United Sates
Securities and Exchange Commission
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-28106
FirstBancorporation, Inc.
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(Exact name of registrant as specified in its charter)
South Carolina 57-1033905
- -------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) No.)
1121 Boundary Street P.O. Box 2147, Beaufort, S.C. 29901-2147
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 803-521-5600
------------
Securities registered pursuant to Section 12(b) of the Act
None
Securities registered pursuant to Section 12(g) of the Act
Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
Authorized 2,000,000 shares
Issued and Outstanding 627,587 shares
Check whether the registrant (1)filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
----- -----
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
Revenues for its most recent fiscal year: $7,656,918.
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The registrant's voting stock is not regularly and actively traded in any
established market, and there are no regularly quoted bid and asked prices for
the registrant's voting stock. The aggregate market value of the voting stock
held by non-affiliates of the registrant, computed by reference to the price
of recent private trades was approximately $8,158,631 (627,587 shares) as of
February 15, 1997. This is evidenced by a limited number of trades of said
stock during the period of January 1, 1997 to February 15, 1997. For the
purposes of this calculation officers and directors of the registrant are
considered non-affiliates.
The document listed below is incorporated by reference, for compliance with
Part I and Part II.
1996 ANNUAL REPORT TO STOCKHOLDERS
The document listed below is incorporated by reference for full compliance
with PART I Item 3 and PART III, Items 9-12.
PROXY STATEMENT FOR 1997 ANNUAL STOCKHOLDERS' MEETING
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TABLE OF CONTENTS
PART I Page
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Item 1. Business ---------------------------------------- 4
Item 2. Properties ------------------------------------- 22
Item 3. Legal Proceedings ------------------------------ 23
Item 4. Submission of Matters to a Vote of
Security Holders ----------------------------- 23
PART II
-------
Item 5. Market for the Registrant's Common Stock
and Related Stockholder Matters -------------- 23
Item 6. Managements discussion and Analysis------------- 23
Item 7. Financial statements and Supplementary data----- 23
Item 8. Changes in and disagreements with accountants on
accounting and financial disclosure------------- 23
PART III
--------
Item 9. Directors, Executive officer, promoters and
control persons, compliance with Section 16(a)
of the Exchange Act----------------------------- 24
on Accounting and Financial Disclosure --------- 24
Item 10. Executive Compensation-------------------------- 24
Item 11. Security ownership of certain beneficial owners
and Management---------------------------------- 24
Item 12. Certain relationships and related transactions-- 24
PART IV
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Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K -------------------------- 25
THIS DOCUMENT CONTAINS 73 PAGES.
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PART I
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ITEM 1: BUSINESS
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GENERAL
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FirstBancorporation, Inc. (Company) is the holding company for FirstBank,
N.A.(Bank), a national bank and successor to The Savings Bank of Beaufort
County, FSB. In order to expand its banking services, The Savings Bank
reorganized in 1995 into a national bank under a holding company form of
ownership. The Board of Directors of the Bank voted on April 28, 1994 to
convert from a thrift to a national bank charter. The Office of Thrift
Supervision (OTS) and the Office of the Comptroller of the Currency (OCC)
subsequently issued all regulatory approvals, and the Bank converted to a
national bank charter on June 5, 1995. On June 15, 1995, the Federal Reserve
Bank issued its initial approval to become a bank holding company, and on
October 31, 1995, FirstBank, N.A. reorganized as a wholly-owned subsidiary of
FirstBancorporation, Inc. As of December 31, 1996 the sole business of the
Company was operating the Bank. The following financial results reflect the
activities of the Bank.
As of the filing date, the only business the Corporation conducts is operation
of the Bank. The Bank conducts a general banking business under a national
charter. The Bank's business primarily consists of taking deposits and making
residential mortgage loans, other consumer loans and commercial loans. At
December 31, 1996, the Bank conducted its activities from its main office
located at 1121 Boundary Street, Beaufort, South Carolina, a full service
branch office located on U.S. Highway 21 on Lady's Island, Beaufort, South
Carolina, and a full service branch located at One Burnt Church Road,
Bluffton, South Carolina.
The Bank seeks savings deposits and transaction accounts from households and
businesses in its service areas by offering a full range of savings accounts,
retirement and professional accounts (including Individual Retirement
Accounts), checking accounts, NOW accounts and time certificates. The Bank's
service area consists primarily of the all areas of Beaufort County excluding
Hilton Head Island. The Bank has no active subsidiaries. See Note 1 of Notes
to Financial Statements. The Bank's principal expenses are interest paid on
deposits and operating expenses incurred in the daily operation of the Bank.
BANKING INDUSTRY IN GENERAL
- ---------------------------
COMPETITION
- -----------
Competition for deposits and loans is strong among South Carolina commercial
banks, savings institutions, mortgage banks, credit unions and money market
mutual funds. Competition has increased from securities firms and other
financial service corporations not traditionally engaged in the banking or
savings industry. The primary areas in which institutions compete for
deposits and loans are interest rates, loan origination fees and the range of
services offered.
As of December 31, 1996, there were 15 branches of commercial banks, 3
branches of savings and loan associations and 2 credit unions in the Bank's
principal market area. The City of Beaufort had 9 branches of commercial
banks and 2 branches of savings associations.
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EMPLOYEES
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The Corporation had 44 full-time equivalent employees as of December 31, 1996.
No employees are represented by a collective bargaining unit. Management
believes that its relations with employees are excellent.
LENDING ACTIVITIES
- ------------------
The Bank's principal market area (the "PMA") for loans is all of Beaufort
County excluding Hilton Head Island. Much of the growth in Beaufort County
derives from the retirement and tourism industries. The service sector growth
is expected to continue to dominate the area's economy. The area is noted for
its beaches, state park, historical sites and fishing. The military presence
in Beaufort County is significant with the Marine Corps Recruit Depot at
Parris Island, the Marine Corps Air Station at Beaufort and the Naval Hospital
at Beaufort. The military provides an important contribution to the
population and economy of Beaufort County.
The Bank's PMA is currently experiencing steady growth in population, which
creates a continued demand for mortgage funds. The 1990 Census indicates that
the population of Beaufort County has risen from 65,364 in 1980 to 86,425 in
1990, an increase of 32.2%. The South Carolina Department of Commerce reports
that the population of Beaufort County in 1996 totaled 103,736. Land use is
primarily residential within the PMA and demand for residential mortgage funds
is currently strong. No assurance can be given however, as to the continued
growth in housing or demand for mortgage funds in the PMA in future periods or
as to the extent to which the Bank may participate in such growth.
The Bank concentrates its lending activities on first mortgage loans secured
by residential properties, and on other consumer and commercial loans in the
PMA. The Bank's portfolio is comprised of adjustable rate mortgages, which
include provisions for periodic interest rate adjustments and short-term
loans, which reflect interest rate fluctuations, such as consumer, commercial
and real estate construction loans.
The Bank's principal lending activity consists of the origination of permanent
and construction loans on residential real estate (single-family dwellings and
multifamily dwellings of up to four units), consumer loans and commercial
loans to small businesses. The Bank's portfolio currently consists of
adjustable rate mortgage loans with terms of up to 30 years. FHA, VA and
conventional fixed-rate mortgage loans are generally sold in the secondary
mortgage market. At December 31, 1996, approximately 72.4% of the Bank's total
loan portfolio consisted of loans secured by first mortgage residential real
estate loans. Of the total loans portfolio, approximately 85.1% of all loans
are adjustable rate or short term (less than one year) loans. The Bank has
begun to utilize the Federal Home Loan Mortgage Corporation for loan sales,
and continues to use other secondary sources (notably other financial
institutions) as a source for loan sales. The majority of loans are
underwritten to guidelines published by both, thus enabling the Bank to market
loans to these entities. There are, due to the nature of adjustable rate
mortgages in the industry, unqualifiable risks resulting from increased cost
to the borrower as a result of periodic repricing. Despite the benefits of
adjustable rate mortgages to the Bank's asset/liability management program,
they do pose potential additional risks, primarily because as interest rates
rise, the underlying payment by the borrower rises, increasing the potential
for default. At the same time, the marketability of the underlying property
may be adversely affected by higher interest rates. During 1996, the Bank
originated a larger volume of adjustable rate long-term loans than fixed rate
long-term loans which resulted in an overall increase in permanent mortgage
loans outstanding in its portfolio. Should future interest rate environments
not favor adjustable rate lending, the Bank's loan portfolio growth rate could
decline.
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Construction financing is generally considered to involve a higher degree of
credit risk than long-term financing of residential properties. The Bank's
risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction. If
the estimate of construction cost or the salability of the property upon
completion of the project proves to be inaccurate, the Bank may be required to
advance funds beyond the amount originally committed to permit completion of
the development. If the estimate of value proves to be inaccurate, the Bank
may be confronted, at or prior to maturity of the loan, with a collateral
source with insufficient value to assure full repayment.
Although commercial real estate loans typically have shorter terms to maturity
and higher interest rates than residential mortgage loans, they also involve
greater credit and interest rate risks than certain residential mortgage
loans. Commercial real estate and construction mortgage loans may involve
large loan balances to single borrowers or groups of related borrowers. In
addition, payment experience on loans secured by income producing properties
is typically dependent on the successful operation of the properties and thus
may be subject to a greater extent to adverse conditions in the real estate
market, or in the economy generally. Despite the benefits of adjustable rate,
commercial real estate loans to the Bank's asset/liability management policy,
they do pose potential interest rate risks to the Bank. Specifically, as
interest rates rise, the underlying payment by the borrower rises, increasing
the potential for default. At the same time, the marketability of the
underlying property may be adversely affected by higher interest rates.
The Bank intends to continue selling most of its fixed rate loans in the
secondary mortgage market as the loans are originated. The Bank generally has
the ability to generate an adequate volume of loans within its market area
without seeking loan purchases from other institutions.
Using loan underwriting guidelines established by its Board of Directors, the
Bank's first mortgage real estate loans are for loan to value ratios of 80% or
less. If borrowers require additional financing, private mortgage insurance
insuring the Bank's exposure above 80% is required. Loan underwriting and
credit policies are determined by the Board of Directors and monitored for
compliance by the Board's Loan Committee.
All real estate loans require that the borrower maintain hazard insurance in
an amount not less than to the loan amount. The Bank also requires various
other types of insurance, such as title, flood, casualty and, in some cases,
life insurance on the borrower.
The Bank solicits loan originations through newspaper advertisements, officer,
director, and employee referrals, and employs full-time loan originators.
Once an application has been filed, the loan is underwritten and forwarded to
one of the Bank's loan review committees. These committees consist of at
least two directors and the Bank's Chief Executive Officer. All loans which
do not require prior full Board of Directors approval are approved for the
Board of Director's consideration by these four committees.
The Bank makes consumer loans secured by junior liens on real estate,
including home improvement and home equity loans; loans secured by personal
property, such as automobiles, recreational vehicles or boats, as well as
loans to depositors of the institution on the security of their savings
accounts. The Bank also offers unsecured personal loans and personal lines of
credit in conjunction with its NOW accounts. At December 31, 1996,
approximately 11.4% of the Bank's total loan portfolio consisted of these
types of consumer loans. Consumer loans historically have had higher rates of
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default than residential mortgage loans; although the Bank's loan loss
experience to date has been favorable in comparison to industry averages.
The Bank makes secured and unsecured loans for commercial, corporate and
business purposes, concentrating on loans to small businesses for purposes of
providing working capital, construction and leasehold improvements. Such
loans have typically have variable interest rates that are indexed to prime
rate or a one or three year treasury index. At December 31, 1996,
approximately 12.8% of the Bank's total loan portfolio consisted of loans
secured by real estate other than 1-4 family homes, and approximately 3.8%
consisted of other commercial loans, both unsecured and secured by assets
other than real estate. The Bank may participate, but has not yet
participated, in the Small Business Administration's guaranteed commercial
loan program. Commercial business loans are advantageous to the Bank because
the loans are short term; however, they also involve more risk than
residential mortgage loans because of the higher potential for defaults and
the difficulties involved in disposing of the collateral, if any.
The following table presents information regarding loans receivable at
December 31, 1996 and 1995:
Real Estate % of % of
Mortgage Loans: 1996 Total 1995 Total
---- ----- ---- -----
Permanent $63,845,701 81.7 $55,249,181 76.4
Construction 6,453,600 8.3 8,058,175 11.2
----------- ----- ----------- -----
Total Mortgage Loans 70,299,301 90.0 63,307,356 87.6
Other Loans:
Consumer Loans 8,717,516 11.2 8,234,531 11.3
Commercial Loans 2,988,014 3.8 3,507,794 4.9
---------- ----- ---------- -----
Total Other Loans 11,705,530 15.0 11,742,325 16.2
---------- ----- ---------- -----
Total Loans 82,004,831 104.9 75,049,681 103.8
Less:
Allowance for
Loan Losses (630,557) (0.8) (470,198) (0.8)
Loans in Process (3,163,315) (4.0) (2,293,691) (3.0)
Deferred Loan Fees (61,350) (0.1) ( 8,447) (0.0)
----------- ----- ----------- -----
Loans Receivable, Net $78,149,609 100.0 $72,277,345 100.0
=========== ===== =========== =====
The following table presents maturity information on commercial and real
estate construction loans:
Due with-in Due 1-5 Due after 5
1 year years years Total
------ ----- ----- -----
Commercial 1,864,568 952,201 171,245 2,988,014
Real estate
construction 3,246,700 450,000 2,756,900 6,453,600
--------- --------- --------- ---------
Total 5,111,268 1,402,201 2,928,145 9,441,614
========= ========= ========= =========
The table below sets forth the dollar amount of all loans due one year after
December 31, 1997 which have fixed rates and have adjustable rates:
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Due after December 31, 1997
Fixed Rate Adjustable Rate Total
---------- --------------- -------
Commercial 217,379 906,067 1,123,446
Real estate construction -0- 3,206,900 3,206,900
------- --------- ---------
Total 217,379 4,112,967 4,330,346
======= ========= =========
Loan Origination and Other Fees
- -------------------------------
In addition to interest earned on loans and fees for making loan commitments,
the Bank receives loan origination fees or "points" for originating loans.
Loan origination fees charged to the borrower for originating a loan are based
on a percentage of the principal amount of the mortgage loan.
Fees vary with the volume and type of loans and commitments made and purchased
and the competitive conditions present in mortgage markets, which in turn
respond to the demand for and availability of money. The Bank also receives
other fees and charges relating to existing loans, such as late charges and
fees collected in connection with a change in borrower or other loan
modifications. These fees and charges have not constituted, and are not
expected to constitute, a material source of income.
Effective January 1, 1988, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 91, which
requires the amortization of loan origination fees and certain origination
expenses over the life of the related loan. In accordance with SFAS No. 91,
the Bank defers loan origination fees and certain direct loan origination
costs. Such costs and fees are recognized as an adjustment to yield over the
lives of the related loans utilizing a method of amortization that
approximates the level yield method.
Commitment fees to originate or purchase loans are deferred and, if the
commitment is exercised, recognized over the life of the loan as an adjustment
of yield. If the commitment expires unexercised, commitment fees are
recognized in income upon expiration of the commitment.
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MANAGEMENT OF CREDIT RISK
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An allowance for loan losses is maintained by Management at a level considered
adequate to absorb possible losses that are currently anticipated because some
loans may not be repaid in full. Increases to the allowance are recorded by a
provision for loan losses, which is charged to expense. Such provisions are
based on Management's estimate of the net realizable value or fair market
value of the underlying collateral, as applicable. Management, in determining
the amount of the provision for loan losses, considers the current and future
operating and/or sales conditions of the collateral from which repayment of
the outstanding loan balances are expected. Such estimates made by Management
are particularly susceptible to changes in economic, operating or other
conditions that may be beyond the Bank's control.
During 1996, 1995, 1994, 1993, and 1992, the Bank added $162,000, $192,000,
$178,500, $149,150 and $77,000, respectively to its allowance for loan losses.
The Bank had loan charge-offs totaling $29,000, $70,000, $83,000, $133,000 and
$8,000 for the periods ended December 31, 1996, 1995, 1994, 1993, and 1992,
respectively. The amount charged-off in 1996 was for real estate loans
totaling $7,000, consumer loans of $18,000 and commercial loans totaling
$4,000. Recoveries for 1996 totaled $28,000 comprised primarily of
miscellaneous consumer and small commercial loans. The Bank's collection
procedures provide that when a loan is 15 days past due, the borrower is
contacted by mail and payment requested. If the delinquency continues,
subsequent efforts are made to contact the delinquent borrower. In certain
instances, the Bank may modify the loan or grant a limited moratorium on loan
payments to enable the borrower to reorganize his financial affairs. If the
loan continues in a delinquent status for 60 days or more, the Bank generally
initiates foreclosure proceedings.
At December 31, 1996, the Bank owned two single family homes acquired as the
result of foreclosure on construction loans to the same borrower. As of
December 31, 1996 there were no troubled debt restructurings.
Management, to the best of its knowledge, knows of no material or unusual risk
contained in its loan or investment portfolios.
The following table sets forth information with respect to the Bank's
non-performing assets for the periods indicated.
At December 31,
---------------
1996 1995
---- ----
(Dollars in thousands)
Loans 90 days or more delinquent and
not accruing interest(a):
Residential ..................... $308 $134
Commercial ..................... 46 -0-
Consumer ..................... 36 -0-
---- ----
Total.............................. $390 $134
==== ====
Loans 90 days past due and still
accruing:
Residential Real Estate........... 100 450
Commercial........................ 12 125
---- ----
Total............................. $112 575
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Total non accrual and accruing loans..
As a percent of net loans............ 0.49% .98%
==== ====
As a percent of total assets......... 0.42% 0.69%
==== ====
Real estate acquired through
foreclosure......................... 213 238
Other Repossessed Property........... 15 205
---- ----
Total .............................. $228 $577
==== ====
___________________
(a) Excludes mortgage-backed securities.
See Note 2 of Notes to Financial Statements for treatment of loans which are
90 days past due and non accrual loans. Interest income of $26,000 was
recognized for cash payments received in 1996. Gross income that would have
been earned on non accrual loans had they been accruing all year totaled
$36,000.
The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated.
Year Ended December 31,
----------------------
1996 1995
---- ----
(Dollars in thousands)
Balance at beginning of period....... $ 470 $ 346
Loans Charged Off:
Real Estate........................ 7 27
Commercial......................... 4 34
Consumer........................... 18 10
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Total Charge-Offs.................... 29 71
Recoveries:
Real Estate........................ 1 -0-
Commercial 12 -0-
Consumer........................... 14 3
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Total Recoveries..................... 28 3
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Net Loans Charged Off................ 1 68
Provision for possible loan losses... 162 192
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Balance at end of period............. $ 631 $ 470
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Ratio of net charge-offs to average
loans outstanding during the period 0.00% 0.10%
===== =====
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The following table sets forth the 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 the 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 category.
Year Ended December 31,
---------------------------
1996 1995
---- ----
Percent of Percent of
Balance at end of period loans in loans in
applicable to: Amount category Amount category
- ------------- ------ -------- ------ --------
Commercial 80,000 3.64 17,000 4.67
Real estate-Construction 19,450 7.87 14,140 10.74
Real estate-Mortgage 90,294 77.86 96,946 73.62
Installment 224,199 10.63 229,717 10.97
Unallocated 216,614 -0- 112,395 -0-
------- ------ ------ ------
Total 630,557 100.00 470,198 100.00
======= ====== ======= ======
Under the Bank's loan classification system, problem assets are classified as
"substandard," "doubtful" or "loss," depending on the presence of certain
characteristics discussed below.
An asset is considered "substandard" if inadequately protected by the current
net worth and paying capacity of the obligor or the value of any collateral
pledged. "Substandard" assets include those characterized by the "distinct
possibility" that the institution will sustain "some loss" if the deficiencies
are not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard" with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis
of currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified "loss" are those considered "uncollectible" and
of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
When an institution classifies problem assets as either substandard or
doubtful, it is required to establish general allowances for loan losses in an
amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk
associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an institution
classifies problem assets as "loss," it is required either to establish a
specific allowance for losses equal to 100% of the amount of the asset so
classified or to charge off such amount. An institution's determination as to
the classification of its assets and the amount of its valuation allowances is
subject to review by the institution's regulator, the Office of the
Comptroller of the Currency, who can order the establishment of additional
general or specific loss allowances.
At December 31, 1996, the Bank had ten loans totaling approximately $463,152
which were classified substandard. Nine of these loans are secured by lots or
residential
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properties with outstanding principal balances totaling $417,647.
The remaining loan was unsecured totaling $45,505.
INVESTMENT PORTFOLIO
- --------------------
The sole investment of the Corporation is its investment in the Bank and the
incidental costs associated with the start-up of operations. The Bank's
investment portfolio includes primarily interest sensitive mortgage backed
securities backed by GNMA adjustable rate loans and Federal Home Loan Bank and
Federal Reserve Bank Stock. FHLB and FRB stock are required to be held as
requirements for membership in each system. Both have no contractual
maturities but pay dividends, subject to adjustment, quarterly. Neither the
Bank nor the Corporation invests in high yielding "junk-bonds". See Note 4 of
Notes to Financial Statements
The following table presents maturity information and weighted average yield
information on the Bank's investment securities:
Period in which securities matures
1 year or 1-5 5-10 due 10
less years years years+ Total
---- ----- ----- ------ -----
GNMA Securities -0- -0- -0- 1,707,829 1,707,829
6.71% 6.71%
U.S. Government
Securities 98,846 98,846
5.03% 5.03%
FHLB/FRB Stock -0- -0- -0- 678,400 678,400
-0- -0- -0- 7.01% 6.97%
------ ---- ---- --------- ---------
Total 98,846 -0- -0- 2,386,229 2,485,075
5.03% -0- -0- 6.82% 6.69%
---- --- --- ---- ----
FHLB/FRB stock has no contractual maturity and is assumed to be "10 years+"
for this table.
DEPOSITS
- --------
GENERAL
- -------
Transaction accounts, savings certificates and other types of deposits are the
primary source of the Bank's funds for use in lending and other general
business purposes. None of the deposit instruments offered by the Bank have
rates subject to regulation. Deposit inflows and outflows vary widely and are
influenced by prevailing interest rates and money market conditions.
Transaction account balances are influenced considerably by the time of the
month and general economic activity.
The Bank's large variety of deposit accounts has allowed the Bank to be
competitive in attracting new funds. The Bank's ability to attract and retain
deposits and the Bank's cost of funds has been, and will continue to be,
significantly affected by market conditions.
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Most of the Bank's deposits are obtained from residents of South Carolina,
principally from residents in Beaufort County, the Bank's largest deposit
market. See Note 8 of Notes to Financial Statements for certificate of
deposit maturity information. At December 31, 1996, certificate of deposit
accounts of approximately $100,000 or more totaled approximately $10.5
million. In addition, the Bank accepts deposits typically in denominations of
$99,000 from out-of-state depositors at rates comparable to rates offered to
local depositors. Most of these are arranged through third parties
representing these customers. At December 31, 1996 these deposits totaled
approximately $7.1 million.
The following table details the Bank's average deposits outstanding and rates
paid for the years ended December 31, 1996 and 1995.
Average deposits outstanding and rate paid:
1996 Rate 1995 Rate
Average Paid Average Paid
Balance Balance
Non interest bearing demand deposits $6,299,000 -- $4,800,000 --
Interest bearing demand deposits 25,440,000 2.82% 23,272,000 2.76%
Savings deposits 6,457,000 2.34% 8,722,000 2.61%
Time deposits 38,879,000 5.78% 34,893,000 5.99%
The following table list maturities and rates paid on deposits greater than
$100,000 at December 31, 1996:
Maturity
3 months 6-12 Over 12
or less 3-6 months months months Total
$100,000 and greater
certificates $3,834,000 $3,519,000 $1,282,000 $1,909,000 $10,544,000
5.65% 5.80% 5.95% 6.51%
BORROWINGS
- ----------
The Bank uses FHLB advances to support additional loan demand and other
funding needs. See Annual Report and Note 9 of Notes to Financial Statements.
The following table presents information on short-term borrowings for the past
two years:
1996 1995
Borrowings outstanding at end of year $4,650,000 $1,000,000
Weighted average interest rate at the end
of year 6.95% 5.92%
Maximum amount outstanding at any month-end $4,650,000 $4,500,000
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Average amount outstanding during the year $2,080,000 $2,378,000
Weighted average rate during the year 5.60% 6.16%
REGULATION
The Bank
General. As a federally insured national bank, the Bank is subject to
extensive regulation. Lending activities and other investments must comply
with various statutory and regulatory requirements, including prescribed
minimum capital standards. The Bank is regularly examined by the OCC and the
FDIC and files periodic reports concerning its activities and financial
condition with those regulatory agencies. The Bank's relationship with
depositors and borrowers also is regulated to a great extent by both federal
law and the laws of the State of South Carolina, especially in such matters as
the ownership of savings accounts and the form and content of mortgage
documents.
The federal banking laws and regulations govern all areas of the operation of
the Bank, including reserves, loans, mortgages, capital, issuance of
securities, payment of dividends and establishment of branches. Federal
regulatory agencies also have the general authority to limit the dividends
paid by insured banks and bank holding companies if such payments should be
deemed to constitute an unsafe and unsound practice. The respective primary
federal regulators of the Company and the Bank have authority to impose
penalties, initiate civil and administrative actions and take other steps
intended to prevent banks from engaging in unsafe or unsound practices.
Deposit Insurance. The FDIC insures deposits at the Bank to the maximum
extent permitted by law. The Bank currently pays deposit insurance premiums
to the FDIC based on a risk-based assessment system established by the FDIC
for all SAIF-member institutions. Under applicable regulations, institutions
are assigned to one of three capital groups which are based solely on the
level of an institution's capital --"well capitalized," "adequately
capitalized," and "undercapitalized" -- which are defined in the same manner
as the regulations establishing the prompt corrective action system under
Section 38 of the Federal Deposit Insurance Act ("FDIA"), as discussed below.
These three groups are then divided into three subgroups which reflect varying
levels of supervisory concern, from those which are considered to be healthy
to those which are considered to be of substantial supervisory concern. The
matrix so created results in nine assessment risk classifications, with rates
that until September 30, 1996 ranged from .23% for well capitalized,
financially sound institutions with only a few minor weaknesses to .31% for
undercapitalized institutions that pose a substantial risk of loss to the SAIF
unless effective corrective action is taken. The FDIC is authorized to raise
assessment rates in certain circumstances. The Bank's assessments expensed
for the year ended December 31, 1996, equaled $145,050.
Pursuant to the Deposit Insurance Funds Act ("DIF"), which was enacted on
September 30, 1996, the FDIC imposed a special assessment on each depository
institution with SAIF-assessable deposits which resulted in the SAIF achieving
its designated reserve ratio. In connection therewith, the FDIC reduced the
assessment schedule for SAIF members, effective January 1, 1997, to a range of
0% to 0.27%, with most institutions, including the Bank, paying 0%. This
assessment schedule is the same as that for the BIF, which reached its
designated reserve ratio in 1995. In addition, since January 1, 1997, SAIF
members are charged an assessment of .065% of SAIF-assessable deposits for the
purpose of paying interest on the obligations issued by the Financing
Corporation ("FICO") in
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the 1980s to help fund the thrift industry cleanup. BIF-assessable deposits
will be charged an assessment to help pay interest on the FICO bonds at a rate
of approximately .013% until the earlier of December 31, 1999 or the date upon
which the last savings association ceases to exist, after which time the
assessment will be the same for all insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the Deposit
Insurance Fund on January 1, 1999, but only if no insured depository
institutions a savings association on that date. The DIF Act contemplates the
development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. It
also may suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances which could
result in termination of the deposit insurance of the Bank.
Prompt Corrective Action. Under Section 38 of the FDIA, each federal banking
agency (including the OCC) is required to implement a system of prompt
corrective action for institutions which it regulates. The federal banking
agencies have promulgated substantially similar regulations to implement this
system of prompt corrective action. Under the regulations, an institution
shall be deemed to be: (i) "well capitalized" if it has a total risk-based
capital ratio of 10.0% or more, has a Tier I risk-based capital ratio of 6.0%
or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to specified requirements to meet and maintain a specific capital
level for any capital measure; (ii) "adequately capitalized" if it has a total
risk-based capital ratio of 8.0% or more, has a Tier I risk-based capital
ratio of 4.0% or more, has a Tier I leverage capital ratio of 4.0% or more
(3.0% under certain circumstances) and does not meet the definition of "well
capitalized;" (iii) "undercapitalized" if it has a total risk-based capital
ratio that is less than 8.0%, has a Tier I risk-based capital ratio that is
less than 4.0% or has a Tier I leverage capital ratio that is less than 4.0%
(3.0% under certain circumstances); (iv) "significantly undercapitalized" if
it has a total risk-based capital ratio that is less than 6.0%, has a Tier I
risk-based capital ratio that is less than 3.0% or a Tier I leverage capital
ratio that is less than 3.0%; and (v) "critically undercapitalized" if it has
a ratio of tangible equity to total assets that is equal to or less than 2.0%.
A federal banking agency may, after notice and an opportunity for a hearing,
reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or engaging
in an unsafe or unsound practice. (The FDIC may not, however, reclassify a
significantly undercapitalized institution as critically undercapitalized.)
An institution generally must file a written capital restoration plan which
meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is
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undercapitalized, significantly undercapitalized or critically
undercapitalized. Immediately upon becoming undercapitalized, an institution
shall become subject to various mandatory and discretionary restrictions on
its operations.
At December 31, 1996, the Bank was categorized as "well capitalized" under the
OCC prompt corrective action regulations.
Standards for Safety and Soundness. The federal banking regulatory agencies
have prescribed regulatory standards for all insured depository institutions
relating to: (i) internal controls, information systems and internal audit
systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest
rate risk exposure; (v) asset growth; (iv)asset quality; (vii) earnings and
(vii) compensation, fees and benefits. The Guidelines set forth the safety
and soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. If the OCC determines that the Bank fails to meet any standard
prescribed by the Guidelines, the agency may require the Bank to submit to the
agency an acceptable plan to achieve compliance with the standard, as required
by the FDIA. The final regulations establish deadlines for the submission and
review of such safety and soundness compliance plans.
Capital Requirements. The OCC's regulations establish two capital standards
for national banks: a leverage requirement and a risk-based capital
requirement. In addition, the OCC may, on a case-by-case basis, establish
individual minimum capital requirements for a national bank that vary from the
requirements which would otherwise apply under OCC regulations. A national
bank that fails to satisfy the capital requirements established under the
OCC's regulations will be subject to such administrative action or sanctions
as the OCC deems appropriate.
The leverage ratio requires a minimum ratio of "Tier 1 capital" to adjusted
total assets of 3% for national banks rated Composite 1 under the CAMEL rating
system for banks. National banks not rated Composite 1 are required to
maintain a minimum ratio of Tier 1 capital to adjusted total assets of 4% to
5%, depending upon the level and nature of risks of their operations. For
purposes of the OCC's leverage requirement, Tier 1 capital generally consists
of tangible capital plus certain intangibles. At December 31, 1996, the
Bank's Tier 1 leverage ratio was 10.9%.
The OCC risk-based capital requirement requires national banks to maintain
"total capital" equal to at least 8% of total risk-weighted assets. For
purposes of the risk-based capital requirement, "total capital" means Tier 1
capital (as described above) plus "Tier 2 capital" (as described below),
provided that the amount of Tier 2 capital may not exceed the amount of Tier 1
capital, less certain assets. The components of Tier 2 capital generally
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general loan and lease loss allowances up to a
maximum of 1.35% of risk weighted assets. Total risk-weighed assets include
all assets, including certain off-balance sheet items, multiplied by a risk
weight, ranging from 0% to 100%, based on the risk inherent in the type of
asset. At December 31, 1996, the Bank's risked-based capital ration was
11.9%.
The OCC has revised its risk-based capital requirements to permit it to
require higher level of capital for an institution in light of its interest
rate risk. In addition, the OCC has proposed that a bank's interest rate risk
exposure would be quantified using either the measurement system set forth in
the proposal or the institution's internal model for measuring such exposure,
if such model is determined to be adequate by the institution's examiner.
Small institutions that are highly capitalized and have minimal interest rate
risk, such as the Bank, would be exempt from the rule unless otherwise
determined by the OCC. Management of the Bank has not determined what effect,
if any, the OCC's proposed interest rate risk component would have on the
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Bank's capital if adopted as proposed.
Dividends. Dividends from the Bank constitute the major source of funds for
dividends which may be paid by the Company. Federal law and OCC regulations
provide that all dividends by a national bank must be paid out of current or
retained net profits, after deducting reserves for losses and bad debts.
Federal Law further restricts the payment of dividends out of net profits by
prohibiting a national bank from declaring a dividend on its shares of common
stock until the surplus fund equals the amount of capital stock or, if the
surplus fund does not equal the amount of capital stock, until one-tenth of
the bank's net profits for the preceding half year in the case of quarterly or
semi-annual dividends, or the preceding two half-year periods in the case of
annual dividends, are transferred to the surplus fund. In addition, the prior
approval of the OCC is required for the payment of a dividend if the total of
all dividends declared by a national bank in any calendar year would exceed
the total of its net profits for the year combined with its net profits for
the two preceding years, less any required transfers to surplus or a fund of
the retirement of any preferred stock.
The OCC has the authority to prohibit the payment of dividends by a national
bank when it determines such payment to be an unsafe and unsound banking
practice. In addition, the Bank would be prohibited by federal statute and
the OCC's prompt corrective action regulations from making any capital
distribution if, after giving effect to the distribution, the Bank would be
classified as "undercapitalized" under the OCC's regulations. See "-- Prompt
Corrective Action." Moreover, the OCC also has the general authority to limit
the dividends paid by national banks if such payments should be deemed to
constitute an unsafe and unsound practice.
Liquidity. National banks are not subject to any prescribed regulatory
liquidity requirements. At December 31, 1996, the Bank believed that it
maintained sufficient liquid assets to meet its commitments at that date.
Loans-to-One-Borrower. Federal law limits the amount of loans that the Bank
can extend to any one borrowers and the borrower's related entities.
Generally, this limit is 15% of the Bank's unimpaired capital and surplus,
plus an additional 10% of unimpaired capital and surplus, if such loan is
secured by readily-marketable collateral, which is defined to include certain
financial instruments and bullion. At December 31, 1996 the Bank's
loans-to-one borrower limit was approximately $1,057,000. At December 31,
1996, the Bank was in compliance with this requirement.
Federal Reserve System. Regulation D promulgated by the Federal Reserve
imposes reserve requirements on all depository institutions that maintain
transaction accounts or non personal time deposits. These reserves may be in
the form of cash or non-interest-bearing deposits with the regional Federal
Reserve Bank. NOW accounts and other types of accounts that permit payments
or transfers to third parties fall within the definition of transaction
accounts and are subject to Regulation D reserve requirements, as are any non
personal time deposits at a bank. Under Regulation D, a bank must establish
reserves equal to 0% of the first $4.4 million of net transaction accounts, 3%
of the next $44.9 million, and 10% plus $1.56 million of the remainder. The
reserve requirement on non-personal time deposits with original maturities of
less than 1-1/2 years is 0%. As of December 31, 1996, the Bank met its
reserve requirements.
Affiliate Transactions. The Company and the Bank are separate and distinct
legal entities. Various legal limitations restrict the Bank from lending or
otherwise supplying funds to the Company (an "affiliate"), generally limiting
such transactions with the affiliate to 10% of the Bank's capital and surplus
and limiting all such transactions to 20% of the Bank's capital and surplus.
Such transactions, including
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extensions of credit, sales of securities or assets and provision of services,
also must be on terms and conditions consistent with safe and sound banking
practices, including credit standards, that are substantially the same or at
least as favorable to the Bank as those prevailing at the time for
transactions with unaffiliated companies.
Federally insured banks are subject, with certain exceptions, to certain
restrictions on extensions of credit to their parent holding companies or
other affiliates, on investments in the stock or other securities of
affiliates and on the taking of such stock or securities as collateral from
any borrower. In addition, such banks are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit or the
providing of any property or service.
Community Reinvestment Act. Banks are also subject to the provisions of the
Community Reinvestment Act of 1977 ("CRA"), which requires the appropriate
federal bank regulatory agency, in connection with its regular examination of
a bank, to assess the bank's record in meeting the credit needs of the
community serviced by the bank, including low and moderate income
neighborhoods. The regulatory agency's assessment of the bank's record is
made available to the public. Further, such assessment is required of any
bank which has applied, among other things, to establish a new branch office
that will accept deposits, relocate an existing office or merge or consolidate
with, or acquire the assets or assume the liabilities of, a federally
regulated financial institution. The bank received a "satisfactory" rating
during its latest CRA examination.
The Holding Company
General. As the sole shareholder of the Bank, the Company is a bank holding
company registered as such with the Federal Reserve and subject to
comprehensive regulation by the Federal Reserve under the Bank Holding Company
Act of 1956, as amended ("BHCA"), and the regulations thereunder. The Company
is required to file with the Federal Reserve annual reports and such
additional information as the Federal Reserve may require and is subject to
regular examinations by the Federal Reserve. The Federal Reserve also has
extensive enforcement authority over bank holding companies, including, among
other things, the ability to assess civil money penalties, to issue cease and
desist or removal orders and to require that a holding company divest
subsidiaries (including its bank subsidiaries). Generally, enforcement
actions may be initiated for violations of law and regulations and unsafe or
unsound practices.
Under Federal Reserve policy, a bank holding company must serve as a source of
strength for its subsidiary banks. Under this policy the Federal Reserve may
require, and has required, a holding company to contribute additional capital
to an undercapitalized subsidiary bank.
Under the BHCA, the Company must obtain Federal Reserve approval before: (I)
acquiring, directly or indirectly, ownership or control of any voting shares
of another bank or bank holding company if, after such acquisition, it would
own or control more than 5% of such shares (unless it already owns or controls
the majority of such shares); (ii) acquiring all or substantially all of the
assets of another bank or bank holding company; or (iii) merging or
consolidating with another bank holding company.
Any direct or indirect acquisition by a bank holding company or its
subsidiaries of more than 5% of the voting shares of, or substantially all of
the assets of, any bank located outside of the state in which the operations
of the bank holding company's banking subsidiaries are principally conducted,
may not be approved by the Federal Reserve unless the laws of the state in
which the bank to be acquired is located
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specifically authorize such an acquisition. See "-- interstate Banking and
Branching." Since September 30, 1995, federal law permits well capitalized
and well managed bank holding companies to acquire control of an existing bank
in any state.
The BHCA also prohibits a bank holding company, with certain exceptions, from
acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company that is not a bank or bank holding company and
from engaging directly or indirectly in activities other than those of
banking, managing or controlling banks, or providing services for its
subsidiaries. Under the BHCA, the Federal Reserve is authorized to approve
the ownership of shares by a bank holding company in any company, the
activities of which the Federal Reserve has determined to be so closely
related to the business of banking or managing or controlling banks as to be a
proper incident thereto. The list of activities determined by regulation to
be closely related to banking within the meaning of the BHCA includes, among
other things: operating a savings institution, mortgage company, finance
company, credit card company or factoring company; performing certain data
processing operations; providing certain investment and financial advice;
underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; selling money orders, travelers' checks and U.S. Savings Bonds; real
estate and personal property appraising; providing tax planning and
preparation services; and, subject to certain limitations, providing
securities brokerage services for customers.
Interstate Banking and Branching. On September 29, 1994, the Riegle-Neal
Interstate Banking and Branching Act of 1994 ("Riegle-Neal") was enacted to
ease restrictions on interstate banking. Effective September 29, 1995,
Riegle-Neal allows the Federal Reserve to approve an application of an
adequately capitalized and adequately managed bank holding company to acquire
control of, or acquire all or substantially all of the assets of, a bank
located in a state other than such holding company's home state, without
regard to whether the transaction is prohibited by the laws of any state. The
Federal Reserve may not approve the acquisition of the bank that has not been
in existence for the minimum time period (not exceeding five years) specified
by the statutory laws of the host state. Riegle-Neal also prohibits the FRB
form approving an application if the applicant (and its depository institution
affiliates) controls or would control more than 10% of the insured deposits in
the Untied States or 30% or more of the deposits int eh target bank's home
state or in any state in which the target bank maintains a branch.
Riegle-Neal does not affect the authority of states to limit the percentage of
total insured deposits in the state which may be held or controlled by a bank
or bank holding company to the extent such limitation does not discriminate
against out-of-state banks or bank holding companies. Individual states may
also waive the 30% state-wide concentration limit contained in the Act.
Generally, South Carolina law permits any bank holding company to acquire
banks or bank holding companies located in South Carolina subject to the
requirements that the laws of the state in which the acquiring bank holding
company is located permit bank holding companies located in South Carolina to
acquire banks or bank holding companies in the acquiror's state and that the
South Carolina bank sought to be acquired has been in existence for at least
five years.
Additional, beginning on June 1, 1997, the federal banking agencies will be
authorized to approve interstate merger transactions without regard to whether
such transaction is prohibited by the law of any state, unless the home state
of one of the banks opts out of the Act by adopting a law after the date of
enactment of the Act and prior to June 1, 1997 which applies equally to all
out-of-state banks and expressing prohibits merger transactions involving
out-of-state banks. Interstate acquisitions of branches will be permitted
only if the law of the sate in which the branch is located permits such
acquisitions. Interstate mergers and branch acquisitions will also be subject
to the nationwide and statewide insured deposit concentration amounts
described above.
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Riegle-Neal authorizes the OCC and FDIC to approve interstate branching de
novo by national and state banks, respectively, only in states which
specifically allow for such branching. Riegle-Neal also requires the
appropriate federal banking agencies to prescribe regulations by June 1, 1997
which prohibit any out-of-state bank from using the interstate branching
authority primarily for the purpose of deposit production. These regulations
must include guidelines to ensure that interstate branches operated by an
out-of-state bank in a host state are reasonably helping to meet the credit
needs of the communities which they serve.
Dividends. The Federal Reserve has issued a policy statement on the payment
of cash dividends by bank holding companies, which expresses the Federal
Reserve's view that a bank holding company should pay cash dividends only to
the extent that the company's net income for the past year is sufficient to
cover both the cash dividends and a rate of earning retention that is
consistent with the company's capital needs, asset quality and overall
financial condition. The Federal Reserve also indicated that it would be
inappropriate for a company experiencing serious financial problems to borrow
funds to pay dividends. Furthermore, under the prompt corrective action
regulations adopted by the Federal Reserve pursuant to FDICIA, the Federal
Reserve may prohibit a bank holding company from paying any dividends if the
holding company's bank subsidiary is classified as "undercapitalized" under
the prompt corrective action regulations.
Generally, bank holding companies are required to give the Federal Reserve
prior written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of their consolidated
net worth. The Federal Reserve may disapprove such a purchase or redemption
of it determines that the proposal would constitute an unsafe or unsound
practice or would violate any law, regulation, Federal Reserve order, or any
condition imposed by, or written agreement with, the Federal Reserve. This
notification requirement does not apply to any company that meets the
well-capitalized standard for commercial banks, has a safety and soundness
examination rating of at least at "2" and is not subject to any unresolved
supervisory issues.
Capital Requirements. The Federal Reserve has established capital adequacy
requirements for bank holding companies that generally parallel the capital
requirements for national banks. For bank holding companies with consolidated
assets of less than %150 million, like the Company, compliance is measured on
a bank-only basis. See "-- The Bank -- Capital Requirements."
TAXATION
Federal Taxation
In years prior to the consummation of the conversion of The Savings Bank of
Beaufort County, FSB ("Savings Bank") to a national bank ("Bank Conversion"),
the Savings Bank, as a qualified thrift meeting certain eligibility criteria
prescribed in the Code, was able to determine its tax basis bad debt reserve
using the percentage of taxable income method ("PTI Method") set forth in the
Code. The Savings Bank's use of the PTI Method resulted in a significantly
greater tax basis reserve for bad debts than that recognized for financial
reporting purposes.
Upon consummation of the Bank Conversion, the Bank became a "former thrift
institution" and, as such, under provisions of the Code, is no longer eligible
to maintain its tax basis bad debt reserve on the PTI Method. As a financial
institution with total assets less than $500 million, the Bank is permitted to
maintain its tax basis bad debt reserves on the experience method ("Experience
Method"), which computes a tax basis bad
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debt reserve based upon a six-year weighted-average calculation of actual bad
debts experienced by the Bank.
Under applicable provisions of the Code, on a ratable basis over a six-year
period commencing in 1995, the Bank must include in income the excess of the
PTI Method bad debt reserve as of December 31, 1994 over its newly adopted
Experience Method tax basis reserve determined as of December 31, 1994. See
Note 10 of Notes to Consolidated Financial Statements.
In the event that the Bank's assets ever exceed the $500 million threshold,
the Bank would be required to recapture its newly adopted Experience Method
tax basis bad debt reserve in increasing increments over a four-year period.
Thereafter, the Bank would be required to use the direct or specific
charge-off method applicable to large banks in calculating the Bank's tax bad
debt deduction. Under the direct or specific charge-off method, the Bank
would be entitled to a bad debt deduction only in the taxable year in which a
specific debt become worthless or is shown to be recoverable only in part.
Under the Tax Reform Act of 1986 ("Tax Reform Act"), for taxable years
beginning after December 31, 1986, the existing corporate minimum tax was
replaced by a new corporate alternative minimum tax which is imposed to the
extent a corporation's applicable alternative minimum tax exceeds the
corporation's regular income tax for the year. The alternative minimum tax is
imposed at the rate of 20% of a specially computed tax base known as
"alternative minimum taxable income." A corporation's alternative minimum
taxable income for any taxable year is the corporation's taxable income
determined with certain adjustments prescribed by the Code, and increased by a
number of preference items, including (I) the amount by which the deduction
allowable for the taxable year for a reasonable addition to a reserve for bad
debts exceeds the amount that would have been allowable had the bad debt
reserve been maintained for all taxable years on the basis of actual
experience and (ii) the amount of interest on certain tax-exempt bonds. The
adjustments to taxable income include (I) an adjustment for "adjusted current
earnings" (which is an account that is meant to resemble both traditional
earnings and profits concepts and taxable income) and (ii) an adjustment to
limit the use of net operating losses to 90% of alternative minimum taxable
income. Payments of alternative minimum tax may be used as credits against
regular tax liabilities in future years.
Generally, for taxable years beginning after 1986, the Tax Reform Act also
amended the Code to require most corporations, including thrift institutions
and commercial banks, to utilize the accrual method of accounting for tax
purposes and to disallow 100% of an institution's interest expense allocated
to certain tax-exempt obligations.
Under provisions of the Revenue Reconciliation Act of 1993 ("RRA"), enacted on
August 10, 1993, the maximum federal corporate income tax rate was increased
from 34% to 35% for taxable income over $10.0 million, with a 3% surtax
imposed on taxable income over $15.0 million. Also under provisions of RRA, a
separate depreciation calculation requirement has been eliminated in the
determination of adjusted current earnings for alternative minimum taxable
income purposes, rules relating to payment of estimated corporate income taxes
were revised, and certain acquired intangible assets such as goodwill and
customer-based intangibles were allowed a 15-year amortization period.
Beginning with tax years ending on or after January 1, 1993, RRA also provides
that securities dealers must use mark-to-market accounting and generally
reflect changes in value during the year or upon sale as taxable gains or
losses. The IRS has indicated that financial institutions which originate and
sell loans will be subject to the new rule. Because of the absence of
definitive IRS guidance on the scope and extent of this provision's
applicability to financial institutions, it is unclear what effect, if any,
this provision may have on the Company.
Other aspects of the Tax Reform Act have an indirect effect on the savings
institution
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industry. The Tax Reform Act generally has limited the deductions
allowable with respect to losses attributable to passive trade or business
activities, such as real estate investment, to the amount of income earned
from all such passive activities. This limitation was phased in over five
years for interests in passive activities in which a taxpayer invested before
October 22, 1986. This change has had an adverse effect on the market for
rental and other real estate generally and on the ability of borrowers to
repay loans secured by commercial real estate. The Tax Reform Act eliminated
the deduction for contributions to IRAs by individuals who are covered by
employer-sponsored retirement plans and whose income exceeds specified levels;
however, the income on contributions of these individuals have continued to be
exempt from federal income tax until withdrawn. This limitation on the
deductibility of IRA contributions has reduced significantly the amount
individuals have elected to contribute to IRAs. The Tax Reform Act eliminated
the deduction for personal interest expense on loans other than those secured
by mortgages on a principal or second residence over a five-year phase-out.
As a result of changes to the Code made pursuant to the Revenue Act of 1987,
mortgage interest on a principal or second residence is deductible to the
extent that the amount of the mortgage loan indebtedness thereon does not
exceed $1 million acquisition indebtedness ($500,000 for a married individual
who files a separate return) plus $100,000 home equity indebtedness ($50,000
for a married individual filing a separate return).
The foregoing examples are intended to be illustrative only and do not
constitute a comprehensive review of all aspects of the Tax Reform Act or any
other tax legislation that could have an indirect effect on the business of
the Bank.
There have not been any IRS audits of the Bank's Federal income tax returns
during the past five years.
ITEM 2: PROPERTIES
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The Company and the Bank's main office is a 7,500 square foot building located
at 1121 Boundary Street, the northeastern corner of Church and Boundary
Streets in Beaufort, South Carolina. The building is leased from First
Patriots Partnership, a South Carolina general partnership made up of the
following affiliated persons, all of whom are Corporate Directors of the Bank:
Colden R. Battey, Jr., Richard L. Gray, Russell L. Jeter, Carson R. Rentz and
Robert A. Kerr. The Bank also leases additional parking space adjacent to its
main office from First Patriots Partnership.
The Bank operates its Lady's Island branch in a 2,100 square foot building
located on U.S. Highway 21 on Lady's Island, in Beaufort, South Carolina.
The building is leased from Richard L. Gray, a director of the Bank. (See
"Certain Transactions" in the proxy statement distributed in connection with
the 1996 Annual Meeting of Stockholders which is contained in exhibit (23) of
this Form 10-KSB and note 7 to the financial statements included in the 1996
Annual Report to Stockholders, which is contained in exhibit (13) of this Form
10-K).
During September 1991, Olive Financial Services Incorporated (Developer), a
developer from Winston Salem, North Carolina, purchased the property at the
intersection of Burnt Church Road and U.S. Highway 278 in Bluffton, South
Carolina, from the Bank and began construction of the permanent Bluffton
branch for the Bank. During the summer of 1992, the Developer ceased
construction of the building. The property was subsequently foreclosed on by
the financial institution which had provided construction financing to the
Developer. The Bank was to have leased this facility from the Developer. In
November 1992, the Bank purchased this property and the building at the
foreclosure sale and completed the construction. The Developer was not an
affiliate of the Bank.
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The building is approximately 8,700 square feet, of which the Bank will
occupies approximately 3,850 square feet for its Bluffton branch facility and
leases the remaining office space. The final cost of the project, including
the acquisition cost at the foreclosure sale, was $666,000. The construction
contract was awarded as the result of a sealed bid process to Coastal
Contractors, Inc. of Beaufort, South Carolina. Carson R. Rentz, an
affiliated person owns 79.68% of Coastal Contractors, Inc. Construction was
completed during May 1993 and the Bluffton branch relocated from the temporary
location at the Moss Creek Shopping Center.
ITEM 3: LEGAL PROCEEDINGS
- -------------------------
This item is satisfied by the information contained in Note 14 of Notes to
Financial Statements, which is incorporated herein by reference.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
There were no matters submitted to a vote of the security holders during the
fourth quarter of the fiscal year ended December 31, 1996.
PART II
- -------
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
- ------------------------------------------------------------------------
MATTERS
-------
This item is satisfied by the information contained under the section
captioned "Common Stock Information" in the Bank's 1996 Annual Report (the
Annual Report) to Stockholders (exhibit (13)), which is incorporated herein by
reference.
ITEM 6: MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
- -----------------------------------------------------------------
This item is satisfied by the information contained under the section
captioned "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the Annual Report to Stockholders (exhibit (13)),
which is incorporated herein by reference.
ITEM 7: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
This item is satisfied by the financial statements contained in the Annual
Report to Stockholders (exhibit (13)), which are incorporated herein by
reference.
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
This item is satisfied by the incorporation by reference of the Annual Report
(entitled "Changes in Accountants"). There are no disagreements with or
changes expected with respect to the Bank's public accountants at this time.
23
<PAGE>
<PAGE>
PART III
- --------
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
- ---------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
-------------------------------------------------
Reference is made to the cover page of this report in reference to compliance
with Section 16(a) of the Exchange Act.
ITEM 10: EXECUTIVE COMPENSATION
- -------------------------------
This item is satisfied by the incorporation by reference of the attached Proxy
Statement (exhibit (23)) in connection with the 1997 Annual Stockholders'
Meeting.
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference to the
section captioned "Voting Securities and Principal Holders Thereof" of the
attached Proxy Statement (exhibit (23)) in connection with the 1997 Annual
Stockholders' Meeting.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference to the
attached Proxy Statement (exhibit (23)) in connection with the 1997 Annual
Stockholders' Meeting.
(c) Changes in Control
The Company is not aware of any arrangements, including any pledge by any
person of securities of the Company, the operation of which may at a
subsequent date result in a change in control of the Company.
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
This item is satisfied by the incorporation by reference of the attached Proxy
Statement (exhibit (23)) in connection with the 1997 Annual Stockholders'
Meeting.
24
<PAGE>
<PAGE>
PART IV
- -------
ITEM 13: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- ------------------------------------------------------------------------
(a) 1. Index to financial statements (incorporated by reference to the 1996
Annual Report to Stockholders):
Independent Auditors' Report **
Balance Sheets, December 31, 1996 and 1995 **
Statement of Income, Years ended
December 31, 1996, 1995 and 1994 **
Statement of Changes in Stockholders' Equity,
Years Ended December 31, 1996, 1995 and 1994 **
Statement of Cash Flows, Years ended
December 31, 1996, 1995 and 1994 **
Notes to Financial Statements **
** (Incorporated by reference to the 1996 Annual Report to
Stockholders)
2. Financial statement schedules have been omitted because they are not
applicable or because the required information is included in the
financial statements or the notes thereto.
3. Exhibits
(13) 1996 Annual Report to Stockholders
(99) Audit report of Deloitte & Touche, LLP
(Note: All other required exhibits are not applicable.)
25
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(D) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FirstBancorporation, Inc.
Dated: March 19, 1997 By /s/ James A. Shuford, III
--------------------------------
James A. Shuford, III
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
/s/ James L. Pate, III /s/ James A. Shuford, III
- ----------------------------- --------------------------------
James L. Pate, III James A. Shuford, III
Senior Vice President and Chief Executive Officer
(Principal Finance and (Principal Executive Officer)
Accounting Officer) March 19, 1997
March 19, 1997
/s/ Colden R. Battey, Jr. /s/ Laurance H. Davis, Jr.
- ----------------------------- -------------------------------
Colden R. Battey, Jr. Laurance H. Davis, Jr.
Director Director
Chairman of the Board Secretary
March 19, 1997 March 19, 1997
/s/ Richard L. Gray /s/ Russell L. Jeter
- ----------------------------- -------------------------------
Richard L. Gray Russell L. Jeter
Director Director
March 19, 1997 March 19, 1997
/s/ Robert A. Kerr, Sr. /s/ James D. Neighbors
- ----------------------------- -------------------------------
Robert A. Kerr, Sr. James D. Neighbors
Director Director
March 19, 1997 March 19, 1997
/s/ Jerry H. Reeves, III /s/ Carson R. Rentz
- ----------------------------- -------------------------------
Jerry H. Reeves, III Carson R. Rentz
Director Director
March 19, 1997 March 19, 1997
/s/ William C. Robinson
- ------------------------
William C. Robinson
Director
March 19, 1997
26
<PAGE>
<PAGE>
EXHIBIT (13)
1996 ANNUAL REPORT TO STOCKHOLDERS
FirstBancorporation, Inc.
<PAGE>
<PAGE>
CORPORATE PROFILE
- -----------------
FirstBancorporation, Inc. (the "Company") was formed in 1995 as the holding
company for FirstBank, N.A.(the "Bank"). The Company presently has no other
subsidiaries. The Bank originally began operations in 1986 as The Savings
Bank of Beaufort County, FSB and converted its thrift charter to a national
bank charter in 1995. The Bank currently operates two full service offices in
Beaufort, South Carolina and one full service branch in Bluffton, South
Carolina. The Bank provides a full range of financial products for businesses
and individuals, including a variety of credit and deposit services. The
Company is an equal opportunity employer.
CORPORATE INFORMATION
- ---------------------
Main Office General Counsel
1121 Boundary Street Harvey & Battey, P.A.
Beaufort, South Carolina 29902 Beaufort, South Carolina 29902
Branch Office Independent Auditors
One Burnt Church Road J.W. Hunt and Company, LLP
Bluffton, South Carolina 29910 Columbia, South Carolina
Branch Office Special Securities Counsel
U. S. Highway 21, Lady's Island Breyer & Aguggia
Beaufort, South Carolina 29902 Washington, D.C.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
- ----------------------------------------
The Annual Meeting of Shareholders will convene on April 24, 1997 at 5:30 P.M.
at the following location:
Oyster Cove Community Center
Johnny Morrall Circle
Beaufort, South Carolina 29902
10-KSB INFORMATION
- ------------------
A copy of the Form 10-KSB as filed with the Securities and Exchange Commission
will be furnished to shareholders, free of charge, upon written request to the
Corporate Secretary at the above Main Office address.
COMMON STOCK INFORMATION
- ------------------------
The Company's voting common stock is not regularly or actively traded in any
established market, and there are no regularly quoted bid and asked prices for
the stock. During 1996, 11,461 shares were traded at an average price of
approximately $13.00 per share based upon transfer records maintained by the
Company and the per share price of the trade of which the Company is made
aware. The most recent trade of which the Company is aware involved 170
shares at $13.00 per share and occurred on January 31, 1997. As of February
19, 1997, there were 653 stockholders of record and 627,587 common shares
issued and outstanding.
The Company declared a 5% stock dividend in 1996. A 1997 10% stock dividend
was also declared for stockholders of record as of February 21, 1997. No cash
dividends have ever been declared by the Company or the Bank since beginning
operations in 1986. Cash dividends may be declared and paid only from
retained earnings of the Company. Additional regulatory restrictions apply.
See the Liquidity and Capital Resources Section of this report.
<PAGE>
<PAGE>
April 1, 1997
To Our Shareholders:
1996 was an exceptional year for FirstBancorporation. The Bank put
behind it the SAIF recapitalization issue with the payment of a $445,000
assessment, which was recorded in the third quarter. Effective after-tax
earnings before the SAIF charge were $785,000 as compared to 1995 net income
of $527,000. Final net income after this charge totaled $501,000 for 1996.
Total assets grew 10.5% to $91,733,000.
As we reported in our third quarter letter to shareholders, our
Bank had no choice but to share in the industry-wide SAIF deposit insurance
assessment, although we vigorously disagreed with the logic and methodology
used in its computation. A significant benefit of this one-time assessment,
however, is the reduction in our future deposit insurance premiums.
During 1996, FirstBank originated more than $40,000,000 in real
estate, consumer, and commercial loans for our customers. This record amount
was outstanding evidence of our commitment to our Beaufort and Bluffton
markets. This record of success reflects the growth and changing dynamics in
our service areas and our customers' desire to entrust their financial needs
to a locally owned and managed institution.
Our Bank currently serves over 7000 customers, and during this past
year we introduced several new products and services. In July, our checking
account products were significantly enhanced and provide attractive value-
added services. In September, FirstBank completed the installation of an
automated teller machine in Bluffton. Since its installation, our customers
have enjoyed the convenience of twenty-four hour banking. Finally, in
November, our Visa CheckCard was introduced. This innovation allows our
checking account holders to use a card that looks like a credit card but acts
like a check.
As a result of our performance, your Board declared a 10% stock
dividend in February and you should have already received your certificate for
additional shares.
The successes of 1996 could not have been possible without the individual
and cooperative efforts of our entire staff. We have a skilled
group of professionals who remain dedicated to providing service to our
customers and value to our shareholders. Our employees, management, and
directors are also committed to our communities and provide volunteer hours,
expertise, and financial assistance to a wide array of community and civic
organizations.
As we move into 1997 and beyond, many challenges face our company and our
industry; none are greater, however, than that of rapidly changing technology.
FirstBank is moving forward aggressively to address this
issue.
To promote competitive success, FirstBank is converting its data
processing to a new and technically advanced system. This change will allow
us to provide faster and much more efficient service to our current and future
customers. It will also allow us to introduce telephone banking services
during 1997 and to improve our productivity. This new system was installed
during the first quarter of 1997.
Bank consolidations continued during 1996, and it is debated whether
or not this trend is good for our country. However, it is our view that your
community bank can serve our marketplace better than our larger competition
whose decision making takes place miles and hours away and whose decisions are
not based on our community's needs for their success. Thank you for the
continued confidence and support which you provide our company.
/s/ Colden R. Battey, Jr. /s/ James A. Shuford, III
- ----------------------------- -----------------------------
Colden R. Battey, Jr. James A. Shuford, III
Chairman of the Board President and Chief Executive Officer
2
<PAGE>
<PAGE>
BUSINESS OF THE COMPANY
FirstBancorporation, Inc. (the "Company") is the holding company for
FirstBank, N.A.(the "Bank"), a national bank and successor to The Savings Bank
of Beaufort County, FSB (the "Savings Bank"). In order to expand its banking
services, the Savings Bank converted in 1995 into a national bank under a
holding company form of ownership. The Board of Directors of the Bank voted
on April 28, 1994 to convert from a thrift to a national bank charter. The
Office of Thrift Supervision (the "OTS") and the Office of the Comptroller of
the Currency (the "OCC") subsequently issued approvals, and the Bank converted
to a national bank charter on June 5, 1995. On June 15, 1995, the Federal
Reserve Bank issued its approval for the Company to become a bank holding
company and on October 31, 1995, N.A., reorganized as a wholly-owned
subsidiary of the Company. As of December 31, 1996, the sole business of the
Company was operating the Bank. The following financial results reflect the
activities of the Bank.
The Bank began operations on March 19, 1986 after receiving its charter from
the Federal Home Loan Bank Board (the "FHLBB"). Upon its conversion to a
national bank, the Bank's regulator became the OCC. Its deposits are insured
by the Savings Association Insurance Fund (the "SAIF") which is administered
by the Federal Deposit Insurance Corporation (the "FDIC").
The Company, through the Bank, conducts a community banking business. The
Bank's business primarily consists of taking deposits and making consumer,
commercial and mortgage loans, mainly in the communities it serves. The
Bank's service area consists primarily of the northern two-thirds of Beaufort
County. At December 31, 1996, the Company conducted its activities from its
main office located at 1121 Boundary Street, Beaufort, South Carolina, a
full-service branch office located on U.S. Highway 21 on Lady's Island,
Beaufort, South Carolina, and a full-service branch located at One Burnt
Church Road, Bluffton, South Carolina. The Bank conducts mortgage loan
production operations at these three offices. The Bank leases its Boundary
Street location from First Patriots Partnership (the Partnership) which owns
the building and is composed of Company Directors Battey, Gray, Jeter, Kerr
and Rentz. The monthly lease amount is $9,250 and the lease agreement expires
on February 1, 2013. The Board of Directors, with those named above as
members of the Partnership abstaining, considered the lease to be fair and
equitable and approved the lease agreement.
The Bank owns and operates its Bluffton office at One Burnt Church Road in
Bluffton. The building contains approximately 8,700 square feet of office
space, of which the Bank occupies approximately 3,850 square feet and leases
the remaining office space.
The Bank seeks deposit accounts from households and businesses in its service
areas by offering a full range of savings accounts, retirement and
professional accounts (including Individual Retirement Accounts), checking
accounts, NOW accounts and time certificates. It also solicits commercial,
consumer and mortgage loans, as well as other authorized investments.
Historically, a large percentage of the Bank's loan production has been in
residential mortgage loans. Its principal expenses are interest paid on
deposits and operating expenses incurred in its daily operation.
3
<PAGE>
<PAGE>
FIVE YEAR FINANCIAL SUMMARY
The following table sets forth balance sheet and other information for
1992 through 1996.
Balance sheet and other data
(Dollars in thousands)
At December 31,
Consolidated Bank Only
1996 1995 1994 1993 1992
------ ------ ------ ------ -----
Cash and amounts due from banks $4,721 4,197 $3,359 $2,164 $1,975
Interest bearing deposits and time
deposits with banks 3,349 1,548 218 599 1,687
Securities at amortized costs (1) 0 0 2,754 3,001 359
Securities available for sale (1) 2,485 2,630 0 0 0
Loans held for sale 663 251 0 0 0
Loans receivable, Net 78,150 72,026 68,900 65,141 65,458
Other assets 2,365 2,395 2,080 2,249 1,244
------- ------- ------- ------- -------
Total Assets $91,733 $83,047 $77,311 $73,154 $70,723
======= ======= ======= ======= =======
Total deposits $78,300 $74,905 $69,273 $67,249 $63,838
Federal Home Loan Bank borrowings 5,600 1,000 1,000 0 750
Amounts due to depository
institutions 200 238 870 185 730
Other liabilities 588 387 273 346 590
Stockholders' equity 7,045 6,517 5,895 5,374 4,815
Total Liabilities and
Stockholders' Equity ------- ------- ------- ------- -------
$91,733 $83,047 $77,311 $73,154 $70,723
======= ======= ======= ======= =======
Number of:
Real estate loans outstanding 787 771 720 658 636
Deposit accounts 7,442 7,428 7,542 6,314 5,630
Full service office locations 3 3 3 3 3
(1) See Notes 2 and 4 in Notes to Financial Statements for discussion of
investments and Mortgage-backed securities.
4
<PAGE>
<PAGE>
FIVE YEAR FINANCIAL SUMMARY (CONTINUED)
The following tables summarize key income statement and other financial data
of the Company for the previous five years:
Selected income statement data
(In thousands, except per share amounts)
For the Years Ended December 31,
Consolidated Bank Only
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Total interest income $6,876 $6,259 $5,149 $5,072 $5,020
Total interest expense 3,281 3,106 2,220 2,352 2,659
------ ------ ------ ------ -----
Net interest income 3,595 3,153 2,929 2,720 2,361
Provision for loan losses 162 192 179 149 77
------ ------ ------ ------ -----
Net interest income after
Provision for loans losses 3,433 2,961 2,750 2,571 2,284
Non interest income 781 624 547 549 469
SAIF recapitalization assessment 445 0 0 0 0
Non interest expenses 2,946 2,707 2,474 2,301 1,962
------ ------ ------ ------ -----
Income before income taxes 823 878 823 819 791
------ ------ ------ ------ -----
Provision for federal & state
income taxes 322 351 302 309 282
------ ------ ------ ------ -----
Net income $501 $527 $521 $510 $509
====== ====== ====== ====== ======
Primary earnings per share(1) $0.76 $0.82 $0.81 $0.80 $0.81
====== ====== ====== ====== ======
Fully diluted earnings per share(1) $0.76 $0.82 $0.81 $0.80 $0.81
====== ====== ====== ====== ======
Other financial data
For the Years Ended December 31,
Consolidated Bank Only
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Net interest rate spread 3.89% 3.75% 3.90% 3.65% 3.62%
Net yield on average interest
earning assets 4.37% 4.15% 4.14% 3.91% 3.82%
Return on average assets 0.57% 0.65% 0.70% 0.71% 0.79%
Return on average equity 7.41% 8.51% 9.29% 10.01% 11.14%
Ratio of average equity to:
Average assets 7.71% 7.64% 7.49% 7.08% 7.09%
Average liabilities 8.35% 8.27% 8.09% 7.62% 7.63%
End of year ratios:
Equity to assets 7.68% 7.85% 7.52% 7.35% 6.81%
Equity to liabilities 8.32% 8.52% 8.16% 7.93% 7.31%
Asset quality ratios:
Loan loss allowance to total
loans receivable 0.81% 0.65% 0.49% 0.36% 0.33%
Net loan charge-offs to average
loans receivable 0.00% 0.09% 0.12% 0.20% 0.01%
Non-performing assets to total
assets 0.44% 0.16% 0.35% 0.17% 0.39%
(1) Primary and Fully diluted earnings per share have been restated for prior
years to show the effect of stock options on the per share calculations.
1996 earnings per share without the SAIF assessment were $1.19 for
primary and fully diluted shares outstanding.
5
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
- -------
The Company experienced approximately 10.5% growth in total assets during the
year ended December 31, 1996, with assets of $91,733,000 as compared to assets
of $83,047,000 at December 31, 1995. Net loans receivable increased from
$72,026,000 at December 31, 1995 to $78,150,000 at December 31, 1996.
Securities available-for-sale had a fair market value of $2,485,000 at
December 31, 1996 versus $2,630,000 at December 31, 1995. Total deposits
increased from $74,905,000 at December 31, 1995 to $78,300,000 at December 31,
1996. Federal Home Loan Bank (the " FHLB") advances at December 31, 1996
totaled $5,600,000 compared to $1,000,000 at December 31, 1995.
The Bank had ninety-day past-due and non-accruing loans of $641,000 at
December 31, 1996 and $709,000 at December 31, 1995. During the year ended
December 31, 1996, the Bank added $162,000 to its general loan loss reserve.
Charged off loans, net of recoveries, totaled $2,000 for the year ended
December 31, 1996. Real estate owned and other foreclosed property decreased
from $443,000 at December 31, 1995 to $228,000 at December 31, 1996. The
decrease during the year primarily resulted from the Bank's liquidation of a
multifamily apartment building with a carrying value of $238,000 and the
liquidation of sewer rights totaling $205,000. Major increases during the
year to real estate owned resulted from the transfer of two construction loans
totaling $202,000.
At December 31, 1996, the Bank's allowance for loan losses was $631,000.
Based on all information available to management at December 31, 1996
management considers the allowance for loan losses adequate at that date.
Management, to the best of its knowledge at December 31, 1996, knew of no
material or unusual risk contained in its loan or investment securities
portfolios at that date.
ASSET AND LIABILITY MANAGEMENT
- ------------------------------
The Bank's asset and liability management program is designed to decrease the
Bank's vulnerability to material changes in interest rates or "interest-rate
risk." The principal determinant of the exposure of the Bank's earnings to
interest-rate risk is the timing difference between the repricing or maturity
of the Bank's interest-earning assets and the repricing or maturity of its
interest-bearing liabilities. If the maturities or repricings of the Bank's
assets and liabilities were perfectly matched, and if the interest rate borne
by its assets and liabilities were equally flexible and moved concurrently
(neither of which is the case) the impact on net interest income of any
material changes in interest rates would be minimal.
The Bank's asset and liability policies are directed toward the objectives of
maintaining the interest-rate sensitivity of the Bank's assets and matching
the maturities of the Bank's interest-earning assets and interest-bearing
liabilities to the extent practical. At December 31, 1996, the Bank's total
interest-earning assets due within one year exceeded interest-bearing
liabilities due within one year by approximately $676,000, resulting in a
cumulative one-year gap to total earning assets ratio of 0.79%. The Bank is
constantly monitoring and attempting to control or improve its short-term gap
position through periodic review of
6
<PAGE>
<PAGE>
asset and liability repricing and through its internal analysis of the effects
of changing rate environments on its net interest income.
A significant part of the Bank's program of asset and liability management has
been to emphasize the origination of adjustable rate and/or short-term loans,
which includes adjustable rate residential mortgage loans and short-term
construction loans. At December 31, 1996, residential real estate mortgage
loans that provided for repayment or interest-rate adjustment within three
years totaled approximately $50,294,000, and represented approximately 64% of
total loans receivable. The Bank sells in the secondary market almost all of
the fifteen to thirty year fixed-rate mortgage loans it originates.
Generally, a commitment to sell such loans, subject to approval, is in place
at the time of origination of these loans. The Bank generally holds such
loans in its portfolio only for the length of time it takes to receive funding
from the purchaser of the loan. In 1996, the Bank originated approximately
$12,200,000 of adjustable rate permanent mortgage loans versus $8,000,000
million of fixed rate loans. Adjustable rate mortgage loans are generally
kept in the portfolio. In 1996, the Bank originated approximately $10,100,000
million in construction loans which are usually for a term of less than one
year and indexed to prime. When long-term rates fall, residential mortgage
demand typically favors fixed-rate lending. Should a lower long-term rate
environment such as this occur, the Bank would have more difficulty in
maintaining the level of its current portfolio of adjustable-rate mortgage
loans because of the potential for increased refinancings.
Another strategic objective of the Bank's asset and liability management
effort has been to originate short- term consumer and commercial loans. This
segment of the loan portfolio is comprised primarily of equity
lines-of-credit, other traditional consumer type loans and smaller business
commercial loans. These loans are usually interest sensitive and often
indexed to a prime rate or a one- or three-year treasury index. They are
usually originated in the Bank's service areas. At December 31, 1996, these
consumer and commercial loans totaled approximately $18,159,000 or
approximately 23% of total loans receivable. Consumer and commercial loans
are considered to involve greater credit risk than residential loans.
The Bank's objective is to increase its retail deposit base by promoting the
growth of transaction accounts and by maintaining competitive rates in order
to retain and attract longer-term certificates. During 1996 the Bank started
its "Privilege Plus" campaign designed to attract transaction accounts. As of
December 31, 1996 the Bank's total Now, Money Market and non interest-bearing
demand deposit accounts had increased to $33,041,000 from $29,410,000 at
December 31, 1995.
The following table presents the Bank's interest sensitivity gap between
interest-earning assets and interest-bearing liabilities at December 31,
1996.
7
<PAGE>
<PAGE>
Interest-rate sensitivity analysis at December 31, 1996
(Dollars in thousands)
Interest-earning assets 3 4-12 1 Year- 3 Years- Over 4
Months Months 2 years 4 Years Years Total
Loans receivable and
loans held for sale $16,974 $27,716 $13,145 $9,878 $11,791 $79,504
Investments 3,996 1,708 0 0 130 5,834
------- ------- ------- ------ ------- -------
Total interest-earning
assets 20,970 29,424 13,145 9,878 11,921 85,338
Interest-bearing
liabilities
Deposits 26,706 18,412 7,371 16,056 1,235 69,780
Borrowings 4,600 0 500 500 0 5,600
------ ------ ------ ------- ------ ------
Total interest-bearing
liabilities 31,306 18,412 7,871 16,556 1,235 75,380
------- ------- ------ ------ ------- ------
Asset (liability) Gap
Position ($10,336) $11,012 $5,274 ($6,678) $10,686 $9,958
======= ======= ====== ====== ======= ======
Cumulative Gap Position ($10,336) $676 $5,950 ($728) $9,958
======= ======= ====== ====== ======
Cumulative Gap to Total
Earning Assets (12.11%) 0.79% 6.97% (.85%) 11.67%
====== ===== ===== ===== ======
YIELDS EARNED AND RATES PAID
- ----------------------------
The Company's pre-tax earnings depend primarily on its net interest income or
the difference between the income it receives on its loan portfolio and other
investments and expenses paid on deposits, FHLB advances and other
liabilities. The Company's net interest income is affected by (i) the
difference between rates of interest earned on its interest-earning assets and
rates of interest paid on its interest-bearing liabilities (interest-rate
spread) and (ii) the relative amounts or volume of its interest-earning assets
and interest-bearing liabilities. When the volume of interest-earning assets
approximate or exceed interest-bearing liabilities, any positive interest-rate
spread will generate net interest income.
The following tables set forth comparative information for the years indicated
regarding the total dollar amount of interest income from interest-earning
assets and the resulting yields, as well as the interest expense associated
with interest-bearing liabilities, expressed in dollars and rates, as well as
the net yield on interest-earning assets (net interest income divided by total
interest-earning assets).
8
<PAGE>
<PAGE>
Average Balances and yields earned versus rates paid
1996 compared to 1995
(Dollars in thousands)
Interest Yr-end
Average Earned Annualized Yld/Rt
Balance or Paid Yield/Rate 1996
1996 1995 1996 1995 1996 1995 1996
------ ------ ------ ------ ------ ------ ------
Assets
Interest-earning assets
Loans receivable $77,610 $71,582 $6,590 $5,976 8.49% 8.35% 8.55%
Investments 4,600 4,398 286 283 6.22% 6.43% 6.65%
------- ------ ----- ----- ----- ----- -----
Total earning assets/
income earned $82,210 75,980 6,876 6,259 8.36% 8.24% 8.42%
Non-earning assets 5,534 5,090
------ ------
Total assets $87,744 $81,070
====== ======
Liabilities
Interest-bearing
deposits $70,798 $66,888 $3,126 $2,959 4.42% 4.42% 4.44%
Borrowings 2,650 2,378 155 147 5.85% 6.16% 6.90%
------- ------ ----- ----- ---- ----- ----
Interest-bearing
liabilities/expense 73,448 69,266 3,281 3,106 4.47% 4.48% 4.62%
Non interest-bearing
liabilities 7,535 5,610
Stockholders' Equity 6,761 6,194
------ -----
Total liabilities and
stockholders' equity $87,744 $81,070
======= =======
Net interest income $3,595 $3,153
====== ======
Interest rate spread 3.89% 3.75% 3.80%
Net yield on average
interest-earning
assets 4.37% 4.15% 4.17%
Average Balances and
yields earned
versus rates paid
1995 compared to 1994
(Dollars in thousands)
Interest Yr-end
Average Earned Annualized Yld/Rt
Balance or Paid Yield/Rate 1996
1995 1994 1995 1994 1995 1994 1995
Assets
Interest-earning
assets
Loans receivable $71,582 $66,628 $5,976 $4,932 8.35% 7.40% 8.57%
Investments 4,398 4,112 283 217 6.43% 5.28% 6.13%
Total earning assets/ ------ ------ ------ ------ ------ ------ ------
income earned 75,980 70,740 6,259 5,149 8.24% 7.28% 8.44%
Non-earning assets 5,090 4,102
------ ------
Total assets $81,070 $74,842
====== ======
Liabilities
Interest-bearing
deposits $66,888 64,987 $2,959 $2,190 4.42% 3.37% 4.28%
Borrowings 2,378 769 147 30 6.16% 3.90% 5.92%
Interest-bearing ------ ------ ------ ------ ------ ------ ------
liabilities/expense 69,266 65,756 3,106 2,220 4.48% 3.38% 4.30%
Non interest-bearing
liabilities 5,610 3,483
Stockholders' Equity 6,194 5,603
Total liabilities and ------- -------
stockholders' equity $81,070 $74,842
======= =======
Net interest income $3,153 $2,929
====== ======
Interest rate spread 3.75% 3.90% 4.14%
Net yield on average
interest-earning
assets 4.15% 4.14% 4.48%
1995 balances and yields are for the Company. 1994 balances and yields are
for the Bank only.
9
<PAGE>
<PAGE>
The effects of changes in average balances (volume) and the effects of yield
on earning assets and rates on interest-bearing liabilities (rates) are shown
in the tables below. The rate/volume variances (effect of changes in rate
times the changes in volume) have been allocated between the rate and volume
variances based on the ratio of such variances to the total before allocation.
Rate/Volume analysis, 1996 compared to 1995
(Dollars in thousands)
Consolidated Variance due to:
1996 1995 Difference Rate Volume
------ ------ ---------- ------ -----
Interest income
Loans receivable $6,590 $5,976 $614 $104 $510
Investments 286 283 3 (10) 13
------ ------ ---- ---- ----
Total interest income $6,876 $6,259 $617 $94 $523
Interest Expense
Deposits $3,126 $2,959 $167 ($6) $173
Borrowings 155 147 8 (8) 16
------ ------ ---- ---- ----
Total interest expense $3,281 $3,106 $175 ($14) $189
Net interest income $3,595 $3,153 $442 $108 $334
====== ====== ==== ==== ====
Rate/Volume analysis, 1995 compared to 1994
(Dollars in thousands)
Consolidated Variance due to:
1995 1994 Difference Rate Volume
------ ------ ---------- ------ ------
Interest income
Loans receivable $5,976 $4,932 $1,044 $660 $384
Investments 283 217 66 50 16
------ ------ ------ ---- ----
Total interest income $6,259 $5,149 $1,110 $710 $400
Interest Expense
Deposits $2,959 $2,190 $769 $703 $66
Borrowings 147 30 117 25 92
------ ------ ---- ---- ----
Total interest expense $3,106 $2,220 $886 $728 $158
Net interest income $3,153 $2,929 $224 ($18) $242
====== ====== ==== ==== ====
10
<PAGE>
<PAGE>
RESULTS OF OPERATIONS
Comparison of Years Ended December 31, 1996 and December 31, 1995
- -----------------------------------------------------------------
Net income for 1996 was $501,000 which is a decrease of $26,000 over 1995 net
income of $527,000. The decline in income was primarily a result of the
one-time SAIF assessment of $445,000, pretax, which was levied in the third
quarter of 1996. (See "Recapitalization of SAIF" below.) Other changes in
income include a $443,000 increase in net interest income before provision for
loan losses, a decrease in provision for loan losses of $30,000, an increase
in other income of $157,000, an increase in other expenses, excluding the SAIF
assessment, of $238,000 and a decrease in income taxes of $28,000.
Net interest income increased from $3,153,000 in 1995 to $3,595,000 in 1996.
This increase is primarily the result of an increase in average
interest-earning assets which totaled $82,210,000 in 1996 as compared to
$75,980,000 in 1995.This resulted primarily from increases in permanent,
construction and commercial mortgage loans outstanding during 1996. (See Note
5 of Notes to Financial Statements.) Total yield on interest- earning assets
also increased from 8.24% in 1995 to 8.36% in 1996 while total costs of
interest-bearing liabilities remained relatively stable at 4.47% in 1996
versus 4.48% in 1995. As a result of the yield on interest-earning assets
increasing while the rate paid on interest-bearing liabilities remained
stable, net interest spread increased to 3.89% in 1996 from 3.75% in 1995.
The provision for loan losses for 1996 was $162,000, which is a decrease of
$30,000 over the 1995 provision for loan losses of $192,000. The Bank
establishes the provision based on the evaluation of credit and collateral
risk in the Bank's loan portfolio. This process is accomplished by reviewing
the loan portfolio on a regular basis and assigning a risk value to each loan,
considering the type of loan, loan-to-value ratio, payment history, total
indebtedness to the Bank, collateral value and any other information which may
affect the loan.
Other income increased $157,000 in 1996 over 1995. Loan related fees
increased $24,000. These loan fee increases resulted from higher loan
originations during 1996. Other service charges and fees were higher by
$133,000 during 1996 which included increases in deposit account fees of
$41,000, gains of the sale of foreclosed assets of $50,000 and increases in
late charge fees of $5,000.
Other expenses, excluding the one-time SAIF assessment of $445,000, increased
$238,000 in 1996 as compared to 1995. This increase is primarily the result
of an increase in compensation and benefits of $172,000. This increase was
due to an increase in salaries due to pay raises and bonuses earned and an
increase in staff. Supplies and printing expense decreased by $30,000, partly
as a result of an increase in prepaid expenses and a reduction in supplies
ordered in 1996. Professional fees increased by $22,000 as the Bank
outsourced certain compliance functions. Marketing expense increased by
$8,000 as a result of the Bank's "Privilege Plus" campaign which was started
during 1996 to increase transaction accounts. Data processing costs also
increased by $24,000 and account analysis charges increased by $10,000 as a
result of higher transaction account processing. Insurance costs, excluding
the SAIF assessment, were reduced $45,000 during the year as a result of the
FDIC eliminating the fourth quarter SAIF charge for Sasser institutions (i.e.
thrift institutions that convert to a national bank charter).
11
<PAGE>
<PAGE>
Comparison of Years Ended December 31, 1995 and December 31, 1994
- -----------------------------------------------------------------
Net income for 1995 was $527,000, which is an increase of $6,000 over 1994 net
income of $521,000. This is the result of a $224,000 increase in net interest
income before provision for loan losses, an increase in provision for loan
losses of $14,000, an increase in other income of $77,000, an increase in
other expenses of $233,000 and an increase in income taxes of $48,000.
Net interest income increased from $2,929,000 in 1994 to $3,153,000 in 1995.
This increase is primarily the result of an increase in average
interest-earning assets which totaled $75,980,000 in 1995 as compared to
$70,740,000 in 1994. This was offset in part by a decline in net interest
spread to 3.75% in 1995 from 3.90% in 1994. The decline in interest-rate
spread resulted from the rate paid on interest-bearing liabilities increasing
at a faster rate than the increase in the yield on interest-earning assets.
The provision for loan losses for 1995 was $192,000, which is an increase of
$14,000 over the 1994 provision for loan losses of $179,000. The Bank
establishes the provision based on past loan loss experience, known and
inherent risk in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral
and current economic conditions.
Other income increased $77,000 in 1995 over 1994. This increase was primarily
the result of an increase in transaction account fees of approximately
$146,000 during 1995.This increase resulted from an increase in the Bank's
deposit fee structure at the beginning of 1995. As a result of this fee
increase, the total number of transaction accounts remained relatively
unchanged from 1994. This increase was reduced by a decline in loan related
fees of approximately $8,000 and a decrease in servicing release fees of
$74,000. These declines were partly offset by a $13,000 increase in rental
income on previously vacant space of the Bluffton office.
Other expenses increased $233,000 in 1995 as compared to 1994. This increase
is primarily the result of an increase in compensation and benefits of
$101,000.This increase was due in part to a general increase in salaries due
to pay raises and increases in health care benefit costs due to higher
premiums in the industry. In addition, furniture and equipment expense
increased by $36,000, supplies and printing expense increased by $37,000,
professional fees increased by $11,000 and marketing expense increased by
$19,000. Expense increases in supplies and printing, marketing and
professional fees during 1995 were in part a result of the Bank's charter
conversion to a national bank and subsequent conversion to a holding company
form of ownership. As more high-volume commercial accounts have been added,
data processing costs have also increased. Automated teller machine charges
in 1995 also increased due to increased usage.
INCOME TAX
- ----------
The Company's provision for income taxes for 1996 was $322,000, of which
$277,000 represented federal income taxes and $46,000 represented state income
taxes. This provision decreased $28,000 or 8.0% from 1995 income taxes. The
decrease in the provision resulted from a decline in income before taxes of
$54,000 in 1996 versus 1995. In 1996 the Company's effective tax rate was
39.1% versus the 1995 rate of 40.0%. See Note 10 of Notes to the financial
statements for further details concerning income tax expenses for 1996, 1995
and 1994.
12
<PAGE>
<PAGE>
RECAPITALIZATION OF SAIF
- ------------------------
On September 30, 1996, Congress passed legislation which recapitalized the
Savings Association Insurance Fund ("SAIF"), the Bank's deposit insurer. As a
result of this legislation, the Bank and other institutions which held SAIF
insured deposits, paid a one-time assessment so that the SAIF could achieve
its designated reserve ratio. The Bank's assessment was $445,000, pretax
($.67 per share). The SAIF and the Bank Insurance Fund ("BIF") were created
following the collapse of the Federal Savings and Loan Insurance Corporation,
to insure Bank and Savings Institution deposit accounts. Since that time, the
SAIF had not met its legally required reserve level of 1.25% of deposits.
BIF, which had reached the 1.25% level, had reduced deposit insurance premiums
to a range of 0 to .27%, with approximately 92% of BIF members paying the
statutory minimum annual assessment rate of $2,000. SAIF insured institutions
were charged an assessment ranging from .23% for well capitalized institutions
to .31% for undercapitalized institutions with substantial risk. During 1996,
the Bank paid deposit insurance at the well capitalized rate of .23% .
Beginning January 1, 1997, the Bank will pay an assessed rate of .064% of
SAIF-assessable deposits. For the fourth quarter of 1996, the Bank was
refunded its fourth quarter deposit insurance premium (see Management's
Discussion and Analysis above).
LIQUIDITY
- ---------
Liquidity is the ability to meet the day-to-day cash needs of the Company.
These cash needs are comprised of loan disbursements, customer deposit
withdrawals, repayment of borrowings, payment of interest on deposits and
other operating expenses. The primary sources of liquidity are cash,
overnight investments and other short term investments. Available-for-sale
securities are a source for collateralizing large deposits or sold as a source
of funds.
The Company has no material liquidity needs other than those of its subsidiary
bank. The Bank maintains in cash, other short-term investments and available
credit lines liquidity adequate to meet its funding needs. The Bank had total
liquid assets at December 31, 1996 of $8,070,000 which amounted to 8.8% of
total assets outstanding. At December 31, 1995, the Bank had total liquid
assets of $5,745,000. Under its previous thrift charter, the Bank had excess
liquidity as defined by regulators at December 31, 1994 of $927,000, at
December 31, 1993 of $1,141,000 and at December 31, 1992 of $840,000. The
Bank's interest-earning liquid investments are primarily in overnight deposits
at the FHLB of Atlanta and federally insured short-term certificates of
deposit. The Bank also holds available-for-sale securities comprised of GNMA
mortgage backed securities. The Bank does not own any bonds which are not of
investment grade (i.e. "junk" bonds).
At December 31, 1996, the Bank's loan portfolio included $8,212,000 of unused
lines-of-credit outstanding. These are at market rates that are generally
indexed to prime. Of these lines, $6,039,000 were secured by one-to-four
family residential properties. Other commitments to extend credit, not
including undisbursed portions of loans in process, consisted of $460,000 in
fixed-rate residential mortgage loans, $224,000 in adjustable rate residential
mortgage loans and $570,000 in residential construction loans. Commitments to
sell fixed-rate loans are generally in place at the time the commitment is
issued. (See Note 15 in Notes to the Financial Statements.) The Company
generally sells loans to investors with recourse only in the first four months
after purchase. At December 31, 1996 the Company had sold $2,180,000 in
mortgage loans on which recourse provisions remained for a default occurring
during the first four
13
<PAGE>
<PAGE>
installments due and remaining in default for a period of ninety days. The
purchase price would include the outstanding principal loan balance and
accrued interest, any servicing release fee and other costs. Management does
not anticipate any unusual risk associated with this potential obligation.
The Company has relied on deposit growth, loan repayments and proceeds from
loan sales as the principal sources of funds to meet its liquidity needs. In
addition, the Bank uses FHLB advances as a source of funds. At December 31,
1996 the Bank had a total credit line with the FHLB of Atlanta of $11,000,000.
The availability of funds from loan sales is influenced by general interest
rates and market conditions. Borrowings may be used on a short-term basis to
compensate for inflows at less than projected levels or on a longer-term basis
to support lending activities. Management believes that with the ability to
obtain advances from the FHLB, this level of excess liquidity is satisfactory.
The Bank encourages deposit growth through its three offices and uses these
deposits as its primary source of loan and investment funding. The
introduction of its package accounts for DDA and NOW accounts was the primary
contributor to transaction account deposit increases during 1996.
Certificates of deposit that are $100,000 or more totaled approximately $10.5
million at December 31, 1996, 96% of which were from in-state sources. The
Company maintains deposit relationships with out-of-state depositors of
amounts generally in $99,000 increments at rates consistent with those of
in-state depositors. At December 31, 1996 these deposits totaled
approximately $7,100,000.
The FHLB advances at December 31, 1996 and 1995 are summarized in the
following table.
Outstanding Balances:
December 31, 1996 Rate Amount
- ----------------- Outstanding
Type advance and/or Maturity Date
Daily rate credit advances 6.95% $4,650,000
Principal reducing credit maturing June 5, 2001 6.92% $450,000
Fixed rate credit maturing June 5, 1998 6.65% $500,000
----------
Total $5,600,000
==========
Maximum amount of advances outstanding at any
month-end $5,600,000
Average borrowings during the year $2,650,000
Weighted average interest rate during the year 5.85%
December 31, 1995
- -----------------
Daily rate credit advances 5.92% $1,000,000
Maximum amount of advances outstanding at any
month-end $4,500,000
Average borrowings during the year $2,378,000
Weighted average interest rate during the year 6.16%
14
<PAGE>
<PAGE>
There are no known trends or any known demands, commitments, events or
uncertainties that will result in or are likely to have a material adverse
effect on the Company's liquidity.
CAPITAL RESOURCES
- -----------------
The Bank maintains a minimum level of capital (stockholders' equity and
certain other items) in accordance with capital requirements established by
the Office of the Comptroller of the Currency. The Bank may not pay a cash
dividend to its parent company if the dividend would exceed the Bank's net
profits for the current year plus retained net profits for the preceding two
years, less any required transfers to surplus. Its minimum capital
requirements are calculated as a percentage of its total assets and certain
off-balance sheet items, adjusted according to various risk weights. Its
total capital, adjusted for certain items including reductions for intangible
assets must equal, at a minimum, 8% of these adjusted risk- weighted assets.
The risk-based requirement divides assets into risk-weighted categories of 0%,
20%, 50% and 100%. The 0% category contains cash and cash items in process.
The 20% category contains federally-insured deposits, investments, FHLB stock,
and loans fully secured by segregated deposits. The 50% category contains
first mortgage loans secured by 1-4 family dwellings. The 100% category
contains other loans and all other assets not contained in any of the other
categories. Off-balance sheet items including loan commitments are applied a
risk-weight. This resulting amount is included in total risk- weighted
assets. Because much of the Bank's portfolio is concentrated in residential
first mortgage loans, which are included in risk-weighted assets at 50% of
their face amount, the Bank's total risk-adjusted assets are considerably less
than total book value.
At December 31, 1996, the Bank met all of its regulatory capital requirements.
The Bank's risk-weighted assets were approximately $63,200,000. Its total
Tier 1 capital, which includes common stockholders' equity less intangible
assets, was $6,900,000 or 10.91% of risk-weighted assets. Its Tier 2 capital,
which includes Tier 1 capital plus the Bank's allowance for loan losses,
totaled $7,500,000 or 11.90% of risk-weighted assets.
EFFECT OF INFLATION AND CHANGING PRICES
- ---------------------------------------
The Company's financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurement of 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.
Since the primary assets and liabilities of the Bank are monetary, to the
extent that inflation impacts interest rates, inflation will impact the net
income of the Bank. Interest rates do not, however, necessarily move in the
same direction or at the same magnitude as the prices of goods and services.
Non-interest operating expenses are affected by general levels of inflation.
CHANGES IN ACCOUNTANTS
- ----------------------
On September 22, 1995 the management of the Bank, after receiving the approval
of members of the Bank's Audit Committee and Board of Directors, informed its
independent accountants, Deloitte &
15
<PAGE>
<PAGE>
Touche LLP (the "Prior Accountants"), that such accounting firm would not be
retained for the fiscal year ending December 31, 1995. On September 22, 1995,
the Board of Directors, after receiving proposals from other accounting firms,
formally elected to engage J.W. Hunt and Company, LLP to serve as independent
accountants for the year ending December 31, 1995. Prior to their engagement
on September 22, 1995, the firm of J. W. Hunt and Company, LLP was not
consulted by the Bank for any financial or accounting matters. J.W. Hunt and
Company, LLP was also engaged by the Board of Directors to serve as
independent accountants for the year ending December 31, 1996.
In connection with the audit of the Bank's consolidated financial statements
for the year ended December 31, 1994, and any subsequent interim period
preceding the dismissal of the Prior Accountants and the engagement of the new
accountants, there were no disagreements with the Prior Accountants on any
matter of accounting principles or practices, financial statement disclosure,
or auditing scope or procedure, which disagreements if not resolved to the
satisfaction of the Prior Accountants would have caused them to make reference
in connection with their report to the subject matter of the disagreements.
The audit report of the Prior Accountants on the Bank's consolidated financial
statements for the year ended December 31, 1994 was unqualified.
16
<PAGE>
<PAGE>
Audit Committee's Report
Dear Stockholder:
The Audit Committee of the Board of Directors is composed of independent
directors. The members of the Audit Committee are: William C. Robinson,
Chairman, Laurance H. Davis, Jr., and Robert A Kerr. The Committee held
three meetings during fiscal year 1996.
The Audit Committee oversees the Company's and the Bank's financial reporting
process on behalf of the Board of Directors. In fulfilling its
responsibility, the Committee recommended to the Board of Directors the
Company's independent public accountant. The Audit Committee discussed with
the Company's independent public accountant the overall scope and specific
plans for its audit. The Committee also discussed the Company's financial
statements and the adequacy of the internal controls.
The independent auditors and representation of management meet regularly
(separately and jointly) with the Committee to review the activities of each,
to ensure that each is properly discharging its responsibilities and to assess
the effectiveness of the system of internal accounting controls and the
overall quality of the organization's financial reporting. The meetings also
were designed to facilitate any private communication with the Committee
desired by the independent public accountant.
/s/ William C. Robinson
William C. Robinson
Audit Committee
17
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Stockholders and the Board of Directors
FirstBancorporation, Inc.
Beaufort, South Carolina
We have audited the accompanying consolidated balance sheets of
FirstBancorporation, Inc., and Subsidiary as of December 31, 1996 and 1995,
and the related consolidated statements of income and cash flows for each of
the years in the two-year period ended December 31, 1996, and the consolidated
statements of changes in stockholders' equity for the year ended December 31,
1996 and for the period November 1, 1995 through December 31, 1995. We have
also audited the statement of changes in stockholders' equity of FirstBank,
N.A. for the period January 1, 1995 through October 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The balance sheet of FirstBank, N.A., formerly known as The
Savings Bank of Beaufort County, F.S.B., as of December 31, 1994 and the
related statements of income, changes in stockholders' equity and cash flows
for the year ended December 31, 1994, were audited by other auditors whose
report, dated January 31, 1995, expressed an unqualified opinion on those
statements.
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. The audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
The 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, the financial statements referred to above present fairly in
all material respects, the financial position of FirstBancorporation, Inc.
and Subsidiary at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the financial statements, FirstBancorporation, Inc.
was organized in 1995 to become a bank holding company for FirstBank, N.A.
/s/ J.W. Hunt and Company, LLP
J.W. Hunt and Company, LLP
Columbia, South Carolina
January 31, 1997
18
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<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARY
=========================================
CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 1996 AND 1995
-----------------------------------------------------------
1996 1995
------ ------
ASSETS
------
Cash and amounts due from banks $4,721,174 $4,197,281
Interest-bearing deposits with bank 3,149,854 1,349,087
---------- ----------
Total cash and cash equivalents 7,871,028 5,546,368
Interest-bearing time deposits with banks 199,177 199,000
Securities available-for-sale 2,485,075 2,629,812
Real estate loans held for sale 663,316 251,350
Loans receivable-net of loans in process 78,780,166 72,496,193
Less, allowance for loan losses (630,557) (470,198)
---------- ----------
Net loans receivable 78,149,609 72,025,995
---------- ----------
Accrued interest receivable 502,412 496,445
Premises and equipment, net 1,147,127 1,035,895
Foreclosed real estate 227,510 442,865
Deferred organization costs 135,547 147,058
Deferred tax asset 185,172 146,324
Prepaid expenses and other assets 167,176 126,371
----------- -----------
Total assets $91,733,149 $83,047,483
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Demand Deposits $33,041,216 $29,409,682
Savings deposits 5,969,522 7,299,461
Time deposits 39,289,281 38,195,782
---------- ----------
Total deposits 78,300,019 74,904,925
Federal Home Loan Bank advances 5,600,000 1,000,000
Amounts due to depository institutions
(non-interest bearing) 200,117 238,090
Advance payments by borrowers for
taxes and insurance 76,473 83,661
Accrued liabilities
Interest payable 119,059 104,661
Expenses payable 213,569 50,874
Income taxes payable -- 25,160
Other 179,233 122,648
---------- ----------
Total liabilities 84,688,470 76,530,019
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock-$0.01 par value, shares
authorized-1,000,000, issued and outstanding
Common stock-$0.01 par value, shares authorized
-2,000,000, issued 6,276 5,958
and outstanding-627,587-1996; issued and
outstanding-595,848-1995 5,441,306 5,037,021
Additional paid-in capital
Unrealized loss on securities available-for-sale,
net of applicable deferred income taxes (10,931) (19,325)
Retained earnings 1,608,028 1,493,810
----------- -----------
Total stockholders' equity 7,044,679 6,517,464
----------- -----------
Total liabilities and stock holders' equity $91,733,149 $83,047,483
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
-----------------------------------------------------------------------
19
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<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARY
=========================================
STATEMENTS OF INCOME, YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
------------------------------------------------------------------
....CONSOLIDATED... ...BANK ONLY...
1996 1995 1994
---- ---- ----
INTEREST AND DIVIDEND INCOME:
Interest on loans $6,590,411 $5,975,775 $4,931,619
Interest on securities
available-for-sale 239,684 246,326 192,226
Dividends - Federal Reserve Bank and
Federal Home Loan Bank 45,931 36,246 24,696
Total interest and dividend income 6,876,026 6,258,347 5,148,541
INTEREST EXPENSE:
Deposits 3,125,187 2,959,101 2,190,296
--------- --------- ---------
FHLB advances 155,460 146,567 29,530
--------- --------- ---------
Total interest expense 3,280,647 3,105,668 2,219,826
--------- --------- ---------
NET INTEREST INCOME 3,595,379 3,152,679 2,928,715
PROVISION FOR LOAN LOSSES 162,000 192,000 178,500
--------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,433,379 2,960,679 2,750,215
--------- --------- ---------
NONINTEREST INCOME:
Loan related fees 119,295 95,548 177,196
Other service charges and fees 617,994 485,470 339,672
Rental income 43,603 43,148 30,370
--------- ---------- ----------
Total noninterest income 780,892 624,166 547,238
--------- ---------- ---------
NONINTEREST EXPENSES:
Compensation and benefits 1,553,094 1,380,966 1,280,376
Occupancy 275,314 284,503 266,441
Insurance 617,948 207,296 192,569
Furniture and equipment 234,915 233,466 197,884
Data processing 156,330 132,810 123,015
Account analysis charges 119,380 109,222 103,107
Professional fees 115,973 94,035 83,331
Supplies and printing 70,275 99,826 63,116
Marketing 61,942 54,194 35,284
Telephone and postage 101,552 102,674 103,918
Automobile 8,787 11,210 15,278
Regulatory fees 34,532 30,005 25,073
Automated teller system 13,667 13,518 11,044
Other expenses 188,084 120,423 115,019
Loan origination costs deferred (160,831) (166,798) (141,434)
--------- --------- ---------
Total noninterest expenses 3,390,962 2,707,350 2,474,021
--------- --------- ---------
INCOME BEFORE INCOME TAXES 823,309 877,495 823,432
--------- --------- ---------
PROVISION FOR INCOME TAXES
Federal 276,647 307,640 251,772
State 45,851 43,037 51,028
-------- -------- --------
Total 322,498 350,677 302,800
-------- -------- --------
NET INCOME $500,811 $526,818 $520,632
======== ======== ========
NET INCOME PER WEIGHTED AVERAGE
NUMBER OF COMMON SHARES
OUTSTANDING
Primary $0.76 $0.82 $0.81
===== ===== =====
Fully Diluted $0.76 $0.82 $0.81
===== ===== =====
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
-----------------------------------------------------------------------
20
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARY
=========================================
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY, YEARS ENDED
DECEMBER 31, 1996, 1995, 1994
----------------------------------------------------------
UNREALIZED
LOSS ON
SECURITIES
AVAILABLE-
FOR SALE
NET OF
COMMON STOCK ADDITIONAL APPLICABLE TOTAL
NUMBER PAID-IN RETAINED DEFERRED STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL EARNINGS INCOME TAXES EQUITY
--------- ------ ------- -------- ---------- ---------
BANK ONLY:
Balance,
December 31,
1993 501,847 $2,509,235 $1,557,979 $1,307,125 $ - $5,374,339
Issuance of
50,151
shares of
stock
for 10%
stock
dividend 50,151 250,755 250,755 (501,510) - -
Net income - - - 520,632 - 520,632
------ ------- ------- -------- ----- -------
Balance,
December 31,
1994 551,998 2,759,990 1,808,734 1,326,247 - 5,894,971
Issuance of
27,635
shares of
stock for
5% stock
dividend 27,635 138,175 221,080 (359,255)
Stock
options
exercised 16,215 81,075 33,925 - - 115,000
------- ------- ------- -------- ----- --------
Balance,
October 31,
1995 595,848 $2,979,240 $2,063,739 $966,992 $ - $6,009,971
======= ========== ========== ======== ====== =========
CONSOLIDATED:
Beginning
balance,
November 1,
1995 595,848 $2,979,240 $2,063,739 $966,992 $ - $6,009,971
Recapitali-
zation-
change in
par value
of common
stock - (2,973,282) 2,973,282 - - -
Net income - - - 526,818 - 526,818
Change in
unrealized
loss on
securities
available-
for-sale,
net of
applicable
deferred
income
taxes of
$11,844 - - - - (19,325) (19,325)
------- -------- --------- -------- ------- -------
21
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARY
=========================================
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY, YEARS ENDED
DECEMBER 31, 1996, 1995, 1994
----------------------------------------------------------
UNREALIZED
LOSS ON
SECURITIES
AVAILABLE-FOR SALE
NET OF
COMMON STOCK ADDITIONAL APPLICABLE TOTAL
NUMBER PAID-IN RETAINED DEFERRED STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL EARNINGS INCOME TAXES EQUITY
--------- ------ ------- -------- ---------- ---------
Balance,
December
31, 1995 595,848 $5,958 $5,037,021 $1,493,810 $(19,325) $6,517,464
------- ------ ---------- ---------- -------- ----------
Issuance of
29,700
shares of
stock for
5 % stock
dividend 29,738 297 386,297 (386,594) - -
Stock options
exercised 2,001 20 17,990 - - 18,010
Net income - - - 500,811 - 500,811
Change in
unrealized
loss on
securities
available-
for-sale,
net of
applicable
deferred
income
taxes of
$5,144 - - - - 8,394 8,394
------- ------ ---------- ---------- -------- ----------
Balance,
December 31,
1996 627,587 $6,275 $5,441,308 $1,608,027 $(10,931) $7,044,679
======= ====== ========== ========== ========= ==========
(concluded)-2.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
-----------------------------------------------------------------------
22
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARY
========================================
STATEMENTS OF CASH FLOWS, YEARS ENDED DECEMBER 31, 1996, 1995, 1994
-------------------------------------------------------------------
....CONSOLIDATED... ...BANK ONLY...
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net income $500,811 $526,818 $520,632
Adjustments to reconcile net income
to net cash provided by operating
activities:
Amortization of deferred loan
fees and discounts (3,654) (9,007) (37,858)
Provision for loan losses 162,000 192,000 178,500
(Increase) decrease in loan fees
deferred, net of costs - (10) 21,434
Depreciation and amortization 202,949 181,588 180,227
Deferred income taxes (43,992) (115,319) (29,161)
Gain on sale of foreclosed real estate (50,393) (4,330) -
Loss on disposition of premises and
equipment - 5,760 -
(Increase) in interest receivable (5,967) (55,632) (72,615)
Increase in deferred organization costs - (58,622) (90,666)
(Increase) decrease in prepaid
expense and other (40,805) 34,928 51,789
Originations of loans sold
to investors (7,521,386) (4,664,658) (10,082,064)
Proceeds from sales of loans
to investors 7,521,386 4,664,658 10,082,064
(Increase) decrease in real estate
loans held for sale (411,966) 60,991 214,975
Increase in accrued interest payable 14,398 34,205 7,781
Increase (decrease) in accrued expenses 162,695 (22,085) 9,528
Increase (decrease) in income
taxes payable (25,160) 160 25,000
Increase (decrease) in other liabilities 56,585 65,975 (81,337)
------- ------- -------
Net cash provided by operating
activities 517,501 837,420 898,229
------- ------- -------
Cash flows from investing activities:
Purchase of securities available-
for-sale (97,315) - (299,000)
Maturities of securities - - 200,000
Principal repayments of securities
available-for-sale 350,613 247,632 242,024
Purchase of Federal Home Loan Bank
Stock and dividends received (103,800) (30,700) (5,100)
Purchase of Federal Reserve Bank stock - (130,300) -
Loans originated, net (6,546,888) (3,879,871) (3,861,099)
Proceeds from sales of foreclosed
real estate 530,500 82,500 -
Capital expenditures (293,894) (109,323) (169,954)
---------- ---------- ----------
Net cash used by investing activities (6,160,784) (3,820,062) (3,893,129)
---------- ---------- ----------
Cash flows from financing activities:
Net increase in demand deposit
accounts 3,631,534 2,077,090 970,629
Net decrease in savings deposit
accounts (1,329,939) (3,831,808) (2,637,608)
Net increase in time deposits 1,093,499 7,386,904 3,691,053
Proceeds from Federal Home Loan
Bank advances 15,150,000 9,750,000 8,500,000
Repayment of Federal Home Loan
Bank Advances (10,550,000) (9,750,000) (7,500,000)
Increase (decrease) in amounts due
to depository institutions (37,973) (632,136) 685,336
Increase (decrease) in advance
payments by borrowers for taxes
and insurance (7,188) 36,124 819
Proceeds from stock options exercised 18,010 115,000 -
--------- -------- ---------
Net cash provided by financing
activities 7,967,943 5,151,174 3,710,229
--------- --------- ---------
(continued) - 1
23
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS, YEARS ENDED DECEMBER 31, 1996, 1995, 1994
- --------------------------------------------------------------------
....CONSOLIDATED... ...BANK ONLY...
1996 1995 1994
---- ---- ----
Net increase in cash and
cash equivalents $2,324,660 $2,168,532 $ 715,329
Cash and cash equivalents
at beginning of year 5,546,368 3,377,836 2,662,507
---------- ---------- ----------
Cash and cash equivalents
at end of year $7,871,028 $5,546,368 $3,377,836
========== ========== ==========
Supplemental disclosure of
cash flow information:
Cash paid for:
Interest on deposits
and borrowings $3,110,789 $3,071,463 $2,212,045
========== ========== ==========
Income taxes $ 400,160 $ 465,836 $ 338,409
========== ========== ==========
Supplemental disclosures
of noncash investing
activities:
Transfer of securities
from held-to-maturity
to available-for-sale
on December 20, 1995 $ - $2,112,800 $ -
========= ========== ==========
Change in unrealized loss
on securities available-
for-sale $ 13,537 $ (31,169) $ -
========= ========== ==========
Change in deferred income
tax expense (benefit) on
unrealized loss on
securities available-
for-sale $ (5,144) $ 11,844 $ -
========= ========== ==========
(concluded) - 2
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
-----------------------------------------------------------------------
24
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARY
========================================
NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 1 - ORGANIZATION:
FirstBancorporation, Inc. (the Company) was organized under the laws of the
State of South Carolina on February 28, 1995, for the purpose of becoming a
bank holding company for FirstBank, N.A. (formerly known as The Savings Bank
of Beaufort County, F.S.B.). Pursuant to the provisions of the Bank Holding
Company Act, application was filed during April, 1995, with the Board of
Governors of the Federal Reserve System for the Company to become a bank
holding company by acquiring the Bank and approval was granted on June 15,
1995.
In accordance with the terms of the Plan of Reorganization, FirstBank, N.A.
(the Bank) became a wholly-owned subsidiary of FirstBancorporation, Inc. on
November 1, 1995. The Company issued 595,848 shares of common stock in
exchange for the outstanding common stock of the Bank on a one-for-one basis.
Acquisition of the Bank was recorded at historical cost in a manner similar to
the pooling of interest method and the issuance of $ 5,042,979 of
FirstBancorporation, Inc. common stock was recorded by the Company.
On June 5, 1995, a plan of conversion was completed whereby The Savings Bank
of Beaufort County, F.S.B., a federal stock savings bank chartered on March
18, 1986 by the Federal Home Loan Bank Board, predecessor of the Office of
Thrift Supervision (OTS), became a national bank to be known as FirstBank,
N.A. Upon completion of the conversion, FirstBank, N.A. became subject to
the provisions of the National Bank Act, as amended, and the regulations and
rules issued thereunder by the Office of the Comptroller of the Currency
(OCC). The Bank is no longer subject to the regulatory jurisdiction of the
OTS.
The aggregate number of shares of all classes of capital stock which the
Company has authority to issue is three million (3,000,000), of which two
million (2,000,000) shall be common stock, par value $.0l per share, amounting
in the aggregate to $20,000, and of which one million (1,000,000) shall be
serial preferred stock, par value $.0l per share, amounting in the aggregate
to $10,000.
In 1996, First Securities Corporation (FSC) was incorporated in South
Carolina. FSC was organized to provide alternative investment services in the
Bank's service area. At December 31, 1996, FSC was inactive and none of its
authorized common stock had been issued. FSC will be a wholly-owned
subsidiary of FirstBank, N.A.
25
<PAGE>
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of the Company and the Bank conform with
generally accepted accounting principles and with the prevailing practices
within the banking industry. The Company provides general banking services in
the area encompassing the northern two-thirds of Beaufort County of the State
of South Carolina.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements of FirstBancorporation, Inc. include the
accounts of the Company and its wholly-owned subsidiary, the Bank. All
significant intercompany balances and transactions have been eliminated in
consolidation.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS:
For purposes of reporting cash flows, cash and cash equivalents include cash
and amounts due from depository institutions and interest-bearing overnight
deposits and other short-term investments with original maturities of 90 days
or less.
SECURITIES AVAILABLE-FOR-SALE:
Unrealized holding gains and losses, net of tax, on securities
available-for-sale are reported as a net amount in a separate component of
stockholders' equity until realized.
Gains and losses on the sale of securities available-for-sale are determined
using the specific-identification method.
Premiums and discounts are recognized in interest income using methods
approximating the interest method over the period to maturity.
LOANS RECEIVABLE:
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal adjusted for any charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans and unamortized
premiums or discounts on purchased loans.
26
<PAGE>
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
LOANS RECEIVABLE (CONTINUED):
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield of the related loan.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they
become due. When interest accrual is discontinued, all unpaid accrued
interest is reversed. Interest income is subsequently recognized only to the
extent cash payments are received in excess of principal payments due.
The allowance for loan losses is increased by charges to income and decreased
by charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on the Bank's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions.
DEFERRED LOAN FEES AND DISCOUNTS ON LOANS:
The Bank defers all loan origination fees as well as certain direct loan
origination costs. Such fees and costs received or incurred in connection
with mortgage loans made and purchased are recognized as an adjustment to
yield over the average life of the loans using a method which approximates the
level yield method. Commitment fees to originate loans are deferred and, if
the commitment is exercised, recognized over the life of the loan as an
adjustment of yield. If the commitment expires unexercised, commitment fees
are recognized in income upon expiration of the commitment.
REAL ESTATE LOANS HELD FOR SALE:
The Bank originates loans for sale in the secondary market generally without
recourse under commitments or other arrangements in place prior to loan
origination. Sales are completed at or near the loan origination date. All
fees and other income from these activities are recognized in income when loan
sales are completed. At December 31, 1996, the Bank had sold mortgage loans
on which recourse remained with the Bank due to possible borrower default and
other general recourse provisions as follows:
Principal Loan Balance
Principal Recourse Criteria: Subject to Recourse
----------------------
A default occurs during the first four (4)
installments due and the default continues for
a period of ninety (90) days. $2,179,900
==========
The repurchase price would include the outstanding principal loan balance and
accrued interest, any servicing release fees and other costs. Management does
not anticipate any unusual risk associated with this potential obligation.
27
<PAGE>
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
FORECLOSED REAL ESTATE:
Real estate properties acquired through, or in lieu of, loan foreclosure are
initially recorded at fair value less estimated disposal costs at the date of
foreclosure. Fair value is determined on the basis of the property being sold
in the normal course of business and not on a liquidation or distress basis.
After foreclosure, valuations are periodically performed by management and the
real estate is carried at the lower of carrying amount or fair value less cost
to sell. Revenue and expenses from operations are included in other expenses.
PREMISES AND EQUIPMENT:
Land is stated at cost. Office equipment, furnishings, and buildings are
stated at cost less accumulated depreciation computed using the straight-line
method over the estimated useful lives of the assets. Estimated useful lives
are 31-1/2 years for buildings and five years for furniture and equipment.
Additions to premises and equipment and major replacements are added to the
accounts at cost. Maintenance and repairs and minor replacements are charged
to expense when incurred. Gains and losses on routine dispositions are
reflected in current operations.
MARKETING EXPENSES:
The costs of marketing is expensed as incurred.
DEFERRED ORGANIZATION COSTS:
Organization costs are amortized using the straight-line method over a period
of five years from the commencement of operations.
Costs associated with the conversion to a national bank are amortized using
the straight-line method over a period of twenty-five years.
AMOUNTS DUE TO DEPOSITORY INSTITUTIONS:
The Bank invests excess funds on deposit at other depository institutions
(including amounts intended for payment of issued and outstanding checks) on a
daily basis in overnight interest-bearing accounts. Accordingly, issued and
outstanding checks are recorded as a liability.
INCOME TAXES:
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through
the provision for income taxes. The provision for income taxes of the Bank is
recorded as if the Bank filed a separate return.
28
<PAGE>
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
RETIREMENT PLAN:
The Bank has a contributory 401(k) plan covering substantially all employees.
Contributions to the plan are made on a matching basis of 50% up to a maximum
of 6% of employees' plan contributions. Total contributions to the plan were
$17,992, $17,054 and $17,247 for 1996, 1995 and 1994, respectively.
LEASE COMMITMENTS:
The Bank has entered into operating lease agreements for land, buildings, and
equipment used in operations. The agreements expire over various terms with
the longest such term extending to the year 2013. Certain of the leases are
subject to rent escalation provisions. In addition, the Bank pays
maintenance, property taxes and insurance on the leased properties.
EARNINGS PER SHARE:
Primary earnings per common share was computed by dividing net income by the
weighted average number of shares of common stock and common stock equivalents
outstanding during the year. The number of common shares was increased by the
number of shares issuable on the exercise of stock options when the market
price of the common stock exceeds the exercise price of the options. This
increase in the number of common shares was reduced by the number of common
shares that are assumed to have been purchased with the proceeds from the
exercise of the options; those purchases were assumed to have been made at the
average price of common stock during the year. Earnings per share assuming
full dilution was determined in the same manner as primary earnings per common
share except that the year-end stock price was used. Earnings per share
amounts for all periods presented reflect stock dividends granted.
OFF-BALANCE-SHEET INSTRUMENTS:
In the ordinary course of business the Bank has entered into off-balance-sheet
financial instruments consisting of commitments to extend credit and stand-by
letters of credit. Such financial instruments are recorded in the financial
statements when they are funded or related fees are incurred or received.
FAIR VALUES OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used in estimating fair values of
financial instruments as disclosed herein:
Cash and short-term instruments. The carrying amounts of cash and short-
term instruments approximate their fair value.
Securities available-for-sale. Fair values for securities are based on
quoted market prices.
29
<PAGE>
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED):
Loans receivable. For variable-rate loans that reprice frequently and have
no significant change in credit risk, fair values are based on carrying
values. Fair values for certain mortgage loans (for example, one-to-four
family residential) and other consumer loans are based on quoted market
prices of similar loans sold adjusted for differences in loan
characteristics. Fair values for commercial real estate and commercial
loans are estimated using discounted cash flow analyses, using interest
rates currently being offered for loans with similar terms to borrowers of
similar credit quality. Fair values for impaired loans are estimated using
discounted cash flow analyses or underlying collateral values, where
applicable.
Deposit liabilities. The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date
(that is, their carrying amounts). The carrying amounts of variable-rate,
fixed-term money-market accounts and certificates of deposit (CDS)
approximate their fair values at the reporting date. Fair values for
fixed-rate CDS are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a schedule
of aggregated expected monthly maturities on time deposits.
Federal Home Loan Bank advances. Fair value of the advances are estimated
using discounted cash flow analyses based on the Bank's current incremental
borrowing rate for similar types of borrowing arrangements.
Accrued interest and amounts due to depository institutions. The carrying
amounts approximate their fair values.
Off-balance-sheet instruments. Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the counterparties' credit standings.
OTHER:
Certain amounts previously reported have been restated in order to conform
with current year presentation. Such reclassifications had no effect on net
income.
30
<PAGE>
<PAGE>
NOTE 3 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS:
As a member of the Federal Reserve System, the Bank is required by regulation
to maintain an average cash reserve balance with the Federal Reserve Bank or
in vault cash. The average daily reserve balance requirement for December 31,
1996 was approximately $562,000.
At December 31, 1996, the Bank had due from bank balances in excess of
federally insured limits in the amount of approximately $1,724,000.
NOTE 4 - SECURITIES AVAILABLE-FOR-SALE:
Securities available-for-sale have been classified according to management
intent.
The following is the amortized cost and fair value of securities
available-for-sale at December 31, 1996:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
Mortgage-backed securities $1,725,460 $ - $(17,631) $1,707,829
U.S. Government securities 98,846 - - 98,846
Federal Home Loan Bank stock 548,100 - - 548,100
Federal Reserve Bank stock 130,300 - - 130,300
---------- --- -------- ----------
Total $2,502,706 $ - $(17,631) $2,485,075
========== === ======== ==========
The following is the amortized cost and fair value of securities
available-for-sale at December 31, 1995:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
Mortgage-backed securities $2,086,381 $ - $(31,169) $2,055,212
Federal Home Loan Bank stock 444,300 - - 444,300
Federal Reserve Bank stock 130,300 - - 130,300
---------- ----- -------- ----------
Total $2,660,981 $ - $(31,169) $2,629,812
========== ===== ======== ==========
31
<PAGE>
<PAGE>
NOTE 4 - SECURITIES AVAILABLE-FOR-SALE (CONTINUED):
The mortgage-backed securities held at December 31, 1996 consist solely of
GNMA Adjustable Rate Mortgage Securities and mature generally between 24 and
29 years. The actual lives of these securities may be shorter as a result of
prepayments. The U.S. Government securities mature in 1997. Other
securities consist of the required capital stock of the Federal Home Loan Bank
and the Federal Reserve Bank and have no contractual maturity.
There were no realized gains or losses on sales of investment securities
during the three year period ending December 31, 1996.
At December 31, 1996 and 1995, the Federal Home Loan Bank stock was pledged as
collateral on the Federal Home Loan Bank advances.
NOTE 5 - LOANS RECEIVABLE:
Loans receivable at December 31, 1996 and 1995, consisted of the following
1996 1995
---- ----
Real estate mortgage loans:
Permanent $51,402,196 $47,873,904
Construction 9,346,027 8,058,175
Commercial 9,833,048 7,115,480
========== ==========
Total mortgage loans 70,581,271 63,047,559
---------- ----------
Other loans:
Consumer loans 8,717,516 8,669,229
Commercial loans 2,988,014 3,507,794
---------- ----------
Total other loans 11,705,530 12,177,023
---------- ----------
Total loans 82,286,801 75,224,582
Less - loans in process (3,506,635) (2,728,389)
----------- -----------
Loans receivable $78,780,166 $72,496,193
=========== ===========
The Bank's loan portfolio consists principally of adjustable rate residential
first mortgage loans to individuals for single family homes in the northern
two-thirds of Beaufort County. At December 31, 1996, the Bank's total loan
portfolio included adjustable rate loans totaling approximately $12.9 million,
having interest rate adjustments indexed to prime, and approximately $40.3
million of adjustable rate loans, having interest rate adjustments indexed to
the one or three year U.S. Treasury bill adjusted to a constant maturity.
Future market factors may, in certain instances, affect the correlation of the
interest rate adjustment with the rates the Bank pays on the short-term
deposits and Federal Home Loan Bank advances that have been primarily utilized
to fund these loans.
32
<PAGE>
<PAGE>
NOTE 5 - LOANS RECEIVABLE (CONTINUED):
Transactions in the allowance for loan losses are summarized as follows:
1996 1995 1994
---- ---- ----
Beginning balance $ 470,198 $ 345,605 $ 238,000
Provision (charged to income) 162,000 192,000 178,500
Recoveries of charge-offs 26,993 2,883 11,824
Charge-offs (28,634) (70,290) (82,719)
--------- --------- ---------
Ending balance $ 630,557 $ 470,198 $ 345,605
========= ========= =========
Real estate mortgage loans include investments of $1,709,611 and $1,867,619 in
participating interests of loans originated and serviced by other financial
institutions as of December 31, 1996 and 1995, respectively.
Real estate mortgage loans exclude loans serviced for others of $4,392,204 and
$1,886,761 as of December 31, 1996 and 1995, respectively. Servicing loans
for others generally consists of collecting mortgage payments, maintaining
escrow accounts and disbursing payments to investors. Loan servicing income
is recorded on the accrual basis and includes servicing fees from investors
and certain charges collected from borrowers, such as late payment fees.
Impairment of loans having recorded investments of $389,663 at December 31,
1996, has been recognized in conformity with Statement of Financial Accounting
Standards No. 114, Accounting by Creditors for Impairment of a Loan, as
amended by Statement of Financial Accounting Standards No. 118, Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosure. The
average recorded investment in impaired loans during 1996 was $261,613. The
total allowance for loan losses related to these loans was $48,340 at December
31, 1996. Interest income on impaired loans of $26,263 was recognized for
cash payments received in 1996. No loans were considered impaired at December
31, 1995.
Loans having carrying values of $264,752 and $254,594 were transferred to
foreclosed real estate in 1996 and 1995, respectively.
33
<PAGE>
<PAGE>
NOTE 6 - PREMISES AND EQUIPMENT:
Premises and equipment at December 31, 1996 and 1995, consists of the
following:
1996 1995
---- ----
Cost:
Land $ 251,000 $ 251,000
Buildings and leasehold
improvements 457,405 428,622
Equipment and furnishings 1,446,655 1,181,544
--------- ---------
Total cost 2,155,060 1,861,166
Less, accumulated depreciation
and amortization (1,007,933) (825,271)
---------- ----------
Premises and equipment - net $1,147,127 $1,035,895
========== ==========
Depreciation expense charged to operations was $182,662, $172,094 and $156,146
in 1996, 1995, and 1994, respectively.
NOTE 7 - LEASES:
The Bank has entered into noncancelable operating leases for a main office
facility and for additional office space and parking with a partnership in
which certain of the Bank's directors are partners. The Bank has also entered
into a lease with a member of the Bank's Board of Directors for a branch
facility on Lady's Island, South Carolina. The leases require the Bank to pay
for all utilities, property taxes and hazard insurance related to the leased
properties.
The main office facility lease provides for a lease term of 20 years, expiring
in 2013. The lease is subject to rent escalation provisions which are
computed every five years during the life of the lease.
The Lady's Island branch facility lease provides for a five-year lease
expiring in 1998.
During 1993, the Bank entered into a noncancelable operating lease for a
telephone system for a term of four years.
Aggregate future minimum lease payments under all operating leases are as
follows:
Year ending December 31:
1997 $ 159,177
1998 144,950
1999 111,000
2000 111,000
2001 111,000
Thereafter 1,230,250
---------
Total minimum payments 1,867,377
=========
Total rental expense for the years ended December 31, 1996, 1995 and 1994 was
approximately $161,000 for each of the three years.
34
<PAGE>
<PAGE>
NOTE 8 - DEPOSITS:
Certificates of deposits, each with a minimum denomination of $100,000, were
approximately $10.5 million and $7.8 million at December 31, 1996 and 1995,
respectively.
At December 31, 1996, the scheduled maturities of certificates of deposit are
as follows (in thousands of dollars):
1997 $31,060
1998 6,296
1999 451
2000 315
2001 and thereafter 1,167
-------
Total $39,289
=======
NOTE 9 - FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS:
The Bank has an $11 million line of credit with the Federal Home Loan Bank of
Atlanta. At December 31, 1996 and 1995, advances from the Federal Home Loan
Bank were $5.6 million and $1 million, respectively. At December 31, 1996,
the maturity dates and interest rates on the advances were as follows:
MATURITY DATE INTEREST RATE AND TYPE ADVANCE AMOUNT
------------- ---------------------- ------
December 1997 6.95% variable $4,650,000
June 1998 6.65% fixed 500,000
June 2001 6.92% fixed 450,000
----------
$5,600,000
==========
As security for advances, the Bank, under a blanket floating lien, is required
to maintain qualifying mortgages with unpaid principal balances, when
discounted at 75% of the unpaid principal balances, at least equal to 100% of
its outstanding advances. All stock in the Federal Home Loan Bank is also
pledged to secure these advances. Advance agreements contain penalty
provisions for early repayment if current advance rates are lower than the
interest rates on the advances being repaid.
35
<PAGE>
<PAGE>
NOTE 9 - FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS (CONTINUED):
Such borrowings under lines of credit during 1996 and 1995 are summarized as
follows:
1996 1995
---- ----
Maximum amount of advances at any month end $5,600,000 $4,500,000
---------- ----------
Average borrowings during the year $2,649,727 $2,377,834
---------- ----------
Weighted average interest rate during the year 5.85% 6.16%
---- ----
NOTE 10 - INCOME TAXES:
The Company files consolidated federal income tax returns on a calendar-year
basis.
The provision for income taxes for the three years ended December 31, 1996
consists of the following:
1996 1995 1994
---- ---- ----
Currently payable:
Federal $336,524 $407,503 $277,905
State 29,967 58,493 54,056
-------- -------- --------
Total 366,491 465,996 331,961
-------- ------- --------
Deferred tax benefit:
Federal (40,046) (99,863) (26,133)
State (3,947) (15,456) (3,028)
-------- --------- ---------
Total (43,993) (115,319) (29,161)
-------- -------- --------
Total income taxes $322,498 $350,677 $302,800
-------- -------- --------
Effective tax rate 39.2% 40.0% 36.8%
===== ===== =====
The provision for income taxes for 1996, 1995, and 1994 differed from amounts
computed by applying the statutory federal rate to income before income taxes
as follows:
1996 1995 1994
---- ---- ----
Income taxes at statutory rate on
pre-tax income $279,925 $298,348 $279,967
Increase (reduction) of taxes:
State income taxes, net of federal
tax benefit 26,650 28,404 33,678
Other, net 15,923 23,925 (10,845)
-------- -------- --------
Total provision $322,498 $350,677 $302,800
======== ======== ========
36
<PAGE>
<PAGE>
NOTE 10 - INCOME TAXES (CONTINUED):
The sources of deferred tax assets and liabilities at December 31, 1996 and
1995 are as follows:
1996 1995
---- ----
Gross deferred assets:
Allowance for loan losses $222,233 $173,186
Foreclosed real estate - 7,319
Deferred loan fees - 2,347
Unrealized losses on securities
available-for-sale 6,700 11,844
------- -------
Total 228,933 194,696
------- -------
Gross deferred liabilities:
Federal Home Loan Bank
stock dividends (43,551) (43,551)
Other (210) (4,821)
-------- --------
Total (43,761) (48,372)
-------- --------
Net deferred tax asset $185,172 $146,324
======== ========
As disclosed in Note 1, on June 5, 1995, the Bank completed a plan of
conversion from a federally chartered stock savings bank to a national bank.
Prior to this date, the Bank was subject to the South Carolina income tax
regulations pertaining to savings and loan associations and therefore, a 6%
tax. As a national bank, the Bank is subject to a 4.5% South Carolina bank
tax. Such change in the Bank's tax status did not have a material effect on
the financial statements.
NOTE 11 - STOCK OPTIONS:
Options to purchase shares of the Company's common stock have been granted to
its directors and officers. Upon the acquisition of the Bank by the Company,
all options granted under the stock option plan of the Bank remain in effect
under the stock option plan of the Company with no change in the terms.
Information concerning the options outstanding is summarized as follows (all
amounts have been retroactively restated for stock dividends):
.........1996.......... ......1995............
OPTION OPTION
PRICE PRICE
SHARES PER SHARE SHARES PER SHARE
------ --------- ------ ---------
Outstanding,
January 1 88,793 $7.05 - 12.38 99,808 $5.88 - 11.33
Granted 9,160 11.33 - 12.38 6,011 11.33 - 12.38
Exercised (2,001) 9.00 (17,026) 5.88 - 7.05
------ ------
Outstanding,
December 31 95,902 7.05 - 12.38 88,793 7.05 - 12.38
====== ======
Exercisable,
December 31 71,757 71,757
====== ======
37
<PAGE>
<PAGE>
NOTE 11 - STOCK OPTIONS (CONTINUED):
The Company accounts for its stock-based compensation plans using the
provisions of Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25). In 1995, Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS
123) was issued and is effective for transactions entered into after December
15, 1995. Under the provisions of SFAS 123, companies can elect to account
for stock-based compensation plans using a fair-value-based method or continue
measuring compensation expense for those plans using the intrinsic value
method prescribed in APB 25. The Company elected to continue to account for
stock-based compensation using the intrinsic value method SFAS 123 did not
have an impact on the Company's results of operations or financial position.
NOTE 12 - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES:
The Bank, as a national bank, is subject to certain restrictions regarding the
ability of the Bank to transfer funds to the Company in the form of cash
dividends, loans, or advances. The approval of the Office of the Comptroller
of the Currency (OCC) is required to pay dividends in excess of the Bank's net
profits for the current year plus retained net profits (net profits less
dividends paid) for the preceding two years, less any required transfers to
surplus. As of December 31, 1996, $1,506,400 of the Bank's retained earnings
are available for distribution to the Company as dividends without prior
regulatory approval.
Under Federal Reserve regulation, the Bank also is limited as to the amount it
may loan to the Company unless such loans are collateralized by specified
obligations. The maximum amount available for transfer from the Bank to the
Company in the form of loans or advances approximated $1,397,000 at December
3l, 1996.
NOTE 13 - RELATED PARTY TRANSACTIONS:
During 1996 and 1995, the Bank had loan relationships with certain related
parties; principally, directors and executive officers, their immediate
families and their business interests. All of these relationships were in the
ordinary course of business. Total loans outstanding to this group (including
immediate families and business interests) amounted to $1,416,864 at December
31, 1996, and $1,464,669 at December 31, 1995. During 1996, $339,437 of new
loans were made to this group. Repayments of $387,242 were made during 1996.
Related party deposits totaled approximately $2,450,000 and $1,891,000 at
December 31, 1996 and 1995, respectively.
38
<PAGE>
<PAGE>
NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES:
The Bank is involved at times in various litigation arising out of the normal
course of business. In the opinion of the Bank's legal counsel, there is no
pending or threatened litigation of any material consequence at this time.
The Company has entered into contracts that provide for contract buyouts of
certain employees in the event of a change in control of ownership of the
Company.
As a former federal savings bank, the Bank's deposits are insured by the
Savings Association Insurance Fund (SAIF) of the Federal Deposit Insurance
Corporation. To recapitalize the reserves of SAIF, a special assessment on
institutions with SAIF-insured deposits was approved by the Congress. The
Bank expensed approximately $445,000 for the special assessment during 1996.
NOTE 15 - FINANCIAL INSTRUMENTS:
The Bank 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 and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit, standby letters of credit
and financial guarantees. These instruments involve, to varying degrees,
elements of credit, interest-rate, or liquidity risk in excess of the amounts
recognized in the balance sheet. The contract amounts of these instruments
reflect the extent of involvement the Bank has in particular classes of
financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit, standby
letters of credit and financial guarantees written is represented by the
contractual amount of those instruments. The Bank uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance sheet instruments.
COMMITMENTS TO EXTEND CREDIT:
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. Commitments to extend credit
at fixed rates exposes the Bank to some degree of interest-rate risk. The
Bank evaluates each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank upon extension
of credit, is based on management's credit evaluation of the counterparty.
Collateral held varies but may include real property, equipment and
income-producing commercial properties.
39
<PAGE>
<PAGE>
NOTE 15 - FINANCIAL INSTRUMENTS (CONTINUED):
COMMITMENTS TO EXTEND CREDIT (CONTINUED):
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Bank guaranteeing the performance of a customer to a
third party. Those guarantees are primarily issued to support public and
private borrowing arrangements. All standby letters of credit outstanding at
December 31, 1996, expire in 1997. The credit risk involved in issuing a
letter of credit is essentially the same as that involved in extending loan
facilities to customers. The amount of collateral obtained if deemed
necessary by the Bank is based on management's credit evaluation of the
customer. The Bank has not been required to perform on any financial
guarantees during the past three years and has not incurred any losses on its
commitments during the past three years.
The estimated fair value of the Bank's financial instruments at December 31,
1996 and 1995, are as follows:
1996 1995
---- ----
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
Financial assets:
Cash and cash
equivalents $7,871,028 $7,871,028 $5,546,368 $5,546,368
Time deposits with
banks 199,177 199,177 199,000 199,000
Securities
available-for-sale 2,485,075 2,485,075 2,629,812 2,629,812
Loans receivable 78,149,609 79,079,805 72,025,994 72,348,689
Accrued interest
receivable 502,412 502,412 496,445 496,445
Financial liabilities:
Deposits 78,300,019 78,426,021 74,904,925 75,133,497
Federal Home Loan
Bank advances 5,600,000 5,601,896 1,000,000 999,807
Amounts due to
depository
institutions 200,117 200,117 238,090 238,090
Unrecognized financial
instruments:
Commitments to extend
credit 3,163,315 3,163,315 2,293,691 2,293,691
Lines of credit 8,211,780 8,211,780 6,586,944 6,586,944
Standby letters of
credit 193,725 193,725 100,100 100,100
40
<PAGE>
<PAGE>
NOTE 16 - REGULATORY MATTERS
The Company 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 Company's consolidated financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve quantitative
measures of the Company's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Company'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 Company 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, 1996,
that the Company meets all capital adequacy requirements to which they are
subject.
As of December 31, 1996, the most recent notifications from the Office of the
Comptroller of the Currency categorized the Company as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well capitalized, the Company 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 Company's categories.
The Company's actual capital amounts and ratios are also presented in the
table as follows (in thousands of dollars):
At December 31, 1996:
MINIMUM REQUIRED
MINIMUM REQUIRED TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT
ACTUAL ADEQUACY PURPOSES CORRECTIVE
------ ----------------- ACTION PROVISIONS
-----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
Total Capital (to
Risk Weighted
Assets) $7,520 11.9% $5,054 8.0% $6,317 10.0%
Tier I Capital (to
Risk Weighted
Assets) $6,889 10.9% $2,527 4.0% $3,790 6.0%
Tier I Capital (to
Average Assets) $6,889 7.7% $3,578 4.0% $4,472 5.0%
41
<PAGE>
<PAGE>
NOTE 16 - REGULATORY MATTERS (CONTINUED):
At December 31, 1995, the Company met all of its regulatory capital
requirements. The Company's risk-weighted assets were approximately
$53,318,000. Its total Tier I capital was approximately $6,407,000 or 12.02%
of risk-weighted assets. Total capital was approximately $6,877,000 or 12.9%
of risk-weighted assets.
NOTE 17 - CONCENTRATION OF CREDIT RISK:
Although the Bank has a diversified loan portfolio, a substantial portion of
its debtors' ability to honor their contracts is dependent upon the economy of
Beaufort County, South Carolina, and the surrounding area.
The contractual amounts of credit-related financial instruments such as
commitments to extend credit and letters of credit represent the amounts of
potential accounting loss should the contract be fully drawn upon, the
customer default, and the value of any existing collateral become worthless.
NOTE 18 - CONDENSED FINANCIAL STATEMENTS:
Presented below are the condensed financial statements for
FirstBancorporation, Inc. (parent company only).
DECEMBER 31, DECEMBER 31,
1996 1995
---- ----
Balance Sheet:
Assets:
Cash $ 19,394 $ 100
Investment in banking
subsidiary 6,943,854 6,518,332
Other assets 39,589 38,567
--------- ---------
Total assets 7,002,837 6,556,999
========= =========
Liabilities:
Amounts due to banking
subsidiary $ - $ 39,535
Stockholders' equity 7,002,837 6,517,464
--------- ---------
Total liabilities and
stockholders' equity 7,002,837 6,556,999
========= =========
42
<PAGE>
<PAGE>
NOTE 18 - CONDENSED FINANCIAL STATEMENTS (CONTINUED):
DECEMBER 31, DECEMBER 31,
1996 1995
---- ----
Statement of Income:
Dividends from banking
subsidiary $ 61,125 $ -
Expenses:
Amortization 7,887 1,315
Other 20,304 -
--------- -------
Income before equity in
undistributed earnings
of subsidiary 32,934 (1,315)
Applicable income tax benefit 8,908 447
Equity in undistributed earnings
of subsidiary 458,970 527,686
--------- ----------
Net income $ 500,812 $ 526,818
========= ==========
Statement of Cash Flows:
Cash flows from operating
activities:
Net income $ 500,811 $ 526,818
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Amortization expense 7,887 1,315
Increase in other assets (8,909) (39,882)
Increase (decrease) in
other liabilities (39,535) 39,535
Undistributed earnings of
subsidiary (458,970) (527,686)
------- -------
Net cash provided by
operating activities 1,284 100
Cash flows from financing
activities:
Common stock issued 18,010 -
------ ---
Net increase in cash and
cash equivalents 19,294 100
Cash at beginning of year 100 -
------ ---
Cash at end of year 19,394 100
====== ===
THESE NOTES ARE AN INTEGRAL PART OF THE ACCOMPANYING FINANCIAL STATEMENTS
-------------------------------------------------------------------------
43
<PAGE>
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
Parent
------
FirstBancorporation, Inc.
Percentage Jurisdiction or
Subsidiaries Of Ownership State of Incorporation
------------ ------------ -----------------------
FirstBank, N.A. 100% United States
______________
(a) The operation of the Company's wholly owned subsidiary is included in
the Company's Financial statements contained in the Annual Report attached
hereto as Exhibit 13.
44
<PAGE>
<PAGE>
EXHIBIT (99)
AUDIT REPORT OF DELOITTE & TOUCHE, LLP
45
<PAGE>
<PAGE>
Deloitte & Touche LLP 1200 NationsBank Plaza
7 North Laurens Street
Greenville, South Carolina 29601
INDEPENDENT AUDITORS' REPORT
The Savings Bank of Beaufort County, F.S.B.:
We have audited the statements of income, changes in stockholders' equity, and
cash flows of The Savings Bank of Beaufort County, F.S.B. (the Bank) for the
year ended December 31, 1994. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects the results of the Bank's operations and its cash flows
for the year ended December 31, 1994, in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
January 31, 1995
46
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 4721174
<INT-BEARING-DEPOSITS> 3349031
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3148391
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 78780166
<ALLOWANCE> 630557
<TOTAL-ASSETS> 91733149
<DEPOSITS> 78300019
<SHORT-TERM> 5876590
<LIABILITIES-OTHER> 511861
<LONG-TERM> 0
0
0
<COMMON> 6276
<OTHER-SE> 7038403
<TOTAL-LIABILITIES-AND-EQUITY> 91733149
<INTEREST-LOAN> 6590411
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<INTEREST-OTHER> 0
<INTEREST-TOTAL> 6876026
<INTEREST-DEPOSIT> 3125187
<INTEREST-EXPENSE> 3280647
<INTEREST-INCOME-NET> 3595379
<LOAN-LOSSES> 162000
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<EXPENSE-OTHER> 3390962
<INCOME-PRETAX> 823309
<INCOME-PRE-EXTRAORDINARY> 500811
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 500811
<EPS-PRIMARY> 0.76
<EPS-DILUTED> 0.76
<YIELD-ACTUAL> 4.37
<LOANS-NON> 390000
<LOANS-PAST> 112000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 470198
<CHARGE-OFFS> 28634
<RECOVERIES> 26993
<ALLOWANCE-CLOSE> 630557
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 630557
</TABLE>
