a registered global certificate or certificates
representing the Junior Subordinated Debentures to be delivered upon such
distribution with respect to Preferred Securities held by DTC or its nominee and
(iii) any certificates representing the Preferred Securities not held by DTC or
its nominee will be deemed to represent the Junior Subordinated Debentures
having a principal amount equal to the stated Liquidation Amount of the
Preferred Securities and bearing accrued and unpaid interest in an amount equal
to the accumulated and unpaid Distributions on the Preferred Securities until
such certificates are presented to the security registrar for the Trust
Securities for transfer or reissuance.
If the Company does not redeem the Junior Subordinated Debentures prior to
maturity and the Issuer Trust is not liquidated and the Junior Subordinated
Debentures are not distributed to holders of the Preferred Securities, the
Preferred Securities will remain outstanding until the repayment of the Junior
Subordinated Debentures and the distribution of the Liquidation Distribution to
the holders of the Preferred Securities.
There can be no assurance as to the market prices for the Preferred
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for Preferred Securities if a dissolution and liquidation of the Issuer
Trust were to occur. Accordingly, the Preferred Securities that an investor may
purchase, or the Junior Subordinated Debentures that the investor may receive on
dissolution and liquidation of the Issuer Trust, may trade at a discount to the
price that the investor paid to purchase the Preferred Securities offered
hereby.
EVENTS OF DEFAULT; NOTICE
Any one of the following events constitutes an "Event of Default" under the
Trust Agreement (an "Event of Default") with respect to the Preferred Securities
(whatever the reason for such Event of Default and whether it is voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(i) the occurrence of a Debenture Event of Default (see "Description
of Junior Subordinated Debentures -- Debenture Events of Default"); or
(ii) default by the Issuer Trust in the payment of any Distribution
when it becomes due and payable, and continuation of such default for a
period of 30 days; or
(iii) default by the Issuer Trust in the payment of any Redemption
Price of any Trust Security when it becomes due and payable; or
(iv) default in the performance, or breach, in any material respect,
of any covenant or warranty of the Issuer Trustees in the Trust Agreement
(other than a covenant or warranty a default in the performance of which or
the breach of which is dealt with in clause (ii) or (iii) above), and
continuation of such default or breach for a period of 60 days after there
has been given, by registered or certified mail, to the Issuer Trustees and
the Company by the holders of at least 25% in aggregate Liquidation Amount
of the outstanding Preferred Securities, a written notice specifying such
default or breach and requiring it to be remedied and stating that such
notice is a "Notice of Default" under the Trust Agreement; or
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(v) the occurrence of certain events of bankruptcy or insolvency with
respect to the Property Trustee if a successor Property Trustee has not
been appointed within 90 days thereof.
Within five Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee will transmit
notice of such Event of Default to the holders of Trust Securities and the
Administrators, unless such Event of Default has been cured or waived. The
Company, as Depositor, and the Administrators are required to file annually with
the Property Trustee a certificate as to whether or not they are in compliance
with all the conditions and covenants applicable to them under the Trust
Agreement.
If a Debenture Event of Default has occurred and is continuing as a result
of any failure by the Company to pay any amounts in respect of the Junior
Subordinated Debentures when due, the Preferred Securities will have a
preference over the Common Securities with respect to payments of any amounts in
respect of the Preferred Securities as described above. See "-- Subordination of
Common Securities," "-- Liquidation Distribution Upon Dissolution" and
"Description of Junior Subordinated Debentures -- Debenture Events of Default."
REMOVAL OF ISSUER TRUSTEES; APPOINTMENT OF SUCCESSORS
The holders of at least a majority in aggregate Liquidation Amount of the
outstanding Preferred Securities may remove an Issuer Trustee for cause or, if a
Debenture Event of Default has occurred and is continuing, with or without
cause. If an Issuer Trustee is removed by the holders of the outstanding
Preferred Securities, the successor may be appointed by the holders of at least
25% in aggregate Liquidation Amount of Preferred Securities. If an Issuer
Trustee resigns, such Issuer Trustee will appoint its successor. If an Issuer
Trustee fails to appoint a successor, the holders of at least 25% in aggregate
Liquidation Amount of the outstanding Preferred Securities may appoint a
successor. If a successor has not been appointed by the holders, any holder of
Preferred Securities or Common Securities or the other Issuer Trustee may
petition a court in the State of Delaware to appoint a successor. Any Delaware
Trustee must meet the applicable requirements of Delaware law. Any Property
Trustee must be a national or state-chartered bank, and at the time of
appointment have securities rated in one of the three highest rating categories
by a nationally recognized statistical rating organization and have capital and
surplus of at least $50,000,000. No resignation or removal of an Issuer Trustee
and no appointment of a successor trustee shall be effective until the
acceptance of appointment by the successor trustee in accordance with the
provisions of the Trust Agreement.
MERGER OR CONSOLIDATION OF ISSUER TRUSTEES
Any entity into which the Property Trustee or the Delaware Trustee may be
merged or converted or with which it may be consolidated, or any entity
resulting from any merger, conversion or consolidation to which such Issuer
Trustee is a party, or any entity succeeding to all or substantially all the
corporate trust business of such Issuer Trustee, will be the successor of such
Issuer Trustee under the Trust Agreement, provided such entity is otherwise
qualified and eligible.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS, OR REPLACEMENTS OF THE ISSUER TRUST
The Issuer Trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to, any entity, except as described below or as
otherwise set forth in the Trust Agreement. The Issuer Trust may, at the request
of the holders of the Common Securities and with the consent of the holders of
at least a majority in aggregate Liquidation Amount of the outstanding Preferred
Securities, merge with or into, consolidate, amalgamate, or be replaced by or
convey, transfer or lease its properties and assets substantially as an entirety
to a trust organized as such under the laws of any State, so long as (i) such
successor entity either (a) expressly assumes all the obligations of the Issuer
Trust with respect to the Preferred Securities or (b) substitutes for the
Preferred Securities other securities having substantially the same terms as the
Preferred Securities (the "Successor Securities") so long as the Successor
Securities have the same priority as the Preferred Securities with respect to
distributions and payments upon liquidation, redemption, and otherwise, (ii) a
trustee of such successor entity, possessing the same powers and duties as the
Property Trustee, is appointed to hold the Junior
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Subordinated Debentures, (iii) such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease does not cause the Preferred
Securities (including any Successor Securities) to be downgraded by any
nationally recognized statistical rating organization, if then rated, (iv) such
merger, consolidation, amalgamation, replacement, conveyance, transfer or lease
does not adversely affect the rights, preferences and privileges of the holders
of the Preferred Securities (including any Successor Securities) in any material
respect, (v) such successor entity has a purpose substantially identical to that
of the Issuer Trust, (vi) prior to such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, the Issuer Trust has received an
opinion from independent counsel experienced in such matters to the effect that
(a) such merger, consolidation, amalgamation, replacement, conveyance, transfer
or lease does not adversely affect the rights, preferences and privileges of the
holders of the Preferred Securities (including any Successor Securities) in any
material respect and (b) following such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, neither the Issuer Trust nor such
successor entity will be required to register as an investment company under the
Investment Company Act, and (vii) the Company or any permitted successor or
assignee owns all the common securities of such successor entity and guarantees
the obligations of such successor entity under the Successor Securities at least
to the extent provided by the Guarantee. Notwithstanding the foregoing, the
Issuer Trust may not, except with the consent of holders of 100% in aggregate
Liquidation Amount of the Preferred Securities, consolidate, amalgamate, merge
with or into, or be replaced by or convey, transfer or lease its properties and
assets substantially as an entirety to, any other entity or permit any other
entity to consolidate, amalgamate, merge with or into, or replace it if such
consolidation, amalgamation, merger, replacement, conveyance, transfer or lease
would cause the Issuer Trust or the successor entity to be taxable as a
corporation for United States federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF TRUST AGREEMENT
Except as provided above and under "-- Removal of Issuer Trustees;
Appointment of Successors" and "Description of Guarantee -- Amendments and
Assignment" and as otherwise required by law and the Trust Agreement, the
holders of the Preferred Securities will have no voting rights.
The Trust Agreement may be amended from time to time by the holders of a
majority of the Common Securities and the Property Trustee, without the consent
of the holders of the Preferred Securities, (i) to cure any ambiguity, correct
or supplement any provisions in the Trust Agreement that may be inconsistent
with any other provision, or to make any other provisions with respect to
matters or questions arising under the Trust Agreement, provided that any such
amendment does not adversely affect in any material respect the interests of any
holder of Trust Securities, or (ii) to modify, eliminate or add to any
provisions of the Trust Agreement to such extent as may be necessary to ensure
that the Issuer Trust will not be taxable as a corporation for United States
federal income tax purposes at any time that any Trust Securities are
outstanding or to ensure that the Issuer Trust will not be required to register
as an "investment company" under the Investment Company Act, and any such
amendments of the Trust Agreement will become effective when notice of such
amendment is given to the holders of Trust Securities. The Trust Agreement may
be amended by the holders of a majority of the Common Securities and the
Property Trustee with (i) the consent of holders representing not less than a
majority in aggregate Liquidation Amount of the outstanding Preferred Securities
and (ii) receipt by the Issuer Trustees of an opinion of counsel to the effect
that such amendment or the exercise of any power granted to the Issuer Trustees
in accordance with such amendment will not affect the Issuer Trust's not being
taxable as a corporation for United States federal income tax purposes or the
Issuer Trust's exemption from status as an "investment company" under the
Investment Company Act, except that, without the consent of each holder of Trust
Securities affected thereby, the Trust Agreement may not be amended to (i)
change the amount or timing of any Distribution on the Trust Securities or
otherwise adversely affect the amount of any Distribution required to be made in
respect of the Trust Securities as of a specified date or (ii) restrict the
right of a holder of Trust Securities to institute suit for the enforcement of
any such payment on or after such date.
So long as any Junior Subordinated Debentures are held by the Issuer Trust,
the Property Trustee will not (i) direct the time, method and place of
conducting any proceeding for any remedy available to the Debenture Trustee, or
execute any trust or power conferred on the Property Trustee with respect to the
Junior
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Subordinated Debentures, (ii) waive any past default that is waivable under
Section 5.13 of the Junior Subordinated Indenture, (iii) exercise any right to
rescind or annul a declaration that the Junior Subordinated Debentures shall be
due and payable or (iv) consent to any amendment, modification or termination of
the Junior Subordinated Indenture or the Junior Subordinated Debentures, where
such consent shall be required, without, in each case, obtaining the prior
approval of the holders of at least a majority in aggregate Liquidation Amount
of the outstanding Preferred Securities, except that, if a consent under the
Junior Subordinated Indenture would require the consent of each holder of Junior
Subordinated Debentures affected thereby, no such consent will be given by the
Property Trustee without the prior consent of each holder of the Preferred
Securities. The Property Trustee may not revoke any action previously authorized
or approved by a vote of the holders of the Preferred Securities except by
subsequent vote of the holders of the Preferred Securities. The Property Trustee
will notify each holder of Preferred Securities of any notice of default with
respect to the Junior Subordinated Debentures. In addition to obtaining the
foregoing approvals of the holders of the Preferred Securities, before taking
any of the foregoing actions, the Property Trustee will obtain an opinion of
counsel experienced in such matters to the effect that the Issuer Trust will not
be taxable as a corporation for United States federal income tax purposes on
account of such action.
Any required approval of holders of Preferred Securities may be given at a
meeting of holders of Preferred Securities convened for such purpose or pursuant
to written consent. The Property Trustee will cause a notice of any meeting at
which holders of Preferred Securities are entitled to vote, or of any matter
upon which action by written consent of such holders is to be taken, to be given
to each registered holder of Preferred Securities in the manner set forth in the
Trust Agreement.
No vote or consent of the holders of Preferred Securities will be required
to redeem and cancel Preferred Securities in accordance with the Trust
Agreement.
Notwithstanding that holders of Preferred Securities are entitled to vote
or consent under any of the circumstances described above, any of the Preferred
Securities that are owned by the Company, the Issuer Trustees or any affiliate
of the Company or any Issuer Trustees, will, for purposes of such vote or
consent, be treated as if they were not outstanding.
EXPENSES AND TAXES
In the Junior Subordinated Indenture, the Company, as borrower, has agreed
to pay all debts and other obligations (other than with respect to the Preferred
Securities) and all costs and expenses of the Issuer Trust (including costs and
expenses relating to the organization of the Issuer Trust, the fees and expenses
of the Issuer Trustees and the costs and expenses relating to the operation of
the Issuer Trust) and to pay any and all taxes and all costs and expenses with
respect thereto (other than United States withholding taxes) to which the Issuer
Trust might become subject. The foregoing obligations of the Company under the
Junior Subordinated Indenture are for the benefit of, and shall be enforceable
by, any person to whom any such debts, obligations, costs, expenses and taxes
are owed (a "Creditor") whether or not such Creditor has received notice
thereof. Any such Creditor may enforce such obligations of the Company directly
against the Company, and the Company has irrevocably waived any right or remedy
to require that any such Creditor take any action against the Issuer Trust or
any other person before proceeding against the Company. The Company has also
agreed in the Junior Subordinated Indenture to execute such additional
agreements as may be necessary or desirable to give full effect to the
foregoing.
BOOK ENTRY, DELIVERY, AND FORM
The Preferred Securities will be issued in the form of one or more fully
registered global securities which will be deposited with, or on behalf of, DTC
and registered in the name of DTC's nominee. Unless and until it is exchangeable
in whole or in part for the Preferred Securities in definitive form, a global
security may not be transferred except as a whole by DTC to a nominee of DTC or
by a nominee of DTC to DTC or another nominee of DTC or by DTC or any such
nominee to a successor of such Depository or a nominee of such successor.
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Ownership of beneficial interests in a global security will be limited to
persons that have accounts with DTC or its nominee ("Participants") or persons
that may hold interests through Participants. The Company expects that, upon the
issuance of a global security, DTC will credit, on its book-entry registration
and transfer system, the Participants' accounts with their respective principal
amounts of the Preferred Securities represented by such global security.
Ownership of beneficial interests in such global security will be shown on, and
the transfer of such ownership interests will be effected only through, records
maintained by DTC (with respect to interests of Participants) and on the records
of Participants (with respect to interests of Persons held through
Participants). Beneficial owners will not receive written confirmation from DTC
of their purchase, but are expected to receive written confirmations from the
Participants through which the beneficial owner entered into the transaction.
Transfers of ownership interests will be accomplished by entries on the books of
Participants acting on behalf of the beneficial owners.
So long as DTC, or its nominee, is the registered owner of a global
security, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Preferred Securities represented by such global security
for all purposes under the Trust Agreement. Except as provided below, owners of
beneficial interests in a global security will not be entitled to receive
physical delivery of the Preferred Securities in definitive form and will not be
considered the owners or holders thereof under the Trust Agreement. Accordingly,
each person owning a beneficial interest in such a global security must rely on
the procedures of DTC and, if such person is not a Participant, on the
procedures of the Participant through which such person owns its interest, to
exercise any rights of a holder of Preferred Securities under the Trust
Agreement. The Company understands that, under DTC's existing practices, in the
event that the Company requests any action of holders, or an owner of a
beneficial interest in such a global security desires to take any action which a
holder is entitled to take under the Trust Agreement, DTC would authorize the
Participants holding the relevant beneficial interests to take such action, and
such Participants would authorize beneficial owners owning through such
Participants to take such action or would otherwise act upon the instructions of
beneficial owners owning through them. Redemption notices will also be sent to
DTC. If less than all of the Preferred Securities are being redeemed, the
Company understands that it is DTC's existing practice to determine by lot the
amount of the interest of each Participant to be redeemed.
Distributions on the Preferred Securities registered in the name of DTC or
its nominee will be made to DTC or its nominee, as the case may be, as the
registered owner of the global security representing such Preferred Securities.
None of the Company, the Issuer Trustees, the Administrators, any Paying Agent
or any other agent of the Company or the Issuer Trustees will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the global
security for such Preferred Securities or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
Disbursements of Distributions to Participants shall be the responsibility of
DTC. DTC's practice is to credit Participants' accounts on a payable date in
accordance with their respective holdings shown on DTC's records unless DTC has
reason to believe that it will not receive payment on the payable date. Payments
by Participants to beneficial owners will be governed by standing instructions
and customary practices, as is the case with securities held for the accounts of
customers in bearer form or registered in "street name," and will be the
responsibility of such Participant and not of DTC, the Company, the Issuer
Trustees, the Paying Agent or any other agent of the Company, subject to any
statutory or regulatory requirements as may be in effect from time to time.
DTC may discontinue providing its services as securities depository with
respect to the Preferred Securities at any time by giving reasonable notice to
the Company or the Issuer Trustees. If DTC notifies the Company that it is
unwilling to continue as such, or if it is unable to continue or ceases to be a
clearing agency registered under the Exchange Act and a successor depository is
not appointed by the Company within ninety days after receiving such notice or
becoming aware that DTC is no longer so registered, the Company will issue the
Preferred Securities in definitive form upon registration of transfer of, or in
exchange for, such global security. In addition, the Company may at any time and
in its sole discretion determine not to have the Preferred Securities
represented by one or more global securities and, in such event, will issue
Preferred Securities in definitive form in exchange for all of the global
securities representing such Preferred Securities.
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DTC has advised the Company and the Issuer Trust as follows: DTC is a
limited purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its Participants and to facilitate the clearance and
settlement of securities transactions between Participants through electronic
book entry changes to accounts of its Participants, thereby eliminating the need
for physical movement of certificates. Participants include securities brokers
and dealers (such as the Underwriter), banks, trust companies and clearing
corporations and may include certain other organizations. Certain of such
Participants (or their representatives), together with other entities, own DTC.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through, or maintain a custodial
relationship with a Participant, either directly or indirectly.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Preferred Securities will be made by the Underwriter in
immediately available funds.
Secondary trading in preferred securities of corporate issuers is generally
settled in clearinghouse or next-day funds. In contrast, the Preferred
Securities will trade in DTC's Same-Day Funds Settlement System, and secondary
market trading activity in the Preferred Securities will therefore be required
by DTC to settle in immediately available funds. No assurance can be given as to
the effect, if any, of settlement in immediately available funds on trading
activity in the Preferred Securities.
PAYMENT AND PAYING AGENCY
Payments in respect of the Preferred Securities will be made to DTC, which
will credit the relevant accounts at DTC on the applicable Distribution Dates
or, if the Preferred Securities are not held by DTC, such payments will be made
by check mailed to the address of the holder entitled thereto as such address
appears on the securities register for the Trust Securities. The paying agent
(the "Paying Agent") will initially be the Property Trustee and any co-paying
agent chosen by the Property Trustee and acceptable to the Administrators. The
Paying Agent will be permitted to resign as Paying Agent upon 30 days' written
notice to the Property Trustee and the Administrators. If the Property Trustee
is no longer the Paying Agent, the Property Trustee will appoint a successor
(which must be a bank or trust company reasonably acceptable to the
Administrators) to act as Paying Agent.
REGISTRAR AND TRANSFER AGENT
The Property Trustee will act as registrar and transfer agent for the
Preferred Securities.
Registration of transfers of Preferred Securities will be effected without
charge by or on behalf of the Issuer Trust, but upon payment of any tax or other
governmental charges that may be imposed in connection with any transfer or
exchange. The Issuer Trust will not be required to register or cause to be
registered the transfer of the Preferred Securities after the Preferred
Securities have been called for redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, other than during the occurrence and continuance of
an Event of Default, undertakes to perform only such duties as are specifically
set forth in the Trust Agreement and, after such Event of Default, must exercise
the same degree of care and skill as a prudent person would exercise or use in
the conduct of his or her own affairs. Subject to this provision, the Property
Trustee is under no obligation to exercise any of the powers vested in it by the
Trust Agreement at the request of any holder of Preferred Securities unless it
is offered reasonable indemnity against the costs, expenses and liabilities that
might be incurred thereby.
For information concerning the relationships between Bankers Trust Company,
the Property Trustee, and the Company, see "Description of Junior Subordinated
Debentures -- Information Concerning the Debenture Trustee."
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MISCELLANEOUS
The Administrators and the Property Trustee are authorized and directed to
conduct the affairs of and to operate the Issuer Trust in such a way that the
Issuer Trust will not be deemed to be an "investment company" required to be
registered under the Investment Company Act or taxable as a corporation for
United States federal income tax purposes and so that the Junior Subordinated
Debentures will be treated as indebtedness of the Company for United States
federal income tax purposes. In this connection, the Property Trustee and the
holders of Common Securities are authorized to take any action, not inconsistent
with applicable law, the certificate of trust of the Issuer Trust or the Trust
Agreement, that the Property Trustee and the holders of Common Securities
determine in their discretion to be necessary or desirable for such purposes, as
long as such action does not materially adversely affect the interests of the
holders of the Preferred Securities.
Holders of the Preferred Securities have no preemptive or similar rights.
The Issuer Trust may not borrow money, issue debt or mortgage or pledge any
of its assets.
GOVERNING LAW
The Trust Agreement will be governed by and construed in accordance with
the laws of the State of Delaware.
DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES
The Junior Subordinated Debentures are to be issued under the Junior
Subordinated Indenture, under which Bankers Trust Company is acting as Debenture
Trustee. This summary of certain terms and provisions of the Junior Subordinated
Debentures and the Junior Subordinated Indenture does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, all the
provisions of the Junior Subordinated Indenture, including the definitions
therein of certain terms. Whenever particular defined terms of the Junior
Subordinated Indenture (as amended or supplemented from time to time) are
referred to herein, such defined terms are incorporated herein by reference. A
copy of the form of Junior Subordinated Indenture is available from the
Debenture Trustee upon request.
GENERAL
Concurrently with the issuance of the Preferred Securities, the Issuer
Trust will invest the proceeds thereof, together with the consideration paid by
the Company for the Common Securities, in the Junior Subordinated Debentures
issued by the Company. The Junior Subordinated Debentures will bear interest,
accruing from July 7, 1998, at the annual rate of 8.50% of the principal amount
thereof, payable quarterly in arrears on March 31, June 30, September 30 and
December 31 of each year (each, an "Interest Payment Date"), commencing
September 30, 1998, to the person in whose name each Junior Subordinated
Debenture is registered at the close of business on the 15th day of March, June,
September or December (whether or not a Business Day) next preceding such
Interest Payment Date. It is anticipated that, until the liquidation, if any, of
the Issuer Trust, each Junior Subordinated Debenture will be registered in the
name of the Issuer Trust and held by the Property Trustee in trust for the
benefit of the holders of the Trust Securities. The amount of interest payable
for any period less than a full interest period will be computed on the basis of
a 360-day year of twelve 30-day months and the actual days elapsed in a partial
month in such period. The amount of interest payable for any full interest
period will be computed by dividing the rate per annum by four. If any date on
which interest is payable on the Junior Subordinated Debentures is not a
Business Day, then payment of the interest payable on such date will be made on
the next succeeding day that is a Business Day (without any interest or other
payment in respect of any such delay), with the same force and effect as if made
on the date such payment was originally payable, except that, if such Business
Day falls in the next calendar year, such payment will be made on the
immediately preceding Business Day. Accrued interest that is not paid on the
applicable Interest Payment Date will bear additional interest on the amount
thereof (to the extent permitted by law) at the rate per annum of 8.50%,
compounded quarterly and computed on the basis of a 360-day year
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of twelve 30-day months and the actual days elapsed in a partial month in such
period. The amount of additional interest payable for any full interest period
will be computed by dividing the rate per annum by four. The term "interest" as
used herein includes quarterly interest payments, interest on quarterly interest
payments not paid on the applicable Interest Payment Date and Additional Sums
(as defined below), as applicable.
The Junior Subordinated Debentures will mature on June 30, 2028, subject to
the Maturity Adjustment (such date, as it may be shortened by the Maturity
Adjustment is referred to herein as the Stated Maturity). The Maturity
Adjustment represents the right of the Company to shorten the maturity date once
at any time to any date not earlier than June 30, 2003, subject to the Company
having received prior approval of the FRB if then required under applicable
capital guidelines or policies of the FRB. In the event the Company elects to
shorten the Stated Maturity of the Junior Subordinated Debentures, it will give
notice to the registered holders of the Junior Subordinated Debentures, the
Debenture Trustee and the Issuer Trust of such shortening no less than 90 days
prior to the effectiveness thereof. The Property Trustee must give notice to the
holders of the Trust Securities of the shortening of the Stated Maturity at
least 30 but not more than 60 days before such date.
The Junior Subordinated Debentures will be unsecured and will rank junior
and be subordinate in right of payment to all Senior Indebtedness of the
Company. The Junior Subordinated Debentures will not be subject to a sinking
fund. The Junior Subordinated Indenture does not limit the incurrence or
issuance of other secured or unsecured debt by the Company, including Senior
Indebtedness, whether under the Junior Subordinated Indenture or any existing or
other indenture that the Company may enter into in the future or otherwise. See
"-- Subordination."
OPTION TO EXTEND INTEREST PAYMENT PERIOD
So long as no Debenture Event of Default has occurred and is continuing,
the Company has the right at any time during the term of the Junior Subordinated
Debentures to defer the payment of interest at any time or from time to time for
a period not exceeding 20 consecutive quarterly periods with respect to each
Extension Period, provided that no Extension Period may extend beyond the Stated
Maturity of the Junior Subordinated Debentures. During any such Extension Period
the Company shall have the right to make partial payments of interest on any
interest payment date. At the end of such Extension Period, the Company must pay
all interest then accrued and unpaid (together with interest thereon at the
annual rate of 8.50%, compounded quarterly and computed on the basis of a
360-day year of twelve 30-day months and the actual days elapsed in a partial
month in such period, to the extent permitted by applicable law). The amount of
additional interest payable for any full interest period will be computed by
dividing the rate per annum by four. During an Extension Period, interest will
continue to accrue and holders of Junior Subordinated Debentures (or holders of
Preferred Securities while outstanding) will be required to accrue interest
income for United States federal income tax purposes. See "Certain Federal
Income Tax Consequences -- Interest Income and Original Issue Discount."
During any such Extension Period, the Company may not (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of the Company's capital stock or (ii)
make any payment of principal of or interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company that rank pari passu in
all respects with or junior in interest to the Junior Subordinated Debentures
(other than (a) repurchases, redemptions or other acquisitions of shares of
capital stock of the Company in connection with any employment contract, benefit
plan or other similar arrangement with or for the benefit of any one or more
employees, officers, directors or consultants, in connection with a dividend
reinvestment or stockholder stock purchase plan or in connection with the
issuance of capital stock of the Company (or securities convertible into or
exercisable for such capital stock) as consideration in an acquisition
transaction entered into prior to the applicable Extension Period, (b) as a
result of a reclassification or an exchange or conversion of any class or series
of the Company's capital stock (or any capital stock of a subsidiary of the
Company) for any class or series of the Company's capital stock or of any class
or series of the Company's indebtedness for any class or series of the Company's
capital stock, (c) the purchase of fractional interests in shares of the
Company's capital stock pursuant to the conversion or
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exchange provisions of such capital stock or the security being converted or
exchanged, (d) any declaration of a dividend in connection with any
stockholder's rights plan, or the issuance of rights, stock or other property
under any stockholders rights plan, or the redemption or repurchase of rights
pursuant thereto, or (e) any dividend in the form of stock, warrants, options or
other rights where the dividend stock or the stock issuable upon exercise of
such warrants, options or other rights is the same stock as that on which the
dividend is being paid or ranks pari passu with or junior to such stock). Prior
to the termination of any such Extension Period, the Company may further defer
the payment of interest, provided that no Extension Period may exceed 20
consecutive quarterly periods or extend beyond the Stated Maturity of the Junior
Subordinated Debentures. Upon the termination of any such Extension Period and
the payment of all amounts then due, the Company may elect to begin a new
Extension Period subject to the above conditions. No interest shall be due and
payable during an Extension Period, except at the end thereof. The Company must
give the Issuer Trustees notice of its election of such Extension Period at
least one Business Day prior to the earlier of (i) the date the Distributions on
the Preferred Securities would have been payable but for the election to begin
such Extension Period and (ii) the date the Property Trustee is required to give
notice to holders of the Preferred Securities of the record date or the date
such Distributions are payable, but in any event not less than one Business Day
prior to such record date. The Property Trustee will give notice of the
Company's election to begin a new Extension Period to the holders of the
Preferred Securities. There is no limitation on the number of times that the
Company may elect to begin an Extension Period.
REDEMPTION
The Junior Subordinated Debentures are redeemable prior to maturity at the
option of the Company (i) on or after June 30, 2003, 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 during the continuation of a Tax Event,
Investment Company Event, or Capital Treatment Event (each as defined under
"Description of Preferred Securities -- Redemption"), in each case at the
redemption price described below. The proceeds of any such redemption will be
used by the Issuer Trust to redeem the Preferred Securities.
The FRB's risk-based capital guidelines, which are subject to change,
currently provide that redemptions of permanent equity or other capital
instruments before stated maturity could have a significant impact on a bank
holding company's overall capital structure and that any organization
considering such a redemption should consult with the FRB before redeeming any
equity or capital instrument prior to maturity if such redemption could have a
material effect on the level or composition of the organization's capital base
(unless the equity or capital instrument were redeemed with the proceeds of, or
replaced by, a like amount of a similar or higher quality capital instrument and
the FRB considers the organization's capital position to be fully adequate after
the redemption).
The redemption of the Junior Subordinated Debentures by the Company prior
to their Stated Maturity would constitute the redemption of capital instruments
under the FRB's current risk-based capital guidelines and may be subject to the
prior approval of the FRB. The redemption of the Junior Subordinated Debentures
also could be subject to the additional prior approval of the FRB under its
current risk-based capital guidelines.
The redemption price for Junior Subordinated Debentures is the outstanding
principal amount of the Junior Subordinated Debentures plus accrued interest
(including any Additional Interest or any Additional Sums) thereon to but
excluding the date fixed for redemption.
ADDITIONAL SUMS
The Company has covenanted in the Junior Subordinated Indenture that, if
and for so long as (i) the Issuer Trust is the holder of all Junior Subordinated
Debentures and (ii) the Issuer Trust is required to pay any additional taxes,
duties or other governmental charges as a result of a Tax Event, the Company
will pay as additional sums on the Junior Subordinated Debentures such amounts
as may be required so that the Distributions payable by the Issuer Trust will
not be reduced as a result of any such additional taxes, duties or other
governmental charges. See "Description of Preferred Securities -- Redemption."
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REGISTRATION, DENOMINATION, AND TRANSFER
The Junior Subordinated Debentures will initially be registered in the name
of the Issuer Trust. If the Junior Subordinated Debentures are distributed to
holders of Preferred Securities, it is anticipated that the depositary
arrangements for the Junior Subordinated Debentures will be substantially
identical to those in effect for the Preferred Securities. See "Description of
Preferred Securities -- Book Entry, Delivery and Form."
Although DTC has agreed to the procedures described above, it is under no
obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. If DTC is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
the Company within 90 days of receipt of notice from DTC to such effect, the
Company will cause the Junior Subordinated Debentures to be issued in definitive
form.
Payments on Junior Subordinated Debentures represented by a global security
will be made to Cede & Co., the nominee for DTC, as the registered holder of the
Junior Subordinated Debentures, as described under "Description of Preferred
Securities -- Book Entry, Delivery and Form." If Junior Subordinated Debentures
are issued in certificated form, principal and interest will be payable, the
transfer of the Junior Subordinated Debentures will be registrable, and Junior
Subordinated Debentures will be exchangeable for Junior Subordinated Debentures
of other authorized denominations of a like aggregate principal amount, at the
corporate trust office of the Debenture Trustee in New York, New York or at the
offices of any Paying Agent or transfer agent appointed by the Company, provided
that payment of interest may be made at the option of the Company by check
mailed to the address of the persons entitled thereto. However, a holder of $1
million or more in aggregate principal amount of Junior Subordinated Debentures
may receive payments of interest (other than interest payable at the Stated
Maturity) by wire transfer of immediately available funds upon written request
to the Debenture Trustee not later than 15 calendar days prior to the date on
which the interest is payable.
Junior Subordinated Debentures will be exchangeable for other Junior
Subordinated Debentures of like tenor, of any authorized denominations, and of a
like aggregate principal amount.
Junior Subordinated Debentures may be presented for exchange as provided
above, and may be presented for registration of transfer (with the form of
transfer endorsed thereon, or a satisfactory written instrument of transfer,
duly executed), at the office of the securities registrar appointed under the
Junior Subordinated Debenture or at the office of any transfer agent designated
by the Company for such purpose without service charge and upon payment of any
taxes and other governmental charges as described in the Junior Subordinated
Indenture. The Company will appoint the Debenture Trustee as securities
registrar under the Junior Subordinated Indenture. The Company may at any time
designate additional transfer agents with respect to the Junior Subordinated
Debentures.
In the event of any redemption, neither the Company nor the Debenture
Trustee shall be required to (i) issue, register the transfer of or exchange
Junior Subordinated Debentures during a period beginning at the opening of
business 15 days before the day of selection for redemption of the Junior
Subordinated Debentures to be redeemed and ending at the close of business on
the day of mailing of the relevant notice of redemption or (ii) transfer or
exchange any Junior Subordinated Debentures so selected for redemption, except,
in the case of any Junior Subordinated Debentures being redeemed in part, any
portion thereof not to be redeemed.
Any monies deposited with the Debenture Trustee or any paying agent, or
then held by the Company in trust, for the payment of the principal of (and
premium, if any) or interest on any Junior Subordinated Debenture and remaining
unclaimed for two years after such principal (and premium, if any) or interest
has become due and payable shall, at the request of the Company, be repaid to
the Company and the holder of such Junior Subordinated Debenture shall
thereafter look, as a general unsecured creditor, only to the Company for
payment thereof.
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RESTRICTIONS ON CERTAIN PAYMENTS; CERTAIN COVENANTS OF THE COMPANY
The Company has covenanted that it will not (i) declare or pay any
dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's capital stock or (ii)
make any payment of principal of or interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company that rank pari passu in
all respects with or junior in interest to the Junior Subordinated Debentures
(other than (a) repurchases, redemptions or other acquisitions of shares of
capital stock of the Company in connection with any employment contract, benefit
plan or other similar arrangement with or for the benefit of any one or more
employees, officers, directors or consultants, in connection with a dividend
reinvestment or stockholder stock purchase plan or in connection with the
issuance of capital stock of the Company (or securities convertible into or
exercisable for such capital stock) as consideration in an acquisition
transaction entered into prior to the applicable Extension Period or other event
referred to below, (b) as a result of an exchange or conversion of any class or
series of the Company's capital stock (or any capital stock of a subsidiary of
the Company) for any class or series of the Company's capital stock or of any
class or series of the Company's indebtedness for any class or series of the
Company's capital stock, (c) the purchase of fractional interests in shares of
the Company's capital stock pursuant to the conversion or exchange provisions of
such capital stock or the security being converted or exchanged, (d) any
declaration of a dividend in connection with any stockholder's rights plan, or
the issuance of rights, stock or other property under any stockholder's rights
plan, or the redemption or repurchase of rights pursuant thereto, or (e) any
dividend in the form of stock, warrants, options or other rights where the
dividend stock or the stock issuable upon exercise of such warrants, options or
other rights is the same stock as that on which the dividend is being paid or
ranks pari passu with or junior to such stock), if at such time (i) there has
occurred any event (a) of which the Company has actual knowledge that with the
giving of notice or the lapse of time, or both, would constitute a Debenture
Event of Default and (b) that the Company has not taken reasonable steps to
cure, (ii) if the Junior Subordinated Debentures are held by the Issuer Trust,
the Company is in default with respect to its payment of any obligations under
the Guarantee or (iii) the Company has given notice of its election of an
Extension Period as provided in the Junior Subordinated Indenture and has not
rescinded such notice, or such Extension Period, or any extension thereof, is
continuing.
The Company has covenanted in the Junior Subordinated Indenture (i) to
continue to hold, directly or indirectly, 100% of the Common Securities,
provided that certain successors that are permitted pursuant to the Junior
Subordinated Indenture may succeed to the Company's ownership of the Common
Securities, (ii) as holder of the Common Securities, not to voluntarily
terminate, windup or liquidate the Issuer Trust, other than (a) in connection
with a distribution of Junior Subordinated Debentures to the holders of the
Preferred Securities in liquidation of the Issuer Trust or (b) in connection
with certain mergers, consolidations or amalgamations permitted by the Trust
Agreement and (iii) to use its reasonable efforts, consistent with the terms and
provisions of the Trust Agreement, to cause the Issuer Trust to continue not to
be taxable as a corporation for United States federal income tax purposes.
MODIFICATION OF JUNIOR SUBORDINATED INDENTURE
From time to time, the Company and the Debenture Trustee may, without the
consent of any of the holders of the outstanding Junior Subordinated Debentures,
amend, waive or supplement the provisions of the Junior Subordinated Indenture
to: (1) evidence succession of another corporation or association to the Company
and the assumption by such person of the obligations of the Company under the
Junior Subordinated Debentures, (2) add further covenants, restrictions or
conditions for the protection of holders of the Junior Subordinated Debentures,
(3) cure ambiguities or correct the Junior Subordinated Debentures in the case
of defects or inconsistencies in the provisions thereof, so long as any such
cure or correction does not adversely affect the interest of the holders of the
Junior Subordinated Debentures in any material respect, (4) change the terms of
the Junior Subordinated Debentures to facilitate the issuance of the Junior
Subordinated Debentures in certificated or other definitive form, (5) evidence
or provide for the appointment of a successor Debenture Trustee, or (6) qualify,
or maintain the qualification of, the Junior Subordinated Indentures under the
Trust Indenture Act. The Junior Subordinated Indenture contains provisions
permitting the Company and the Debenture Trustee, with the consent of the
holders of not less than a majority in
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principal amount of the Junior Subordinated Debentures, to modify the Junior
Subordinated Indenture in a manner affecting the rights of the holders of the
Junior Subordinated Debentures, except that no such modification may, without
the consent of the holder of each outstanding Junior Subordinated Debenture so
affected, (i) change the Stated Maturity of the Junior Subordinated Debentures,
or reduce the principal amount thereof, the rate of interest thereon or any
premium payable upon the redemption thereof, or change the place of payment
where, or the currency in which, any such amount is payable or impair the right
to institute suit for the enforcement of any Junior Subordinated Debenture or
(ii) reduce the percentage of principal amount of Junior Subordinated
Debentures, the holders of which are required to consent to any such
modification of the Junior Subordinated Indenture. Furthermore, so long as any
of the Preferred Securities remain outstanding, no such modification may be made
that adversely affects the holders of such Preferred Securities in any material
respect, and no termination of the Junior Subordinated Indenture may occur, and
no waiver of any Debenture Event of Default or compliance with any covenant
under the Junior Subordinated Indenture may be effective, without the prior
consent of the holders of at least a majority of the aggregate Liquidation
Amount of the outstanding Preferred Securities unless and until the principal of
(and premium, if any, on) the Junior Subordinated Debentures and all accrued and
unpaid interest thereon have been paid in full and certain other conditions are
satisfied.
DEBENTURE EVENTS OF DEFAULT
The Junior Subordinated Indenture provides that any one or more of the
following described events with respect to the Junior Subordinated Debentures
that has occurred and is continuing constitutes an "Event of Default" with
respect to the Junior Subordinated Debentures:
(i) failure to pay any interest on the Junior Subordinated Debentures
when due and continuance of such default for a period of 30 days (subject
to the deferral of any due date in the case of an Extension Period); or
(ii) failure to pay any principal of or premium, if any, on the Junior
Subordinated Debentures when due whether at the Stated Maturity; or
(iii) failure to observe or perform in any material respect certain
other covenants contained in the Junior Subordinated Indenture for 90 days
after written notice to the Company from the Debenture Trustee or the
holders of at least 25% in aggregate outstanding principal amount of the
outstanding Junior Subordinated Debentures; or
(iv) the Company consents to the appointment of a receiver or other
similar official in any liquidation, insolvency or similar proceeding with
respect to the Company or all or substantially all its property.
For purposes of the Trust Agreement and this Prospectus, each such Event of
Default under the Junior Subordinated Debenture is referred to as a "Debenture
Event of Default." As described in "Description of Preferred
Securities -- Events of Default; Notice," the occurrence of a Debenture Event of
Default will also constitute an Event of Default in respect of the Trust
Securities.
The holders of at least a majority in aggregate principal amount of
outstanding Junior Subordinated Debentures have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Debenture Trustee. The Debenture Trustee or the holders of not less than 25% in
aggregate principal amount of outstanding Junior Subordinated Debentures may
declare the principal due and payable immediately upon a Debenture Event of
Default, and, should the Debenture Trustee or such holders of Junior
Subordinated Debentures fail to make such declaration, the holders of at least
25% in aggregate Liquidation Amount of the outstanding Preferred Securities
shall have such right. The holders of a majority in aggregate principal amount
of outstanding Junior Subordinated Debentures may annul such declaration and
waive the default if all defaults (other than the non-payment of the principal
of Junior Subordinated Debentures which has become due solely by such
acceleration) have been cured and a sum sufficient to pay all matured
installments of interest and principal due otherwise than by acceleration has
been deposited with the Debenture Trustee. Should the holders of Junior
Subordinated Debentures fail to annul such declaration and
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waive such default, the holders of a majority in aggregate Liquidation Amount of
the outstanding Preferred Securities shall have such right.
The holders of at least a majority in aggregate principal amount of the
outstanding Junior Subordinated Debentures affected thereby may, on behalf of
the holders of all the Junior Subordinated Debentures, waive any past default,
except a default in the payment of principal (or premium, if any) or interest
(unless such default has been cured and a sum sufficient to pay all matured
installments of interest and principal due otherwise than by acceleration has
been deposited with the Debenture Trustee) or a default in respect of a covenant
or provision which under the Junior Subordinated Indenture cannot be modified or
amended without the consent of the holder of each outstanding Junior
Subordinated Debenture affected thereby. See "-- Modification of Junior
Subordinated Indenture." The Company is required to file annually with the
Debenture Trustee a certificate as to whether or not the Company is in
compliance with all the conditions and covenants applicable to it under the
Junior Subordinated Indenture.
If a Debenture Event of Default occurs and is continuing, the Property
Trustee will have the right to declare the principal of and the interest on the
Junior Subordinated Debentures, and any other amounts payable under the Junior
Subordinated Indenture, to be forthwith due and payable and to enforce its other
rights as a creditor with respect to the Junior Subordinated Debentures.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF PREFERRED SECURITIES
If a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of the Company to pay any amounts payable
in respect of the Junior Subordinated Debentures on the date such amounts are
otherwise payable, a registered holder of Preferred Securities may institute a
Direct Action against the Company for enforcement of payment to such holder of
an amount equal to the amount payable in respect of Junior Subordinated
Debentures having a principal amount equal to the aggregate Liquidation Amount
of the Preferred Securities held by such holder. The Company may not amend the
Junior Subordinated Indenture to remove the foregoing right to bring a Direct
Action without the prior written consent of the holders of all the Preferred
Securities. The Company will have the right under the Junior Subordinated
Indenture to set-off any payment made to such holder of Preferred Securities by
the Company in connection with a Direct Action.
The holders of the Preferred Securities are not able to exercise directly
any remedies available to the holders of the Junior Subordinated Debentures
except under the circumstances described in the preceding paragraph. See
"Description of Preferred Securities -- Events of Default; Notice."
CONSOLIDATION, MERGER, SALE OF ASSETS, AND OTHER TRANSACTIONS
The Junior Subordinated Indenture provides that the Company may not
consolidate with or merge into any other Person or convey, transfer or lease its
properties and assets substantially as an entirety to any Person, and no Person
may consolidate with or merge into the Company or convey, transfer or lease its
properties and assets substantially as an entirety to the Company, unless (i) if
the Company consolidates with or merges into another Person or conveys or
transfers its properties and assets substantially as an entirety to any Person,
the successor Person is organized under the laws of the United States or any
state or the District of Columbia, and such successor Person expressly assumes
the Company's obligations in respect of the Junior Subordinated Debentures; (ii)
immediately after giving effect thereto, no Debenture Event of Default, and no
event which, after notice or lapse of time or both, would constitute a Debenture
Event of Default, has occurred and is continuing; and (iii) certain other
conditions as prescribed in the Junior Subordinated Indenture are satisfied.
The provisions of the Junior Subordinated Indenture do not afford holders
of the Junior Subordinated Debentures protection in the event of a highly
leveraged or other transaction involving the Company that may adversely affect
holders of the Junior Subordinated Debentures.
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SATISFACTION AND DISCHARGE
The Junior Subordinated Indenture provides that when, among other things,
all Junior Subordinated Debentures not previously delivered to the Debenture
Trustee for cancellation (i) have become due and payable, (ii) will become due
and payable at the Stated Maturity within one year, and the Company deposits or
causes to be deposited with the Debenture Trustee funds, in trust, for the
purpose and in an amount sufficient to pay and discharge the entire indebtedness
on the Junior Subordinated Debentures not previously delivered to the Debenture
Trustee for cancellation, for the principal (and premium, if any) and interest
to the date of the deposit or to the Stated Maturity, as the case may be, then
the Junior Subordinated Indenture will cease to be of further effect (except as
to the Company's obligations to pay all other sums due pursuant to the Junior
Subordinated Indenture and to provide the officers' certificates and opinions of
counsel described therein), and the Company will be deemed to have satisfied and
discharged the Junior Subordinated Indenture.
SUBORDINATION
The Junior Subordinated Debentures will be subordinate and junior in right
of payment, to the extent set forth in the Junior Subordinated Indenture, to all
Senior Indebtedness (as defined below) of the Company. If the Company defaults
in the payment of any principal, premium, if any, or interest, if any, or any
other amount payable on any Senior Indebtedness when the same becomes due and
payable, whether at maturity or at a date fixed for redemption or by declaration
of acceleration or otherwise, then, unless and until such default has been cured
or waived or has ceased to exist or all Senior Indebtedness has been paid, no
direct or indirect payment (in cash, property, securities, by set-off or
otherwise) may be made or agreed to be made on the Junior Subordinated
Debentures, or in respect of any redemption, repayment, retirement, purchase or
other acquisition of any of the Junior Subordinated Debentures.
As used herein, "Senior Indebtedness" means, whether recourse is to all or
a portion of the assets of the Company and whether or not contingent, (i) every
obligation of the Company for money borrowed; (ii) every obligation of the
Company evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses; (iii) every reimbursement obligation of the Company with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of the Company; (iv) every obligation of the Company issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business); (v) every capital lease obligation of the Company; (vi) every
obligation of the Company for claims (as defined in Section 101(4) of the United
States Bankruptcy Code of 1978, as amended) in respect of derivative products
such as interest and foreign exchange rate contracts, commodity contracts and
similar arrangements; and (vii) every obligation of the type referred to in
clauses (i) through (vi) of another person and all dividends of another person
the payment of which, in either case, the Company has guaranteed or is
responsible or liable, directly or indirectly, as obligor or otherwise,
including without limitation the Barnett Credit Line; provided that Senior
Indebtedness shall not include (i) any obligations which, by their terms, are
expressly stated to rank pari passu in right of payment with, or to not be
superior in right of payment to, the Junior Subordinated Debentures, (ii) any
Senior Indebtedness of the Company which when incurred and without respect to
any election under Section 1111(b) of the United States Bankruptcy Code of 1978,
as amended, was without recourse to the Company, (iii) any indebtedness of the
Company to any of its subsidiaries, (iv) indebtedness to any executive officer
or director of the Company, or (v) any indebtedness in respect of debt
securities issued to any trust, or a trustee of such trust, partnership or other
entity affiliated with the Company that is a financing entity of the Company in
connection with the issuance of such financing entity of securities that are
similar to the Preferred Securities.
In the event of (i) certain events of bankruptcy, dissolution or
liquidation of the Company or the holder of the Common Securities, (ii) any
proceeding for the liquidation, dissolution or other winding up of the Company,
voluntary or involuntary, whether or not involving insolvency or bankruptcy
proceedings, (iii) any assignment by the Company for the benefit of creditors or
(iv) any other marshaling of the assets of the Company, all Senior Indebtedness
(including any interest thereon accruing after the commencement of any such
proceedings) shall first be paid in full before any payment or distribution,
whether in cash, securities or
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other property, shall be made on account of the Junior Subordinated Debentures.
In such event, any payment or distribution on account of the Junior Subordinated
Debentures, whether in cash, securities or other property, that would otherwise
(but for the subordination provisions) be payable or deliverable in respect of
the Junior Subordinated Debentures will be paid or delivered directly to the
holders of Senior Indebtedness in accordance with the priorities then existing
among such holders until all Senior Indebtedness (including any interest thereon
accruing after the commencement of any such proceedings) has been paid in full.
In the event of any such proceeding, after payment in full of all sums
owing with respect to Senior Indebtedness, the holders of Junior Subordinated
Debentures, together with the holders of any obligations of the Company ranking
on a parity with the Junior Subordinated Debentures, will be entitled to be paid
from the remaining assets of the Company the amounts at the time due and owing
on the Junior Subordinated Debentures and such other obligations before any
payment or other distribution, whether in cash, property or otherwise, will be
made on account of any capital stock or obligations of the Company ranking
junior to the Junior Subordinated Debentures and such other obligations. If any
payment or distribution on account of the Junior Subordinated Debentures of any
character or any security, whether in cash, securities or other property is
received by any holder of any Junior Subordinated Debentures in contravention of
any of the terms hereof and before all the Senior Indebtedness has been paid in
full, such payment or distribution or security will be received in trust for the
benefit of, and must be paid over or delivered and transferred to, the holders
of the Senior Indebtedness at the time outstanding in accordance with the
priorities then existing among such holders for application to the payment of
all Senior Indebtedness remaining unpaid to the extent necessary to pay all such
Senior Indebtedness in full. By reason of such subordination, in the event of
the insolvency of the Company, holders of Senior Indebtedness may receive more,
ratably, and holders of the Junior Subordinated Debentures may receive less,
ratably, than the other creditors of the Company. Such subordination will not
prevent the occurrence of any Event of Default in respect of the Junior
Subordinated Debentures.
The Junior Subordinated Indenture places no limitation on the amount of
additional Senior Indebtedness that may be incurred by the Company. The Company
expects from time to time to incur additional indebtedness constituting Senior
Indebtedness.
INFORMATION CONCERNING THE DEBENTURE TRUSTEE
The Debenture Trustee, other than during the occurrence and continuance of
a default by the Company in performance of its obligations under the Junior
Subordinated Debenture, is under no obligation to exercise any of the powers
vested in it by the Junior Subordinated Indenture at the request of any holder
of Junior Subordinated Debentures, unless offered reasonable indemnity by such
holder against the costs, expenses and liabilities that might be incurred
thereby. The Debenture Trustee is not required to expend or risk its own funds
or otherwise incur personal financial liability in the performance of its duties
if the Debenture Trustee reasonably believes that repayment or adequate
indemnity is not reasonably assured to it.
Bankers Trust Company, the Debenture Trustee, may serve from time to time
as trustee under other indentures or trust agreements with the Company or its
subsidiaries relating to other issues of their securities. In addition, the
Company and certain of its affiliates may have other banking relationships with
Bankers Trust Company and its affiliates.
GOVERNING LAW
The Junior Subordinated Indenture and the Junior Subordinated Debentures
will be governed by and construed in accordance with the laws of the State of
New York.
DESCRIPTION OF GUARANTEE
The Guarantee will be executed and delivered by the Company concurrently
with the issuance of Preferred Securities by the Issuer Trust for the benefit of
the holders from time to time of the Preferred Securities. Bankers Trust Company
will act as Guarantee Trustee under the Guarantee. This summary of certain
provisions of the Guarantee does not purport to be complete and is subject to,
and qualified in its
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entirety by reference to, all the provisions of the Guarantee, including the
definitions therein of certain terms. A copy of the form of Guarantee is
available upon request from the Guarantee Trustee. The Guarantee Trustee will
hold the Guarantee for the benefit of the holders of the Preferred Securities.
GENERAL
The Company will irrevocably agree to pay in full on a subordinated basis,
to the extent set forth in the Guarantee and described herein, the Guarantee
Payments (as defined below) to the holders of the Preferred Securities, as and
when due, regardless of any defense, right of set-off or counterclaim that the
Issuer Trust may have or assert other than the defense of payment. The following
payments with respect to the Preferred Securities, to the extent not paid by or
on behalf of the Issuer Trust (the "Guarantee Payments"), will be subject to the
Guarantee: (i) any accrued and unpaid Distributions required to be paid on such
Preferred Securities, to the extent that the Issuer Trust has funds on hand
available therefor at such time, (ii) the Redemption Price with respect to any
Preferred Securities called for redemption, to the extent that the Issuer Trust
has funds on hand available therefor at such time, and (iii) upon a voluntary or
involuntary dissolution, termination, winding up or liquidation of the Issuer
Trust (unless the Junior Subordinated Debentures are distributed to holders of
the Preferred Securities), the lesser of (a) the aggregate of the Liquidation
Amount and all accumulated and unpaid Distributions to the date of payment, to
the extent that the Issuer Trust has funds on hand available therefor at such
time, and (b) the amount of assets of the Issuer Trust remaining available for
distribution to holders of the Preferred Securities on liquidation of the Issuer
Trust. The Company's obligation to make a Guarantee Payment may be satisfied by
direct payment of the required amounts by the Company to the holders of the
Preferred Securities or by causing the Issuer Trust to pay such amounts to such
holders.
The Guarantee will be an irrevocable guarantee of payment on a subordinated
basis of the Issuer Trust's obligations under the Preferred Securities, but will
apply only to the extent that the Issuer Trust has funds sufficient to make such
payments, and is not a guarantee of collection.
If the Company does not make payments on the Junior Subordinated Debentures
held by the Issuer Trust, the Issuer Trust will not be able to pay any amounts
payable in respect of the Preferred Securities and will not have funds legally
available therefor. The Guarantee will rank subordinate and junior in right of
payment to all Senior Indebtedness of the Company. See "-- Status of the
Guarantee." The Guarantee does not limit the incurrence or issuance of other
secured or unsecured debt of the Company, including Senior Indebtedness, whether
under the Junior Subordinated Indenture, any other indenture that the Company
may enter into in the future or otherwise.
The Company has, through the Guarantee, the Trust Agreement, the Junior
Subordinated Debentures and the Junior Subordinated Indenture, taken together,
fully, irrevocably and unconditionally guaranteed all the Issuer Trust's
obligations under the Preferred Securities on a subordinated basis. No single
document standing alone or operating in conjunction with fewer than all the
other documents constitutes such guarantee. It is only the combined operation of
these documents that has the effect of providing a full, irrevocable and
unconditional guarantee of the Issuer Trust's obligations in respect of the
Preferred Securities. See "Relationship Among the Preferred Securities, the
Junior Subordinated Debentures, and the Guarantee."
STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of the Company and
will rank subordinate and junior in right of payment to all Senior Indebtedness
of the Company in the same manner as the Junior Subordinated Debentures.
The Guarantee will constitute a guarantee of payment and not of collection
(i.e., the guaranteed party may institute a legal proceeding directly against
the Guarantor to enforce its rights under the Guarantee without first
instituting a legal proceeding against any other person or entity). The
Guarantee will be held by the Guarantee Trustee for the benefit of the holders
of the Preferred Securities. The Guarantee will not be discharged except by
payment of the Guarantee Payments in full to the extent not paid by the Issuer
Trust or distribution to the holders of the Preferred Securities of the Junior
Subordinated Debentures.
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AMENDMENTS AND ASSIGNMENT
Except with respect to any changes which do not materially adversely affect
the rights of holders of the Preferred Securities (in which case no consent will
be required), the Guarantee may not be amended without the prior approval of the
holders of not less than a majority of the aggregate Liquidation Amount of the
outstanding Preferred Securities. The manner of obtaining any such approval will
be as set forth under "Description of Preferred Securities -- Voting Rights;
Amendment of Trust Agreement." All guarantees and agreements contained in the
Guarantee shall bind the successors, assigns, receivers, trustees and
representatives of the Company and shall inure to the benefit of the holders of
the Preferred Securities then outstanding.
EVENTS OF DEFAULT
An event of default under the Guarantee will occur upon the failure of the
Company to perform any of its payment or other obligations thereunder, or to
perform any non-payment obligation if such non-payment default remains
unremedied for 30 days. The holders of not less than a majority in aggregate
Liquidation Amount of the outstanding Preferred Securities have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Guarantee Trustee in respect of the Guarantee or to direct the
exercise of any trust or power conferred upon the Guarantee Trustee under the
Guarantee.
Any registered holder of Preferred Securities may institute a legal
proceeding directly against the Company to enforce its rights under the
Guarantee without first instituting a legal proceeding against the Issuer Trust,
the Guarantee Trustee or any other person or entity.
The Company, as guarantor, is required to file annually with the Guarantee
Trustee a certificate as to whether or not the Company is in compliance with all
the conditions and covenants applicable to it under the Guarantee.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than during the occurrence and continuance of
a default by the Company in performance of the Guarantee, undertakes to perform
only such duties as are specifically set forth in the Guarantee and, after the
occurrence of an event of default with respect to the Guarantee, must exercise
the same degree of care and skill as a prudent person would exercise or use in
the conduct of his or her own affairs. Subject to this provision, the Guarantee
Trustee is under no obligation to exercise any of the powers vested in it by the
Guarantee at the request of any holder of the Preferred Securities unless it is
offered reasonable indemnity against the costs, expenses and liabilities that
might be incurred thereby.
For information concerning the relationship between Bankers Trust Company,
as Guarantee Trustee, and the Company, see "Description of Junior Subordinated
Debentures -- Information Concerning the Debenture Trustee."
TERMINATION OF THE GUARANTEE
The Guarantee will terminate and be of no further force and effect upon
full payment of the Redemption Price of the Preferred Securities, upon full
payment of the amounts payable with respect to the Preferred Securities upon
liquidation of the Issuer Trust or upon distribution of Junior Subordinated
Debentures to the holders of the Preferred Securities in exchange for all of the
Preferred Securities. The Guarantee will continue to be effective or will be
reinstated, as the case may be, if at any time any holder of the Preferred
Securities must restore payment of any sums paid under the Preferred Securities
or the Guarantee.
GOVERNING LAW
The Guarantee will be governed by and construed in accordance with the laws
of the State of New York.
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RELATIONSHIP AMONG THE PREFERRED SECURITIES, THE JUNIOR
SUBORDINATED DEBENTURES, AND THE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
Payments of Distributions and other amounts due on the Preferred Securities
(to the extent the Issuer Trust has funds available for such payment) are
irrevocably guaranteed, on a subordinated basis, by the Company as and to the
extent set forth under "Description of Guarantee." Taken together, the Company's
obligations under the Junior Subordinated Debentures, the Junior Subordinated
Indenture, the Trust Agreement and the Guarantee provide, in the aggregate, a
full, irrevocable and unconditional guarantee of payments of Distributions and
other amounts due on the Preferred Securities. No single document standing alone
or operating in conjunction with fewer than all the other documents constitutes
such guarantee. It is only the combined operation of these documents that has
the effect of providing a full, irrevocable and unconditional guarantee of the
Issuer Trust's obligations in respect of the Preferred Securities. If and to the
extent that the Company does not make payments on the Junior Subordinated
Debentures, the Issuer Trust will not have sufficient funds to pay Distributions
or other amounts due on the Preferred Securities. The Guarantee does not cover
payment of amounts payable with respect to the Preferred Securities when the
Issuer Trust does not have sufficient funds to pay such amounts. In such event,
the remedy of a holder of the Preferred Securities is to institute a legal
proceeding directly against the Company for enforcement of payment of the
Company's obligations under Junior Subordinated Debentures having a principal
amount equal to the Liquidation Amount of the Preferred Securities held by such
holder.
The obligations of the Company under the Junior Subordinated Debentures and
the Guarantee are subordinate and junior in right of payment to all Senior
Indebtedness.
SUFFICIENCY OF PAYMENTS
As long as payments are made when due on the Junior Subordinated
Debentures, such payments will be sufficient to cover Distributions and other
payments distributable on the Preferred Securities, primarily because (i) the
aggregate principal amount of the Junior Subordinated Debentures will be equal
to the sum of the aggregate stated Liquidation Amount of the Preferred
Securities and Common Securities; (ii) the interest rate and interest and other
payment dates on the Junior Subordinated Debentures will match the Distribution
rate, Distribution Dates and other payment dates for the Preferred Securities;
(iii) the Company will pay for any and all costs, expenses and liabilities of
the Issuer Trust except the Issuer Trust's obligations to holders of the Trust
Securities; and (iv) the Trust Agreement further provides that the Issuer Trust
will not engage in any activity that is not consistent with the limited purposes
of the Issuer Trust.
Notwithstanding anything to the contrary in the Junior Subordinated
Indenture, the Company has the right to set-off any payment it is otherwise
required to make thereunder against and to the extent the Company has
theretofore made, or is concurrently on the date of such payment making, a
payment under the Guarantee.
ENFORCEMENT RIGHTS OF HOLDERS OF PREFERRED SECURITIES
A holder of any Preferred Security may institute a legal proceeding
directly against the Company to enforce its rights under the Guarantee without
first instituting a legal proceeding against the Guarantee Trustee, the Issuer
Trust or any other person or entity. See "Description of Guarantee."
A default or event of default under any Senior Indebtedness of the Company
would not constitute a default or Event of Default in respect of the Preferred
Securities. However, in the event of payment defaults under, or acceleration of,
Senior Indebtedness of the Company, the subordination provisions of the Junior
Subordinated Indenture provide that no payments may be made in respect of the
Junior Subordinated Debentures until such Senior Indebtedness has been paid in
full or any payment default thereunder has been cured or waived. See
"Description of Junior Subordinated Debentures -- Subordination."
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LIMITED PURPOSE OF ISSUER TRUST
The Preferred Securities represent preferred undivided beneficial interests
in the assets of the Issuer Trust, and the Issuer Trust exists for the sole
purpose of issuing its Preferred Securities and Common Securities and investing
the proceeds thereof in Junior Subordinated Debentures. A principal difference
between the rights of a holder of a Preferred Security and a holder of a Junior
Subordinated Debenture is that a holder of a Junior Subordinated Debenture is
entitled to receive from the Company payments on Junior Subordinated Debentures
held, while a holder of Preferred Securities is entitled to receive
Distributions or other amounts distributable with respect to the Preferred
Securities from the Issuer Trust (or from the Company under the Guarantee) only
if and to the extent the Issuer Trust has funds available for the payment of
such Distributions.
RIGHTS UPON DISSOLUTION
Upon any voluntary or involuntary dissolution of the Issuer Trust, other
than any such dissolution involving the distribution of the Junior Subordinated
Debentures, after satisfaction of liabilities to creditors of the Issuer Trust
as required by applicable law, the holders of the Preferred Securities will be
entitled to receive, out of assets held by the Issuer Trust, the Liquidation
Distribution in cash. See "Description of Preferred Securities -- Liquidation
Distribution Upon Dissolution." Upon any voluntary or involuntary liquidation or
bankruptcy of the Company, the Issuer Trust, as registered holder of the Junior
Subordinated Debentures, would be a subordinated creditor of the Company,
subordinated and junior in right of payment to all Senior Indebtedness as set
forth in the Junior Subordinated Indenture, but entitled to receive payment in
full of all amounts payable with respect to the Junior Subordinated Debentures
before any stockholders of the Company receive payments or distributions. Since
the Company is the guarantor under the Guarantee and has agreed under the Junior
Subordinated Indenture to pay for all costs, expenses and liabilities of the
Issuer Trust (other than the Issuer Trust's obligations to the holders of the
Trust Securities), the positions of a holder of the Preferred Securities and a
holder of such Junior Subordinated Debentures relative to other creditors and to
stockholders of the Company in the event of liquidation or bankruptcy of the
Company are expected to be substantially the same.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
In the opinion of Carlton, Fields, Ward, Emmanuel, Smith & Cutler, P.A.,
Tampa, Florida, in its capacity as counsel to the Company ("Tax Counsel"), the
following discussion summarizes the material United States federal income tax
consequences of the purchase, ownership and disposition of the Preferred
Securities.
This summary is based on the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury regulations thereunder, and administrative and judicial
interpretations thereof, each as of the date hereof, all of which are subject to
change, possibly on a retroactive basis. The authorities on which this summary
is based are subject to various interpretations, and the opinions of Tax Counsel
are not binding on the Internal Revenue Service (the "IRS") or the courts,
either of which could take a contrary position. Moreover, no rulings have been
or will be sought from the IRS with respect to the transactions described
herein. Accordingly, there can be no assurance that the IRS will not challenge
the opinions expressed herein or that a court would not sustain such a
challenge.
Except as otherwise stated, this summary deals only with the Preferred
Securities held as a capital asset by a holder who or which (i) purchased the
Preferred Securities upon original issuance at their original offering price and
(ii) is a US Holder (as defined below). This summary does not address all the
tax consequences that may be relevant to a US Holder, nor does it address the
tax consequences, except as stated below, to holders that are not US Holders
("Non-US Holders") or to holders that may be subject to special tax treatment
(such as banks, thrift institutions, real estate investment trusts, regulated
investment companies, insurance companies, brokers and dealers in securities or
currencies, certain securities traders, other financial
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institutions, tax-exempt organizations, persons holding the Preferred Securities
as a position in a "straddle," or as part of a "synthetic security," "hedging,"
as part of a "conversion" or other integrated investment, persons having a
functional currency other than the U.S. Dollar and certain United States
expatriates). Further, this summary does not address (a) the income tax
consequences to shareholders in, or partners or beneficiaries of, a holder of
the Preferred Securities, (b) the United States federal alternative minimum tax
consequences of the purchase, ownership or disposition of the Preferred
Securities, or (c) any state, local or foreign tax consequences of the purchase,
ownership and disposition of Preferred Securities.
A "US Holder" generally is a holder of the Preferred Securities who or
which is (i) a citizen or individual resident (or is treated as a citizen or
individual resident) of the United States for income tax purposes, (ii) a
corporation or partnership created or organized (or treated as created or
organized for income tax purposes) in or under the laws of the United States or
any political subdivision thereof, (iii) an estate the income of which is
includible in its gross income for United States federal income tax purposes
without regard to its source, or (iv) a trust if (a) a court within the United
States is able to exercise primary supervision over the administration of the
trust and (b) one or more United States persons have the authority to control
all substantial decisions of the trust.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE PREFERRED
SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER
TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR OTHER
TAX LAWS.
US HOLDERS
CHARACTERIZATION OF THE ISSUER TRUST. In connection with the issuance of
the Preferred Securities, Tax Counsel will render its opinion generally to
effect that, under then current law and based on the representations, facts and
assumptions set forth in this Prospectus, and assuming full compliance with the
terms of the Trust Agreement (and other relevant documents), and based on
certain assumptions and qualifications referenced in the opinion, the Issuer
Trust will be characterized for United States federal income tax purposes as a
grantor trust and will not be characterized as an association taxable as a
corporation. Accordingly, for United States federal income tax purposes, each
holder of the Preferred Securities generally will be considered the owner of an
undivided interest in the Junior Subordinated Debentures owned by the Issuer
Trust, and each US Holder will be required to include all income or gain
recognized for United States federal income tax purposes with respect to its
allocable share of the Junior Subordinated Debentures on its own income tax
return.
CHARACTERIZATION OF THE JUNIOR SUBORDINATED DEBENTURES. The Company and
the Issuer Trust will treat the Junior Subordinated Debentures as indebtedness
for all United States federal income tax purposes. In connection with the
issuance of the Junior Subordinated Debentures, Tax Counsel will render its
opinion generally to the effect that, under then current law and based on the
representations, facts and assumptions set forth in this Prospectus, and
assuming full compliance with the terms of the Junior Subordinated Indenture
(and other relevant documents) and based on certain assumptions and
qualifications referenced in the opinion, the Junior Subordinated Debentures
will be characterized for United States federal income tax purposes as debt of
the Company.
INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT. Under the terms of the Junior
Subordinated Debentures, the Company has the ability to defer payments of
interest from time to time by extending the interest payment period for a period
not exceeding 20 consecutive quarterly periods, but not beyond the maturity of
the Junior Subordinated Debentures. Treasury regulations under Section 1273 of
the Code provide that debt instruments like the Junior Subordinated Debentures
will not be considered issued with original issue discount ("OID") by reason of
the Company's ability to defer payments of interest if the likelihood of such
deferral is "remote."
The Company has concluded, and this discussion assumes, that, as of the
date of this Prospectus, the likelihood of deferring payments of interest under
the terms of the Junior Subordinated Debentures is "remote" within the meaning
of the applicable Treasury regulations, in part because exercising that option
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would prevent the Company from declaring dividends on its stock and would
prevent the Company from making any payments with respect to debt securities
that rank pari passu with or junior to the Junior Subordinated Debentures.
Therefore, the Junior Subordinated Debentures should not be treated as issued
with OID by reason of the Company's deferral option. Rather, stated interest on
the Junior Subordinated Debentures will generally be taxable to a US Holder as
ordinary income when paid or accrued in accordance with that holder's method of
accounting for income tax purposes. It should be noted, however, that these
Treasury regulations have not yet been interpreted in any rulings or any other
published authorities of the IRS. Accordingly, it is possible that the IRS could
take a position contrary to the interpretation described herein.
In the event the Company exercises its option to defer payments of
interest, the Junior Subordinated Debentures would be treated as redeemed and
reissued for OID purposes and the sum of the remaining interest payments (and
any de minimis OID) on the Junior Subordinated Debentures would thereafter be
treated as OID, which would accrue, and be includible in a US Holder's taxable
income, on an economic accrual basis (regardless of the US Holder's method of
accounting for income tax purposes) over the remaining term of the Junior
Subordinated Debentures (including any period of interest deferral), without
regard to the timing of payments under the Junior Subordinated Debentures.
(Subsequent distributions of interest on the Junior Subordinated Debentures
generally would not be taxable.) Consequently, during any period of interest
deferral, US Holders will include OID in gross income in advance of the receipt
of cash, and a US Holder that disposes of a Preferred Security prior to the
record date for payment of distributions on the Junior Subordinated Debentures
following that period will be subject to income tax on OID accrued through the
date of disposition (and not previously included in income), but will not
receive cash from the Issuer Trust with respect to the OID.
If the possibility of the Company's exercise of its option to defer
payments of interest is not remote, the Junior Subordinated Debentures would be
treated as initially issued with OID in an amount equal to the aggregate stated
interest (plus any de minimis OID) over the term of the Junior Subordinated
Debentures. That OID would generally be includible in a US Holder's taxable
income, over the term of the Junior Subordinated Debentures, on an economic
accrual basis.
CHARACTERIZATION OF INCOME. Because the income underlying the Preferred
Securities will not be characterized as dividends for income tax purposes,
corporate holders of the Preferred Securities will not be entitled to a
dividends-received deduction for any income recognized with respect to the
Preferred Securities.
MARKET DISCOUNT AND BOND PREMIUM. Holders of the Preferred Securities may
be considered to have acquired their undivided interests in the Junior
Subordinated Debentures with market discount or acquisition premium (as each
phrase is defined for United States federal income tax purposes).
RECEIPT OF JUNIOR SUBORDINATED DEBENTURES OR CASH UPON LIQUIDATION OF THE
ISSUER TRUST. Under certain circumstances described herein (See "Description of
the Preferred Securities -- Liquidation Distribution Upon Dissolution"), the
Issuer Trust may distribute the Junior Subordinated Debentures to holders in
exchange for the Preferred Securities and in liquidation of the Issuer Trust.
Except as discussed below, such a distribution would not be a taxable event for
United States federal income tax purposes, and each US Holder would have an
aggregate adjusted basis in its Junior Subordinated Debentures for United States
federal income tax purposes equal to such holder's aggregate adjusted basis in
its Preferred Securities. For United States federal income tax purposes, a US
Holder's holding period in the Junior Subordinated Debentures received in such a
liquidation of the Issuer Trust would include the period during which the
Preferred Securities were held by the holder. If, however, the relevant event is
a Tax Event which results in the Issuer Trust being treated as an association
taxable as a corporation, the distribution would likely constitute a taxable
event to US Holders of the Preferred Securities for United States federal income
tax purposes.
Under certain circumstances described herein (see "Description of the
Preferred Securities"), the Junior Subordinated Debentures may be redeemed for
cash and the proceeds of such redemption distributed to holders in redemption of
their Preferred Securities. Such a redemption would be taxable for United States
federal income tax purposes, and a US Holder would recognize gain or loss as if
it had sold the Preferred Securities for cash. See "-- Sales of Preferred
Securities" below.
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SALES OF PREFERRED SECURITIES. A US Holder that sells Preferred Securities
will recognize gain or loss equal to the difference between its adjusted basis
in the Preferred Securities and the amount realized on the sale of such
Preferred Securities. A US Holder's adjusted basis in the Preferred Securities
generally will be its initial purchase price, increased by OID previously
included (or currently includible) in such holder's gross income to the date of
disposition, and decreased by payments received on the Preferred Securities
(other than any interest received with respect to the period prior to the
effective date of the Company's first exercise of its option to defer payments
of interest). Any such gain or loss generally will be capital gain or loss, and
generally will be a long-term capital gain or loss if the Preferred Securities
have been held for more than one year prior to the date of disposition. Tax
rates on long-term capital gains received by individual US Holders vary
depending on each US Holder's income and holding period for the Preferred
Securities. US Holders that are individuals should contact their own tax
advisors for more information or for the capital gains rate applicable to a
specific Preferred Security.
A holder who disposes of his Preferred Securities between record dates for
payments of distributions thereon will be required to include accrued but unpaid
interest (or OID) on the Junior Subordinated Debentures through the date of
disposition in its taxable income for United States federal income tax purposes
(notwithstanding that the holder may receive a separate payment from the
purchaser with respect to accrued interest), and to deduct that amount from the
sales proceeds received (including the separate payment, if any, with respect to
accrued interest) for the Preferred Securities (or as to OID only, to add such
amount to such holder's adjusted tax basis in its Preferred Securities). To the
extent the selling price is less than the holder's adjusted tax basis (which
will include accrued but unpaid OID, if any), a holder will recognize a capital
loss. Subject to certain limited exceptions, capital losses cannot be applied to
offset ordinary income for United States federal income tax purposes.
PENDING TAX LITIGATION AFFECTING THE PREFERRED SECURITIES
Recently, a taxpayer filed a petition in the United States Tax Court
contesting the IRS' proposed disallowance of interest deductions the taxpayer
claimed in respect of securities issued in 1993 and 1994 that are, in some
respects, similar to the Preferred Securities of the Issuer Trust (Enron Corp.
v. Commissioner, Docket No. 6149-98, filed April 1, 1998). It is possible that
an adverse decision by the Tax Court concerning the deductibility of such
interest could give rise to a Tax Event. Such a Tax Event would give the Company
the right to redeem the Junior Subordinated Debentures. See "Description of
Junior Subordinated Debentures -- Redemption" and "Description of Preferred
Securities -- Liquidation Distribution Upon Dissolution."
NON-US HOLDERS
The following discussion applies to a Non-US Holder.
Payments to a holder of a Preferred Security which is a Non-US Holder will
generally not be subject to withholding of income tax, provided that (a) the
beneficial owner of the Preferred Security does not (directly or indirectly,
actually or constructively) own 10% or more of the total combined voting power
of all classes of stock of the Company entitled to vote, (b) the beneficial
owner of the Preferred Security is not a controlled foreign corporation that is
related to the Company through stock ownership, and (c) either (i) the
beneficial owner of the Preferred Securities certifies to the Issuer Trust or
its agent, under penalties of perjury, that it is a Non-US Holder and provides
its name and address, or (ii) a securities clearing organization, bank or other
financial institution that holds customers' securities in the ordinary course of
its trade or business (a "Financial Institution"), and holds the Preferred
Security in such capacity, certifies to the Issuer Trust or its agent, under
penalties of perjury, that such a statement has been received from the
beneficial owner by it or by another Financial Institution between it and the
beneficial owner in the chain of ownership, and furnishes the Issuer Trust or
its agent with a copy thereof.
A Non-US Holder of a Preferred Security will generally not be subject to
withholding of income tax on any gain realized upon the sale or other
disposition of a Preferred Security.
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A Non-US Holder which holds the Preferred Securities in connection with the
active conduct of a United States trade or business will be subject to income
tax on all income and gains recognized with respect to its proportionate share
of the Junior Subordinated Debentures.
INFORMATION REPORTING
In general, information reporting requirements will apply to payments made
on, and proceeds from the sale of, the Preferred Securities held by a
noncorporate US Holder within the United States. In addition, payments made on,
and payments of the proceeds from the sale of, the Preferred Securities to or
through the United States office of a broker or through certain U.S.-related
financial intermediaries, are subject to information reporting unless the holder
thereof certifies as to its Non-United States status or otherwise establishes an
exemption from information reporting and backup withholding. See "-- Backup
Withholding." Taxable income on the Preferred Securities for a calendar year
should be reported to US Holders on the appropriate forms by the following
January 31st.
BACKUP WITHHOLDING
Payments made on, and proceeds from the sale of, the Preferred Securities
may be subject to a "backup" withholding tax of 31% unless the holder complies
with certain identification or exemption requirements. Any amounts so withheld
will be allowed as a credit against the holder's income tax liability, or
refunded, provided the required information is provided to the IRS.
THE PRECEDING DISCUSSION IS ONLY A SUMMARY AND DOES NOT ADDRESS ALL THE
CONSEQUENCES TO A PARTICULAR HOLDER OF THE PURCHASE, OWNERSHIP AND DISPOSITION
OF THE PREFERRED SECURITIES. POTENTIAL HOLDERS OF THE PREFERRED SECURITIES ARE
URGED TO CONTACT THEIR OWN TAX ADVISORS TO DETERMINE THEIR PARTICULAR TAX
CONSEQUENCES.
CERTAIN ERISA CONSIDERATIONS
The Company and certain affiliates of the Company may each be considered a
"party in interest" within the meaning of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") or a "disqualified person" within the
meaning of Section 4975 of the Code with respect to certain employee benefit
plans ("Plans") that are subject to ERISA. The purchase of the Preferred
Securities by a Plan that is subject to the fiduciary responsibility provisions
of ERISA or the prohibited transaction provisions of Section 4975(e)(1) of the
Code and with respect to which the Company, or any affiliate of the Company is a
service provider (or otherwise is a party in interest or a disqualified person)
may constitute or result in a prohibited transaction under ERISA or Section 4975
of the Code, unless the Preferred Securities are acquired pursuant to and in
accordance with an applicable exemption. Any pension or other employee benefit
plan proposing to acquire any Preferred Securities should consult with its
counsel.
SUPERVISION AND REGULATION
The banking industry is extensively regulated under both federal and state
law, and is undergoing significant change. These laws and regulations are
intended primarily to protect depositors and the federal deposit insurance
funds, and not for the protection of shareholders. The following discussion
summarizes certain aspects of the banking laws and regulations that affect the
Company or the Bank. Proposals to change the laws and regulations governing the
banking industry are frequently raised in Congress, in state legislatures, and
before the various banking agencies. The likelihood and timing of any changes,
and the impact that such changes might have on the Company, are impossible to
predict with any certainty. A change in the applicable laws or regulations, or a
change in the way such laws or regulations are interpreted by regulatory
agencies or the courts, may have a material impact on the business or prospects
of the Company and the Bank.
To the extent that the following information describes statutory and
regulatory provisions, it is qualified in its entirety by reference to the
particular statutory and regulatory provisions.
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BANK HOLDING COMPANY REGULATION
GENERAL. As a bank holding company registered under the BHCA, the Company
is subject to the regulation and supervision of, and inspection by, the FRB. The
Company is required to file with the FRB annual reports and other information
regarding its business operations and those of its subsidiaries. Under the BHCA,
the Company's activities and those of its subsidiaries are limited to banking,
managing or controlling banks, furnishing services to or performing services for
its subsidiaries or engaging in any other activity which the FRB determines to
be so closely related to banking or managing or controlling banks as to be
properly incident thereto. In this regard, the BHCA prohibits a bank holding
company, with certain limited exceptions, from (i) acquiring or retaining direct
or indirect ownership or control of more than 5% of the outstanding voting stock
of any company which is not a bank or bank holding company, or (ii) engaging
directly or indirectly in activities other than those of banking, managing or
controlling banks, or performing services for its subsidiaries; unless such
nonbanking business is determined by the FRB to be so closely related to banking
or managing or controlling banks as to be properly incident thereto. In making
such determinations, the FRB is required to weigh the expected benefit to the
public, such as greater convenience, increased competition, or gains in
efficiency, against the possible adverse effects such as undue concentration of
resources, decreased or unfair competition, conflicts of interest, or unsound
banking practices. Generally, bank holding companies, such as the Company, are
required to obtain prior approval of the FRB to engage in any new activity not
previously approved by the FRB.
The enactment of the Economic Growth and Regulatory Paperwork Reduction Act
of 1996 ("EGRPRA") streamlines the nonbanking activities application process for
well-capitalized and well managed bank holding companies. Under EGRPRA,
qualified bank holding companies may commence a regulatory approved nonbanking
activity without prior notice to the FRB; written notice is merely required
within ten business days after commencing the activity. Also under EGRPRA, the
prior notice period is reduced to twelve business days in the event of any
nonbanking acquisition or share purchase, assuming the size of the acquisition
does not exceed 10% of risk-weighted assets of the acquiring bank holding
company and the consideration does not exceed 15% of Tier 1 capital. This prior
notice requirement also applies to commencing a nonbanking activity de novo
which has been previously approved by order of the FRB, but not yet implemented
by regulations.
The BHCA also requires, among other things, the prior approval of the FRB
in any case where a bank holding company proposes to (i) acquire all or
substantially all of the assets of any bank, (ii) acquire direct or indirect
ownership or control of more than 5% of the outstanding voting stock of any bank
(unless it owns a majority of such bank's voting shares) or (iii) merge or
consolidate with any other bank holding company. The FRB will not approve any
acquisition, merger, or consolidation that would result in a monopoly, or which
would be in the furtherance of any attempt to monopolize the business of banking
in any part of the United States, or which would have a substantially
anti-competitive effect, unless the anti-competitive impact of the proposed
transaction is clearly outweighed by a greater public interest in meeting the
convenience and needs of the community to be served. The FRB also considers
capital adequacy and other financial and managerial factors when reviewing
acquisitions or mergers. As described in greater detail below, pursuant to the
Riegle-Neal Interstate Banking and Branch Efficiency Act of 1994 (the
"Interstate Banking and Branching Act"), a bank holding company is permitted to
acquire banks in states other than its home state. See "Supervision and
Regulation -- Bank Holding Company Regulation -- Interstate Banking" below for
additional information.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by law and regulatory
policies that are designed to minimize potential loss to the depositors of such
depository institutions and the FDIC insurance funds in the event the depository
institution becomes in danger of default or is in default. For example, under
the Federal Deposit Insurance Company Improvement Act of 1991 ("FDICIA"), in
order to avoid receivership of an insured depository institution subsidiary, a
bank holding company is required to guarantee the compliance of any insured
depository institution subsidiary that may become "undercapitalized" with the
terms of any capital restoration plan filed by such subsidiary with its
appropriate federal banking agency up to the lesser of (i) an amount equal to 5%
of the institution's total assets at the time the institution became
undercapitalized or (ii) the amount that is necessary (or would have been
necessary) to bring the institution into compliance with all
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applicable capital standards as of the time the institution fails to comply with
such capital restoration plan. See "Supervision and Regulation -- Capital
Adequacy Guidelines."
Under a policy of the FRB with respect to bank holding company operations,
a bank holding company is required to serve as a source of financial strength to
its subsidiary depository institutions and to commit all available resources to
support such institutions in circumstances where it might not do so absent such
policy. Although this "source of strength" policy has been challenged in
litigation, the FRB continues to take the position that it has authority to
enforce it. The FRB under the BHCA also has cease and desist authority pursuant
to which it may require a bank holding company to terminate any activity or to
relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a
bank) upon the FRB's determination that such activity or control constitutes a
serious risk to the financial soundness and stability of any bank subsidiary of
the bank holding company.
The FRB and the FDIC collectively have extensive enforcement authority over
commercial banks, which authority was enhanced substantially by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") and the
FDICIA. This enforcement authority includes, among other things, the ability to
assess civil money penalties, to issue cease and desist or removal orders, to
initiate injunctive actions, and, in extreme cases, to terminate deposit
insurance. In general, these enforcement actions may be initiated for violations
of laws and regulations and unsafe or unsound practices. Other actions or
inactions may provide the basis for enforcement action, including misleading or
untimely reports filed with the federal banking agencies. FIRREA significantly
increased the amount of and the grounds for civil money penalties and generally
requires public disclosure of final enforcement actions.
COMMUNITY REINVESTMENT ACT. Bank holding companies and their subsidiary
banks are subject to the provisions of the Community Reinvestment Act of 1977
("CRA") and the regulations promulgated thereunder by the appropriate bank
regulatory agency. Under the terms of the CRA, a state bank 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 FDIC, in connection with its examination of a state bank, to assess
the association's record of meeting the credit needs of its community and to
take such record into account in its evaluation of certain applications by such
association. The CRA also requires all institutions to make public disclosure of
their CRA ratings. Further, such assessment also is required of any state bank
that, among other things, has applied to merge or consolidate with, or acquire
the assets or assume the liabilities of, a federally regulated financial
institution, or to open or relocate a branch office. In the case of a bank
holding company applying for approval to acquire a bank or a bank holding
company, the FRB will assess the record of each subsidiary bank of the applicant
bank holding company in considering the application.
Pursuant to current CRA regulations, an institution's CRA rating is based
on its actual performance in meeting community needs. In particular, the rating
system focuses on three tests: (i) a lending test, which evaluates the
institution's record of making loans in its service areas; (ii) an investment
test, which evaluates the institution's record of investing in community
development projects, affordable housing, and programs benefitting low or
moderate income individuals and business; and (iii) a service test, which
evaluates the institution's delivery of services through its branches, ATMs, and
other offices. The current CRA regulations also clarify how an institution's CRA
performance will be considered in the application process.
INTERSTATE BANKING. Under the Interstate Banking and Branching Act,
regardless of any previously applicable state law, bank holding companies which
meet specified capital and management adequacy standards are eligible to acquire
banks in states other than their home states, but will need to retain a separate
bank charter in each state where subsidiaries conduct banking business. Various
restrictions on interstate acquisitions will continue to apply, including: (1)
federal and state antitrust laws, as currently in effect; (2) prohibitions on a
single holding company system accounting for more than 10% of all deposits
nationwide or, subject to various opt-in and opt-out provisions for various
states on a nondiscriminatory basis, accounting for more than 30% or more of
deposits in any state; (3) state-imposed prohibitions on acquiring banks within
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up to five years after they commence operations; and (4) compliance by the
acquirer with the CRA and fair lending laws.
Furthermore, beginning June 1, 1997, the Interstate Banking and Branching
Act authorized adequately capitalized and managed banks to cross state lines to
merge with other banks, thereby creating interstate branches, subject to
individual state's adoption of various nondiscriminatory opt-in and opt-out
provisions. Under such legislation, each state had the opportunity to "opt-in"
at an earlier time thereby allowing interstate banking in that state prior to
1997, or to "opt-out". Furthermore a state may opt-in with respect to de novo
branching thereby permitting a bank to open new branches in a state in which the
bank does not already have a branch. Without de novo branching, an out-of-state
bank can enter the state only by acquiring an existing bank. Antitrust and
anti-concentration restrictions will apply as described above. It will not be
necessary to keep multiple state charters in effect or to have a holding company
system. Generally, all banks that are parties to a proposed post-1997 merger
must satisfy applicable CRA, management quality, and capital adequacy standards.
FLORIDA INTERSTATE BANKING LAWS. In this context, the Florida legislature
enacted legislation in 1996, the Florida Interstate Banking Act ("FIBA"), which
specifically authorizes out-of-state bank holding companies located in any state
or the District of Columbia that meet certain prescribed criteria to acquire
Florida bank holding companies or banks which have been in existence and
continuously operated as a bank for more than three years, subject to the prior
approval of the Department. Entry into the State of Florida by interstate
branching or by means other than such an acquisition is expressly prohibited by
the FIBA. Furthermore, except for initial entry into the State of Florida by an
out-of-state bank or bank holding company, no acquisition of a Florida bank or
Florida bank holding company is permitted if the resulting bank holding company
and its affiliates would control 30% or more of total deposits in the state.
In addition, the Florida legislature also enacted the Florida Interstate
Branching Act ("Florida Branching Act") which permits interstate branching in
Florida by a merger transaction and grants Florida state-chartered banks the
same interstate branching opportunities as is afforded to national banks under
the newly enacted federal law.
An out-of-state bank that does not operate a branch in the State of Florida
is prohibited from establishing a de novo branch in Florida. Accordingly an
out-of-state bank or bank holding company can only enter Florida by acquiring an
existing Florida bank which has been operating continuously for at least three
years. The same deposit concentration limits referred to above apply. Any
out-of-state bank or bank holding company that has acquired a Florida bank under
either the FIBA or the Florida Branching Act, may establish additional branches
in Florida to the same extent as any Florida bank may do so.
Proposals to change the laws and regulations governing the banking industry
are frequently introduced in Congress, in state legislatures, and before the
various bank regulatory agencies. The likelihood and timing of any such changes
and the potential impact of such changes on the Company or the Bank cannot be
determined at this time.
BANK REGULATION
GENERAL. The Bank, a Florida state-chartered banking corporation, is a
general commercial bank, the deposits of which are insured by the Bank Insurance
Fund ("BIF") of the FDIC and, as such, is subject to the primary supervision,
examination, and regulation by the Department and the FDIC. It is not a member
of the Federal Reserve System.
As a state-chartered commercial bank, the Bank is subject to the applicable
provisions of Florida law and the regulations adopted by the Department. The
Bank must file various reports with, and is subject to periodic examinations by
the Department and the FDIC. Florida law and the Department regulate (in
conjunction with applicable federal laws and regulations), among other things,
the Bank's capital, permissible activities, reserves, investments, lending
authority, branching, the issuance of securities, payment of dividends,
transactions with affiliated parties, and borrowing.
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The FDIC insures the deposits of the Bank to the current maximum allowed by
law. Applicable statutes and regulations administered by the FDIC also relate to
required reserves against deposits, investments, loans, mergers and
consolidations, issuance of securities, payment of dividends, establishment of
branches, and other aspects of the Bank's operations. Various consumer laws and
regulations also affect the operations of the Bank, including state usury laws,
laws relating to fiduciaries, consumer credit and equal credit, and fair credit
reporting.
TRANSACTIONS WITH AFFILIATES. There are various legal restrictions on the
extent to which the Company and any future nonbank subsidiaries can borrow or
otherwise obtain credit from the Bank. There also are legal restrictions on the
Bank's purchase of or investments in the securities of and purchases of assets
from the Company and any of its future nonbank subsidiaries, a bank's loans or
extensions of credit to third parties collateralized by the securities or
obligations of the Company and any of its future nonbank subsidiaries, the
issuance of guaranties, acceptances and letters of credit on behalf of the
Company and any of its future nonbank subsidiaries, or with respect to which the
Company and nonbank subsidiaries, act as agent, participate or have a financial
interest. Subject to certain limited exceptions, the Bank may not extend credit
to the Company or to any other affiliate in an amount which exceeds 10% of the
Bank's capital stock and surplus and may not extend credit in the aggregate to
such affiliates in an amount which exceeds 20% of its capital stock and surplus.
Further, there are legal requirement as to the type, amount and quality of
collateral which must secure such extensions of credit transactions between the
Bank and the Company or such affiliates, and such transactions must be on terms
and under circumstances, including credit standards, that are substantially the
same or at least as favorable to the Bank as those prevailing at the time for
comparable transactions with non-affiliated companies. These regulations and
restrictions may limit the Company's ability to obtain funds from the Bank for
its cash needs, including funds for acquisitions, and the payment of dividends,
interest and operating expenses.
Further, the Bank and the Company are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit, lease or sale of
property, or furnishing of services. For example, the Bank may not generally
require a customer to obtain other services from the Bank or the Company, and
may not require the customer to promise not to obtain other services from a
competitor, as a condition to an extension of credit.
The Bank also is subject to certain restrictions imposed by the Federal
Reserve Act on extensions of credit to executive officers, directors, principal
shareholders or any related interest of such persons. Extensions of credit (i)
must be made on substantially the same terms, including interest rates and
collateral as, and following credit underwriting procedures that are not less
stringent than those prevailing at the time for comparable transactions with
persons not covered above and who are not employees and (ii) must not involve
more than the normal risk of repayment or present other unfavorable features.
The Bank also is subject to certain lending limits and restrictions on
overdrafts to such persons. A violation of these restrictions may result in the
assessment of substantial civil monetary penalties on the Bank or any officer,
director, employee, agent or other person participating in the conduct of the
affairs of the Bank or the imposition of a cease and desist order.
DIVIDEND RESTRICTIONS AND TRANSFERS OF FUNDS. Under various banking laws,
the declaration and payment of dividends by a state banking institution is
subject to certain restrictions, including those relating to the amount and
frequency of such dividends. Under the FDICIA, an insured depository institution
is prohibited from making any capital distribution to its owner, including any
dividend, if, after making such distribution, the depository institution fails
to meet the required minimum level for any relevant capital measure, including
the risk-based capital adequacy and leverage standards described below.
If, in the opinion of the applicable federal bank regulatory authority, a
depository institution or holding company is engaged in or is about to engage in
an unsafe or unsound practice (which, depending on the financial condition of
the depository institution or holding company, could include the payment of
dividends), such authority may require, after notice and hearing (except in the
case of an emergency proceeding where there is no notice or hearing), that such
institution or holding company cease and desist from such practice. The federal
banking agencies have indicated that paying dividends that deplete a depository
institution's or
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holding company's capital base to an inadequate level would be such an unsafe
and unsound banking practice. Moreover, the FRB and the FDIC have issued policy
statements which provide that bank holding companies and insured depository
institutions generally should only pay dividends out of current operating
earnings.
In addition, Florida law places certain restrictions on the declaration of
dividends form state chartered banks to their holding companies. Pursuant to the
Florida Banking Code, the Board of Directors of state-chartered banks, after
charging off bad debts, depreciation, and other worthless assets, if any, and
making provisions for reasonably anticipated future losses on loans and other
assets, may quarterly, semiannually or annually declare a dividend of up to the
aggregate net profits of that period combined with bank's retained net profits
for the preceding two years and, with the approval of the Department, declare a
dividend from retained net profits which accrued prior to the preceding two
years. Before declaring such dividends, 20% of the net profits for the preceding
period as is covered by the dividend must be transferred to the surplus fund of
the bank until the fund becomes equal to the amount of the bank's common stock
then issued and outstanding. A state-chartered bank may not declare any dividend
if (i) its net income from the current year combined with the retained net
income from the preceding two years is a loss, or (ii) the payment of such
dividend would cause the capital account of the bank to fall below the minimum
amount required by law, regulation, order, or any written agreement with the
Department or a federal regulatory agency.
CAPITAL ADEQUACY GUIDELINES
MINIMUM CAPITAL REQUIREMENTS. The federal banking agencies, including the
FRB and the FDIC, have adopted substantially similar risk-based capital
guidelines for bank holding companies and banks under their supervision. The
risk-based capital guidelines are designed to make regulatory capital
requirements more sensitive to differences in risk profile among banks and bank
holding companies, to account for off-balance sheet exposure, and to minimize
disincentives for holding liquid assets. Under these guidelines, assets and off-
balance sheet items are assigned to broad risk categories each with appropriate
weights. The resulting capital ratios represent capital as a percentage of total
risk- weighted assets and off-balance sheet items. In addition, these regulatory
agencies may from time to time require that a banking organization maintain
capital above the minimum limits, whether because of its financial condition or
actual or anticipated growth.
These risk-based capital guidelines define a two-tier capital framework.
Under these regulations, the minimum ratio of total capital to risk-weighted
assets (including certain off-balance sheet activities, such as stand-by letters
of credit) is 8%. At least half of the total capital must be "Tier 1 Capital,"
consisting of common shareholders' equity, noncumulative perpetual preferred
stock, and a limited amount of cumulative perpetual preferred stock, less
certain goodwill items and other intangible assets (i.e., at least 4% of the
risk weighted assets). The remainder ("Tier 2 Capital") may consist of (a) the
allowance for loan losses of up to 1.25% of risk-weighted risk assets, (b)
excess of qualifying perpetual preferred stock, (c) hybrid capital instruments,
(d) perpetual debt, (e) mandatory convertible securities, and (f) subordinated
debt and intermediate term-preferred stock up to 50% of Tier 1 capital. As noted
above, the proceeds to the Company of the issuance of the Trust Securities will
qualify as Tier 1 capital up to the 25% Capital Limitation and as Tier 2 capital
in excess thereof. See "Use of Proceeds." Total capital is the sum of Tier 1 and
Tier 2 capital less reciprocal holdings of other banking organizations' capital
instruments and investments in unconsolidated subsidiaries and any other
deductions as determined on a case by case basis or as a matter of policy after
formal rule making.
In computing total risk-weighted assets, an institution's assets are given
risk-weights of 0%, 20%, 50% and 100%. In addition, certain off-balance sheet
items are given similar credit conversion factors to convert them to asset
equivalent amounts to which an appropriate risk-weight will apply. These
computations result in the total risk-weighted assets. Most loans will be
assigned to the 100% risk category, except for first mortgage loans fully
collateralized by residential property which carry a 50% risk rating. Most
investment securities (including, primarily, general obligation claims on states
or other political subdivisions of the United States) will be assigned to the
20% category, except for municipal or state revenue bonds, which have a 50%
risk-weight, and direct obligations of the U.S. treasury or obligations backed
by the full faith and credit of the U.S. Government, which have a 0%
risk-weight. In converting off-balance sheet items, direct credit substitutes
including general guarantees and standby letters of credit backing financial
obligations, are given a 100%
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conversion factor. Transaction related contingencies such as bid bonds, standby
letters of credit backing non-financial obligations, and undrawn commitments
(including commercial credit lines with an initial maturity or more than one
year) have a 50% conversion factor. Short term or trade letters of credit are
converted at 20% and certain short-term unconditionally cancelable commitments
have a 0% factor.
As of December 31, 1997, the total risk-based capital ratio of the Company
and the Bank were 10.9% and 10.0%, respectively. In addition to the risk-based
capital guidelines, the FRB and the FDIC also have adopted a leverage standard
to supplement the risk-based ratios. This leverage standard focuses on the
institution's ratio of Tier 1 capital to average total assets, adjusted for
goodwill and certain other items. Under these guidelines, institutions which
have received the highest regulatory rating and exhibit certain other high
standards, must maintain a minimum level of Tier 1 capital to average
consolidated assets of at least 3%. All other institutions are expected to
maintain a ratio of at least 1% or 2% above the stated minimum. As of December
31, 1997, the leverage capital ratio of the Company and the Bank were 6.9% and
6.7%, respectively.
Federal banking agencies also have adopted regulations which require
regulators to take into consideration concentrations of audit risk and risks
from non-traditional activities, as well as an institution's ability to manage
those risks. This evaluation will be made as part of the institution's regular
safety and soundness examination. In addition, pursuant to the requirements of
the FDICIA, federal banking agencies all have adopted regulations requiring
regulators to consider interest rate risk (when interest rate sensitivity of an
institution's assets does not match its liabilities or its off-balance sheet
position) in the evaluation of a bank's capital adequacy. Concurrently, the
federal banking agencies have prepared a new methodology for evaluating interest
rate risk.
CLASSIFICATION OF BANKING INSTITUTIONS. FDICIA substantially revised the
bank regulatory and funding provisions of the FDI Act and made revisions to
several other federal banking statutes. Among other things, the FDICIA provided
federal banking agencies broad powers to take "prompt corrective action" in
respect of depository institutions that do not meet minimum capital
requirements. The extent of those powers depend upon whether the institutions in
question are "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," or "critically undercapitalized." A depository
institution's capital tier will depend upon where its capital levels are in
relation to various relevant capital measures, which include a risk-based
capital measure and a leverage ratio capital measure, and certain other factors.
Under implementing regulations adopted by the federal banking agencies, a
bank would be considered "well capitalized" if it has (i) a total risk-based
capital ratio of 10% or greater, (ii) a Tier 1 risk-based capital ratio of 6% or
greater, (iii) a leverage ratio of 5% or greater and (iv) is not subject to any
order or written directive to meet and maintain a specific capital level for any
capital measure. An "adequately capitalized" bank would be defined as one that
has (i) a total risk-based capital ratio of 8% or greater, (ii) a Tier 1 risk-
based capital ratio of 4% of greater, and (iii) a leverage ratio of 4% or
greater (or 3% or greater in the case of a bank with a composite CAMEL rating of
1). A bank would be considered (A) "undercapitalized" if it has (i) a total
risk-based capital ratio of less than 8%, (ii) a Tier 1 risk-based capital ratio
of less than 4%, or (iii) a leverage ratio of less than 4% (or 3% in the case of
a bank with a composite CAMEL rating of 1); (B) "significantly undercapitalized"
if the bank has (i) a total risk-based capital ratio of less than 6%, or (ii) a
Tier 1 risk-based capital ratio of less than 3%, or (iii) a leverage ratio of
less than 3%; and (C) "critically undercapitalized" if the bank has a ratio of
tangible equity to total assets equal to or less than 2%. The FRB may reclassify
a "well classified" bank as "adequately capitalized" or subject an "adequately
capitalized" or "undercapitalized" institution to supervisory actions applicable
to the next lower capital category if it determines that the bank is in an
unsafe or unsound condition or deems the bank to be engaged in an unsafe or
unsound practice and not have corrected the deficiency. The Bank currently meets
the definition of a "well capitalized" institution.
BROKERED DEPOSITS
Only a "well capitalized" depository institution may accept brokered
deposits without prior regulatory approval. Under implementing regulations,
"well capitalized" banks may accept brokered deposits without restriction,
"adequately capitalized" banks may accept brokered deposits with a waiver from
the FDIC
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<PAGE> 95
(subject to certain restrictions on payments of rates), while "undercapitalized"
banks may not accept brokered deposits.
FDIC INSURANCE PREMIUMS
The Bank is required to pay semiannual FDIC deposit insurance assessments.
Under the FDIC's risk-based insurance system, BIF-insured institutions are
currently assessed premiums of between zero and $0.27 per $100 of insured
deposits, depending on the institution's capital position and other supervisory
factors. Each financial institution is assigned to one of three capital
groups -- well capitalized, adequately capitalized or undercapitalized -- and
further assigned to one of three subgroups -- within a capital group, on the
basis of supervisory evaluations by the institution's primary federal and, if
applicable, state supervisors and other information relevant to the
institution's financial condition and the risk posed to the applicable FDIC
deposit insurance fund. The actual assessment rate applicable to a particular
institution (and any applicable refund) will, therefore, depend in part upon the
risk assessment classification so assigned to the institution by the FDIC.
Under EGRPRA, BIF-insured institutions will be assessed for certain
payments to be used to pay certain Financing Corporation ("FICO") obligations.
In addition to any BIF insurance assessments, BIF-insured banks are expected to
make payments relating to the FICO obligations equal to an estimated $0.0129 per
$100 of eligible deposits each year during 1997 through 1999, and an estimated
$0.024 per $100 of eligible deposits thereafter. The Bank's assessment rate was
zero basis points before the FICO assessment noted above.
MONETARY POLICY AND ECONOMIC CONTROL
The commercial banking business in which the Bank engages is affected not
only by general economic conditions, but also by the monetary policies of the
FRB. Changes in the discount rate on member bank borrowing, availability of
borrowing at the "discount window," open market operations, the imposition of
changes in reserve requirements against members banks' deposits and assets of
foreign branches and the imposition of and changes in reserve requirements
against certain borrowings by banks and their affiliates are some of the
instruments of monetary policy available to the FRB. These monetary policies are
used in varying combinations to influence overall growth and distributions of
bank loans, investments and deposits, and this use may affect interest rates
charged on loans or paid on deposits. The monetary policies of the FRB have had
a significant effect on the operating results of commercial banks and are
expected to do so in the future. The monetary policies of these agencies are
influenced by various factors, including inflation, unemployment, short-term and
long-term changes in the international trade balance and in the fiscal policies
of the United States Government. Future monetary policies and the effect of such
policies on the future business and earnings of the Company cannot be predicted.
FINANCE COMPANY
The Finance Company is a wholly-owned subsidiary of the Company. As
indicated above, a bank holding company is only permitted to engage in
nonbanking activities that the have been determined by the FRB to be so closely
related to banking as to be a proper incident thereto. The FRB has promulgated
rules identifying certain permissible nonbanking activities in which a bank
holding company may engage including making, acquiring, or servicing loans or
other extensions of credit that can be made by consumer or commercial finance
companies, credit card companies, mortgage companies, or through factoring.
Prior to commencement of such activities, FRB approval is required which
approval has been received by the Company, and on or about March 30, 1998, the
Company began providing such nonbanking services de novo through the Finance
Company.
The State of Florida also regulates the operation of a finance company
within the state. As a condition to providing such services in the State of
Florida, the Finance Company has applied for and been granted a mortgage
lender's license, retail installment sales license and sales finance license
from the Department's Division of Finance. Florida law requires that mortgage
lender licensees maintain a minimum net worth of $250,000 and that the foregoing
licenses be renewed biennially.
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<PAGE> 96
UNDERWRITING
Under the terms and conditions set forth in the underwriting agreement (the
"Underwriting Agreement") among the Company, the Issuer Trust, and the
underwriter named therein (the "Underwriter"), the Underwriter has agreed to
purchase from the Issuer Trust and the Issuer Trust has agreed to sell to the
Underwriter, $15,000,000 aggregate Liquidation Amount of Preferred Securities at
the public offering price less the underwriting discounts and commissions set
forth on the cover page of this Prospectus.
The Underwriting Agreement provides that the obligations of the Underwriter
is subject to certain conditions precedent and that the Underwriter will
purchase all of the Preferred Securities offered hereby if any of such Preferred
Securities are purchased.
The Underwriter has advised the Company and the Issuer Trust that the
Underwriter proposes to offer the Preferred Securities directly to the public at
the public offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not to exceed $0.20 per
Preferred Security. The Underwriter may allow, and such dealers may reallow, a
concession not in excess of $0.10 per Preferred Security to certain other
dealers. After the public offering of the Preferred Securities, the public
offering price, concession, and reallowance to dealers may be changed by the
representative of the Underwriter. No such change shall affect the amount of
proceeds to be received by the Issuer Trust as set forth on the cover page of
this Prospectus.
The Company and Issuer Trust have granted to the Underwriter an option
exercisable during the 30 day period beginning from the date of this Prospectus
to purchase up to an additional $2,250,000 aggregate Liquidation Amount of the
Preferred Securities, solely to cover over-allotments, if any, at the public
offering price as set forth on the cover page. To the extent that the
Underwriter exercises such option, the Issuer Trust will be obligated, pursuant
to the option, to sell such Preferred Securities to the Underwriter. If
purchased, the Underwriter will offer such additional Preferred Securities on
the same terms as those on which the $15,000,000 aggregate Liquidation Amount of
the Preferred Securities are being offered.
In view of the fact that the proceeds from the sale of the Preferred
Securities will be used to purchase the Junior Subordinated Debentures issued by
the Company, the Underwriting Agreement provides that the Company will pay as
compensation for the Underwriter's arranging the investment therein of such
proceeds an amount of $0.40 per Preferred Security (or $600,000 ($690,000 if the
over-allotment option is exercised in full) in the aggregate) and an advisory
fee equal to $25,000.
Because the National Association of Securities Dealers, Inc. ("NASD") is
expected to view the Preferred Securities as interest in a direct participation
program, the offering of the Preferred Securities is being made in compliance
with the applicable provisions of Rule 2810 of the NASD's Conduct Rules.
Subject to certain limitations, the Company, the Issuer Trust, and the
Underwriter have agreed to indemnify each other against certain liabilities
including liabilities under the Securities Act, or to contribute to payments
that the Company, the Issuer Trust, or the Underwriter may be required to make
in respect thereof.
The foregoing is a summary of the principal terms of the Underwriting
Agreement and does not purport to be complete. Reference is made to a copy of
the Underwriting Agreement which is on file as an exhibit to the Registration
Statement.
In connection with the offering of the Preferred Securities, the
Underwriter and any selling group members and their respective affiliates may
engage in transactions effected in accordance with Rule 104 of the Securities
and Exchange Commission's Regulation M that are intended to stabilize, maintain,
or otherwise affect the market price of the Preferred Securities. Such
transactions may include over-allotment transactions in which the Underwriter
creates a short position for its own account by selling more Preferred
Securities than it is committed to purchase from the Issuer Trust. In such a
case, to cover all or part of the short position, the Underwriter may exercise
the over-allotment option described above or may purchase Preferred Securities
in the open market following completion of the initial offering of the Preferred
Securities. The Underwriter also may engage in stabilizing transactions in which
it bids for, and purchases, shares of the Preferred Securities at a level above
that which might otherwise prevail in the open market for the purpose of
preventing or retarding
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<PAGE> 97
a decline in the market price of the Preferred Securities. The Underwriter also
may reclaim any selling concessions allowed to a dealer if the Underwriter
repurchases shares distributed by that dealer. Any of the foregoing transactions
may result in the maintenance of a price for the Preferred Securities at a level
above that which might otherwise prevail in the open market. Neither the Company
nor the Underwriter makes any representation or prediction as to the direction
or magnitude of any effect that the transactions described above may have on the
price of the Preferred Securities. The Underwriter is not required to engage in
any of the foregoing transactions and, if commenced, such transactions may be
discontinued at any time without notice.
The Preferred Securities are a new issue of securities with no established
trading market. The Preferred Securities have been approved for quotation on the
Nasdaq National Market. Nasdaq National Market maintenance standards require the
existence of two market makers for continued listing, and the presence of such
market makers cannot be assured. No assurance can be given as to the development
or liquidity of any market for the Preferred Securities.
Advest, Inc. acted as the managing underwriter in connection with the
Company's initial public offering completed in February 1996, and has continued
to serve as a financial advisor to the Company in connection with the Company's
acquisition and capital programs. In addition, Advest, Inc. has entered into an
agreement with the Bank to provide trust services to the Bank's customers
through Advest, Inc's wholly-owned banking subsidiary. Advest, Inc. may in the
future perform various services to the Company, including investment banking
services for which it may receive customary fees.
VALIDITY OF SECURITIES
The validity of the Guarantee and the Junior Subordinated Debentures and
certain tax matters will be passed upon for the Company by Carlton, Fields,
Ward, Emmanuel, Smith & Cutler, P.A., Tampa, Florida, and certain legal matters
will be passed upon for the Underwriter by Arnold & Porter, Washington, D.C. and
New York, New York. Arnold & Porter will rely as to certain matters of Florida
law on the opinion of Carlton, Fields, Ward, Emmanuel, Smith & Cutler, P.A.
Certain matters of Delaware law relating to the validity of the Preferred
Securities, the enforceability of the Trust Agreement, and the creation of the
Issuer Trust will be passed upon by Richards, Layton & Finger, P.A., special
Delaware counsel to the Company and the Issuer Trust. Carlton, Fields, Ward,
Emmanuel, Smith & Cutler, P.A., and Arnold & Porter will rely as to certain
matters of Delaware law on the opinion of Richards, Layton & Finger, P.A.
EXPERTS
The consolidated balance sheets of the Company and its subsidiaries as of
December 31, 1997 and 1996, and the consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997, which appear in the Prospectus, have been audited by
Coopers & Lybrand L.L.P., independent accountants, and have been included in
this Prospectus and in the Registration Statement in reliance on the report
given on the authority of that firm as experts in accounting and auditing and on
the report of Hacker, Johnson, Cohen & Grieb, P.A. on the financial statements
of Murdock as of December 31, 1997 and 1996 and for each of the three years in
the period December 31, 1997, included as an exhibit to the Registration
Statement, and upon the authority of said firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith files reports, proxy statements, and other information with the
Securities and Exchange Commission (the "Commission" or the "SEC"). Such
reports,
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<PAGE> 98
proxy statements, and other information filed by the Company may be inspected
and copied at the public reference facilities maintained by the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the Commission's regional offices at Seven World Trade Center, Suite 1300,
New York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials can be obtained at
prescribed rates from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
also maintains an Internet Web site that contains reports, proxy statements, and
other information filed electronically by the Company with the Commission which
can be accessed at http://www.sec.gov. The Company's common shares trade on the
Nasdaq National Market and, as a result, reports, proxy statements, and other
information concerning the Company also can be inspected at the offices of
Nasdaq Stock Market, Inc., 1735 K Street, N.W., Washington, D.C. 20006-1500.
In addition, the Company has filed with the Commission a Registration
Statement on Form S-1 (the "Registration Statement") under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the securities offered
hereby. This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules filed as part thereof,
certain portions of which have been omitted as permitted by the rules and
regulations of the Commission. For further information with respect to the
Company and the Common Stock, reference is hereby made to the Registration
Statement, including the exhibits and schedules filed as part thereof.
Statements contained in this Prospectus as to the contents of any document
referred to herein are not necessarily complete and, in each instance, reference
is made to the copy of such document filed with the Commission as an exhibit to
the Registration Statement or otherwise, and each such statement is qualified in
all respects by such reference. The Registration Statement, including exhibits
and schedules filed as a part thereof, may be inspected without charge at Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies thereof may be obtained from the Commission
at prescribed rates.
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<PAGE> 99
AMERICAN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996 AND
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
WITH REPORT OF INDEPENDENT ACCOUNTANTS
<PAGE> 100
INDEX TO FINANCIAL STATEMENTS OF THE COMPANY
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets at December 31, 1997 and 1996... F-3
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996, and 1995......................... F-4
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1997, 1996, and 1995............. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996, and 1995......................... F-6
Notes to Consolidated Financial Statements.................. F-8 - F-26
Consolidated Condensed Balance Sheet at March 31, 1998
(Unaudited)............................................... F-27
Consolidated Condensed Statements of Income for the Three
Months Ended March 31, 1998 and 1997 (Unaudited).......... F-28
Consolidated Condensed Statements of Comprehensive Income
for the Three Months Ended March 31, 1998 and 1997
(Unaudited)............................................... F-29
Consolidated Condensed Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1997 (Unaudited).... F-30
Notes to Consolidated Condensed Financial Statements
(Unaudited)............................................... F-31
</TABLE>
F-1
<PAGE> 101
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
American Bancshares, Inc. and Subsidiaries
Bradenton, Florida
We have audited the accompanying consolidated balance sheets of American
Bancshares, Inc. and Subsidiaries (the "Company") as of December 31, 1997 and
1996, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We did not audit the
financial statements of Murdock Florida Bank which statements reflect total
assets constituting 18% and 23%, at December 31, 1997 and 1996, respectively,
and net income constituting 15%, 13%, and 21% for the years ended December 31,
1997, 1996 and 1995, respectively. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to data included for Murdock Florida Bank, is based solely on the report
of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of American Bancshares,
Inc. and Subsidiaries as of December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Tampa, Florida
February 13, 1998, except for Note 24,
as to which the date is March 23, 1998
F-2
<PAGE> 102
AMERICAN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 13,275,893 $ 17,562,908
Federal funds sold.......................................... 5,120,000 6,000,000
Loans held for sale......................................... 39,587,522 20,351,204
Investment securities available for sale (at aggregate fair
value).................................................... 68,664,216 43,508,712
Loans receivable (net of allowance for loan losses and
deferred loan fees/ costs of $1,704,237 in 1997 and
$1,173,463 in 1996)....................................... 213,405,033 175,264,438
Premises and equipment, net................................. 9,160,971 7,134,589
Other assets................................................ 4,687,692 3,808,477
------------ ------------
Total assets...................................... $353,901,327 $273,630,328
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits.................................................. $302,745,776 $232,432,633
Securities sold under agreements to repurchase............ 17,528,493 10,112,986
Federal Home Loan Bank advances........................... 5,000,000 6,300,000
Note payable.............................................. 500,000 0
Other liabilities......................................... 2,047,748 1,280,802
------------ ------------
Total liabilities................................. 327,822,017 250,126,421
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 14)
SHAREHOLDERS' EQUITY
Common stock -- $1.175 par value; 10,000,000 shares
authorized; 4,994,482 and 4,925,768 shares issued at
December 31, 1997 and 1996, respectively............... 5,868,516 5,787,777
Additional paid-in capital................................ 15,547,568 15,203,743
Unrealized gain (loss) on investment securities available
for sale, net of tax of $85,914 and $(56,145) at
December 31, 1997 and 1996, respectively............... 139,808 (90,951)
Retained earnings......................................... 4,523,418 2,603,338
------------ ------------
Total shareholders' equity........................ 26,079,310 23,503,907
------------ ------------
Total liabilities and shareholders' equity........ $353,901,327 $273,630,328
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 103
AMERICAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans............................ $20,101,030 $16,149,883 $13,091,496
Interest on federal funds sold........................ 534,642 336,408 326,857
Interest on investment securities..................... 3,996,145 2,945,060 2,407,366
----------- ----------- -----------
Total interest income......................... 24,631,817 19,431,351 15,825,719
----------- ----------- -----------
Interest expense:
Deposits.............................................. 11,905,370 9,474,587 8,087,161
Borrowings............................................ 1,012,036 490,591 364,887
----------- ----------- -----------
Total interest expense........................ 12,917,406 9,965,178 8,452,048
----------- ----------- -----------
Net interest income........................... 11,714,411 9,466,173 7,373,671
Provision for loan losses............................... 921,000 514,654 701,604
----------- ----------- -----------
Net interest income after provision for loan
losses...................................... 10,793,411 8,951,519 6,672,067
----------- ----------- -----------
Other income............................................ 4,155,646 2,148,059 2,085,774
----------- ----------- -----------
Other expenses.......................................... 11,911,765 9,856,136 7,436,957
----------- ----------- -----------
Income before income tax provision............ 3,037,292 1,243,442 1,320,884
Income tax provision.................................... 1,117,212 460,953 470,975
----------- ----------- -----------
Net income.................................... $ 1,920,080 $ 782,489 $ 849,909
=========== =========== ===========
Weighted average basic shares outstanding............... 4,988,318 4,637,565 3,160,012
=========== =========== ===========
Weighted average diluted shares outstanding............. 5,019,484 4,692,093 3,206,992
=========== =========== ===========
Earnings per share:
Basic................................................. $ 0.38 $ 0.17 $ 0.27
=========== =========== ===========
Diluted............................................... $ 0.38 $ 0.17 $ 0.27
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 104
AMERICAN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
UNREALIZED
GAINS/
(LOSSES) ON
COMMON STOCK INVESTMENT
------------------------------------- ADDITIONAL SECURITIES
AUTHORIZED OUTSTANDING PAID-IN RETAINED AVAILABLE FOR
SHARES SHARES PAR VALUE CAPITAL EARNINGS SALE, NET TOTAL
---------- ----------- ---------- ----------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1995............... 4,000,000 3,024,944 $3,554,309 $ 7,737,523 $ 970,940 $(778,923) $11,483,849
Exercise of
warrants........... 0 212,932 250,195 610,333 0 0 860,528
Issuance of stock.... 0 87,218 102,481 377,293 0 0 479,774
Change in net
unrealized gain on
investment
securities
available for
sale............... 0 0 0 0 0 958,409 958,409
Net income........... 0 0 0 0 849,909 0 849,909
Change in net
unrealized gain on
investment
securities
available for
sale............... 6,000,000 0 0 0 0 0 0
---------- --------- ---------- ----------- ---------- --------- -----------
Balance, December 31,
1995............... 10,000,000 3,325,094 3,906,985 8,725,149 1,820,849 179,486 14,632,469
Exercise of
warrants........... 0 163,695 192,342 789,828 982,170
Issuance of stock.... 0 1,436,979 1,688,450 5,688,766 0 0 7,377,216
Change in net
unrealized gain on
investment
securities
available for
sale............... 0 0 0 0 0 (270,437) (270,437)
Net income........... 0 0 0 0 782,489 0 782,489
---------- --------- ---------- ----------- ---------- --------- -----------
Balance, December 31,
1996............... 10,000,000 4,925,768 5,787,777 15,203,743 2,603,338 (90,951) 23,503,907
Exercise of
warrants........... 0 61,595 72,374 297,196 0 0 369,570
Issuance of stock.... 0 7,119 8,365 46,629 0 0 54,994
Change in net
unrealized loss on
investment
securities
available for
sale............... 0 0 0 0 0 230,759 230,759
Net income........... 0 0 0 0 1,920,080 0 1,920,080
---------- --------- ---------- ----------- ---------- --------- -----------
Balance, December 31,
1997............... 10,000,000 4,994,482 $5,868,516 $15,547,568 $4,523,418 $ 139,808 $26,079,310
========== ========= ========== =========== ========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 105
AMERICAN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income......................................... $ 1,920,080 $ 782,489 $ 849,909
------------ ------------ ------------
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Deferred tax credit............................. (199,194) (420,411) (392,300)
Depreciation.................................... 717,916 485,976 389,051
Amortization of investment securities........... 18,479 120,064 29,118
Provision for loan losses....................... 921,000 514,654 701,604
Gain on sale of investment securities available
for sale...................................... (139,820) (106,826) (42,310)
Gain on sale of loans........................... (296,991) (190,624) (321,499)
Gain on sale of mortgage servicing rights....... (381,151) (323,378) (210,327)
Gain on sale of assets.......................... 0 0 (42,976)
(Gain) loss on sale of other real estate
owned......................................... (12,990) 336,000 (64,000)
Origination of loans held for sale.............. (58,451,859) (38,628,254) (42,845,175)
Proceeds from sales of loans held for sale...... 44,112,636 38,158,995 42,480,846
Increase in deferred loan costs................. 23,359 150,103 25,079
Increase in other liabilities................... 766,946 71,011 725,635
(Increase) decrease in other assets............. (961,732) 681,988 435,263
------------ ------------ ------------
Total adjustments.......................... (13,883,401) 849,298 868,009
------------ ------------ ------------
Net cash (used in) provided by operating
activities............................... (11,963,321) 1,631,787 1,717,918
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net loans to customers............................. (43,152,942) (36,815,218) (29,070,401)
Purchases of bank premises and equipment........... (2,744,298) (3,332,104) (1,400,094)
Proceeds on sales of assets........................ 0 0 96,000
Proceeds from sales of available for sale
investment securities........................... 17,997,969 33,501,321 10,873,642
Proceeds from maturities of available for sale
investment securities........................... 14,178,000 12,337,437 3,325,000
Purchases of available for sale investment
securities...................................... (56,936,173) (49,448,883) (12,398,348)
Purchases of held-to-maturity investment
securities...................................... 0 0 (4,000,000)
Recoveries on loans charged off.................... 100,536 49,486 23,255
------------ ------------ ------------
Net cash used in investing activities...... (70,556,908) (43,707,961) (32,550,946)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW, money market
and savings accounts............................ 36,468,555 28,231,180 276,090
Net increase in time deposits...................... 33,844,588 17,474,549 20,842,788
Net increase in securities sold under agreements to
repurchase...................................... 7,415,507 546,318 4,189,176
Proceeds from advances from borrowings............. 4,800,000 3,900,000 9,500,000
Repayments of advances from borrowings............. (5,600,000) (4,100,000) (3,600,000)
Repayments of obligations under capital leases..... 0 0 (11,000)
Proceeds from stock sale........................... 424,564 8,359,386 1,340,302
------------ ------------ ------------
Net cash provided by financing
activities............................... 77,353,214 54,411,433 32,537,356
------------ ------------ ------------
</TABLE>
F-6
<PAGE> 106
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net increase (decrease) in cash and cash
equivalents........................................ (5,167,015) 12,335,259 1,704,328
Cash and cash equivalents at beginning of year....... 23,562,908 11,227,649 9,523,321
------------ ------------ ------------
Cash and cash equivalents at end of year............. $ 18,395,893 $ 23,562,908 $ 11,227,649
============ ============ ============
DISCLOSURES
Interest paid...................................... $ 12,710,683 $ 9,787,428 $ 8,269,000
============ ============ ============
Income taxes paid.................................. $ 1,415,233 $ 910,500 $ 549,000
============ ============ ============
Reclassification of loans to foreclosed real
estate.......................................... $ 160,000 $ 518,000 $ 781,000
============ ============ ============
Loans originated for sale of foreclosed real
estate.......................................... $ 95,000 $ 570,000 $ 613,000
============ ============ ============
Unrealized appreciation on investment securities... $ 230,759 $ (270,437) $ 958,409
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 107
AMERICAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION:
American Bancshares, Inc. (Holding Company) is a one-bank holding company,
operated under the laws of the State of Florida. It has two wholly owned
subsidiaries, which include a banking subsidiary, American Bank of Bradenton
(Bank), a state-chartered bank; and Freedom Finance Company (Finance), a Florida
Corporation. The Bank is a general commercial bank with all the rights, powers,
and privileges granted and conferred by the Florida Banking Code. Finance was
incorporated on March 26, 1997 and had no activity during 1997 other than a $100
capital contribution.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of the Holding Company and
Subsidiaries conform to generally accepted accounting principles and general
practice within the banking industry. Following is a description of the more
significant of those policies:
Basis of Presentation -- The consolidated financial statements give
retroactive effect to the merger with Murdock Florida Bank, American Bank
of Bradenton, and the Holding Company. The merger was consummated on March
23, 1998 and resulted in the Holding Company issuing a total of 924,024
shares of common stock in exchange for all of the outstanding stock of
Murdock Florida Bank. The transaction has been accounted for on a
pooling-of-interests basis, and the financial statements are presented as
if the merger had been consummated for the periods presented.
Principles of Consolidation -- The consolidated financial statements
include the accounts of the Holding Company and its wholly owned
subsidiaries, American Bank of Bradenton and Freedom Finance Company,
collectively referred to herein as the Company. All significant
intercompany accounts and transactions have been eliminated.
Investment Securities Available for Sale -- Securities to be held for
indefinite periods of time and not intended to be held to maturity are
classified as available for sale. Assets included in this category are
those assets that management intends to use as part of its asset/liability
management strategy and that may be sold in response to changes in interest
rates, resultant prepayment risk and other factors related to interest rate
and resultant prepayment risk changes. Securities available for sale are
recorded at fair value. Both unrealized gains and losses on securities
available for sale, net of taxes, are included as a separate component of
shareholders' equity in the consolidated balance sheets until these gains
or losses are realized. If a security has a decline in fair value that is
other than temporary, then the security will be written down to its fair
value by recording a loss in the consolidated statements of operations.
Gains or losses on the disposition of investment securities are
recognized using the specific identification method.
Loans -- Loans are carried at the principal amount outstanding, net of
deferred loan fees and/or origination costs. Interest is accrued on a
simple-interest basis. Loans are charged to the allowance for loan losses
at such time as management considers them uncollectible in the normal
course of business. Accrual of interest is discontinued on a loan,
including impaired loans, when management believes, after considering
economic and business conditions and collection efforts, the borrower's
financial condition is such that collection of interest is doubtful.
Classification of a loan as nonaccrual is not necessarily indicative of a
potential loss of principal.
Allowance for Loan Losses -- The Company adheres to an internal asset
review system and allowance for loan losses methodology designated to
provide for the detection of problem assets and to provide an adequate
general valuation allowance to cover loan losses. A provision for loan
losses is charged to operations based on management's evaluation of
potential losses in the loan portfolio. The provision is based on an
analysis of the loan portfolio, economic conditions, historical loan loss
experience,
F-8
<PAGE> 108
AMERICAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
changes in the nature and volume of the loan portfolios and management's
assessment of the inherent risk in the portfolio in relation to the level
of the allowance for loan losses. While management uses the best
information available to make these evaluations, future adjustments to the
allowance may be necessary if economic conditions differ from the
assumptions used in preparing the evaluation. The Company also establishes
provisions on a specific loan basis when an identified problem becomes
known. Ultimate losses may vary from the current estimates and any
adjustments, as they become necessary, are reported in earnings in the
periods in which they become known.
When a loan or portion of a loan, including an impaired loan, is
determined to be uncollectible, the portion deemed uncollectible is charged
against the allowance, and subsequent recoveries, if any, are credited to
the allowance.
Income Recognition on Impaired and Nonaccrual Loans -- Loans,
including impaired loans, are generally classified as nonaccrual if they
are past due as to maturity or payment of principal or interest for a
period of more than 90 days, unless such loans are well-collateralized and
in the process of collection. If a loan or a portion of a loan is
classified as doubtful or is partially charged off, the loan is classified
as nonaccrual. Loans that are on a current payment status or past due less
than 90 days may also be classified as nonaccrual if repayment in full of
principal and/or interest is in doubt.
Loans may be returned to accrual status when all principal and
interest amounts contractually due (including arrearages) are reasonably
assured of repayment within an acceptable period of time, and there is a
sustained period of repayment performance (generally a minimum of six
months) by the borrower, in accordance with the contractual terms of
interest and principal.
While a loan is classified as nonaccrual and the future collectibility
of the recorded loan balance is doubtful, collections of interest and
principal are generally applied as a reduction to principal outstanding.
When the future collectibility of the recorded loan balance is expected,
interest income may be recognized on a cash basis. In the case where a
nonaccrual loan had been partially charged off, recognition of interest on
a cash basis is limited to that which would have been recognized on the
recorded loan balance at the contractual interest rate. Cash interest
receipts in excess of that amount are recorded as recoveries to the
allowance for loan losses until prior charge-offs have been fully
recovered.
Loans Held for Sale -- Mortgage loans originated or purchased and
intended for sale in the secondary market are carried at the lower of cost
or market as determined by outstanding commitments from investors or
current investor yield requirements, calculated on the aggregate loan
basis. Net unrealized losses, if any, are recognized in a valuation
allowance by charges to earnings. Gains and losses resulting from the sales
of these loans are recognized in the period the sale occurs. Mortgage loan
servicing fees are earned concurrently with the receipt of the related
mortgage payments.
Mortgage Servicing Rights -- The Company recognizes an asset for
rights to service mortgage loans for others by management periodically. The
value of mortgage servicing rights related to loans sold was $145,000 and
$226,000 at December 31, 1997 and 1996, respectively. The Company had no
valuation allowance for capitalized mortgage servicing rights at December
31, 1997 and 1996.
Loan Fees -- Loan origination fees and certain direct loan origination
costs are deferred and amortized as a yield adjustment, using a method
which approximates the interest method, over the contractual lives of the
loans. The net of deferred origination fees and deferred origination costs
is presented as an adjustment of loans receivable in the accompanying
balance sheets.
The Company purchases consumer loans from local auto dealers which are
collateralized by automobiles. In conjunction with this program, the
Company pays a premium represented by the present value differential of the
yield required by the Company and the underlying loan interest rate. The
premium paid is amortized as a yield adjustment, using the interest method,
over the contractual lives of
F-9
<PAGE> 109
AMERICAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the loans. If the loan prepays, the Company has recourse against the auto
dealer for any unamortized premiums. At December 31, 1997 and 1996, the
unamortized premiums totaled $448,934 and $459,541, respectively.
Other Real Estate Owned -- Other real estate owned includes properties
acquired through foreclosure or acceptance of deeds in lieu of foreclosure.
These properties are recorded on the date acquired at the lower of fair
value minus estimated costs to sell or the recorded investment in the
related loan. If the fair value minus estimated costs to sell the property
acquired is less than the recorded investment in the related loan, the
resulting loss is charged to the allowance for loan losses. The resulting
carrying value established at the date of foreclosure becomes the new cost
basis for subsequent accounting. After foreclosure, if the fair value minus
estimated costs to sell the property becomes less than its cost, the
deficiency is charged to the valuation allowance on other real estate owned
or charged directly to the asset. Costs relating to the development and
improvement of the property are capitalized, whereas those relating to
holding the property for sale are charged to expense. Gains and losses on
the disposition of other real estate owned are reflected in operations as
incurred. The Company had other real estate owned of $363,501 and $90,000
at December 31, 1997 and 1996, respectively.
Premises and Equipment -- Premises and equipment are carried at cost
less accumulated depreciation and amortization. Depreciation and
amortization are computed on the straight-line method over the estimated
useful lives of the related assets. Maintenance, repairs and minor
improvements are charged to operating expenses as incurred. Major
improvements and betterments are capitalized. Upon retirement or other
disposition of the assets, the applicable cost and accumulated depreciation
are removed from the accounts and any gains or losses are included in
operations.
Income Taxes -- The Company files consolidated income tax returns.
Deferred tax assets or liabilities are computed based on the difference
between the financial statement and income tax bases of assets and
liabilities using the enacted marginal tax rate. Deferred income tax
expenses or credits are based on the changes in the asset or liability from
period to period. The effect on deferred income taxes of a change in tax
rates is recognized in income in the period that includes the enactment
date.
Statement of Cash Flows -- For purposes of reporting cash flows, cash
and cash equivalents include cash and due from banks and federal funds
sold.
Earnings Per Share -- In 1997, the Financial Accounting Standards
Board issued Statement No. 128 (FAS No. 128), "Earnings Per Share." FAS No.
128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. All earnings per share
amounts have been restated to conform to the FAS No. 128 requirements.
Basic earnings per common share is calculated by dividing net income
by the sum of the weighted average number of shares of common stock
outstanding.
Diluted earnings per common share is calculated by dividing net income
by the weighted average number of shares of common stock outstanding,
assuming the exercise of stock options and warrants using the treasury
stock method. Such adjustments to the weighted average number of shares of
common stock outstanding are made only when such adjustments dilute
earnings per common share. The diluted earnings per share is summarized as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Weighted average common shares outstanding............ 4,988,318 4,637,565 3,160,012
Weighted average common shares equivalents............ 31,166 54,528 46,980
--------- --------- ---------
Shares used in diluted earnings per share
calculation......................................... 5,019,484 4,692,093 3,206,992
========= ========= =========
</TABLE>
F-10
<PAGE> 110
AMERICAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reclassifications -- Certain amounts in the 1996 financial statements
have been reclassified to conform with the current year presentation. Such
reclassification had no impact on total assets, equity, net income or total
cash flow balances previously reported.
3. INVESTMENT SECURITIES AVAILABLE FOR SALE:
The amortized costs and approximate fair value of investment securities
available for sale at December 31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
1997
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasury Securities............... $ 4,057,278 $ 358 $(19,046) $ 4,038,590
U.S. Government agencies............... 55,764,939 125,844 (43,127) 55,847,656
State and municipals................... 1,117,877 45,693 0 1,163,570
----------- -------- -------- -----------
Total debt securities.......... 60,940,094 171,895 (62,173) 61,049,816
----------- -------- -------- -----------
FHLB stock............................. 1,709,400 0 0 1,709,400
Mortgage-backed securities............. 5,789,000 129,000 (13,000) 5,905,000
----------- -------- -------- -----------
Total available for sale....... $68,438,494 $300,895 $(75,173) $68,664,216
=========== ======== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasury Securities.............. $ 7,562,521 $ 24,193 $(162,264) $ 7,424,450
U.S. Government agencies.............. 22,202,152 0 (122,400) 22,079,752
State and municipals.................. 1,020,639 15,000 (1,258) 1,034,381
----------- -------- --------- -----------
Total debt securities......... 30,785,312 39,193 (285,922) 30,538,583
----------- -------- --------- -----------
FHLB stock............................ 1,075,100 0 0 1,075,100
Mortgage-backed securities............ 11,803,396 144,951 (53,318) 11,895,029
----------- -------- --------- -----------
Total available for sale...... $43,663,808 $184,144 $(339,240) $43,508,712
=========== ======== ========= ===========
</TABLE>
The FHLB stock is a restricted investment that is required by the FHLB to
be maintained by the Company.
F-11
<PAGE> 111
AMERICAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and approximate fair value of investments at December
31, 1997, by scheduled maturity, are shown below. Scheduled maturities may
differ from actual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED APPROXIMATE
COST FAIR VALUE
----------- -----------
<S> <C> <C>
Due in one year or less..................................... $ 2,604,528 $ 2,599,170
Due after one year through five years....................... 20,632,650 20,618,685
Due after five years through ten years...................... 35,598,916 35,723,107
Due after ten years......................................... 2,104,000 2,108,854
----------- -----------
Total debt securities............................. 60,940,094 61,049,816
FHLB stock.................................................. 1,709,400 1,709,400
----------- -----------
Mortgage-backed securities.................................. 5,789,000 5,905,000
----------- -----------
$68,438,494 $68,664,216
=========== ===========
</TABLE>
Proceeds from the sale of investment securities available for sale during
the years ended December 31, 1997, 1996 and 1995 were $17,997,969, $33,501,321,
and $10,873,642, respectively. Gross gains of $148,259, $159,526, and $42,310
were realized on these sales for the years ended December 31, 1997, 1996, and
1995, respectively. Gross losses of $8,439 and $52,700 were realized on these
sales for the years ended December 31, 1997 and 1996, respectively.
At December 31, 1997, the Company had pledged securities with a carrying
value of approximately $3,788,000 and market value of approximately $3,827,000
to the State of Florida for public fund deposits. The current value of pledged
securities is adequate to meet the pledging requirements.
4. LOANS RECEIVABLE, NET:
The Company's loan portfolio consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Residential mortgage loans, substantially all
single-family........................................... $ 54,243,596 $ 49,575,342
Commercial and commercial real estate loans............... 112,038,918 82,171,560
Consumer loans............................................ 48,826,756 44,690,999
------------ ------------
215,109,270 176,437,901
Less allowance for loan losses............................ (2,311,415) (1,761,000)
Net deferred costs........................................ 607,178 587,537
------------ ------------
Loans, net...................................... $213,405,033 $175,264,438
============ ============
</TABLE>
The Company grants and purchases real estate, commercial and consumer loans
throughout Florida, with a majority in the Sarasota and Manatee County area.
Although the Company has a diversified loan portfolio, a significant portion of
its debtors' ability to honor their contracts is dependent primarily upon the
economy of Sarasota and Manatee Counties, Florida and general economic
conditions.
F-12
<PAGE> 112
AMERICAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of activity in the allowance for loan losses follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year....................... $1,761,000 $1,609,000 $1,374,000
Provision charged to income........................ 921,000 514,654 701,604
Recoveries on loans previously charged off......... 100,535 49,486 67,255
Loans charged off.................................. (471,120) (412,140) (533,859)
---------- ---------- ----------
Balance at end of year............................. $2,311,415 $1,761,000 $1,609,000
========== ========== ==========
</TABLE>
In management's opinion, the allowance is adequate to reflect the risk in
the loan portfolio.
At December 31, 1997, 1996, and 1995, the recorded investment in loans for
which impairment has been recognized totaled approximately $662,000, $1,478,000,
and $2,023,000, respectively. The total allowance for loan losses related to
these loans was approximately $246,000, $331,000, and $493,000 at December 31,
1997, 1996 and 1995, respectively. Interest income on impaired loans of
approximately $48,500 and $87,000 was recognized for cash payments received in
1997 and 1996, respectively. For the years ended December 31, 1997 and 1996, the
average recorded investment in impaired loans was $312,000 and $1,139,000.
At December 31, 1997 and 1996, the Company had approximately $986,000 and
$1,134,000 in nonaccrual loans, respectively. For the years ended December 31,
1997 and 1996, the amount of interest income not recorded related to nonaccrual
loans was approximately $42,000 and $60,000, respectively. Interest income that
would have been earned on the nonaccrual loans for the year ended December 31,
1995 was immaterial. At December 31, 1997 and 1996, there were no accruing loans
that were 90 days or more past due.
Loans to Officers and Directors -- In the course of its business, the
Company has granted loans to executive officers, directors and principal
shareholders of the Company and to entities to which they are related. Following
is a summary of the amount of loans in which the aggregate of the loans exceeded
$60,000 during the year:
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
Balance at beginning of year................................ $ 6,892,406
New loans................................................... 2,164,334
Repayments on loans......................................... (2,597,223)
-----------
Balance at end of year...................................... $ 6,459,517
===========
</TABLE>
5. PREMISES AND EQUIPMENT:
A summary of premises and equipment at December 31, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land........................................................ $ 2,802,264 $ 2,792,263
Building and improvements................................... 5,405,441 3,290,277
Furniture, fixtures, and equipment.......................... 4,034,019 3,618,909
----------- -----------
12,241,724 9,701,449
Less accumulated depreciation............................... (3,080,753) (2,566,860)
----------- -----------
$ 9,160,971 $ 7,134,589
=========== ===========
</TABLE>
Depreciation expense totaled $717,916, $485,976, and $389,051 for the years
ended December 31, 1997, 1996, and 1995, respectively.
F-13
<PAGE> 113
AMERICAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LOAN SERVICING:
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of mortgage loans
serviced for others was approximately $10,998,000 and $19,782,000 at December
31, 1997 and 1996, respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing, and included in demand deposits, were $40,653 and $34,675 at December
31, 1997 and 1996, respectively.
Mortgage servicing rights of $187,889 and $254,783 were capitalized in 1997
and 1996, respectively. There were no mortgage servicing rights in 1995.
Amortization of mortgage servicing rights was $25,927 and $28,901 during 1997
and 1996, respectively. The value of mortgage servicing rights sold was $243,100
and $0 for 1997 and 1996, respectively. At December 31, 1997 and 1996, the
capitalized mortgage servicing rights totaled $144,744 and $225,882,
respectively, which approximated fair value.
7. DEPOSITS:
Deposits consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Demand.................................................... $ 44,119,577 $ 29,763,696
NOW....................................................... 24,390,090 20,546,210
Money market.............................................. 61,997,868 45,463,356
Savings................................................... 13,258,135 11,523,853
------------ ------------
143,765,670 107,297,115
------------ ------------
Certificate accounts:
Under $100,000.......................................... 111,339,006 90,512,837
Over $100,000........................................... 34,838,121 23,361,471
IRAs.................................................... 12,802,979 11,261,210
------------ ------------
158,980,106 125,135,518
------------ ------------
$302,745,776 $232,432,633
============ ============
</TABLE>
The aggregate amount of certificates of deposit of $100,000 or more at
December 31, 1997 and 1996 was approximately $36,170,000 and $24,682,000,
respectively.
A summary of certificate accounts at December 31, 1997 by year of scheduled
maturity follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Due within one year....................................... $ 86,347,105 $ 54,378,388
Due after one year through two years...................... 34,662,004 18,454,878
Due after two years through three years................... 13,486,909 20,754,335
Due after three years through four years.................. 19,389,187 12,087,533
Due after four years...................................... 5,094,901 19,460,384
------------ ------------
$158,980,106 $125,135,518
============ ============
</TABLE>
F-14
<PAGE> 114
AMERICAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest expense on deposit accounts is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Interest on NOW accounts and money market deposit
accounts........................................ $ 3,206,096 $2,087,059 $1,794,281
Interest on savings accounts...................... 304,375 312,249 330,995
Interest on certificate accounts.................. 8,394,899 7,075,279 5,961,885
----------- ---------- ----------
$11,905,370 $9,474,587 $8,087,161
=========== ========== ==========
</TABLE>
8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE:
The Company enters into sales of securities under agreements to repurchase.
Repurchase agreements are treated as financings, and the obligations to
repurchase securities sold are reflected as a liability in the consolidated
balance sheets. The dollar amount of securities underlying the agreements
remains in the asset accounts. The securities sold under repurchase agreements
remain in the custody of a third-party trustee. The Company may have sold,
loaned, or otherwise disposed of such securities in the normal course of its
operations and has agreed to maintain substantially identical securities during
the agreements. The agreements mature within 30 days.
Information related to the Company's securities sold under repurchase
agreements (including accrued interest) at December 31, 1997 and 1996 is
presented below, segregated by the type of securities sold and by due date of
the agreement:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Average balance during the year........................... $14,375,332 $ 9,660,214
Average interest rate during the year..................... 4.54% 4.08%
Maximum month-end balance during the year................. $21,589,255 $10,557,098
U.S. Treasury securities underlying the agreements at
year-end:
Carrying value.......................................... $19,284,514 $11,242,138
Fair value.............................................. 19,332,128 11,153,493
</TABLE>
9. FEDERAL HOME LOAN BANK ADVANCES:
Each Federal Home Loan Bank (FHLB) is authorized to make advances to its
member associations, subject to such regulations and limitations as the FHLB may
prescribe. The Bank's borrowings from the FHLB of Atlanta at December 31, 1997
and 1996 were $5,000,000 and $6,300,000 at 6.31% and 6.95%, respectively, with
the December 31,1997 balance maturing in October 1998.
The FHLB requires that the Bank maintain qualifying mortgages as collateral
and all of its FHLB stock as collateral for its advances. As of December 31,
1997, the Bank has a credit availability of $20,000,000.
Uncollateralized Federal Fund lines amounting to $3.4 million at December
31, 1997 were maintained with various banks with rates which are at or below
prime rate. The lines and their terms are periodically reviewed and are
generally subject to withdrawal at the discretion of the banks. No borrowings on
these agreements were outstanding at December 31, 1997 and 1996, respectively.
10. NOTE PAYABLE:
In 1997, the Company entered into a Loan Agreement with a national banking
association for a $5 million revolving line of credit facility. The agreement
requires the proceeds of the new credit facility to be used for the acquisition
of real estate to be used for the development of the Company's corporate
headquarters, an operations center, and bank branches. The credit facility is
collateralized by the shares of the
F-15
<PAGE> 115
AMERICAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Bank. The agreement requires the Company to meet certain covenants and restricts
the payment of dividends, which have been met. Interest on the revolving credit
facility is calculated quarterly on either one- or three-month LIBOR plus 175
basis points (7.74% at December 31, 1997). After two years, the loan converts
into a ten-year term note with a five-year balloon payment. The total amount of
unused revolving credit available to the Company at December 31, 1997 was $4.5
million.
11. INCOME TAXES:
The Company's provision for income taxes consisted of the following for the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Current:
Federal........................................ $1,239,812 $ 534,953 $ 786,835
State.......................................... 76,600 29,200 76,440
---------- --------- ---------
1,316,412 564,153 863,275
---------- --------- ---------
Deferred:
Federal........................................ (184,000) (90,500) (363,900)
State.......................................... (15,200) (12,700) (28,400)
---------- --------- ---------
(199,200) (103,200) (392,300)
---------- --------- ---------
$1,117,212 $ 460,953 $ 470,975
========== ========= =========
</TABLE>
Deferred income taxes consisted of the following for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Provision for loan losses........................... $(163,000) $ 134,300 $(163,000)
Cash to accrual adjustment.......................... (58,000) 57,900 (72,200)
Merger expense...................................... (128,000) 0 0
Net operating loss carryforward..................... 219,000 (219,000) 0
Other............................................... (69,200) (76,400) (157,100)
--------- --------- ---------
$(199,200) $(103,200) $(392,300)
========= ========= =========
</TABLE>
F-16
<PAGE> 116
AMERICAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the impact of temporary differences between
the amounts of assets and liabilities recorded for financial reporting purposes
and such amounts as measured in accordance with tax laws. In general, these
temporary differences are more inclusive than timing differences recognized
under previously applicable accounting principles. The items which comprise a
significant portion of deferred tax assets and liabilities at December 31 are as
follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Book over tax bad debts................................... $ 657,400 $ 494,400
Market value of loans held for sale....................... 105,800 101,000
Merger expense............................................ 128,000 0
Net operating loss carryforward........................... 0 219,000
Other..................................................... 31,400 15,200
--------- ---------
Deferred tax assets.................................... 922,600 829,600
--------- ---------
Deferred tax liabilities:
Loan origination fees..................................... (71,200) (49,700)
Cash to accrual adjustment................................ (57,900) (116,800)
Other..................................................... 0 (63,900)
--------- ---------
Deferred tax liabilities............................... (129,100) (230,400)
--------- ---------
Net deferred tax asset................................. $ 793,500 $ 599,200
========= =========
</TABLE>
The Company's effective income tax rates of 37%, 37%, and 36% for the years
ended December 31, 1997, 1996, and 1995, respectively, vary from the statutory
federal income tax rate of 34% due primarily to state income taxes of 5.5% net
of federal tax benefits.
12. OTHER INCOME:
Other income consisted of the following for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Service charges on deposit accounts................ $1,812,104 $1,192,258 $1,037,697
Broker loan fees................................... 327,512 32,807 38,350
Net gains on sales of investment securities........ 139,820 106,826 42,310
Net gains on sales of loans held for sale.......... 296,991 190,624 321,499
Net gain (loss) on sale of other real estate
owned............................................ 12,990 (336,000) 64,000
Merchant fees on credit cards...................... 479,048 262,061 97,114
Late fees.......................................... 171,301 127,486 55,503
Net gain on sales of servicing rights.............. 573,289 323,377 210,327
Gain on sale of assets............................. 0 0 63,515
Other.............................................. 342,591 248,620 155,459
---------- ---------- ----------
$4,155,646 $2,148,059 $2,085,774
========== ========== ==========
</TABLE>
F-17
<PAGE> 117
AMERICAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. OTHER EXPENSES:
Other expenses consisted of the following for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Compensation and related benefits................. $ 5,181,275 $4,361,130 $3,165,104
Occupancy and equipment........................... 1,627,498 1,183,960 1,043,853
SAIF assessment................................... 0 348,000 0
FDIC insurance.................................... 81,831 148,181 299,478
Data processing................................... 916,891 925,140 583,708
Advertising and promotion......................... 307,154 350,507 159,284
Printing supplies and postage..................... 433,705 322,445 224,191
Directors fees and expenses....................... 156,680 123,952 97,063
Professional fees................................. 533,606 243,934 187,367
ATM and credit card fees.......................... 631,077 205,681 86,375
Foreclosed real estate expense.................... 29,000 223,000 632,000
Intangible taxes.................................. 156,767 126,235 75,873
Other............................................. 1,856,281 1,293,971 882,661
----------- ---------- ----------
$11,911,765 $9,856,136 $7,436,957
=========== ========== ==========
</TABLE>
Loan origination costs of approximately $686,000, $380,000, and $342,000 in
1997, 1996, and 1995, respectively, have been offset against compensation and
related benefits.
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK:
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, standby
letters of credit, and credit cards. They involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized on the
balance sheet. The contract or notional amounts of those instruments reflect the
extent of involvement the Company has in particular classes of financial
instruments. The Company has no financial instruments with off-balance-sheet
risk that are held for trading purposes.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual or notional amount
of the instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. As of December 31, 1997 and 1996 financial instruments with
off-balance-sheet risk were as follows:
<TABLE>
<CAPTION>
CONTRACTUAL OR NOTIONAL AMOUNTS 1997 1996
- ------------------------------- ----------- -----------
<S> <C> <C>
Commitments to extend credit................................ $56,598,000 $29,395,000
Standby letters of credit................................... 537,000 498,000
Credit cards................................................ 4,742,000 4,258,000
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained if deemed
necessary by the Company upon extension of credit is based on management's
credit evaluation of the counter-party. Collateral held varies but may include
accounts receivable, inventory, property, plant, and equipment, and
income-producing commercial properties.
F-18
<PAGE> 118
AMERICAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing, and similar transactions. The
guarantees are short-term, expiring in 1997.
15. EMPLOYEE BENEFIT AND STOCK OPTION PLANS:
The Company has qualified plans under Section 401(k) of the Internal
Revenue Code (Plans) for all employees meeting certain eligibility requirements.
The Plans allow participants to make annual contributions equal to 15% or less
of the participant's compensation up to a maximum allowed by Internal Revenue
Service regulation. The Company may match a percentage of the participant's
contributions. Plan contributions by the Company for the year ended December 31,
1997 and 1996 was approximately $28,100 and $18,300, respectively.
The Company has a qualified Incentive Stock Option plan (Incentive Plan)
and a Non-qualified Share Option Plan for non-employee directors (Non-qualified
Plan) under which the Company may grant options for up to 150,000 and 75,000
shares of common stock, respectively. Under the Incentive and Non-qualified
Plans, the exercise price of each option equals the market price of the
Company's stock on the date of grant. Options are granted upon approval of the
Board of Directors and vest 33% per year for three years and are exercisable
over 10 years from the date of the grant.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and related Interpretations in accounting for its Incentive
and Non-qualified Plans. Accordingly, no compensation cost has been recognized
for options granted under the Incentive and Non-qualified Plans. Had
compensation cost for the Company's Incentive and Non-qualified Plans been
determined based on the fair value at the grant dates for awards under the
Incentive and Non-qualified Plans consistent with the method of SFAS 123, the
Company's net income and net income per share would have been reduced to the pro
forma amounts of $1,890,680, $774,489, and $839,909 net income and earnings per
share of .38, .17, and .27 for the years ended December 31, 1997, 1996 and 1995,
respectively.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997; dividend yield of 0% in each period, as
there has been no regular dividend payment history, expected stock price
volatility of 0%, risk-free interest rates of 6.35%; and expected lives of four
years.
A summary of the status of the Company's Incentive and Non-qualified Plans
as of December 31, 1997 and 1996, respectively, and changes during the years
ending on those dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year.... 28,800 $5.24 24,000 $5.25 19,200 $5.25
Granted............................. 34,800 7.93 4,800 5.17 4,800 5.24
Exercised...........................
Forfeited...........................
------ ------ ------
Outstanding at end of year.......... 63,600 6.71 28,800 5.24 24,000 5.25
====== ====== ======
Options exercisable at year-end..... 33,600 28,800 24,000
====== ====== ======
</TABLE>
F-19
<PAGE> 119
AMERICAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about the Incentive and
Non-qualified Plans' stock options at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ----------------------------
WEIGHTED- WEIGHTED NUMBER
NUMBER AVERAGE AVERAGE EXERCISABLE WEIGHTED
RANGE OF OUTSTANDING REMAINING EXERCISE AT AVERAGE
EXERCISE PRICES AT 12/31/97 CONTRACTUAL LIFE PRICE 12/31/97 EXERCISE PRICE
- --------------- ----------- ---------------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$5.50 - $8.50 63,600 10 years $6.71 33,600 $5.23
====== ===== ====== =====
</TABLE>
16. SHAREHOLDERS' EQUITY:
The Company's current policy is to retain all earnings to fund operations.
Future dividend payments will be at the discretion of the Board of Directors of
the Company and will be dependent upon several factors, including State and
Federal banking regulations that impose limitations on such payments.
In February 1996, the Company completed a public offering of 1,250,000
shares of common stock at $6.00 per share (the Offering). Subsequent to the
Offering, an additional 187,500 shares of common stock were issued as part of
the over-allotment amount. The net proceeds of the Offering, after deducting
applicable issuance costs and expenses, were approximately $7,377,000.
In January 1997, the Company acquired the net assets of Deschamps & Gregory
Mortgage Company, Inc., a mortgage brokerage company, for approximately $55,000.
The Company issued 7,119 shares of common stock in connection with the
acquisition. The Company accounted for the acquisition using the purchase method
of accounting.
The following table summarizes the activity of the Company's issued and
outstanding warrants and their corresponding exercise prices:
<TABLE>
<CAPTION>
1992 WARRANTS 1994 WARRANTS
---------------------- ----------------------
WARRANTS EXERCISE WARRANTS EXERCISE
OUTSTANDING PRICE OUTSTANDING PRICE
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Balance, January 1, 1995....................... 227,126 $4.00 144,606 $6.00
Warrants exercised............................. (208,532) 4.00 (4,400) 6.00
Warrants issued................................ 0 4.00 87,018 6.00
-------- --------
Balance, December 31, 1995..................... 18,594 $4.00 227,224 $6.00
Warrants exercised............................. 0 0.00 (163,695) 6.00
-------- --------
Balance, December 31, 1996..................... 18,594 4 63,529 6
Options issued................................. -- 0.00 -- --
Warrants expired............................... (18,594) 0.00 (1,934) 6.00
Warrants exercised............................. -- 0.00 (61,595) 6.00
-------- ----- -------- -----
Balance, December 31, 1997..................... 0 $4.00 0 $6.00
======== ========
</TABLE>
17. DIVIDEND RESTRICTIONS:
State banking regulations limit the amount of dividends that may be paid by
the Bank to its Parent without prior approval of regulatory agencies. The amount
of dividends that may be paid is based on the net profits of the current year
combined with retained net profits of the preceding two years as defined by
state banking regulations. At December 31, 1997, approximately $3,720,000 are
available for payment of dividends without prior regulatory approval.
F-20
<PAGE> 120
AMERICAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. FAIR VALUES OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires that the Company disclose
estimated fair values for its financial instruments. Fair value is defined as
the price at which a financial instrument could be liquidated in an orderly
manner over a reasonable time period under present market conditions. Fair
values estimates, methods and assumptions are set forth below for the Company's
financial instruments.
Cash and Due From Bank -- For cash and due from banks, the carrying amount
is a reasonable estimate of fair value.
Investments and Mortgage-Backed Securities -- The fair value of investments
and mortgage-backed securities is estimated based on bid prices published in
financial newspapers or bid quotations received from securities dealers.
Loans Receivable -- The estimated fair value of the Company's fixed rate
loans was calculated by discounting contractual cash flows adjusted for current
prepayment estimates. The discount rates were based on the interest rate charged
to current customers for comparable loans. The Company's adjustable rate loans
reprice frequently at current market rates. Therefore, the fair value of these
loans has been estimated to be approximately equal to their carrying amount.
The impact of delinquent loans on the estimation of the fair values
described above is not considered to have a material effect and, accordingly,
delinquent loans have been disregarded in the valuation methodologies used.
Deposit Liabilities -- The fair value of deposits with no stated maturity,
such as demand, NOW, money market and savings is equal to the amount payable on
demand as of December 31, 1997. The fair value of time deposits is estimated
using the rates currently offered for deposits of similar remaining maturities.
Securities Sold Under Repurchase Agreements -- The repurchase agreements
outstanding at December 31, 1997 mature within 30 days. The estimated fair value
of these agreements approximates the carrying value.
FHLB Advances and Note Payable -- Cash flow from fixed-rate borrowings are
discounted at a spread to the zero Treasury curve which equates to the LIBOR
yield. The note payable's interest rate reprices quarterly. The estimated fair
value approximates the carrying value.
Commitments to Extend Credit and Standby Letters of Credit -- The fair
value of commitments to extend credit is estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the counterparties.
For fixed rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. The fair value
of standby letters of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle the
obligations with the counterparties.
F-21
<PAGE> 121
AMERICAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
---------------------------------------------
1997 1996
--------------------- ---------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from bank...................... $ 13,276 $ 13,276 $ 17,563 $ 17,563
Federal funds sold.......................... 5,120 5,120 6,000 6,000
Loans held for sale......................... 39,588 39,747 20,351 20,414
Investment securities available for sale.... 68,664 68,664 43,509 43,509
Loans receivable, net....................... 213,405 218,927 175,264 175,441
Financial liabilities:
Deposits.................................... 302,746 303,586 232,433 234,291
Securities sold under agreements to
repurchase............................... 17,528 17,528 10,113 10,113
FHLB advances............................... 5,000 5,000 6,300 6,300
Note payable................................ 500 500 0 0
</TABLE>
<TABLE>
<CAPTION>
CONTRACT CONTRACT
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Unrecognized financial instruments:
Loan commitments.............................. $56,598 $80 $29,395 $41
Standby letters of credit..................... 537 0 498 0
Credit cards.................................. 4,742 0 4,258 0
</TABLE>
Limitations -- The fair value estimates are made at a discrete point in
time based on relevant market information and information about the financial
instrument. Quoted market prices, when available, are used as the measure of
fair value. When quoted market prices are not available, fair value estimates
have been based on judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial instruments, and
other factors. These estimates are inherently subjective, involving
uncertainties and matters of significant judgment, and, therefore, may not be
indicative of the value that could be realized in a current market exchange.
Changes in assumptions could significantly affect the estimates.
The value estimates are based on existing on- and off-balance-sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial assets or liabilities include deferred tax assets and
property, plant and equipment. In addition, the tax ramifications related to the
realization of the unrealized gains and losses for investments and
mortgage-backed securities can have a significant effect on fair value estimates
and have not been considered in many of the estimates.
19. RISKS AND UNCERTAINTIES:
The earnings of the Company depend on the earnings of the Bank. The Bank is
dependent primarily upon the level of net interest income, which is the
difference between interest earned on its interest earning assets, such as loans
and investments and the interest paid on its interest-bearing liabilities, such
as deposits and borrowings. Accordingly, the operations of the Bank are subject
to risks and uncertainties surrounding its exposure to changes in the interest
rate environment.
Most of the Bank's lending activity is with customers located within
Sarasota and Manatee counties. Generally, the loans are collateralized by real
estate consisting of single family residential properties and commercial
properties. While this represents a concentration of credit risk, the credit
losses arising from this
F-22
<PAGE> 122
AMERICAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
type of lending compares favorably with the Bank's credit loss experience on its
portfolio as a whole. The ultimate repayment of these loans is dependent to a
certain degree on the local economy and real estate market.
The financial statements of the Company are prepared in conformity with
generally accepted accounting principles that require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from these estimates.
Significant estimates are made by management in determining the allowance
for possible loan losses. Consideration is given to a variety of factors in
establishing these estimates including current economic conditions,
diversification of the loan portfolio, delinquency statistics, results of
internal loan reviews, borrowers' perceived financial and managerial strengths,
the adequacy of underlying collateral, if collateral dependent, or present value
of future cash flows and other relevant factors. Since the allowance for
possible loan losses is dependent, to a great extent, on general and other
conditions that may be beyond the Bank's control, it is at least reasonably
possible that the estimates of the allowance for possible loan losses and the
carrying values of the real estate assets could differ materially in the near
term.
20. REGULATORY CAPITAL:
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the Bank's category.
F-23
<PAGE> 123
AMERICAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Bank's actual capital amounts and ratios are also presented in the
table. There were no deductions for interest-rate risk in 1997 or 1996.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------------- --------------------------- ---------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ------ --------------- --------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk Weighted
Assets)....................... $25,708,738 10.90% > $18,856,898 > 8.0% > $23,571,123 > 10.0%
- - - -
Tier I Capital (to Risk Weighted
Assets)....................... $23,820,322 10.11 > $ 9,428,449 > 4.0 > $14,142,674 > 6.0
- - - -
Tier I Capital (to Averaged
Assets)....................... $23,820,322 6.87 > $10,398,157 > 3.0 > $17,330,261 > 5.0
- - - -
As of December 31, 1996:
Total Capital (to Risk Weighted
Assets)....................... $20,894,512 11.60 > $14,413,417 > 8.0 > $18,016,772 > 10.0
- - - -
Tier I Capital (to Risk Weighted
Assets)....................... $19,491,512 10.82 > $ 7,206,709 > 4.0 > $10,810,063 > 6.0
- - - -
Tier I Capital (to Averaged
Assets)....................... $19,491,512 7.31 > $ 8,001,300 > 3.0 > $13,335,500 > 5.0
- - - -
</TABLE>
21. FUTURE ACCOUNTING PRONOUNCEMENTS:
FAS No. 130, "Reporting Comprehensive Income," establishes new standards
for reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. Comprehensive income is defined as
the change in equity during a period from transactions and other events and
circumstances from non-shareholder sources, such as changes in net unrealized
securities gains. It includes all changes in equity during a period except those
resulting from investments by shareholders and distributions to shareholders.
This statement is effective for the Company's fiscal year ending December 31,
1998. Application of this statement will not impact amounts previously reported
for net income or affect the comparability of previously issued financial
statements.
FAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for the reporting of financial information
from operating segments in annual and interim financial statements. It requires
that financial information be reported on the same basis that it is reported
internally for evaluating segment performance and deciding how to allocate
resources to segments. Because this statement addresses how financial
information is disclosed in annual and interim reports, the adoption will have
no material impact on the financial statements. This statement is effective for
the Company's fiscal year ending December 31, 1998.
F-24
<PAGE> 124
AMERICAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
22. CONDENSED PARENT COMPANY FINANCIAL STATEMENTS:
The condensed financial statements of American Bancshares, Inc., as the
parent organization, are presented as follows:
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Assets:
Cash...................................................... $ 373,665 $ 3,392,968
Premises and equipment.................................... 2,159,542 682,118
Prepaid expense........................................... 156,874 5,781
Investment in banking subsidiary.......................... 24,039,907 19,423,040
Investment in finance subsidiary.......................... 100 0
Other assets.............................................. 3,000 0
----------- -----------
Total assets...................................... $26,733,088 $23,503,907
=========== ===========
Liabilities:
Total liabilities................................. $ 653,778 $ 0
----------- -----------
Shareholders' equity:
Common stock.............................................. 5,868,530 5,787,791
Additional paid-in capital................................ 15,547,554 15,203,729
Unrealized gain (loss) on investment securities available
for sale, net.......................................... 139,808 (90,951)
Retained earnings......................................... 4,523,418 2,603,338
----------- -----------
Total shareholders' equity........................ 26,079,310 23,503,907
----------- -----------
Total liabilities and shareholders' equity........ $26,733,088 $23,503,907
=========== ===========
</TABLE>
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Equity in undistributed earnings of banking
subsidiary...................................... $2,021,108 $852,567 $849,909
Operating expense................................. (101,028) (70,078) 0
---------- -------- --------
Net income.............................. $1,920,080 $782,489 $849,909
========== ======== ========
</TABLE>
F-25
<PAGE> 125
AMERICAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1997 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows used in operating activities......... $ 398,657 $ (75,859) $ 0
----------- ----------- ----------
Cash flows used in investing activities:
Acquisition of premises and equipment......... (3,842,524) (4,890,559) 0
----------- ----------- ----------
Cash flows provided by financing activities:
Proceeds from sale of common stock (net of
stock offering costs).................... 424,564 8,359,386 0
----------- ----------- ----------
Net increase in cash..................... (3,019,303) 3,392,968 0
Cash at beginning of year................ 3,392,968 0 0
----------- ----------- ----------
Cash at end of year...................... $ 373,665 $ 3,392,968 $ 0
=========== =========== ==========
</TABLE>
23. SAIF ASSESSMENT:
On September 30, 1996, a one-time SAIF recapitalization assessment was
enacted. The rate was 65.7 cents per $100 on domestic deposits held as of March
31, 1995. The effect on the Bank was a pretax charge of $348,000 on deposits of
$52.9 million at March 31, 1995. This amount was paid in November, 1996.
24. SUBSEQUENT EVENT:
MERGER -- On March 23, 1998, the Company completed its merger with Murdock
Florida Bank, headquartered in Charlotte County, Florida. Under the terms of the
merger agreement, each outstanding share of Murdock Florida Bank's common stock
was converted into 2.4 shares of the Company's common stock. A total of 924,024
shares of the Company's common stock was issued. At December 31, 1997, Murdock
Florida Bank had total assets, deposits, and net interest income of $64 million,
$58.2 million, and $2.4 million, respectively, and the consolidated financial
statements included herein have been restated to give retroactive effect to the
merger.
F-26
<PAGE> 126
AMERICAN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
1998
----------------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C>
ASSETS
Cash and due from banks..................................... $ 20,660
Mortgage loans held for sale................................ 49,718
Investment securities available for sale.................... 62,266
Loans (net of allowance for credit losses and deferred loan
fees of $1,581)........................................... 230,535
Premises and equipment, net................................. 9,990
Other assets................................................ 6,010
--------
Total assets...................................... $379,179
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits.................................................. $316,595
Securities sold under agreements to repurchase............ 26,265
FHLB borrowings........................................... 5,000
Note payable.............................................. 1,450
Other liabilities......................................... 3,491
--------
Total liabilities................................. 352,801
--------
Shareholders' equity:
Common stock, $1.175 par value, 20,000,000 shares
authorized, 4,994,484 shares issued and outstanding.... 5,869
Additional paid-in capital................................ 15,937
Unrealized gain on securities available for sale, net..... 34
Retained earnings......................................... 4,538
--------
Total shareholders' equity........................ 26,378
--------
Total liabilities and shareholders' equity.................. $379,179
========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
F-27
<PAGE> 127
AMERICAN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Interest income:
Interest and fees on loans................................ $ 5,810 $ 4,452
Interest on investment securities......................... 1,148 950
Other interest income..................................... 143 150
---------- ----------
Total interest income............................. 7,101 5,552
---------- ----------
Interest expense:
Deposits.................................................. 3,240 2,680
Borrowings................................................ 343 198
---------- ----------
Total interest expense............................ 3,583 2,878
---------- ----------
Net interest income......................................... 3,518 2,674
Provision for loan losses................................... 124 171
---------- ----------
Net interest income after provision for loan
losses.......................................... 3,394 2,503
---------- ----------
Other income:
Service charges and fees.................................. 421 322
Gain on sale of mortgage loans............................ 62 4
Gain on sale of securities................................ 122 2
Gain on sale of servicing................................. 22 52
Broker loan fees.......................................... 54 48
Merchant fees............................................. 187 124
Other income.............................................. 235 120
---------- ----------
Total other income................................ 1,103 672
---------- ----------
Other expenses:
Salaries and employee benefits............................ 1,510 1,210
Net occupancy expense..................................... 195 154
Furniture and equipment expenses.......................... 239 214
Data processing fees...................................... 351 158
Other expenses............................................ 1,581 894
---------- ----------
Total other expenses.............................. 3,876 2,630
---------- ----------
Income before income taxes.................................. 621 545
Provision for income taxes.................................. 217 212
---------- ----------
Net income............................................. $ 404 $ 333
========== ==========
Earnings per share (actual $'s)
Basic..................................................... $ 0.08 $ 0.07
Diluted................................................... 0.08 0.07
Average number of shares outstanding:
Basic..................................................... 4,994,484 4,970,030
Diluted................................................... 5,023,454 4,992,639
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
F-28
<PAGE> 128
AMERICAN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
----------------
1998 1997
------ ------
(DOLLARS IN
THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Net income.................................................. $404 $ 333
Other comprehensive income, net of taxes:.................
Unrealized gains (losses) on securities available for
sale arising during the quarter, net of taxes......... (106) (457)
---- -----
Comprehensive income (loss)................................. $298 $(124)
==== =====
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
F-29
<PAGE> 129
AMERICAN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net cash provided by (used in) operating activities....... $ 657 $ (734)
-------- --------
Cash flows from investing activities:
Loan originations, net of repayments...................... (36,881) (19,118)
Proceeds from sales of loans held for sale................ 9,559 4,221
Purchases of bank premises and equipment.................. (1,034) (378)
Proceeds from sales and maturities of available for sale
investment securities.................................. 19,534 1,543
Purchases of available for sale investment securities, net
of repayments.......................................... (13,107) (15,745)
-------- --------
Net cash used in investing activities............. (21,929) (29,477)
-------- --------
Cash flows from financing activities:
Net increase in demand deposits, NOW and savings
accounts............................................... 18,656 21,057
Net increase in time deposits............................. (4,807) 966
Net increase in securities sold under agreements to
repurchase............................................. 8,737 3,377
Proceeds from advances from the FHLB and Federal Funds
purchased.............................................. 950 (1,300)
Proceeds from sale of stock............................... 0 425
-------- --------
Net cash provided by financing activities......... 23,536 24,525
-------- --------
Net increase (decrease) in cash and cash equivalents........ 2,264 (5,686)
Cash and cash equivalents at beginning of period............ 18,396 23,570
-------- --------
Cash and cash equivalents at end of period.................. $ 20,660 $ 17,884
======== ========
Supplemental disclosures:
Interest paid............................................. $ 3,486 $ 2,862
======== ========
Income taxes paid......................................... $ 120 $ 0
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
F-30
<PAGE> 130
AMERICAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. HOLDING COMPANY AND SUBSIDIARIES BACKGROUND INFORMATION:
American Bancshares, Inc. (Company) is a one-bank holding company, operated
under the laws of the State of Florida. Its wholly owned banking subsidiary is
American Bank (Bank), a state-chartered bank. The Bank is a general commercial
bank with all the rights, powers, and privileges granted and conferred by the
Florida Banking Code.
The Company has organized a wholly owned Florida subsidiary corporation,
Freedom Finance Corporation (Finance Company), pursuant to which it engages in
full service consumer financing. The Finance Company offers consumer-driven
products and services ranging from mortgages to automobile loans, home equity
loans and education financing. The Finance Company has the ability to extend
financing to individuals and entities which may not be able to satisfy the
Bank's underwriting requirements or loan standards. During April 1998, the Bank
extended a $2.4 million line of credit to the Finance Company to support
operations. The Finance Company commenced preliminary operations in late March
1998.
2. BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements, in
the opinion on management, include all adjustments, consisting only of normal
recurring adjustments necessary for a fair presentation of the results for the
interim periods. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to SEC rules and
regulations, although the Company believes that the disclosures included herein
are adequate to make the information presented not misleading. The results of
operations for the three-month periods ended March 31, 1998 and 1997 are not
necessarily indicative of the results expected for the full year.
The organization and business of the Company, accounting policies followed
by the Company, and other information are contained in the Company's December
31, 1997 Form 10-KSB. This quarterly information should be read in conjunction
with such annual report.
MERGER -- On March 23, 1998, the Company completed its merger with Murdock
Florida Bank (Murdock). The Company issued 924,024 shares of its common stock in
exchange for all of the outstanding Murdock shares. The transaction was
accounted for as a pooling of interests. Accordingly, the consolidated condensed
balance sheet, statement of income, and statement of cash flows give retroactive
effect to the merger.
3. EARNINGS PER SHARE:
Earnings per share are based on the weighted average number of common
shares outstanding during the periods. Diluted earnings per share includes the
weighted average number of common shares outstanding during the periods and the
further dilution from stock options using the treasury stock method.
4. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS:
Effective January 1, 1998, the Company has adopted Statement of Financial
Accounting Standards (FAS) No. 130, "Reporting Comprehensive Income," which
requires that all items required to be recognized under accounting standards as
components of comprehensive income be reported in the financial statements.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The adoption of FAS No. 130 did not have a
material impact on the Company's financial condition or results of operations.
FAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," which is effective for periods beginning after
December 15, 1997. This statement revises employers' disclosures about pension
and other postretirement benefit plans. Because this statement addresses
disclosures only, the adoption will have no material impact on the financial
statements.
F-31
<PAGE> 131
======================================================
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE ISSUER TRUST. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY
SECURITIES OTHER THAN THE PREFERRED SECURITIES OFFERED HEREBY, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION TO ANY PERSON IN ANY JURISDICTION
OR UNDER ANY CIRCUMSTANCES IN WHICH SUCH OFFERING WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 5
Risk Factors.......................... 12
ABI Capital Trust..................... 20
Use of Proceeds....................... 21
Market for the Preferred Securities... 21
Capitalization........................ 22
Accounting Treatment.................. 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 23
Business.............................. 43
Management............................ 52
Description of Preferred Securities... 60
Description of Junior Subordinated
Debentures.......................... 72
Description of Guarantee.............. 80
Relationship Among the Preferred
Securities, the Junior Subordinated
Debentures, and the Guarantee....... 83
Certain Federal Income Tax
Consequences........................ 84
Certain ERISA Considerations.......... 88
Supervision and Regulation............ 88
Underwriting.......................... 96
Validity of Securities................ 97
Experts............................... 97
Available Information................. 97
Index to Financial Statements of the
Company............................. F-1
</TABLE>
======================================================
======================================================
$15,000,000
ABI CAPITAL TRUST
8.50% PREFERRED SECURITIES
(LIQUIDATION AMOUNT $10)
GUARANTEED, AS DESCRIBED HEREIN, BY
AMERICAN BANCSHARES, INC.
[AMERICAN BANCSHARES, INC. LOGO]
--------------------
PROSPECTUS
--------------------
ADVEST, INC.
JUNE 30, 1998
======================================================
