United States
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, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-28106
FirstBancorporation, Inc.
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(Exact name of registrant as specified in its charter)
South Carolina 57-1033905
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(State or other jurisdiction of incorporation (IRS Employer Identification
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: 843-521-5600
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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
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(Title of Class)
Authorized 2,000,000 shares
Issued and Outstanding 692,748 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 X No
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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. X
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Revenues for its most recent fiscal year: 8,493,994.
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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 $10,391,220 (692,748 shares) as of
February 19, 1998. This is evidenced by a limited number of trades of said
stock during the period of January 1, 1998 to February 19, 1998. For the
purposes of this calculation officers and directors of the registrant are
considered non-affiliates.
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The document listed below is incorporated by reference, for compliance with
Part I and Part II.
1997 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 1998 ANNUAL STOCKHOLDERS' MEETING
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TABLE OF CONTENTS
PART I
Page
Item 1. Business ------------------------------------------ 4
Item 2. Properties ---------------------------------------- 32
Item 3. Legal Proceedings --------------------------------- 32
Item 4. Submission of Matters to a Vote of
Security Holders -------------------------------- 32
PART II
Item 5. Market for the Registrant's Common Stock
and Related Stockholder Matters ----------------- 33
Item 6. Managements Discussion and Analysis---------------- 33
Item 7. Financial Statements and Supplementary data-------- 33
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure-------------- 33
PART III
Item 9. Directors, Executive Officer, Promoters and
Control Persons, Compliance with Section 16(a)
of the Exchange Act------------------------------ 33
Item 10. Executive Compensation---------------------------- 33
Item 11. Security ownership of certain beneficial owners and
Management-------------------------------------- 33
Item 12. Certain relationships and related transactions---- 34
PART IV
Item 13. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K --------------------------- 35
THIS DOCUMENT CONTAINS 86 PAGES.
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PART I
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ITEM 1: BUSINESS
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BUSINESS OF THE COMPANY
The Company is a bank holding company registered under the Bank Holding
Company Act and regulated by the Federal Reserve Board. Currently, the Bank is
the Company's only wholly-owned subsidiary and the current business of the
Company has consisted primarily of directing the affairs of the Bank.
In 1997 the Company voted to seek approval for charter of a new national
bank in Columbia, South Carolina, FirstBank of the Midlands, N.A. ("New
Bank"). Should all regulatory approvals be granted, the Company plans to begin
the new bank operations in 1998. See "Note 16 of Notes to Consolidated
Financial Statements".
The Company uses the premises, furniture and equipment of the Bank to
conduct its operations.
BUSINESS OF THE BANK
General
The Bank is a national bank regulated by the OCC. The Bank is the
successor to The Savings Bank of Beaufort County, FSB, a federally-chartered
stock savings bank that was formed as a de novo institution in 1986 and that
converted to a national bank charter on June 5, 1995. The Bank reorganized as
a wholly-owned subsidiary of the Company on November 1, 1995.
The Bank operates, and intends to continue to operate, as a community
bank devoted to serving the personal banking needs of residents of its primary
market area, as well as the commercial banking needs of small businesses owned
and operated by those residents. The Bank's business primarily consists of
attracting deposits from the general public and using these funds to originate
loans secured by real estate, including construction loans, located in its
primary market area. To a lesser extent, the Bank also originates commercial
real estate loans and consumer loans. The Bank conducts its business from its
main office located in downtown Beaufort, South Carolina, a full service
branch office located on Lady's Island in Beaufort, South Carolina, and a full
service branch office located in Bluffton, South Carolina. See "--
Properties."
Market Area
The Bank's primary market area is Beaufort County, South Carolina,
excluding Hilton Head Island. The economy of this area depends heavily on
services catering to the retirement and tourism industries. The area is noted
for its beaches, state park, historical sites and fishing. The U.S. military
presence in Beaufort County is significant with the Marine Corps Recruit Depot
at Parris Island and the Marine Corps Air Station and the Naval Hospital, both
in Beaufort. These military installations are not expected to be closed as a
result of the findings and recommendations of the U.S. Defense Department Base
Closure Study; however, future military realignments could have material
adverse effect on the local economy.
Land use in Beaufort County in primarily residential. Beaufort County is
experiencing steady population growth, which creates a continued demand for
mortgage loan funds. According to the 1990 Census, the population of Beaufort
County has increased from approximately 65,000 in 1980 to 86,000 in 1990. In
March 1997, the U.S. Census Bureau estimated the 1996 Beaufort County
population at 103,000.
The financial condition and operations of the Bank depend heavily on the
state of the economy of Beaufort County. No assurances can be given regarding
the future state of the economy.
The Bank faces strong competition from many financial institutions
operating in Beaufort County for deposits and loan originations. See "--
Competition."
Lending Activities
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General. At December 31, 1997, the Bank's total loans receivable, net,
was $80.1 million, or 87.3% of total assets. The Bank has traditionally
concentrated its lending activities on the origination of conventional first
mortgage loans secured by one- to- four family properties, with such loans
amounting to $47.2 million, or 5.8% of the total loans receivable portfolio at
December 31, 1997.
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Loan Portfolio Analysis. The following table sets forth the composition
of the Bank's loan portfolio (excluding loans held-for-sale) as of the dates
indicated.
At December 31,
1997 1996
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Amount Percent Amount Percent
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(Dollars in thousands)
Mortgage loans:
One- to- four family. . . . . . . $47,188 58.9% $48,680 63.2%
Lot loans . . . . . . . . . . . . 2,686 3.4 2,721 3.5
Commercial real estate. . . . . . 10,649 13.3 9,490 12.1
Construction. . . . . . . . . . . 5,949 7.4 6,183 7.9
------- ----- ------- -----
Total mortgage loans . . . . . . 66,472 83.0 67,074 85.8
Other Loans:
Open-ended home equity. . . . . . 5,851 7.3 5,059 6.5
Other installment loans . . . . . 3,676 4.6 3,659 4.7
Commercial loans. . . . . . . . . 4,793 6.0 2,988 3.8
------- ----- ------- -----
Total other loans. . . . . . . . 14,320 17.9 11,706 15.0
------- ----- ------- -----
Total loans. . . . . . . . . . . $80,792 100.9 $78,780 100.8
Less:
Allowance for loan losses . . . . $ (728) (0.9) $ (630) (0.8)
------- ----- ------- -----
Total loans receivable, net. . . $80,064 100.0% $78,150 100.0%
======= ===== ======= =====
One- to- Four Family Real Estate Lending. Primarily as a result of the
Bank being the successor to a thrift institution (The Savings Bank of Beaufort
County, FSB) and the demand for real estate loans in its primary market area,
the Bank has concentrated its lending activities on the origination of loans
secured by first mortgage loans on existing one- to- four family residences
located in its primary market area.
The Bank offers both fixed-rate one- to- four family mortgage loans and
ARM loans using documentation approved by the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
Fixed-rate loans are offered for a term between 15 and 30 years and are
generally sold to the FHLMC or private investors, primarily other financial
institutions. See "-- Loan Originations, Sales and Purchases." At December
31, 1997, fixed rate one- to- four family mortgage loans with maturities
between seven and 30 years amounted to $6.4 million or 8.1% of the one- to-
four family mortgage loan portfolio.
The Bank offers ARM loans at rates and terms competitive with market
conditions. At December 31, 1997, $30.7 million, or 38.3%, of the Bank's
total loan portfolio consisted of ARM loans. ARM loans are retained primarily
for the Bank's portfolio. Currently, the Bank originates ARM loans with
interest rates that adjust annually based on the one-year or three-year U.S.
Treasury security constant maturity index after a fixed rate of interest that
is charged for the initial three year term. ARM loans are generally subject
to an annual interest rate adjustment limit of 2.0% and a lifetime interest
rate adjustment limit of 6.0%. ARM loans are typically based on a 30-year
amortization schedule. The Bank qualifies the borrowers on its ARM loans
based on the current market interest rate. The Bank's ARM loans do not
provide for negative amortization.
Borrower demand for ARM loans versus fixed-rate mortgage loans is a
function of the level of interest rates, the expectations of changes in the
level of interest rates and the difference between the initial interest rates
and fees charged for each type of loan. The relative amount of fixed-rate
mortgage loans and ARM loans that can be originated at any time is largely
determined by the demand for each in a competitive environment.
The retention of ARM loans in the Bank's loan portfolio helps reduce the
Bank's exposure to changes in interest rates. There are, however,
unquantifiable credit risks resulting from the potential of increased costs
due to changed rates to be paid by the customer. It is possible that during
periods of rising interest rates the risk of default on ARM loans may increase
as a result of repricing and the increased payments required by the borrower.
In addition, although ARM loans allow the Bank to increase the sensitivity of
its asset base to changes in the interest rates, the extent of this interest
sensitivity is limited by the annual and lifetime interest rate adjustment
limits. Because of these considerations, the Bank has no assurance that
yields on ARM loans will be
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sufficient to offset increases in the Bank's cost of funds. The Bank believes
these risks, which have not had a material adverse effect on the Bank to date,
generally are less than the risks associated with holding fixed-rate loans in
portfolio during an increasing interest rate environment.
Fixed-rate loans and ARM loans customarily include "due on sale" clauses,
which give the Bank the right to declare a loan immediately due and payable in
the event the borrower sells or otherwise disposes of the real property
subject to the mortgage and the loan is not paid.
The Bank generally requires title insurance to assure the status of its
lien on all loans where real estate is the primary collateral. The Bank also
requires that fire and casualty insurance (and, if appropriate, flood, wind,
storm and hail insurance) be maintained in an amount at least equal to the
outstanding loan balance.
One- to- four family residential mortgage loans typically do not exceed
80% of the appraised value of the security property. The Bank requires
private mortgage insurance on the loan amount in excess of 80% of the
appraised value of the security property. Appraisals are generally performed
by certified independent appraiser.
At December 31, 1997, $3.6 million, or 7.6%, of the Bank's one- to- four
family mortgage loan portfolio was secured by second residences, generally
vacation homes. Lending on second residences is generally considered riskier
than lending on primary residences because borrowers are more likely to
default on their second residence obligations than their primary residence
obligations in the event of financial hardship.
Residential Lot Lending. At December 31, 1997, loans secured by first
mortgages on residential building lots amounted to $2.7 million, or 3.4% total
loans. Such loans enable the borrower to purchase real estate on which to
build a future home and are generally made with loan-to-value ratios of up to
80%. Residential lot loans are generally made on an amortizing basis with
maturities of five years or less or on an interest-only basis for one year or
less. The Bank may renew a lot loan under then market interest rate terms
subject to the borrowers continuing creditworthiness and a principal reduction
of 5% or more. Residential lot loans frequently become sources of owner
construction loans.
Residential lot lending entails significant additional risks compared to
residential property lending. The repayment of such loans can be
significantly affected by adverse conditions in the real estate market.
Furthermore, in the event of default and the repossession of the land by the
Bank, vacant land is generally less marketable than improved land with a
finished home. To minimize these risks, the Bank generally limits this type
of lending to its market area and to individuals with above average credit
histories.
Construction Lending. The Bank actively originates two types of
residential construction loans secured by properties located in its primary
market area: (i) speculative construction loans to home builders and (ii)
custom construction loans to either home builders or prospective homeowners.
To a substantially lesser extent, the Bank originates commercial construction
loans to small businesses in its primary market area. At December 31, 1997,
construction loans totaled $5.9 million or 7.4% of total loans.
At December 31, 1997, speculative construction loans amounted to $2.2
million, or 36.9% of the construction loan portfolio at that date.
Speculative construction loans are made to home builders and are termed
"speculative" because the home builder does not have, at the time of loan
origination, a signed contract with a home buyer who has a commitment for
permanent financing with either the Bank or another lender for the finished
home. The home buyer may be identified either during or after the
construction period. The Bank's risk is that the builder will not be able to
service the debt on the speculative construction loan and/or pay real estate
taxes and other carrying costs of the completed home for a significant time
after the completion of construction until the home buyer is identified.
Presently, the Bank lends to approximately 10 local builders with whom the
Bank has longstanding business relationships. The Bank generally limits the
aggregate amount of loans outstanding to one builder at any one time to
approximately $600,000 (usually financing for five homes). Speculative
construction loans are originated for a term of nine to 12 months, with
interest rates ranging from 0.5% to 2.0% above the prime lending rate, and
with a loan-to-value ratio of no more than 80% of the appraised estimated
value of the completed property. At December 31, 1997, the largest aggregate
speculative construction loan balance to one borrower amounted to $485,000,
all of which were performing according to their respective terms.
Unlike speculative construction loans, custom construction loans are
usually made directly to the home buyer. Custom construction loans are
generally originated for a term of 12 months or less at fixed interest rates
or variable rates equal to 1% to 2% above the prime rate. Loan-to-value
ratios are generally no more than 80% of the appraised estimated value of the
completed
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property or cost, whichever is less. At December 31, 1997, the largest
outstanding custom construction loan had an outstanding balance of $336,000
and was performing according to its terms.
To a substantially lesser extent, the Bank also provides construction
financing for commercial properties to small businesses in its primary market
area. Commercial construction loans are generally made on the same terms as
residential construction loans. At December 31, 1997, commercial construction
loans amounted to $633,000, the largest of which was for the development of a
mobile home park located in Beaufort, South Carolina, and had an outstanding
balance of $299,000. Such loan was performing according to its terms at
December 31, 1997.
Prior to preliminary approval of any construction loan application, an
appraiser approved by the Board of Directors inspects the site and reviews the
existing or proposed improvements, identifies the market for the proposed
project, and analyzes the pro forma data and assumptions on the project. In
the case of a speculative or custom construction loan, the Bank reviews the
experience and expertise of the builder. After preliminary approval has been
given, the application is processed, which includes obtaining credit reports,
financial statements and tax returns on the borrowers and guarantors, an
independent appraisal of the property, and any other expert reports necessary
to evaluate the proposed project. In the event of cost overruns, the Bank
requires that the borrower use its own funds to maintain the original amount.
The Bank's construction loan documents require that construction loan
proceeds be disbursed in increments as construction progresses. Disbursements
are based on periodic on-site inspections by an appraiser or Bank inspector
approved by the Board of Directors. The Bank regularly monitors the
construction loan portfolio and the economic conditions and housing inventory.
The Bank believes that the internal monitoring system helps reduce many of the
risks inherent in its construction lending.
Construction lending affords the Bank the opportunity to achieve higher
interest rates and fees with shorter terms to maturity than does its
single-family permanent mortgage lending. Construction lending, however, is
generally considered to involve a higher degree of risk than single-family
permanent mortgage lending because of the inherent difficulty in estimating
both a property's value at completion of the project and the estimated cost of
the project. The nature of these loans is such that they are generally more
difficult to evaluate and monitor. If the estimate of construction cost
proves to be inaccurate, the Bank may be required to advance funds beyond the
amount originally committed to permit completion of the project. If the
estimate of value upon completion proves to be inaccurate, the Bank may be
confronted with a project whose value is insufficient to assure full
repayment. Projects may also be jeopardized by disagreements between
borrowers and builders and by the failure of builders to pay subcontractors.
Loans to builders to construct homes for which no purchaser has been
identified carry more risk because the payoff for the loan depends on the
builder's ability to sell the property prior to the time that the construction
loan is due. The Bank has sought to address these risks by adhering to strict
underwriting policies, disbursement procedures, and monitoring practices. In
addition, because the Bank's construction lending is in its primary market
area, changes in the local economy and real estate market could adversely
affect the Bank's construction loan portfolio.
Commercial Real Estate Lending. At December 31, 1997, commercial real
estate loans totaled $10.6 million, or 13.3% of total loans. The average size
of the commercial real estate loan in the Bank's loan portfolio is
approximately $102,000. Commercial real estate loans are secured by
professional offices, small retail stores and other commercial properties.
Commercial real estate loans are generally structured on an amortization
schedule of up to 15 years, with variable rates of interest based on the prime
lending rate or the U.S. Treasury Bill rate. Generally, loan-to-value ratios
may not exceed 80% of the appraised value of the underlying property as
determined by an independent appraiser. The Bank requires annual financial
statements from its commercial business borrowers and, if the borrower is a
corporation, personal guarantees from the principals. In assessing the value
of such guarantees, the Bank reviews the individuals' personal financial
statements, credit reports, tax returns and other financial information.
Commercial real estate lending entails significant additional risks
compared to residential property lending. These loans typically involve large
loan balances to single borrowers or groups of related borrowers. The payment
experience on such loans typically depends on the successful operation of the
real estate project. These risks can be significantly affected by supply and
demand conditions in the market for office and retail space, and, as such, may
be subject to a greater extent to adverse conditions in the economy generally.
To minimize these risks, the Bank generally limits this type of lending to its
market area and to borrowers with which it has substantial experience or who
are otherwise well known to management.
Commercial Business Lending. The Bank's commercial business lending
activities focuses primarily on small to medium size businesses owned by
individuals well known to the Bank and who reside in the Bank's primary market
area. At December 31, 1997, commercial business loans amounted to $4.8
million, or 6.0% of total loans.
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Commercial business loans may be unsecured loans, but generally are
secured by various types of business collateral other than real estate (i.e.,
inventory, equipment, etc.). Commercial business loans are generally made in
amounts up to $250,000 and may be either lines of credit or term loans. Lines
of credit are generally renewable and made for a one-year term. Lines of
credit are generally variable rate loans indexed to the prime rate. Term
loans are generally originated with three to five year maturities on a fully
amortizing basis. As with commercial real estate loans, the Bank generally
requires annual financial statements from its commercial business borrowers
and, if the borrower is a corporation, personal guarantees from the
principals.
At December 31, 1997, the largest commercial business loan had an
outstanding balance of $243,000 and was secured by marketable equity
securities. Such loan was performing according to its terms at December 31,
1997.
Commercial business lending generally involves greater risk than
residential mortgage lending and involves risks that are different from those
associated with residential, commercial and multi-family real estate lending.
Real estate lending is generally considered to be collateral based lending
with loan amounts based on predetermined loan to collateral values and
liquidation of the underlying real estate collateral is viewed as the primary
source of repayment in the event of borrower default. Although commercial
business loans are often collateralized by equipment, inventory, accounts
receivable or other business assets, the liquidation of collateral in the
event of a borrower default is often not a sufficient source of repayment
because accounts receivable may be uncollectible and inventories and equipment
may be obsolete or of limited use, among other things. Accordingly, the
repayment of a commercial business loan depends primarily on the
creditworthiness of the borrower (and any guarantors), while liquidation of
collateral is a secondary and often insufficient source of repayment.
As part of its commercial business lending activities, the Bank issues
standby letters of credit as an accommodation to its borrowers. See "-- Loan
Commitments and Letters of Credit."
Consumer Lending. At December 31, 1997, consumer loans totaled $9.5
million, or 11.9%, of total loans. Subject to market conditions and other
factors, the Bank intends to continue to actively market consumer loans.
Consumer loans generally have shorter terms to maturity or repricing and
higher interest rates than the long-term, fixed-rate mortgage loans. The
Bank's consumer loans consist of loans secured by automobiles, boats and
recreational vehicles, second mortgages on residences, and unsecured loans for
personal or household purposes.
The largest component of the Bank's consumer loan portfolio is home
equity revolving credit lines secured by a first or second mortgage on the
borrowers' residence. Home equity lines of credit are made for variable rates
of interest tied to the prime lending rate with a loan-to-value ratio of up to
80%, taking into account any outstanding first mortgage loan. At December 31,
1997, home equity lines of credit amounted to $5.9 million, or 7.3%, of total
loans and the largest approved home equity line of credit had a credit line of
$500,000.
Consumer loans secured by deposit accounts, automobiles, boats and other
personal property are made at fixed rates of interest for terms of five years
or less. At December 31, 1997, the largest category of such loans were
secured deposit account loans with aggregate outstanding balances of $925,000.
The Bank does not engage in indirect consumer lending through automobile or
boat dealers.
At December 31, 1997, unsecured consumer loans amounted to $1.9 million,
or 2.4% of total loans. Unsecured loans are made for a maximum of five years
at fixed or variable interest rates. Unsecured loans are offered primarily to
high net worth individuals with whom the Bank has had a longstanding
relationship.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciating assets such as automobiles, particularly used
automobiles. In such cases, any repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment of the
outstanding loan balance as a result of the greater likelihood of damage, loss
or depreciation. The remaining deficiency often does not warrant further
substantial collection efforts against the borrower beyond obtaining a
deficiency judgment. In addition, consumer loan collections are dependent on
the borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Furthermore, the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the amount which
can be recovered on such loans. Such loans may also give rise to claims and
defenses by a consumer loan borrower against an assignee of such loans such as
the Bank, and a borrower may be able to assert against such assignee claims
and defenses that it has against the seller of the underlying collateral. At
December 31, 1997, approximately $49,000, or less than 0.5% of the Bank's
consumer loan portfolio, was 90 days or more past due.
Loan Maturity. The following table sets forth, as of December 31, 1997,
information regarding the dollar amount of loans
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maturing in the Bank's loan portfolio based on their contractual terms to
maturity, but does not include potential prepayments. Demand loans, loans
having no stated schedule of repayments and no stated maturity, and overdrafts
are reported as due in one year or less. Loan balances do not include
undisbursed loan proceeds, unearned discounts, unearned income, and allowance
for loan losses.
Within After 1 Year
1 Year Through 5 Years After 5 Years Total
----- --------------- ------------- -----
(Dollars in thousands)
Commercial . . . . . . . $3,664 $1,129 $ -- $4,793
Real estate/construction 5,738 180 31 5,949
------ ------ ---- -------
Total . . . . . . . $9,402 $1,309 $ 31 $10,742
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The following table sets forth the dollar amount of all loans due after
December 31, 1998, which have fixed interest rates and have floating or
adjustable interest rates.
Fixed Floating or
Rates Adjustable Rates
----- ---------------
(In thousands)
Commercial . . . . . . . . . . $1,129 $ --
Real estate/construction . . . 67 113
------ ----
Total . . . . . . . . . $1,196 $113
Loan Solicitation and Processing. The Bank solicits loans through
advertisements and referrals by officers, directors and employees of the Bank.
The Bank also employs full-time loan originators. Applications for one- to-
four family mortgage loans are written on documentation meeting FNMA and FHLMC
standards, and other loan applications are underwritten and closed based on
the Bank's own guidelines. Title insurance is generally obtained to protect
the Bank from a possible title risk. All mortgage loans require fire and
casualty insurance (and, if appropriate, flood, wind, storm and hail
insurance) on appurtenant structures.
For fixed-rate one- to- four family mortgage loans that are originated
for sale, loan approval authority is vested in loan officers of the Bank who
follow FHLMC guidelines or with the investor purchasing the loan. For loans
that are originated for the Bank's portfolio, loan approval authority is
vested in individual officers, a loan committee or the full Board of Directors
depending on the dollar amount of the total proposed lending relationship. An
individual loan officer may approve a loan if the proposed total lending
relationship is under $200,000. The Loan Committee, consisting of designated
Board members and senior Bank officers, may approve a loan if the proposed
total lending relationship is between $200,000 and $350,000. The full Board
of Directors is required to approve any loan if the total proposed lending
relationship exceeds $350,000.
Upon receipt of a loan application from a prospective borrower, a credit
report and other data are obtained to verify specific information relating to
the loan applicant's employment, income and credit standing. If any real
estate is offered as collateral, an appraisal of the real estate is generally
undertaken by an independent appraiser approved by the Bank. Applicants are
promptly notified of the decision of the Bank. Interest rates are subject to
change if the approved loan is not closed within the time of the commitment.
Loan Originations, Sales and Purchases. The Bank's primary lending
activity has been the origination of one- to- four family residential mortgage
loans. The Bank generally originates ARM loans for retention in its
portfolio. Fixed-rate one- to- four family mortgage loans are generally sold
to the FHLMC and other institutions, primarily other financial institutions.
The Bank generally does not assume any "pipeline risk" (i.e., the risk that
the value of the loan will decline during the period between the time the loan
is originated and the time of sale because of changes in market interest
rates) when it sells loans because it obtains a purchase commitment from the
prospective purchaser at the time it commits to fund the loan at a given
interest rate. The Bank is not an active purchaser of loans.
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The following table sets forth total loans originated, purchased, sold
and repaid during the periods indicated.
Year Ended December 31,
-----------------------
1997 1996
---- ----
(In thousands)
Total loans and loans held-for-sale
at beginning of year . . . . . . $79,443 $72,747
Loans originated:
Real estate mortgage:
Permanent. . . . . . . . . . . . 24,491 21,801
Construction . . . . . . . . . . 13,531 13,371
Other Loans:
Consumer loans . . . . . . . . . 3,810 3,886
Commercial loans . . . . . . . . 11,483 12,077
-------- -------
Total loans originated. . . . . 53,315 51,135
Net change in equity lines of credit (19) (572)
Loans purchased. . . . . . . . . . -- --
Loans sold . . . . . . . . . . . . (14,165) (7,521)
Transfers to real estate owned,
charge-offs and increases in
deferred loan fees . . . . . . . (53) (314)
Loan principal repayments. . . . . (37,053) (36,032)
-------- -------
Total loans and loans held-for-sale
at end of year . . . . . . . . . $81,468 $79,443
======= =======
Loan Commitments and Letters of Credit. The Bank issues, without a fee,
commitments to approved residential mortgage loan applicants conditioned upon
the occurrence of certain events. Such commitments are made in writing on
specified terms and conditions and are honored for up to 30 days. At December
31, 1997, the Bank had total such commitments to extend credit of $3.4
million. See Note 15 of Notes to Consolidated Financial Statements.
As an accommodation to its commercial business borrowers, the Bank issues
standby letters of credit in favor of entities for whom the Bank's borrowers
are performing work or other services. At December 31, 1997, the Bank had
outstanding standby letters of credit of $288,000. See Note 15 of Notes to
the Consolidated Financial Statements.
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. As required by GAAP, loan origination fees and certain
origination expenses are amortized over the life of the related loan, and 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.
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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.
Nonperforming Assets and Delinquencies. When a borrower fails to make a
required payment when due, the Bank institutes collection procedures. The
first notice is mailed to the borrower ten to 15 days after the payment due
date. Attempts to contact the borrower by telephone generally begin
approximately 25 days after the payment due date. If a satisfactory response
is not obtained, continuous follow-up contacts are attempted until the loan
has been brought current. In most cases, delinquencies are cured promptly;
however, if by the 90th day of delinquency, or sooner if the borrower is
chronically delinquent and all reasonable means of obtaining payment on time
have been exhausted, foreclosure, according to the terms of the security
instrument and applicable law, is initiated. If management determines on the
90th day of delinquency that all remedies to cure the delinquency have been
exhausted, the loan generally is placed on nonaccrual status if the collateral
status is such that the interest or principal are unlikely to be recouped.
All previously recorded accrued interest income is reversed. Consumer loans
are charged off when amounts are determined to be uncollectible.
The Bank's Board of Directors is informed monthly as to the status of all
mortgage and consumer loans with outstanding balances in excess of $10,000
that are delinquent 60 days or more and are classified "substandard." The
Board of Directors is informed of the status of all loans currently in
foreclosure, and the status of all foreclosed and repossessed property owned
by the Bank.
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The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated.
At December 31,
-------------------
1997 1996
---- ----
(Dollars in thousands)
Loans accounted for on a
non-accrual basis(1):
Residential . . . . . . . . . . . $405 $308
Commercial. . . . . . . . . . . . 3 46
Consumer. . . . . . . . . . . . . 21 36
---- ----
Total. . . . . . . . . . . . . . 429 390
Accruing loans which are contractually
past due 90 days or more:
Residential . . . . . . . . . . . 27 100
Commercial. . . . . . . . . . . . 150 12
Consumer. . . . . . . . . . . . . 28 --
---- ----
Total. . . . . . . . . . . . . . 205 112
Total of non-accrual loans and
90 day past due loans . . . . . . . 634 502
---- ----
Real estate owned. . . . . . . . . . 127 228
Restructured loans . . . . . . . . . -- --
---- ----
Total nonperforming assets . . . $761 $730
==== ====
Total loans delinquent 90 days
or more, accruing and non-accruing,
to net loans. . . . . . . . . . . . 0.79% 0.64%
Total loans delinquent 90 days
or more, accruing and non-accruing,
to total assets . . . . . . . . . . 0.69% 0.55%
Gross interest income of $38,000 would have been recorded for the year
ended December 31, 1997 if nonaccrual loans had been current according to
their original terms and had been outstanding throughout the entire year.
Interest income of $27,000 on such was included in net income for such year.
Foreclosed Real Estate. At December 31, 1997, the Bank had foreclosed
real estate of $127,000 consisting of a single-family home resulting from the
foreclosure of a builder construction loan and two residential building lots.
See Note 1 of Notes to Consolidated Financial Statements for a discussion of
the Bank's accounting for foreclosed real estate.
Asset Classification. Under the Bank's loan classification system,
problem assets are classified as "substandard," if certain characteristics
exist. The Bank considers a loan for substandard status if it has a balance
greater than $10,000 and is more than 60 days past due. In addition, a past
due loan that has potential for "some loss" will be classified as a
substandard loan; however, this category is also used for well secured loans
that, because of their past due status, need to be monitored.
When an institution classifies problem assets as substandard, it
establishes specific allowances for loan losses based on estimates of losses
for each substandard loan. General allowances are also 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 determines a loan to be not recoverable, it
considers the loan to be a loss and charges-off the loan against its allowance
for loan losses. 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 OCC, who can order the establishment of
additional general or specific loss
14
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allowances.
At December 31, 1997 and 1996, the aggregate amounts of the Bank's
substandard assets were $361,000 and $524,000, respectively. Substandard
assets are monitored monthly by the Bank's Board of Directors.
Allowance for Loan Losses. The Bank has established a systematic
methodology for the determination of provisions for loan losses. The
methodology is set forth in a formal policy and takes into consideration the
need for an overall general valuation allowance as well as specific allowances
that are tied to individual loans. 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
past loan loss experience, known and inherent risks in the loan portfolio,
adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral and current economic conditions.
Such evaluations are particularly susceptible to changes in economic,
operating or other conditions that may be beyond the Bank's control.
The following table sets forth an analysis of the Bank's allowance for
loan losses for the periods indicated. When recoveries are recognized from
charge-offs to the allowance for loan losses, the allowance for loan losses is
credited to the extent of the charge-off. Likewise, any subsequent loss that
may occur from the disposition of collateral is charged to current period
expense.
Year Ended December 31,
-----------------------
1997 1996
---- ----
(Dollars in thousands)
Balance at beginning of period . . $ 631 $ 470
Charge-offs:
Residential . . . . . . . . . . . 19 7
Commercial. . . . . . . . . . . . 21 4
Consumer. . . . . . . . . . . . . 33 18
----- -----
Total charge-offs . . . . . . . 73 29
Recoveries:
Residential . . . . . . . . . . . 2 1
Commercial. . . . . . . . . . . . -- 12
Consumer. . . . . . . . . . . . . 3 15
----- -----
Total recoveries. . . . . . . . 5 28
Net charged-offs . . . . . . . . . 68 1
Provision for possible loan losses 165 162
----- -----
Balance at end of period . . . . . $ 728 $ 631
===== =====
Ratio of allowance to total loans
outstanding at end of period. . . 0.90% 0.80%
Ratio of net charge-offs to average
loans outstanding during period . 0.08% 0.02%
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The following table sets forth the breakdown of the allowance for loan
losses by loan category for the dates indicated.
At December 31,
--------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
% of % of
As a % Loans in As of Loans in
of Out- Category of Out- Category
standing Total standing Total
Loans in to Loans in to
Amount Category Loans Amount Category Loans
------ -------- ----- ------ -------- -----
(Dollars in thousands)
Mortgage loans:
Permanent mortgage. . . $146 0.25% 71.60% $ 90 0.15% 77.20%
Construction. . . . . . 21 0.25 10.70 20 0.31 7.90
Consumer . . . . . . . . 318 3.34 11.80 224 2.57 11.10
Commercial . . . . . . . 39 0.80 5.90 80 2.68 3.80
Unallocated. . . . . . . 204 -- -- 217 -- --
Total allowance for ---- ---- ------ ---- ---- ------
loan losses . . . . . $728 0.90% 100.00% $631 0.80% 100.00%
==== ==== ====== ==== ==== ======
Investment Activities
At December 31, 1997, the sole investments of the Company were its equity
investment in the Bank and the organizational costs incident to the New Bank.
As a national bank, the Bank is permitted under federal law to invest in
various types of liquid assets, including U.S. Treasury obligations,
securities of various federal agencies and of state and municipal governments,
deposits at the FHLB-Atlanta, certificates of deposit of federally insured
institutions, certain bankers' acceptances and federal funds. Subject to
various restrictions, the Bank may also invest a portion of its assets in
commercial paper and corporate debt securities. The Bank is also required to
maintain investments in FHLB of Atlanta stock and Federal Reserve Bank of
Richmond stock a condition of membership in each institution. Neither the
Company nor the Bank invests in high yielding, non-investment grade
securities, or "junk-bonds." See Note 4 of Notes to Consolidated Financial
Statements.
The following table sets forth the composition of the Bank's securities
portfolio at the dates indicated. At December 31, 1997 and 1996, the Bank's
entire securities portfolio was designated as available-for-sale.
At December 31,
--------------------------------------------
1997 1996
--------------------- --------------------
Carrying Percent of Carrying Percent of
Value(1) Portfolio Value(1) Portfolio
-------- --------- -------- ---------
(Dollars in thousands)
FHLB stock . . . . . . . . . $548 24.8% $548 21.9%
Federal Reserve Bank Stock . 130 5.9 130 5.2
US Governments and agency
Obligations. . . . . . . . . 99 4.5 99 3.9
Mortgage Banked Securities . 1,429 64.8 1,726 69.0
------ ----- ------ -----
Total. . . . . . . . . . . $2,206 100.0% $2,503 100.0%
====== ===== ====== =====
- ---------------
(1) The market value of the investment portfolio amounted to $2.2 million and
$2.5 million at December 31, 1997 and 1996, respectively.
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The following table sets forth the maturities and weighted average yields
of the debt securities in the Bank's investment securities portfolio at
December 31, 1997.
Less Than One to Five to Over Ten
One Year Five Years Ten Years Years
------------ ------------ ------------ ------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
U.S. Government and
agency obligations. . . $99 5.85% $ -- --% $ -- --% $ -- --%
GNMA mortgage-backed
securities (1). . . . . -- -- -- -- -- -- 1,429 6.60
FHLB stock (2) . . . . . -- -- -- -- -- -- 548 7.25
Federal Reserve Bank
stock(2). . . . . . . . -- -- -- -- -- -- 130 5.00
--- ----- ----- ------
Total. . . . . . . . . $99 5.85 $ -- -- $ -- -- $2,107 6.73
=== ===== ===== ======
___________________
(1) Mortgage-backed securities have rates that adjust annually to the one year
constant maturity treasury index.
(2) FHLB and Federal Reserve Bank stock have no stated maturity and are
assumed to be over 10 years.
At December 31, 1997 and 1996, the Bank held no investment securities
(other than U.S. Government and agency securities which invest exclusively in
such securities) which had an aggregate book value in excess of 10% of the
Bank's retained earnings at those respective dates.
Deposits
General. The Bank offers a wide array of deposit accounts as set forth
in the following table. Deposits are the primary source of funds for the
Bank's lending and investment activities. 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 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.
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. In addition, the Bank has accepted brokered deposits
typically in denominations of $99,000 from out-of-state depositors at rates
comparable to rates offered to local depositors. At December 31, 1997,
brokered deposits totaled approximately $8.0 million.
17
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The following table sets forth information concerning the Bank's time
deposits and other interest-bearing deposits at December 31, 1997.
Weighted Percen-
Avg. Balance tage
Interest Checking and Minimum (in of
Rate Original Term Savings Deposits Amount thousands Total
- ---- ------------- ---------------- ------ --------- -----
2.09% -- NOW Accounts $500 $16,580 23.42%
3.54 -- Money market 1,000 11,353 16.04
2.33 -- Savings accounts 100 5,176 7.31
Certificates of deposit
5.52 6 months or less Fixed term, fixed rate 500 9,151 12.93
5.82 Over 6 months
through 12
months Fixed term, fixed rate 500 11,174 15.78
6.15 Over 1 year
through 2 years Fixed term, fixed rate 500 9,279 13.11
6.41 Over 2 years Fixed term, fixed rate 500 4,933 6.97
5.84 Various Fixed Rate/IRA/Keough 500 3,142 4.44
------- ------
Total $70,788 100.00%
======= ======
The following table indicates the amount of jumbo certificates of deposit
by time remaining until maturity at December 31, 1997. Jumbo certificates of
deposit require minimum deposits of $100,000.
Maturity Period Amount
------
(In thousands)
Three months or less . . . . . . $ 2,389
Over three through six months. . 1,924
Over six through twelve months . 3,021
Over twelve months . . . . . . . 1,496
--------
Total . . . . . . . . . . . $ 8,830
========
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<PAGE>
The following table sets forth the balances and changes in dollar amounts
of savings deposits in the various types of savings accounts offered by the
Bank at the dates indicated.
At December 31,
-------------------------------------------
1997 1996
-------------------------- ---------------
Percent Percent
of Increase of
Amount Total (Decrease) Amount Total
------ ----- ---------- ------ -----
(Dollars in thousands)
Non-interest-bearing . . . . . . . $ 6,675 8.6% $(494) $ 7,169 9.2%
NOW and money market checking. . . 27,933 36.1 2,061 25,872 33.0
Regular savings accounts . . . . . 5,176 6.7 (794) 5,970 7.6
Certificates of deposit maturing
(1)(2):
Within 1 year . . . . . . . . . . 30,380 39.1 (690) 31,070 39.7
After 1 year, but within 3 years. 7,092 9.2 (344) 7,436 9.5
After 3 years. . . . . . . . . . 206 0.3 (577) 783 1.0
------- ----- ----- ------- -----
Total . . . . . . . . . . . . $77,462 100.0% $(838) $78,300 100.0%
======= ===== ===== ======= =====
_____________
(1) At December 31, 1997 and 1996, jumbo certificates amounted to $8.8
million and $10.5 million, respectively.
(2) IRA accounts included in certificate balances are $3.1 million and $3.4
million at December 31, 1997 and 1996, respectively.
Time Deposits by Rates
The following table sets forth the time deposits in the Bank classified
by rates at the dates indicated.
At December 31,
---------------------
1997 1996
---- ----
(In thousands)
2.00 - 3.99% . . . . . . . . . . . $ 41 $ 125
4.00 - 5.99% . . . . . . . . . . . 22,675 28,631
6.00 - 7.99% . . . . . . . . . . . 14,962 10,533
------- -------
Total. . . . . . . . . . . . . . . $37,678 $39,289
======= =======
Time Deposits by Maturities
The following table sets forth the amount and maturities of time deposits
at December 31, 1997.
Amount Due
--------------------------------------
Percent
of
Less One Over Over Total
Than to Two to to After Certi-
One Two Three Four 4 ficate
Year Years Years Years Years Total Accounts
---- ----- ----- ----- ----- ----- --------
(Dollars in thousands)
2.00 - 3.99% . . . . . $ 41 $ -- $ -- $ -- $ -- $ 41 0.11%
4.00 - 5.99% . . . . . 21,033 1,417 152 64 10 22,676 60.18
6.00 - 7.99% . . . . . 9,306 4,712 811 85 47 14,961 39.71
------- ------- ----- ---- --- ------- ------
Total. . . . . . . . . $30,380 $ 6,129 $ 963 $149 $57 $37,678 100.00%
======= ======= ===== ==== === ======= ======
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Savings Activities. The following table sets forth the savings
activities of the Bank for the periods indicated.
Year Ended December 31,
-----------------------
1997 1996
---- ----
(In thousands)
Beginning balance. . . . . . . . . . . . . $78,300 $74,905
Interest credited. . . . . . . . . . . . . 3,127 3,111
Net increase (decrease) in savings deposits (3,965) 284
------- -------
Ending balance . . . . . . . . . . . . . . $77,462 $78,300
======= =======
Borrowing
The Bank uses FHLB of Atlanta advances to support additional loan demand
and other funding needs. At December 31, 1997, the Bank had a borrowing
capacity of $11.0 million at the FHLB-Atlanta, of which $5.1 million was
outstanding.
The following tables set forth certain information regarding the Bank's
short-term borrowings at the end of and during the periods indicated.
At December 31,
--------------------
1997 1996
---- ----
Weighted average rate paid on:
FHLB borrowings - short term . . . . . . . 6.50% 6.95%
Year Ended December 31,
-----------------------
1997 1996
---- ----
(Dollars in thousands)
Maximum amount of borrowings outstanding
at any month end:
FHLB borrowings - short term. . . . . . . . $4,700 $4,650
Approximate average short-term borrowings
outstanding with respect to:
FHLB borrowings - short term. . . . . . . 2,762 2,071
Approximate weighted average rate paid on:
FHLB borrowings - short term. . . . . . . . 5.85% 5.64%
Competition
The Bank faces intense competition in its primary market area for the
attraction of savings deposits (its primary source of lendable funds) and in
the origination of loans. Its most direct competition for savings deposits
has historically come from commercial banks, credit unions, other thrifts
operating in its market area, and other financial institutions such as
brokerage firms and insurance companies. As of December 31, 1997, there were
seven commercial banks (including the Bank), a thrift institution, two credit
unions and three securities brokerage firms operating in Beaufort County.
Particularly in times of high interest rates, the Bank has faced additional
significant competition for investors' funds from short-term money market
securities and other corporate and government securities. The Bank's
competition for loans comes from commercial banks, thrift institutions, credit
unions and mortgage bankers. Such competition for deposits and the
origination of loans may limit the Bank's growth in the future.
Subsidiary Activities
20
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The Bank has one wholly-owned subsidiary, First Securities Corporation
("First Securities"), that is engaged in discount brokerage activities. At
December 31, 1997, the Bank's investment in First Securities was $76,000.
Properties
The Bank's main office is a 7,500 square foot building located at 1121
Boundary Street, Beaufort, South Carolina. The office was opened in 1986.
The office building is leased from First Patriots Partnership, a South
Carolina general partnership among Colden R. Battey, Jr., Richard L. Gray,
Russell L. Jeter, Carson R. Rentz and Robert A. Kerr, all of whom are
directors of the Company and the Bank. The Bank also leases additional
parking space adjacent to the main office from First Patriots Partnership.
The Bank operates a 2,100 square foot branch office located on U.S.
Highway 21 on Lady's Island in Beaufort, South Carolina. The office was
opened in 1988. The building is leased from Richard L. Gray, a director of
the Company and the Bank.
The Bank owns and operates a 8,700 office located at One Burnt Church
Road, Bluffton, South Carolina. The Bank occupies approximately 3,850 square
feet as a branch office and leases the remaining space. The office was opened
in 1993. In September 1996, the Bank established its first ATM at this branch
office.
Personnel
As of December 31, 1997, the Bank had 43 full-time and four part-time
employees, none of whom is represented by a collective bargaining unit. The
Bank believes its relationship with its employees is good.
Legal Proceedings
Periodically, there have been various claims and lawsuits involving the
Bank, such as claims to enforce liens, condemnation proceedings on properties
in which the Bank holds security interests, claims involving the making and
servicing of real property loans and other issues incident to the Bank's
business. The Bank is not a party to any pending legal proceedings that it
believes would have a material adverse effect on the financial condition or
operations of the Bank.
REGULATION
Regulation of 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
21
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<PAGE>
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 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, 1997, equaled $49,000.
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. 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 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, 1997, 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
22
<PAGE>
<PAGE>
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, 1997, the Bank's Tier 1 leverage ratio was 8.6%.
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, 1997, the Bank's risked-based capital ratio was 12.0%.
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
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, 1997, the Bank believed that it
maintained sufficient liquid assets to meet its commitments at that date.
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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, 1997 the Bank's
loans-to-one borrower limit was approximately $1.3 million. At December 31,
1997, 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, 1997, 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 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.
Regulation of the Company
General. 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 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
24
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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 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. 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 in the target bank's home sate 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.
Additionally, beginning on June 1, 1997, the federal banking agencies
were 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 Riegle-Neal by adopting a law after
the date of enactment of Riegle-Neal 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 are
permitted only if the law of the state in which the branch is located permits
such acquisitions. Interstate mergers and branch acquisitions are also be
subject to the nationwide and statewide insured deposit concentration amounts
described above.
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
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<PAGE>
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 "-- Regulation of the Bank -- Capital
Requirements" and Note 17 of Notes to Consolidated Financial Statements.
Subsidiary Activities
The Bank has one wholly-owned subsidiary, First Securities Corporation
("First Securities"), that is engaged in discount brokerage activities. At
December 31, 1997, the Bank's investment in First Securities was $76,000.
ITEM 2: PROPERTIES
- -------------------
The Bank's main office is a 7,500 square foot building located at 1121
Boundary Street, Beaufort, South Carolina. The office was opened in 1986.
The office building is leased from First Patriots Partnership, a South
Carolina general partnership among Colden R. Battey, Jr., Richard L. Gray,
Russell L. Jeter, Carson R. Rentz and Robert A. Kerr, all of whom are
directors of the Company and the Bank. The Bank also leases additional
parking space adjacent to the main office from First Patriots Partnership.
The Bank operates a 2,100 square foot branch office located on U.S.
Highway 21 on Lady's Island in Beaufort, South Carolina. The office was
opened in 1988. The building is leased from Richard L. Gray, a director of
the Company and the Bank.
The Bank owns and operates a 8,700 office located at One Burnt Church
Road, Bluffton, South Carolina. The Bank occupies approximately 3,850 square
feet as a branch office and leases the remaining space. The office was opened
in 1993. In September 1996, the Bank established its first ATM at this branch
office.
Personnel
As of December 31, 1997, the Bank had 43 full-time and four part-time
employees, none of whom is represented by a collective bargaining unit. The
Bank believes its relationship with its employees is good.
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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, 1997.
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 1997 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
- --------------------
Not applicable.
PART III
- --------
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
- ----------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
- -------------------------------------------------
This item is satisfied by the incorporation by reference of the
information contained under the section captioned "Transactions with
Management" in the Proxy Statement for the 1998 Annual Stockholders meeting.
ITEM 10: EXECUTIVE COMPENSATION
- --------------------------------
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This item is satisfied by the incorporation by reference of the
information contained under the section captioned "Executive Compensation" in
the Proxy Statement for the 1998 Annual Stockholders meeting.
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
This item is satisfied by the incorporation by reference of the
information contained under the section captioned "Voting Securities and
Principal Holders Thereof" in the Proxy Statement for the 1998 Annual
Stockholders meeting.
(b) Security Ownership of Management
This item is satisfied by the incorporation by reference of the
information contained under the section captioned "Voting Securities and
Principal Holders Thereof" in the Proxy Statement for the 1998 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
information contained under the section captioned "Transactions with
Management" in the Proxy Statement for the 1998 Annual Stockholders meeting.
28
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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
1997 Annual Report to Stockholders):
Independent Auditors' Report **
Balance Sheets, December 31, 1997 and 1996 **
Statement of Income, Years ended
December 31, 1997, and 1996 **
Statement of Changes in Stockholders' Equity,
Years Ended December 31, 1997 and 1996 **
Statement of Cash Flows, Years ended
December 31, 1997 and 1996 **
Notes to Financial Statements **
** (Incorporated by reference to the 1997 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
3.1--Articles of Incorporation of FirstBancorporation, Inc.
(incorporated by reference to Exhibit 3.1 contained in the
Company's Current Report on Form 8-k dated November 7, 1995)
3.2--Bylaws of FirstBancorporation, Inc. (incorporated by reference
to Exhibit 3.2 contained in the Company's Current Report on form
8-k dated November 7, 1995)
10.1--Employment Agreement with James A. Shuford, III (incorporated
by reference to Exhibit 10(g) contained in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1995)
10.2--Employment agreement with James L. Pate, III (Incorporated by
reference on Registration Statement on Form SB-2)
10.3 Employment Agreement with Richard E. Morgan, Jr. (Incorporated
by reference on Registration Statement on Form SB-2)
10.4--Employment Agreement with F. Wayne Lovelace (Incorporated by
reference on Registration Statement on Form SB-2)
10.5 1996 Stock Option Plan (incorporated by reference to Exhibit A
appended to the Company's 1996 annual meeting proxy statement)
10.6--Qualified Incentive Stock Option Plan (incorporated by
reference to Exhibit 10(b) contained in the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1995)
10.7--Amended and Restated Non-Qualified Stock Option Plan
(incorporated by reference to Exhibit 10(c) contained in the
Company's Annual Report on form 10-KSB for the year ended December
31, 1995)
10.8--Non-qualified Stock Option for Robert A. Kerr (incorporated
by reference to Exhibit 10(d) contained in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1995)
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<PAGE>
10.9--Lease for Company's main office (incorporated by reference to
Exhibit 10(e) contained in the company's Annual Report on Form
10-KSB for the year ended December 31, 1995)
10.10--Lease for Company's main office (incorporated by reference
to Exhibit 10(e) contained in the company's Annual Report on Form
10-KSB for the year ended December 31, 1995)
10.11--Lease for Columbia, South Carolina Office (Incorporated by
reference on Registration Statement on Form SB-2)
(13) 1997 Annual Report to Stockholders
(21) Subsidiaries of the Registrant
(Note: All other required exhibits are not applicable.)
(b) There were no reports on Form 8K filed in the quarter ended December 31,
1997.
30
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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 27, 1998 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 President and Chief Executive Officer
(Principal Finance and (Principal Executive Officer)
Accounting Officer) March 27, 1998
March 27, 1998
/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 27, 1998 March 27, 1998
/s/Richard L. Gray
- -------------------------------- --------------------------------------
Richard L. Gray Russell L. Jeter
Director Director
March 27, 1998 March 27, 1998
/s/Robert A. Kerr, Sr. /s/James D. Neighbors
- -------------------------------- --------------------------------------
Robert A. Kerr, Sr. James D. Neighbors
Director Director
March 27, 1998 March 27, 1998
- -------------------------------- --------------------------------------
Jerry H. Reeves, III Carson R. Rentz
Director Director
March 27, 1998 March 27, 1998
/s/William C. Robinson
- --------------------------------
William C. Robinson
Director
March 27, 1998
<PAGE>
<PAGE>
EXHIBIT (13)
1997 ANNUAL REPORT TO STOCKHOLDERS
FirstBancorporation, Inc.
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC.
Progress
Growth
Performance
Dedication
FIRSTBANK
--------------
1997
ANNUAL REPORT
<PAGE>
<PAGE>
C O R P O R A T E P R O F I L E FirstBancorporation, Inc. (The "Company")
was formed in 1995 as the holding company for FirstBank, N.A. (The "Bank").
See Note 1 of Note to Consolidated Financial Statements. 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 branches in Beaufort, South Carolina and
one full-service branch in Bluffton, South Carolina. The Bank provides a full
range of financial products, including a variety of credit and deposit
services. In 1997, the Bank opened FirstSecurities Corporation, a wholly-owned
Bank subsidiary. FirstSecurities offers a full range of investment products
including mutual funds, annuities and retirement plans. The Company is an
equal opportunity employer.
N O T I C E OF A N U A L S H A R E H O L D E R S M E T I N G The Annual
Meeting of Shareholders will convene at 5:30 p.m. on April 23, 1998 at the
following location: Oyster Cove Community Center, Oyster Cove Drive,
Beaufort, South Carolina 29902.
10 - K S B I N F O R M A T I O N 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 Main Office
address.
C O M M O N S T O C K I N F O R M A T I O N The Company's voting common
stock is not regularly or actively traded in any established market, and there
are not regularly quoted bid and asked prices for the stock. During 1997,
17,802 shares were traded at an average price of approximately $13.88 per
share based upon transfer records and the per share price of any trades of
which the Company is made aware. The most recent trade of which the Company is
aware involved 425 shares at $15.00 per share, and occurred on February 10,
1998. As of March 16, 1998, there were 656 stockholders of record and 692,748
common shares issued and outstanding. The Company declared a 10% stock
dividend in 1997. No cash dividends have been declared by the Company since
opening 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.
CORPORATE INFORMATION
MAIN OFFICE
1121 Boundary Street
Beaufort, South Carolina 29902
(843) 521-5600
BRANCH OFFICE
One Burnt Church Road
Bluffton, South Carolina 29910
(843) 837-5466
BRANCH OFFICE
184 Sea Island Parkway
Lady's Island
Beaufort, South Carolina 29902
(843) 521-5660
GENERAL COUNSEL
Harvey & Battey, P.A.
Beaufort, South Carolina 29902
INDEPENDENT AUDITORS
J.W. Hund and Company LLP
Columbia, South Carolina
SPECIAL SECURITIES COUNSEL
Breyer & Aguggia
Washington, D.C.
TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016-3572
(800) 456-0596
<PAGE>
<PAGE>
[Picture]
Colden R. Battey, Jr.
[Picture]
James A. Shuford
T O O U R S H A R E H O L D E R S : FirstBank combined record earnings in
1997 with many new initiatives. We expect our efforts to result in long-term
value to you, our shareholders, EARNINGS in 1997 were $947,000, a record for
the Company and an increase of 21% over operating earnings in 1996. These
earnings resulted from the Bank's normal operations and included no
extraordinary items. Your company was not burdened by the one-time SAIF
assessment which occurred in 1996 that impacted earnings by $285,000 after
tax. TOTAL assets at year-end were $91,699,000, which were relatively
unchanged from December 31, 1996. The Bank, however, had a record year of loan
production as it significantly increased loans sales through its mortgage
banking activities. ASSET quality remained high during 1997 and our loan
portfolio performed well. Prudent credit management and credit standards
remain a priority. While our economy has been strong, economic conditions
could change and FirstBank has increased its allowance for loan losses by
$382,000 over the past three years. DURING March, the Bank completed its data
processing upgrade. Our new operating system helps us to provide better and
faster customer service as well as better reporting for our management. We
will now be able to make product changes more efficiently in response to
customer demand for new services. IN September, we introduced our 24 Hour
BankLine so that our customers can access account information any time of the
day. This automated service received immediate acceptance, and the Bank has
averaged more than 3,000 calls monthly. A wholly owned subsidiary of
FirstBank, FirstSecurities Corporation, began operations in early 1997. John
E. Faircloth manages the Company and has done an outstanding job in providing
professional investment advice to our customers. Start-up expenses impacted
earnings but have been minimal when compared to our expected future returns.
THE Bank's Bluffton Executive Board added James A. Parrish, CPA, and Dr.
Michael K. Mikkelson in September. Mr. Parrish and Dr. Mikkelson bring their
wisdom and experience to our bank and will help ensure that we stay in close
contact with our Bluffton customers. REGRETTABLY Mac Kilpatrick, a valued
member of our Bluffton Executive Board, passed away in August. Mac was a
founding member of our Bluffton Executive Board and his service and guidance
will be profoundly missed. MUCH of our effort has recently been devoted to the
successful charter of our proposed Columbia bank, FirstBank of the Midlands.
Wayne Lovelace, the Bank's proposed President, along with our Board members,
brings a vast amount of talent to the new Bank. Thomas E. Suggs has been
designated Chairman of the Board that will include Charles D. Beaman, Robert
R. Bowers, Karen S. Faber and H. Vince Ford. Each of these individuals has
long-standing relationships in the Midlands area and will be invaluable to our
success. THE Columbia opening is planned for summer 1998, and our applications
with various regulatory authorities have been well received to date. Our
planned stock offering is expected to be approved and mailed to our
stockholders and other interested parties in late spring. We will keep you
informed of our progress. INCREASED competition from banking and financial
service companies is a marketplace reality. The initiatives we have taken, our
knowledge of our service areas and our commitment to responsive community
banking will help us to compete successfully. YOUR Board anticipates a
promising future for your Company. The strength in the Beaufort and Bluffton
communities and the potential for growth in the Midlands is encouraging. We
will continue to work hard for your investment.
/s/ Colden R. Battey Jr. /s/ James A. Shuford III
COLDEN R. BATTEY JR. JAMES A. SHUFORD III
CHAIRMAN OF THE BOARD PRESIDENT AND CEO
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SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following tables set forth certain information concerning the
consolidated financial condition and results of operations of the Company and
its subsidiary at the dates and for the years indicated. All per share data
has been adjusted for all stock dividends paid.
At December 31,
---------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
SELECTED FINANCIAL CONDITION DATA:
Total assets $91,699 $91,733 $83,047 $77,311 $73,154
Loans receivable, net 80,064 78,150 72,026 68,900 65,141
Loans held for sale 676 663 251 -- --
Investment securities held-to-
maturity -- -- -- 2,755 2,999
Investment securities available-
for-sale 2,182 2,485 2,630 -- --
Cash and amounts due from banks 4,127 4,721 4,197 3,359 2,164
Deposits 77,465 78,300 74,905 69,273 67,249
FHLB borrowings 5,050 5,600 1,000 1,000 --
Amounts due to depository
institutions 305 200 238 870 185
Stockholder's equity 7,981 7,045 6,517 5,895 5,374
Year Ended December 31,
---------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands, except per share amounts)
Interest Income $7,542 $6,920 $6,295 $5,184 $5,109
Interest Expense 3,423 3,281 3,106 2,220 2,352
Net interest income 4,119 3,639 3,190 2,964 2,757
Provision for loan losses 165 162 192 179 149
Net interest income after
provision for loan losses 3,954 3,477 2,998 2,785 2,608
Non-interest income 952 737 587 512 512
Non-interest expense 3,378 3,391 2,707 2,474 2,301
Income before provision for
income taxes 1,528 823 878 823 819
Provision for income taxes 581 322 351 302 309
Net income $947 $501 $527 $521 $510
Basic earnings per share $1.37 $0.73 $0.78 $0.78 $0.76
Diluted earnings per share 1.29 0.69 0.71 0.71 0.70
3
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SELECTED OTHER DATA:
At December 31,
---------------------------------------
Number of: 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Real estate loans outstanding 2,085 1,875 1,544 1,328 1,299
Deposit accounts 7,651 7,442 7,428 7,542 6,314
Full service offices 3 3 3 3 3
SELECTED OPERATING RATIOS:
At or For the Year Ended December 31,
---------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Performance ratios:
Return of average assets (net
income divided by average
assets) 1.04% 0.57% 0.65% 0.70% 0.71%
Return on average equity (net
income divided by average equity) 12.73 7.41 8.51 9.29 10.01
Interest rate spread (difference
between average yield on interest-
earning assets and average cost of
interest-bearing liabilities) 4.27 3.95 3.81 3.95 3.70
Net interest margin (net interest
income as a percentage of average
interest-earning assets) 4.82 4.43 4.20 4.19 3.97
Non-interest expense to year-end
assets 3.68 3.70 3.26 3.20 3.15
Non-interest expense to average
assets 3.70 3.86 3.34 3.31 3.16
Average interest-earning assets
to interest-bearing liabilities 113.67 111.93 110.00 108.90 109.30
Asset quality Ratios:
Allowance for loan losses to
total loans during the period 0.90 0.80 0.65 0.49 0.36
Net charge-offs to average
outstanding loans during the period 0.08 0.02 0.09 0.12 0.20
Ratio of non accrual loans to
total assets 0.47 0.44 0.16 0.35 0.17
Capital Ratios:
Average equity to average assets 8.16 7.71 7.64 7.49 7.08
4
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BUSINESS OF THE COMPANY
The Company is a bank holding company registered under the Bank Holding
Company Act and regulated by the Federal Reserve Board. Currently, the Bank is
the Company's only wholly-owned subsidiary and the current business of the
Company has consisted primarily of directing the affairs of the Bank.
In 1997 the Company voted to seek approval for charter of a new national
bank in Columbia, South Carolina, FirstBank of the Midlands, N.A. ("New
Bank"). Should all regulatory approvals be granted, the Company plans to begin
the new bank operations in 1998. See "Note 16 of Notes to Consolidated
Financial Statements".
The Company uses the premises, furniture and equipment of the Bank to
conduct its operations.
BUSINESS OF THE BANK
The Bank is a national bank regulated by the OCC. The Bank is the
successor to The Savings Bank of Beaufort County, FSB, a federally-chartered
stock savings bank that was formed as a de novo institution in 1986 and that
converted to a national bank charter on June 5, 1995. The Bank reorganized as
a wholly-owned subsidiary of the Company on November 1, 1995.
The Bank operates, and intends to continue to operate, as a community
bank devoted to serving the personal banking needs of residents of its primary
market area, as well as the commercial banking needs of small businesses owned
and operated by those residents. The Bank's business primarily consists of
attracting deposits from the general public and using these funds to originate
loans secured by real estate, including construction loans, located in its
primary market area. To a lesser extent, the Bank also originates commercial
real estate loans and consumer loans. The Bank conducts its business from its
main office located in downtown Beaufort, South Carolina, a full service
branch office located on Lady's Island in Beaufort, South Carolina, and a full
service branch office located in Bluffton, South Carolina.
Market Area
The Bank's primary market area is Beaufort County, South Carolina,
excluding Hilton Head Island. The economy of this area depends heavily on
services catering to the retirement and tourism industries. The area is noted
for its beaches, state park, historical sites and fishing. The U.S. military
presence in Beaufort County is significant with the Marine Corps Recruit Depot
at Parris Island and the Marine Corps Air Station and the Naval Hospital, both
in Beaufort.
Land use in Beaufort County in primarily residential. Beaufort County is
experiencing steady population growth, which creates a continued demand for
mortgage loan funds. According to the 1990 Census, the population of Beaufort
County has increased from approximately 65,000 in 1980 to 86,000 in 1990. In
March 1997, the U.S. Census Bureau estimated the 1996 Beaufort County
population at 103,000.
Lending Activities
At December 31, 1997, the Bank's total loans receivable, net, was $80.1
million, or 87.3% of total assets. The Bank has traditionally concentrated
its lending activities on the origination of conventional first mortgage loans
secured by one- to- four family properties, with such loans amounting to $47.2
million, or 58.9% of the total loans receivable portfolio at December 31,
1997.
5
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<PAGE>
Loan Portfolio Analysis. The following table sets forth the composition
of the Bank's loan portfolio (excluding loans held-for-sale) as of the dates
indicated.
At December 31,
-------------------------------------
1997 1996
----------------- ----------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
Mortgage loans:
One- to- four family. . . . . . . . . $47,188 58.9% $48,680 62.3%
Lot loans . . . . . . . . . . . . . 2,686 3.4 2,721 3.5
Commercial real estate. . . . . . . . 10,649 13.3 9,490 12.1
Construction. . . . . . . . . . . . . 5,949 7.4 6,183 7.9
------- ----- ------- -----
Total mortgage loans . . . . . . . . 66,472 83.0 67,074 85.8
Other Loans:
Open-ended home equity. . . . . . . . 5,851 7.3 5,059 6.5
Other installment loans . . . . . . . 3,676 4.6 3,659 4.7
Commercial loans. . . . . . . . . . . 4,793 6.0 2,988 3.8
------- ----- ------- -----
Total other loans. . . . . . . . . . 14,320 17.9 11,706 15.0
------- ----- ------- -----
Total loans. . . . . . . . . . . . . $80,792 100.9 $78,780 100.8
Less:
Allowance for loan losses . . . . . . $ (728) (0.9) $ (630) (0.8)
------- ----- ------- -----
Total loans receivable, net. . . . . $80,064 100.0% $78,150 100.0%
======= ===== ======= =====
Primarily as a result of the Bank being the successor to a thrift
institution (The Savings Bank of Beaufort County, FSB) and the demand for real
estate loans in its primary market area, the Bank has concentrated its lending
activities on the origination of loans secured by first mortgage loans on
existing one- to- four family residences located in its primary market area.
The Bank offers both fixed-rate one- to- four family mortgage loans and
ARM loans using documentation approved by the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
Fixed-rate loans are offered for a term between 15 and 30 years and are
generally sold to the FHLMC or private investors, primarily other financial
institutions. At December 31, 1997, fixed rate one- to- four family mortgage
loans with maturities between seven and 30 years amounted to $6.4 million or
8.1% of the one- to- four family mortgage loan portfolio.
The Bank offers ARM loans at rates and terms competitive with market
conditions. At December 31, 1997, $30.7 million, or 38.3%, of the Bank's
total loan portfolio consisted of ARM loans. ARM loans are retained primarily
for the Bank's portfolio. Currently, the Bank originates ARM loans with
interest rates that adjust annually based on the one-year or three-year U.S.
Treasury security constant maturity index after a fixed rate of interest that
is charged for the initial three year term. ARM loans are generally subject
to an annual interest rate adjustment limit of 2.0% and a lifetime interest
rate adjustment limit of 6.0%. ARM loans are typically based on a 30-year
amortization schedule. The Bank qualifies the borrowers on its ARM loans
based on the current market interest rate. The Bank's ARM loans do not
provide for negative amortization.
Borrower demand for ARM loans versus fixed-rate mortgage loans is a
function of the level of interest rates, the expectations of changes in the
level of interest rates and the difference between the initial interest rates
and fees charged for each type of loan. The relative amount of fixed-rate
mortgage loans and ARM loans that can be originated at any time is largely
determined by the demand for each in a competitive environment.
The retention of ARM loans in the Bank's loan portfolio helps reduce the
Bank's exposure to changes in interest rates. There are, however,
unquantifiable credit risks resulting from the potential of increased costs
due to changed rates
6
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<PAGE>
to be paid by the customer. It is possible that during periods of rising
interest rates the risk of default on ARM loans may increase as a result of
repricing and the increased payments required by the borrower.
At December 31, 1997, loans secured by first mortgages on residential
building lots amounted to $2.7 million, or 3.4% total loans. Residential lot
loans are generally made on an amortizing basis with maturities of five years
or less or on an interest-only basis for one year or less. Residential lot
loans frequently become sources of owner construction loans.
The Bank actively originates two types of residential construction loans
secured by properties located in its primary market area: (i) speculative
construction loans to home builders and (ii) custom construction loans to
either home builders or prospective homeowners. To a substantially lesser
extent, the Bank originates commercial construction loans to small businesses
in its primary market area. At December 31, 1997, construction loans totaled
$5.9 million or 7.4% of total loans.
At December 31, 1997, commercial real estate loans totaled $10.6 million,
or 13.3% of total loans. Commercial real estate loans are secured by
professional offices, small retail stores and other commercial properties.
Commercial real estate loans are generally structured on an amortization
schedule of up to 15 years, with variable rates of interest based on the prime
lending rate or the U.S. Treasury Bill rate. Generally, loan-to-value ratios
may not exceed 80% of the appraised value of the underlying property as
determined by an independent appraiser.
The Bank's commercial business lending activities focuses primarily on
small to medium size businesses owned by individuals well known to the Bank
and who reside in the Bank's primary market area. At December 31, 1997,
commercial business loans amounted to $4.8 million, or 6.0% of total loans.
Commercial business loans may be unsecured loans, but generally are
secured by various types of business collateral other than real estate (i.e.,
inventory, equipment, etc.). Commercial business loans are generally made in
amounts up to $250,000 and may be either lines of credit or term loans. Lines
of credit are generally renewable and made for a one-year term. Lines of
credit are generally variable rate loans indexed to the prime rate. As with
commercial real estate loans, the Bank generally requires annual financial
statements from its commercial business borrowers and, if the borrower is a
corporation, personal guarantees from the principals. As part of its
commercial business lending activities, the Bank issues standby letters of
credit as an accommodation to its borrowers. See "Note 15-Financial
Instruments"
At December 31, 1997, consumer loans totaled $9.5 million, or 11.9%, of
total loans. Subject to market conditions and other factors, the Bank intends
to continue to actively market consumer loans. Consumer loans generally have
shorter terms to maturity or repricing and higher interest rates than the
long-term, fixed-rate mortgage loans. The Bank's consumer loans consist of
loans secured by automobiles, boats and recreational vehicles, second
mortgages on residences, and unsecured loans for personal or household
purposes.
The largest component of the Bank's consumer loan portfolio is home
equity revolving credit lines secured by a first or second mortgage on the
borrowers' residence. Home equity lines of credit are made for variable rates
of interest tied to the prime lending rate with a loan-to-value ratio of up to
80%, taking into account any outstanding first mortgage loan. At December 31,
1997, home equity lines of credit amounted to $5.9 million, or 7.3%, of total
loans.
At December 31, 1997 and December 31, 1996 the Bank had total non-accrual
loans and loans greater than 90 days past due of $634,000 and $502,000
respectively.
At December 31, 1997, the Bank had foreclosed real estate of $127,000
consisting of a single-family home resulting from the foreclosure of a builder
construction loan and two residential building lots. See Note 1 of Notes to
Consolidated Financial Statements for a discussion of the Bank's accounting
for foreclosed real estate.
The Bank has established a systematic methodology for the determination
of provisions for loan losses. The methodology is set forth in a formal
policy and takes into consideration the need for an overall general valuation
allowance as well as specific allowances that are tied to individual loans.
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
7
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<PAGE>
is based on past loan loss experience, known and inherent risks in the loan
portfolio, adverse situations that may affect the borrower's ability to repay,
the estimated value of any underlying collateral and current economic
conditions. The Bank had charge-offs, net of recoveries, of $68,000 and
$1,000 in 1997 and 1996 respectively.
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the dates indicated.
At December 31,
-------------------------------------------------
1997 1996
----------------------- ------------------------
% of % of
As a % Cate- As a % Cate-
of Out- gory of Out- gory
standing Total standing Total
Loans in to Loans in to
Amount Category Loans Amount Category Loans
------ -------- ----- ------ -------- -----
(Dollars in thousands)
Mortgage loans:
Permanent mortgage. . . . . $146 0.25% 71.60% $ 90 0.15% 77.20%
Construction. . . . . . . . 21 0.25 10.70 20 0.31 7.90
Consumer . . . . . . . . . . 318 3.34 11.80 224 2.57 11.10
Commercial . . . . . . . . . 39 0.80 5.90 80 2.68 3.80
Unallocated. . . . . . . . . 204 -- -- 217 -- --
Total allowance for loan ---- ---- ------ ---- ---- ------
losses. . . . . . . . . . $728 0.90% 100.00% $631 0.80% 100.00%
Investment Activities
At December 31, 1997, the sole investments of the Company were its equity
investment in the Bank and the organizational costs incident to the New Bank.
As a national bank, the Bank is permitted under federal law to invest in
various types of liquid assets, including U.S. Treasury obligations,
securities of various federal agencies and of state and municipal governments,
deposits at the FHLB-Atlanta, certificates of deposit of federally insured
institutions, certain bankers' acceptances and federal funds. Subject to
various restrictions, the Bank may also invest a portion of its assets in
commercial paper and corporate debt securities. The Bank is also required to
maintain investments in FHLB of Atlanta stock and Federal Reserve Bank of
Richmond stock as a condition of membership in each institution. Neither the
Company nor the Bank invests in high yielding, non-investment grade
securities, or "junk-bonds." See Note 4 of Notes to Consolidated Financial
Statements.
Deposits
The Bank offers a wide array of deposit accounts as set forth in the
following table. Deposits are the primary source of funds for the Bank's
lending and investment activities. 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 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.
8
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The following table sets forth the balances in dollar amounts of savings
deposits in the various types of savings accounts offered by the Bank at the
dates indicated.
Percent Percent
of of
Amount Total Amount Total
------ ----- ------ -----
(Dollars in Thousands)
Non-interest-bearing. . . . . . . . . $ 6,675 8.6% $ 7,169 9.2%
NOW and money market checking . . . . 27,933 36.1 25,872 33.0
Regular savings accounts. . . . . . . 5,176 6.7 5,970 7.6
Certificates of deposit maturing(1):
Within 1 year. . . . . . . . . . . . 30,380 39.1 31,070 39.7
After 1 year, but within 3 years . . 7,092 9.2 7,436 9.5
After 3 years. . . . . . . . . . . . 206 0.3 783 1.0
------- ----- ------- -----
Total $77,462 100.0% $78,300 100.0%
======= ===== ======= =====
- ------------------
(1) At December 31, 1997 and 1996, jumbo certificates amounted to $8.8
million and $10.5 million, respectively.
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. In addition, the Bank has accepted brokered deposits
typically in denominations of $99,000 from out-of-state depositors at rates
comparable to rates offered to local depositors. At December 31, 1997,
brokered deposits totaled approximately $8.0 million.
Borrowing
The Bank uses FHLB of Atlanta advances to support additional loan demand
and other funding needs. At December 31, 1997, the Bank had a borrowing
capacity of $11.0 million at the FHLB-Atlanta, of which $5.1 million was
outstanding.
The following tables set forth certain information regarding the Bank's
short-term borrowings at the end of and during the periods indicated.
At December 31,
1997 1996
---- ----
Weighted average rate paid on:
FHLB borrowings - short term . . . . . . . . . 6.50% 6.95%
Year Ended December 31,
1997 1996
---- ----
(Dollars in thousands)
Maximum amount of borrowings outstanding
at any month end:
FHLB borrowings - short term. . . . . . . . . . $4,700 $4,650
Approximate average short-term borrowings
outstanding with respect to:
FHLB borrowings - short term. . . . . . . . . 2,762 2,071
Approximate weighted average rate paid on:
FHLB borrowings - short term . . . . . . . . . . 5.85% 5.64%
9
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Competition
The Bank faces competition in its primary market area for the attraction
of savings deposits (its primary source of lendable funds) and in the
origination of loans. Its most direct competition for savings deposits has
historically come from commercial banks, credit unions, other thrifts
operating in its market area, and other financial institutions such as
brokerage firms and insurance companies. As of December 31, 1997, there were
seven commercial banks (including the Bank), a thrift institution, two credit
unions and three securities brokerage firms operating in Beaufort County. The
Bank's competition for loans comes from commercial banks, thrift institutions,
credit unions and mortgage bankers.
Subsidiary Activities
In 1997, the Bank began operations of its wholly-owned subsidiary,
FirstSecurities Corporation ("FirstSecurities"), that is engaged in discount
brokerage activities. At December 31, 1997, the Bank's investment in
FirstSecurities was $76,000. See Note 19 of "Notes to Consolidated Financial
Statements"
Properties
The Bank's main office is located at 1121 Boundary Street, Beaufort,
South Carolina. The office was opened in 1986. The office building is leased
from First Patriots Partnership, a South Carolina general partnership among
Colden R. Battey, Jr., Richard L. Gray, Russell L. Jeter, Carson R. Rentz and
Robert A. Kerr, all of whom are directors of the Company and the Bank. The
Bank also leases additional parking space adjacent to the main office from
First Patriots Partnership. See Note 7 of "Notes to Consolidated Financial
Statements"
The Bank operates a 2,100 square foot branch office located on U.S.
Highway 21 on Lady's Island in Beaufort, South Carolina. The office was
opened in 1988. The building is leased from Richard L. Gray, a director of
the Company and the Bank.
The Bank owns and operates a 8,700 square foot office located at One
Burnt Church Road, Bluffton, South Carolina. The Bank occupies approximately
3,850 square feet as a branch office and leases the remaining space. The
office was opened in 1993. In September 1996, the Bank established its first
ATM at this branch office.
10
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results
of operations is intended to assist in understanding the financial condition
and results of operations of the Bank. The information contained in this
section should be read in conjunction with the Consolidated Financial
Statements and accompanying Notes thereto.
Operating Strategy
The Bank's business consists principally of attracting retail deposits
from the general public and using these funds to originate mortgage loans
secured by one- to- four family residences located in its primary market area.
To a lesser extent, the Bank also originates commercial loans to small
businesses and professionals, home equity loans, construction loans and
consumer loans. The Bank funds its assets primarily with retail deposits and,
to a lesser extent, FHLB-Atlanta advances may be used as a supplemental
source of funds.
The Bank's profitability depends primarily on its net interest income,
which is the difference between the income it receives on its loan and
investment portfolio and its cost of funds, which consists of interest paid on
deposits and borrowings. Net interest income is also affected by the relative
amounts of interest-earning assets and interest-bearing liabilities. When
interest-earning assets equal or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income. The Bank's
profitability is also affected by the level of other operating income and
expenses. Other operating income includes service charges and fees, gain on
sale of mortgage loans and gain on sale of investments. Other operating
expenses primarily include compensation and benefits, occupancy and equipment
expenses, deposit insurance premiums and data processing expenses. The Bank's
results of operations are also significantly affected by general economic and
competitive conditions, particularly changes in market interest rates,
government legislation and regulation and monetary and fiscal policies.
The Bank's business strategy is to operate as a well-capitalized,
profitable and independent financial institution dedicated to financing
community credit needs and providing quality customer service. The Bank
emphasizes the origination for retention in its portfolio of adjustable-rate
loans in order to reduce its interest rate risk. Fixed-rate loans with
maturities of 15 years or more are generally originated for sale in the
secondary market.
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, 1997,
the Bank's total interest-bearing liabilities due within one year exceeded
interest-earning assets due within one year by approximately $17.1 million,
resulting in a cumulative one-year negative gap to total earning assets ratio
of 18.65%. The Bank is constantly monitoring and attempting to control or
improve its short-term gap position through periodic review of 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 ("ARM")
loans and short-term
11
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<PAGE>
construction loans. At December 31, 1997, residential real estate mortgage
loans that provided for repayment or interest-rate adjustment within three
years totaled approximately $38.9 million, and represented approximately 48.1%
of total loans receivable. The Bank sells in the secondary market almost all
of the 15 to 30 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 fiscal 1997, the Bank originated approximately $9.2
million of ARM loans versus $13.4 million of fixed-rate loans. ARM loans are
generally originated for retention in the portfolio. In fiscal 1997, the Bank
advanced approximately $13.4 million against approved construction loan lines,
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 ARM 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 business
loans. These loans are usually originated with variable interest rates. At
December 31, 1997, consumer loans totaled approximately $9.5 million, or
approximately 11.9% of total loans, and commercial business loans totaled
approximately $4.8 million, or 6.0% of total loans. 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 fiscal 1996 the
Bank started its "Privilege Plus" campaign designed to attract transaction
accounts. As of December 31, 1997, the Bank's total Now, Money Market and non
interest-bearing demand deposit accounts totaled $34.6 million or 44.7% of
total deposits at that date.
12
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Interest Sensitivity Analysis
The following table presents the Bank's interest sensitivity gap between
interest-earning assets and interest-bearing liabilities at December 31, 1997.
0-3 4-12 1-2 3-4
Months Months Years Years Year 5+ Total
------ ------ ----- ----- ------- -----
(Dollars in thousands)
Interest-earning assets:
Loans . . . . . . . . . . $21,248 $25,666 $20,660 $6,143 $7,751 $81,468
GNMA mortgage-backed
securities . . . . . . . -- 1,405 -- -- -- 1,405
Overnight and other
investments. . . . . . . 2,715 -- -- -- 130 2,845
Total interest earning ------- ------- ------- ------ ------ -------
assets . . . . . . . . 23,963 27,071 20,660 6,143 7,881 85,718
Interest-bearing liabilities:
Regular savings . . . . . 5,176 -- -- -- -- 5,176
NOW and money market
accounts . . . . . . . . 27,933 -- -- -- -- 27,933
Certificate accounts. . . 11,215 19,165 7,092 206 -- 37,678
FHLB borrowing. . . . . . 4,650 -- 400 -- -- 5,050
Total rate sensitive ------- ------- ------- ------- ------ -------
liabilities . . . . . . 48,974 19,165 7,492 206 -- 75,837
------- ------- ------- ------- ------ -------
Excess (deficiency) of
interest sensitive assets
over interest sensitive
liabilities . . . . . . .$(25,011) $ 7,906 $13,168 $ 5,937 $ 7,881 $ 9,881
======== ======= ======= ======= ======= =======
Cumulative excess
(deficiency) of interest
sensitive assets over
interest sensitive
liabilities . . . . . . .$(25,011) $(17,105) $(3,937) $ 2,000 $ 9,881
======== ======= ======= ======= =======
Ratio of interest-
sensitive assets to
interest-sensitive
liabilities . . . . . . . 48.9% 141.3%
Cumulative ratio of
interest-earning
assets to interest-
bearing liabilities . . . 48.9% 74.9%
13
<PAGE>
<PAGE>
Average Balances, Interest and Average Yields/Cost
The following table sets forth, for the periods indicated, information
regarding average balances of assets and liabilities as well as the total
dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities, resultant yields,
interest rate spread, net interest margin, and ratio of average
interest-earning assets to average interest-bearing liabilities. Average
balances for a period have been calculated using average daily balances during
such period.
At
December Year Ended December 31,
31, ----------------------------------------------
1997 1997 1996
----- ---------------------- ----------------------
Interest Interest
and and
Yield Average Divi- Yield Average Divi- Yield
/Cost Balance dends /Cost Balance dends /Cost
------ ------- ----- ----- ------- ----- -----
(Dollars in thousands)
Interest-earning assets:
Total net loans(1). . . . 8.85% $81,221 $ 7,282 8.97% $77,610 $ 6,634 8.55%
FHLB overnight
investments. . . . . . . 6.25 1,815 101 5.56 1,862 108 5.80
Interest-bearing time
deposits with other
banks. . . . . . . . . . 4.68 135 7 5.19 199 11 5.53
Other investments . . . . 6.34 2,350 152 6.47 2,539 167 6.58
Total interest-earning ---- ------ ------- ---- ------- ------- ----
assets. . . . . . . . 8.69 85,521 7,542 8.82 82,210 6,920 8.42
Non-interest-earning
assets. . . . . . . . . . 5,662 5,534
------- -------
Total assets . . . . . $91,183 $87,744
======= =======
Interest-bearing liabilities:
NOW and money market
accounts . . . . . . . . 2.67 $27,479 818 2.98 $25,462 719 2.82%
Other savings . . . . . . 2.33 5,479 126 2.30 6,457 152 2.35
Certificates of deposit . 5.90 38,847 2,272 5.83 38,879 2,255 5.80
Total interest-bearing ---- ------ ------- ---- ------- ------- ----
deposits . . . . . . . 4.37 71,805 3,216 4.47 70,798 3,126 4.42
FHLB advances . . . . . . 6.54 3,429 207 6.03 2,650 155 5.85
Total interest-bearing ---- ------ ------- ---- ------- ------- ----
liabilities. . . . . . 4.51 75,234 3,423 4.55 73,448 3,281 4.47
Non-interest-bearing
liabilities:
Non-interest-bearing
deposits . . . . . . . . 6,441 6,289
Other liabilities . . . . 2,065 1,246
------- -------
Total liabilities . . . 83,740 80,983
Stockholders' equity . . . 7,443 6,761
Total liabilities and ------- -------
stockholders' equity . 91,183 87,744
Net interest income. . . . $ 4,119 $ 3,639
======= =======
Interest rate spread . . . 4.18% 4.27% 3.95%
==== ==== ====
Net interest margin. . . . 4.82% 4.43%
==== ====
Ratio of average interest-
earning assets to average
interest-bearing
liabilities . . . . . . . 1.14 1.12
==== ====
- ------------------
(1) Does not include interest on non-accrual loans.
14
<PAGE>
<PAGE>
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes
on net interest income of the Bank. Information is provided with respect to
(i) effects on net interest income attributable to changes in volume (changes
in volume multiplied by prior rate); (ii) effects on net interest income
attributable to changes in rate (changes in rate multiplied by prior
volume)and (iii) the net change (the sum of the prior columns). The changes
attributable to changes in both rate and volume are allocated proportionately
to the changes in rate and the changes in volume.
Year Ended December Year Ended December
31, 1997 31, 1996
Compared to December Compared to December
31, 1996 31, 1995
Increase (Decrease) Increase (Decrease)
Due to Due to
---------------------- ---------------------
Rate Volume Net Rate Volume Net
---- ------ --- ---- ------ ---
(In thousands)
Interest-earning assets:
Loans receivable(1) . . . $332 $316 $648 $107 $514 $621
FHLB overnight
investments. . . . . . . (4) (3) (7) (26) 31 5
Time deposits in other
banks. . . . . . . . . . (1) (3) (4) (1) -- (1)
Investments . . . . . . . (3) (12) (15) 16 (17) (1)
---- ---- ---- ---- ---- ----
Total interest income . 324 298 622 96 528 624
Interest-bearing liabilities:
Interest-bearing NOW and
MMA accounts . . . . . . 40 59 99 16 61 77
Other savings . . . . . . (3) (23) (26) (21) (55) (76)
Certificates of deposit . 19 (2) 17 (67) 233 166
Short-term borrowing. . . 4 40 44 (12) (18) (30)
Long-term borrowing . . . 2 6 8 -- 38 38
---- ---- ---- ---- ---- ----
Total interest expense . 62 80 142 (84) 259 175
---- ---- ---- ---- ---- ----
Net interest income. . . . $262 $218 $480 $180 $269 $449
==== ==== ==== ==== ==== ====
- -----------------
(1) Does not include interest on non-accrual loans.
Comparison of Financial Condition at December 31, 1997 and 1996
Total assets remained unchanged at $91.7 million at December 31, 1997 and
1996. Loans receivable, net, increased 2.6% from $78.1 million at December
31, 1996 to $80.1 million at December 31, 1997. This increase was funded by
cash and cash equivalents and proceeds from maturing securities
available-for-sale. Cash and cash equivalents decreased from $7.9 million at
December 31, 1996 to $6.1 million at December 31, 1997, while securities
available-for-sale decreased from $2.5 million at December 31, 1996 to $2.2
million at December 31, 1997. Premises and equipment, net, increased from
$1.1 million at December 31, 1996 to $1.3 million at December 31, 1997 as a
result of the purchase of computer hardware as part of the Bank's upgrade of
network computer equipment and upgrades in data processing systems. Total
deposits decreased 1.0% from $78.3 million at December 31, 1996 to $77.5
million at December 31, 1997 primarily as a result of a 4.1% decrease in time
deposits from $39.3 million at December 31, 1996 to $37.7 million at December
31, 1996. Management attributes the decrease in time deposits to increased
competition for funds, particularly from securities brokerage firms and mutual
funds in light of the relatively higher investment return opportunities
offered by the stock market. Total stockholders' equity increased 14.3% from
$7.0 million at December 31, 1996 to $8.0 million at December 31, 1997 as a
result of retained net income.
15
<PAGE>
<PAGE>
Comparison of Operations for the Fiscal Years Ended December 31, 1997 and 1996
Net Income. Net income increased 89.0% from $501,000 in 1996 ($0.73 per
basic earnings per common share and $0.69 per share on a diluted basis) to
$947,000 in 1997 ($1.37 per basic earnings per common share and $1.29 per
share on a diluted basis) primarily as a result of a 13.9% increase in net
interest income from $3.6 million in 1996 to $4.1 million in 1997.
Net Interest Income. Net interest income increased 13.9% from $3.6
million in 1996 to $4.1 million in 1997. The Bank's interest rate spread
increased from 3.94% in 1996 to 4.27% in 1997 as the average yield on
interest-earning assets increased from 8.42% in 1996 to 8.82% in 1997 while
the average rate paid on interest-bearing liabilities only increased from
4.47% in 1996 to 4.55% in 1997.
Total interest and dividend income increased 8.7% from $6.9 million in
1996 to $7.5 million in 1997. Interest and fees on loans increased from $6.6
million in 1996 to $7.3 million in 1997 because of the combined effect of an
increase in the average balance of loans from $77.6 million in 1996 to $81.2
million in 1997 and an increase in the average yield on loans from 8.55% in
1996 to 8.97% in 1997. The growth in interest income on loans was offset by a
reduction in both interest on securities available-for-sale and other interest
income (FHLB overnight deposits) as the Bank reduced the average balance of
these investments to fund loan demand.
Total interest expense increased 3.0% from $3.3 million in 1996 to $3.4
million in 1997. The average balance of interest-bearing liabilities
increased from $73.4 million in 1996 to $75.2 million in 1997 and the average
rate paid on interest-bearing liabilities increased from 4.47% in 1996 to
4.55% in 1997.
Provision for Loan Losses. Provisions for loan losses are charges to
earnings to bring the total allowance for loan losses to a level considered
adequate by management to provide for probable known and inherent loan losses
based on management's evaluation of the collectibility of the loan portfolio.
In determining the adequacy of the allowance for loan losses, management
considers past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect a borrower's ability to repay,
the estimated value of any underlying collateral, and current economic
conditions. Although management uses the best information available, future
adjustments to the allowance may be necessary as a result of changes in
economic, operating, regulatory and other conditions that may be beyond the
Bank's control. While the Bank maintains its allowance for loan losses at a
level that management considers as adequate to provide for probable known and
inherent losses, there can be no assurance that further additions will not be
made to the allowance for loan losses or that actual losses will not exceed
the estimated amounts.
The provision for loan losses was relatively unchanged and was $162,000
in 1996 and $165,000 in 1997. At December 31, 1997, the Bank's allowance for
loan losses to total loans was 0.90%.
Non-interest Income. Total noninterest income increased 29.2% from
$737,000 in 1996 to $952,000 in 1997 primarily as a result of a higher level
of loan related fees attributable to higher loan volume and a higher level of
other service charges and fees attributable to larger numbers of transaction
deposit accounts.
Noninterest Expenses. Total noninterest expenses were $3.4 million in
both 1997 and 1996. Insurance expense was $618,000 in 1996 compared to
$94,000 in 1997 as a result of the one-time, industry-wide special SAIF
assessment paid in 1996, which for the Bank was $475,000 before tax. As a
result of the SAIF recapitalization, the FDIC substantially reduced deposit
insurance premiums. Since January 1, 1997, the Bank has paid deposit
insurance premiums at the rate of $0.065 per $100 of deposits as opposed to
$0.23 per $100 of deposits before the SAIF recapitalization. Furniture and
equipment expense increased from $235,000 in 1996 to $260,000 in 1997 as a
result of the write-off of obsolete computer equipment and the depreciation on
new equipment. Supplies and printing expense increased from $70,000 in 1996
to $103,000 in 1997 as a result of supplies for the conversion to an in-house
data processing system and increased check printing expense. Automated teller
machine expense increased from $14,000 in 1996 to $43,000 in 1997 as a result
of a full year of expense associated with the Bank's sole automated teller
machine in the Bluffton branch office. The increases in the other categories
of noninterest expenses are primarily attributable to general inflationary
increases.
16
<PAGE>
<PAGE>
Provision for Income Taxes. The Company pays Federal corporate income
taxes and South Carolina bank taxes. The provision for income taxes increased
from $322,000 in 1996 to $581,000 in 1997 as a result of higher income before
income taxes. The effective tax rate was 39.2% in 1996 and 38.0% in 1997.
Liquidity and Capital Resources
The Bank's primary sources of funds are customer deposits, proceeds from
principal and interest payments on and the sale of loans, maturing securities
and FHLB advances. While maturities and scheduled amortization of loans are a
predictable source of funds, deposit flows and mortgage prepayments are
greatly influenced by general interest rates, economic conditions and
competition.
National banks are not subject to any prescribed regulatory liquidity
requirements. However, the Bank must maintain an adequate liquidity to ensure
that funds are available to fund loan originations and deposit withdrawals, to
satisfy other financial commitments and to take advantage of investment
opportunities. The Bank generally maintains sufficient cash and short-term
investments to meet short-term liquidity needs. At December 31, 1997, the
Bank had cash and cash equivalents of $6.1 million, interest-bearing time
deposits with banks of $99,000, and marketable securities available-for-sale
of $1.4 million. At December 31, 1997, the Bank also maintained an
uncommitted credit facility with the FHLB-Atlanta, which provided for
immediately available advances up to an aggregate amount of $11.0 million, of
which $5.1 million was outstanding.
The Bank's primary investing activity is the origination of permanent
mortgage loans. During the years ended December 31, 1997 and 1996, the Bank
originated $28.0 million and $25.1 million of such loans, respectively. At
December 31, 1997, the Bank had loan commitments totaling $3.4 million, unused
lines of credit of $10.3 million and standby letters of credit totalling
$288,000. Certificates of deposit that are scheduled to mature in less than
one year from December 31, 1997 totaled $30.4 million.
OCC regulations require the Bank to maintain specific amounts of
regulatory capital. As of December 31, 1997, the Bank complied with all
regulatory capital requirements as of that date with a Tier 1 leverage capital
ratio of 8.6% of adjusted total assets and a total capital ratio of 13.1% of
total risk weighted assets. See Note 17 of "Notes to Consolidated Financial
Statements" for detail of the Bank's and Company's capital position and
requirements.
Year 2000 Compliance
Because the Bank's business depends heavily upon computers, failure of
the Bank's computer systems, or the computer systems of other entities to
which the Bank's computers are linked or on which the Bank's computer systems
depend, to operate properly after December 31, 1999, would have a material
adverse effect on the Bank. The Bank has prepared a plan for addressing Year
2000 compliance issues and is currently testing for compliance. Also, the
Bank is currently contacting other entities with which its systems are linked
or upon which its systems depend to determine whether such entities expect to
encounter material compliance problems.
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data
presented herein have been prepared in accordance with GAAP, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of
money over time due to inflation. The primary impact of inflation is
reflected in the increased cost of the Bank's operations. Unlike most
industrial companies, virtually all the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates generally
have a more significant impact on a financial institution's performance than
do general levels of inflation. Interest rates do not necessarily move in the
same direction or to the same extent as the prices of goods and services.
17
<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 1997.
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
18
<PAGE>
<PAGE>
[LETTERHEAD OF J.W. HUNT AND COMPANY, LLP APPEARS HERE]
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, 1997 and 1996,
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the years in the two-year period ended
December 31, 1997. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
FirstBancorporation, Inc. and Subsidiary at December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the two-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ J.W. Hunt and Company, LLP
Columbia, South Carolina
January 30, 1998
19
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARY
----------------------------------------
CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 1997 AND 1996
- ------------------------------------------------------------------------------
1997 1996
---- ----
ASSETS
------
Cash and amounts due from banks $ 4,126,603 $ 4,721,174
Interest-bearing deposits with banks 1,968,995 3,149,854
-----------------------------------
Total cash and cash equivalents 6,095,598 7,871,028
Interest-bearing time deposits with banks 99,000 199,177
Securities available-for-sale 2,182,412 2,485,075
Real estate loans held-for-sale 676,279 663,316
Loans receivable - net of loans in process 80,792,015 78,780,166
Less, allowance for loan losses (728,043) (630,557)
-------------------------------------
80,063,972 78,149,609
-------------------------------------
Accrued interest receivable 555,537 502,412
Premises and equipment, net 1,288,233 1,147,127
Foreclosed real estate 126,500 227,510
Deferred organization costs 123,233 135,547
Deferred tax asset 263,987 185,172
Prepaid expenses and other assets 224,064 167,176
-------------------------------------
Total assets $ 91,698,815 $ 91,733,149
=====================================
LIABILITIES AND STOCKHOLDERS'
EQUITY
-----------------------------
LIABILITIES:
Demand deposits $ 34,608,201 $ 33,041,216
Savings deposits 5,176,093 5,969,522
Time deposits 37,677,994 39,289,281
-------------------------------------
Total deposits 77,462,288 78,300,019
Federal Home Loan Bank advances 5,050,000 5,600,000
Amounts due to depository
institutions (non-interest bearing) 305,315 200,117
Advance payments by borrowers for
taxes and insurance 54,630 76,473
Accrued liabilities:
Interest payable 208,410 119,059
Expenses payable 173,025 213,569
Other 464,146 179,233
-------------------------------------
Total liabilities 83,717,814 84,688,470
-------------------------------------
STOCKHOLDERS' EQUITY:
Preferred stock - $0.01 par value,
shares authorized - 1,000,000,
issued and
outstanding - none
Common stock - $0.01 par value,
shares authorized - 2,000,000,
issued and outstanding - 690,323
- 1997; issued and outstanding
- 627,587 - 1996 6,903 6,276
Additional paid-in capital 6,248,777 5,441,306
Unrealized loss on securities
available-for-sale, net of
applicable deferred income taxes (14,497) (10,931)
Retained earnings 1,739,818 1,608,028
-------------------------------------
Total stockholders' equity 7,981,001 7,044,679
-------------------------------------
Total liabilities and
stockholders' equity $ 91,698,815 $ 91,733,149
=====================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS
- ------------------------------------------------------------------------
20
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARY
----------------------------------------
CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1997 AND 1996
- ------------------------------------------------------------------------------
1997 1996
---- ----
INTEREST AND DIVIDEND INCOME:
Interest on loans $7,281,594 $6,634,443
Interest on securities available-
for-sale 104,175 119,322
Other interest income 108,765 120,362
Dividends-Federal Reserve Bank and
Federal Home Loan Bank 47,555 45,931
--------- ---------
Total interest and dividend income 7,542,089 6,920,058
--------- ---------
INTEREST EXPENSE:
Deposits 3,215,938 3,125,187
Federal Home Loan Bank advances 206,747 155,460
--------- ---------
Total interest expense 3,422,685 3,280,647
--------- ---------
NET INTEREST INCOME 4,119,404 3,639,411
PROVISION FOR LOAN LOSSES 165,000 162,000
--------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,954,404 3,477,411
--------- ---------
NONINTEREST INCOME:
Loan related fees 210,522 116,180
Other service charges and fees 700,468 577,077
Rental income 40,915 43,603
--------- ---------
Total noninterest income 951,905 736,860
--------- ---------
NONINTEREST EXPENSES:
Compensation and benefits 1,735,195 1,553,094
Occupancy 291,413 275,314
Insurance 93,910 617,948
Furniture and equipment 259,928 234,915
Data processing 152,042 156,330
Account analysis charges 187,135 119,380
Professional fees 107,791 115,973
Supplies and printing 103,144 70,275
Marketing 87,393 61,942
Telephone and postage 119,477 101,552
Automobile 7,598 8,787
Regulatory fees 36,158 34,532
Automated teller system 43,232 13,667
Other expenses 208,878 188,084
Loan origination costs deferred (54,982) (160,831)
--------- ---------
Total noninterest expenses 3,378,312 3,390,962
--------- ---------
INCOME BEFORE INCOME TAXES 1,527,997 823,309
--------- ---------
PROVISION FOR INCOME TAXES:
Federal 515,705 276,647
State 64,934 45,851
--------- ---------
Total 580,639 322,498
--------- ---------
NET INCOME $ 947,358 $ 500,811
========= =========
(Continued)-1.
21
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1997 AND 1996
- ------------------------------------------------------------------------------
1997 1996
---- ----
Basic earnings per common share:
Weighted average shares outstanding . . . 690,285 686,042
============================
Net income per weighted average number of
shares outstanding. . . . . . . . . . . .$ 1.37 $ 0.73
============================
Diluted earnings per common share:
Weighted average shares outstanding . . . 735,507 725,813
============================
Net income per weighted average number of
shares outstanding. . . . . . . . . . . .$ 1.29 $ 0.69
============================
(Concluded) -2.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS
- ------------------------------------------------------------------------------
22
<PAGE>
<PAGE>
<TABLE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARY
----------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY,
YEARS ENDED DECEMBER 31, 1997 AND 1996
- ---------------------------------------------------------------------------------------------
UNREALIZED
LOSS ON
SECURITIES
AVAILABLE-
FOR-SALE,
NET OF TOTAL
COMMON STOCK ADDITIONAL APPLICABLE STOCK-
NUMBER PAID-IN RETAINED DEFERRED HOLDERS'
OF SHARES AMOUNT CAPITAL EARNINGS INCOME TAXES EQUITY
--------- ------ ------- -------- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance,
January 1,
1996 595,848 $ 5,958 $ 5,037,021 $ 1,493,810 $ (19,325) $ 6,517,464
Issuance of 29,738
shares of stock
for 5% stock
dividend 29,738 298 386,295 (386,593) - -
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 6,276 5,441,306 1,608,028 (10,931) 7,044,679
Issuance of 62,736
shares of stock
for 10% stock
dividend 62,736 627 814,941 (815,568) - -
Net income - - - 947,358 - 947,358
Stock issuance cost - - (7,470) - - (7,470)
Change in unrealized
loss on securities
available-for-sale,
net of applicable
deferred income
taxes of $2,185 - - - - (3,566) (3,566)
-----------------------------------------------------------------------------
Balance,
December 31,
1997 690,323 $ 6,903 $ 6,248,777 $ 1,739,818 $(14,497) $ 7,981,001
=============================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------------
23
</TABLE>
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARY
----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS, YEARS ENDED DECEMBER 31, 1997 AND 1996
- ------------------------------------------------------------------------------
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 947,358 $ 500,811
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of deferred loan fees and
discounts (27,018) (3,654)
Provision for loan losses 165,000 162,000
Depreciation and amortization 266,762 202,949
Deferred income taxes (78,815) (43,992)
Gain on sale of foreclosed real estate (4,573) (50,393)
Increase in interest receivable (53,125) (5,967)
Increase in prepaid expenses and other assets (56,888) (65,965)
Originations of loans sold to investors (14,164,921) (7,521,386)
Proceeds from sales of loans to investors 14,164,921 7,521,386
Disbursements on loans serviced for others (1,611,484) (1,227,215)
Receipts on loans serviced for others 1,710,947 1,226,719
Increase in real estate loans held for sale (12,963) (411,966)
Increase in accrued interest payable 89,351 14,398
Increase (decrease) in accrued expenses (40,543) 162,695
Increase in other liabilities 284,913 56,585
-----------------------------
Net cash provided by operating
activities 1,578,922 517,005
-----------------------------
Cash flows from investing activities:
Purchase of securities available-for-sale (98,602) (97,315)
Maturities of interest-bearing time
deposits with banks 100,177 -
Principal repayments of securities
available-for-sale 387,060 350,613
Purchase of Federal Home Loan Bank stock
and dividends received - (103,800)
Loans originated, net (2,193,574) (6,546,392)
Proceeds from sales of foreclosed
real estate 149,534 530,500
Capital expenditures (387,101) (293,894)
-----------------------------
Net cash used by investing
activities (2,042,506) (6,160,288)
-----------------------------
Cash flows from financing activities:
Net increase in demand deposit accounts 1,566,985 3,631,534
Net decrease in savings deposit accounts (793,429) (1,329,939)
Net increase (decrease) in time deposits (1,611,287) 1,093,499
Proceeds from Federal Home Loan Bank
advances 16,450,000 15,150,000
Repayment of Federal Home Loan Bank
advances (17,000,000) (10,550,000)
Increase (decrease) in amounts due to
depository institutions 105,198 (37,973)
Decrease in advance payments by borrowers
for taxes and insurance (21,843) (7,188)
Stock issuance costs (7,470) -
Proceeds from stock options exercised - 18,010
-----------------------------
Net cash provided (used)
by financing activities (1,311,846) 7,967,943
-----------------------------
(Continued) -1.
24
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS,
YEARS ENDED DECEMBER 31, 1997 AND 1996
- ------------------------------------------------------------------------------
1997 1996
---- ----
Net increase (decrease) in cash and cash
equivalents $ (1,775,430) $ 2,324,660
Cash and cash equivalents at beginning of
year 7,871,028 5,546,368
------------------------------
Cash and cash equivalents at end of year $ 6,095,598 $ 7,871,028
==============================
Supplemental disclosure of cash flow
information:
Cash paid for:
Interest on deposits and borrowings $ 3,333,334 $ 3,110,789
==============================
Income taxes $ 637,505 $ 400,160
==============================
Supplemental disclosures of noncash
investing activities:
Non-cash transfers during the year for
transfer of loans receivable to
foreclosed real estate $ 43,951 $ 264,752
==============================
Change in unrealized loss on securities
available-for-sale, net of applicable
deferred income taxes $ (3,566) $ 8,394
==============================
(Concluded) - 2.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS
- -------------------------------------------------------------------------
25
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARY
========================================
NOTES TO CONSOLIDATED 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.
(FirstBank) 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 FirstBank on a one-for-one basis.
Acquisition of FirstBank was recorded at historical cost in a manner similar
to the pooling of interest method and the issuance of $5,042,979 of 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 and changed its name to
"FirstBank, N.A." Upon completion of the conversion, FirstBank 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). FirstBank 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 $.01 per share, amounting
in the aggregate to $20,000, and of which one million (1,000,000) shall be
serial preferred stock, par value $.01 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
FirstBank's service area. At December 31, 1996, FSC was inactive and none of
its authorized common stock had been issued. FSC began operations in the
second quarter of 1997 and is a wholly-owned subsidiary of FirstBank.
26
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 1 ORGANIZATION (CONTINUED):
The Company has filed an application for a new bank charter with the OCC and
the Federal Deposit Insurance Corporation (FDIC) for approval of its
acquisition of all of the stock of FirstBank of the Midlands (in
organization). FirstBank of the Midlands (FBM) in organization is being
sponsored by the Company. Management anticipates preliminary approval for
issuance of the Bank's charter and Federal Deposit Insurance will be granted
to FBM's organizers by the OCC and the FDIC. This newly formed bank will be a
wholly-owned subsidiary of the Company and is expected to begin operations in
the latter half of 1998.
FirstBank's primary source of revenue is providing loans to customers, who are
predominately small and middle-market businesses and individuals in the area
encompassing the northern two-thirds of Beaufort County, South Carolina.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of the Company, FirstBank and FSC
conform with generally accepted accounting principles and with the prevailing
practices within the banking industry.
PRINCIPLES OF CONSOLIDATION:
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, FirstBank. All significant
intercompany balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES:
The preparation of consolidated 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 presentation in the consolidated statements of cash flows,
cash and cash equivalents are defined as amounts included in the balance
sheets under the captions "Cash and amounts due from banks" and
"Interest-bearing deposits with banks".
27
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
SECURITIES AVAILABLE-FOR-SALE:
Securities that may be sold prior to maturity for asset/liability management
purposes, or that may be sold in response to changes in interest rates,
changes in prepayment risk, to increase regulatory capital or other similar
factors, are classified as available-for-sale and are carried at fair value.
Unrealized gains and losses on securities available-for-sale are recognized as
direct increases or decreases, net of deferred income taxes, in stockholders'
equity until realized. Gains and losses on the sale of securities
available-for-sale are recognized using the specific identification method.
Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) stock are carried
at cost.
Premiums and discounts are recognized in interest income using methods
approximating the interest method over the period to maturity.
LOANS HELD FOR SALE:
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses, if any, are recognized through a valuation allowance by
charges to income.
FirstBank 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.
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.
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.
28
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
LOANS RECEIVABLE (CONTINUED):
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 FirstBank'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.
FORECLOSED REAL ESTATE:
Real estate properties acquired through foreclosure or in full or partial
satisfaction of the related loan are to be sold and are initially recorded at
fair value, less estimated disposal costs, at the date of foreclosure,
establishing a new cost 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 estimated 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 and amortization 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 three to five years
for furniture and equipment.
MARKETING EXPENSES:
The costs of marketing is expensed as incurred.
DEFERRED ORGANIZATION COSTS, PREOPENING COSTS AND STOCK
OFFERING 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.
Preopening costs associated with the organization of FBM have been expensed as
incurred. Stock issuance costs, incurred to date, have been charged to
additional paid-in capital.
29
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
AMOUNTS DUE TO DEPOSITORY INSTITUTIONS:
FirstBank 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 each entity
is recorded as if the entity filed a separate return.
RETIREMENT PLAN:
FirstBank has a contributory 401(k) plan covering substantially all employees.
Contributions to the plan are made on a matching basis of 75% up to a maximum
of 6% of employees' plan contributions. Total contributions to the plan were
$31,441 and $17,992 for 1997 and 1996, respectively.
LEASE COMMITMENTS:
FirstBank 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, FirstBank pays
maintenance, property taxes and insurance on the leased properties.
EARNINGS PER SHARE:
Basic earnings per common share are calculated on the basis of the weighted
average number of shares outstanding during the year. Diluted earnings per
common share includes stock options which have been granted but not exercised.
All common share and per share amounts have been restated to reflect the 1997
stock dividend.
OFF-BALANCE-SHEET INSTRUMENTS:
In the ordinary course of business, FirstBank 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.
30
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
LOAN SERVICING:
The cost of mortgage servicing rights is amortized in proportion to, and over,
the period of estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed at each reporting date based on the fair value of
those rights. Fair values are estimated using discounted cash flows based on
a current market interest rate. Mortgage servicing rights were not impaired
at December 31, 1997 and 1996.
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.
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). Fair values for certificates of deposit 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 FirstBank's current incremental
borrowing rate for similar types of borrowing arrangements.
31
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED):
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.
NOTE 3 - RESTRICTIONS ON CASH AND DUE FROM BANKS:
As a member of the Federal Reserve System, FirstBank is required by regulation
to maintain an average cash reserve balance with the FRB or in vault cash. The
average daily reserve balance requirement for December 31, 1997 and 1996, was
met by vault cash held by FirstBank.
At December 31, 1997, FirstBank had due from bank balances in excess of
federally insured limits of approximately $375,000. Management believes the
risk associated with exceeding these limits is balanced by the stability of
the depository institutions involved.
NOTE 4 - SECURITIES AVAILABLE-FOR-SALE:
Securities available-for-sale consist of the following:
.................. 1997 ......................
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
Mortgage-backed securities $ 1,428,793 $ - $ (23,383) $ 1,405,410
U.S. Government securities 98,602 - - 98,602
Federal Home Loan Bank
stock 548,100 - - 548,100
Federal Reserve Bank stock 130,300 - - 130,300
-----------------------------------------------
Total $ 2,205,795 $ - (23,383) $ 2,182,412
===============================================
32
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 4 - SECURITIES AVAILABLE-FOR-SALE (CONTINUED):
.................. 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 mortgage-backed securities held at December 31, 1997 and 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 1998.
Other securities consist of the required capital stock of the FHLB and the FRB
and have no contractual maturity.
There were no realized gains or losses on sales of investment securities
during the two-year period ending December 31, 1997.
At December 31, 1997 and 1996, the FHLB stock was pledged as collateral on the
FHLB advances and securities with carrying values of approximately $1,154,000
and $1,807,000, respectively, were pledged to secure public deposits and for
other purposes as required and permitted by law.
NOTE 5 - LOANS RECEIVABLE:
Loans receivable at December 31, 1997 and 1996, consisted of the following:
1997 1996
---- ----
Mortgage loans:
Permanent $60,522,713 $60,891,924
Construction 5,949,087 6,182,712
----------------------------------------
Total mortgage loans 66,471,800 67,074,636
----------------------------------------
Other loans:
Consumer loans 9,527,554 8,717,516
Commercial loans 4,792,661 2,988,014
----------------------------------------
Total other loans 14,320,215 11,705,530
----------------------------------------
Loans receivable $80,792,015 $78,780,166
========================================
33
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 5 - LOANS RECEIVABLE (CONTINUED):
FirstBank'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, 1997, FirstBank's total loan
portfolio included adjustable rate loans totaling approximately $18.1 million,
having interest rate adjustments indexed to prime, and approximately $34.8
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 FirstBank pays on the short-term
deposits and FHLB advances that have been primarily utilized to fund these
loans.
Transactions in the allowance for loan losses are summarized as follows:
1997 1996
---- ----
Beginning balance $ 630,557 $ 470,198
Provision (charged to income) 165,000 162,000
Recoveries of charge-offs 5,000 26,993
Charge-offs (72,514) (28,634)
-------------------------------------
Ending balance $ 728,043 $ 630,557
=====================================
Real estate mortgage loans include investments of $663,232 and $1,709,611 in
participating interests on loans originated and serviced by other financial
institutions as of December 31, 1997 and 1996, respectively.
Real estate mortgage loans exclude loans serviced for others of $9,871,666 and
$4,392,204 as of December 31, 1997 and 1996, 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 $286,743 and $389,663 at
December 31, 1997 and 1996, have 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 1997 and 1996, was $392,316 and $261,613. The total allowance for loan
losses related to these loans was $55,970 and $48,340 at December 31, 1997 and
1996, respectively. Interest income on impaired loans of $32,359 and $26,263
was recognized for cash payments received in 1997 and 1996, respectively.
34
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 6 - PREMISES AND EQUIPMENT:
Premises and equipment at December 31, 1997 and 1996, consists of the
following:
1997 1996
---- ----
Cost:
Land $ 251,000 $ 251,000
Buildings and leasehold improvements 461,576 457,405
Equipment and furnishings 1,820,046 1,446,655
--------------------------
Total cost 2,532,622 2,155,060
Less, accumulated depreciation and
amortization (1,244,389) (1,007,933)
-------------------------
Premises and equipment - net $1,288,233 $ 1,147,127
=========================
Depreciation expense charged to operations was $245,995 and $182,662 in 1997
and 1996, respectively.
NOTE 7 - LEASES:
FirstBank 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 FirstBank's directors are partners. FirstBank has also
entered into a lease with a director of FirstBank for a branch facility on
Lady's Island, South Carolina. The leases require FirstBank 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. FirstBank has two remaining five year options to renew this
lease. The renewal options include certain rent escalations.
Aggregate future minimum lease payments (exclusive of approximately $46,000
per year for the five years beginning 1999, representing estimated lease
payments on the Lady's Island branch facility under the renewal option) under
all operating leases are as follows:
Year ending December 31:
1998 $ 156,803
1999 125,223
2000 125,223
2001 125,223
2002 125,223
Thereafter 1,262,765
-------------------
Total minimum payments $ 1,920,460
===================
35
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 7 - LEASES (CONTINUED):
Total rental expense for the years ended December 31, 1997 and 1996, was
approximately $161,000 for each of the two years.
NOTE 8 - DEPOSITS:
Certificates of deposits, each with a minimum denomination of $100,000, were
approximately $8.8 million and $10.5 million at December 31, 1997 and 1996,
respectively.
At December 31, 1997, the scheduled maturities of certificates of deposit are
as follows (in thousands of dollars):
1998 $30,380
1999 6,129
2000 963
2001 149
2002 57
-------------------
Total $37,678
===================
As a former federal savings bank, FirstBank's deposits are insured by the
Savings Association Insurance Fund (SAIF) of the FDIC. To recapitalize the
reserves of SAIF, a special assessment on institutions with SAIF-insured
deposits was approved by the U.S. Congress. FirstBank expensed approximately
$445,000 for the special assessment during 1996.
NOTE 9 - FEDERAL HOME LOAN BANK ADVANCES:
FirstBank has an $11 million line-of-credit with the FHLB of Atlanta. At
December 31, 1997 and 1996, advances from the FHLB of Atlanta were $5.05
million and $5.6 million, respectively. At December 31, 1997, the maturity
dates and interest rates on the advances were as follows (in thousands of
dollars):
ADVANCE
MATURITY DATE INTEREST RATE AND TYPE AMOUNT
------------- ---------------------- ------
Repayment at any time 6.50% variable $4,200
June 1998 6.65% fixed 500
June 2001 6.92% fixed 350
--------------
$5,050
==============
As security for advances, FirstBank, 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 FHLB 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.
36
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 9 - FEDERAL HOME LOAN BANK ADVANCES (CONTINUED):
Such advances during 1997 and 1996 are summarized as follows:
1997 1996
---- ----
Maximum amount of advances at any month end $6,300,000 $5,600,000
===============================
Average borrowings during the year $3,428,355 $2,649,727
===============================
Weighted average interest rate during the year 6.03% 5.85%
===============================
NOTE 10 - INCOME TAXES:
The Company files consolidated federal income tax returns on a calendar-year
basis.
The provision for income taxes for the two years ended December 31, 1997
consists of the following:
1997 1996
---- ----
Currently payable:
Federal $589,579 $336,524
State 67,690 29,967
--------------------------------------
Total 657,269 366,491
--------------------------------------
Deferred tax benefit:
Federal (70,061) (40,046)
State (6,569) (3,947)
--------------------------------------
Total (76,630) (43,993)
--------------------------------------
Total income taxes $580,639 $322,498
=======================================
Effective tax rate 38.0% 39.2%
======================================
The provision for income taxes for 1997 and 1996 differed from amounts
computed by applying the statutory federal rate to income before income taxes
as follows:
1997 1996
---- ----
Income taxes at statutory rate on
pre-tax income $519,519 $279,925
State income taxes, net of federal
tax benefit 40,339 17,173
Other, net 20,781 25,400
------------------------------------
Total provision $580,639 $322,498
====================================
37
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 10 - INCOME TAXES (CONTINUED):
The sources of deferred tax assets and liabilities at December 31, 1997 and
1996 are as follows:
1997 1996
---- ----
Gross deferred assets:
Allowance for loan losses $254,739 $222,233
Deferred loan fees 34,896 -
Unrealized losses on securities available-for-sale 8,885 6,700
Other 9,018 -
----------------------
Total 307,538 228,933
----------------------
Gross deferred liabilities:
Federal Home Loan Bank stock dividends (43,551) (43,551)
Other - (210)
----------------------
Total (43,551) (43,761)
----------------------
Net deferred tax asset $263,987 $185,172
======================
NOTE 11 - STOCK OPTIONS:
Options to purchase shares of the Company's common stock have been granted to
its directors and officers. Under the 1996 Stock Option Plan up to 17,325
shares of common stock were authorized to be granted to selected key employees
and nonemployee directors in the form of incentive and nonqualified stock
options. A committee of the Board of Directors determines the dates options
shall be granted and exercised, the period of vesting schedule and the term of
the exercise period (not to exceed 10 years). Under the 1987 Non-Qualified
Stock Option Plan, 112,386 shares of common stock were authorized and granted
to outside directors of the Bank. These options expire in 2006. Upon the
acquisition of FirstBank by the Company, all options granted under this stock
option plan of FirstBank remain in effect with no change in the terms.
Information concerning the options outstanding is summarized as follows (all
amounts have been retroactively restated for stock dividends):
38
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 11 - STOCK OPTIONS (CONTINUED):
......... 1997 ........ ........ 1996 ..........
OPTION OPTION
PRICE PRICE
SHARES PER SHARE SHARES PER SHARE
------ --------- ------ ---------
Outstanding, January 1 105,885 $6.41 - 11.82 97,315 $6.41 - 10.72
Granted 5,700 11.82 - 14.00 9,924 10.30 - 11.25
- - 10,571 9.00
Expired (3,121) - (2,001) -
------------ -----------
Outstanding,
December 31 108,464 6.41 - 11.82 105,885 6.41 - 11.82
============ ============
Exercisable,
December 31 85,739 76,893
============= ============
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
transfer of funds to the Company in the form of cash dividends, loans, or
advances. The approval of the OCC is required to pay dividends in excess of
FirstBank'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, 1997, $1,867,913 of FirstBank's
retained earnings are available for distribution to the Company as dividends
without prior regulatory approval.
Under FRB regulations, FirstBank 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 FirstBank to the Company in the
form of loans or advances approximated $1,572,851 at December 31, 1997.
39
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 13 - RELATED PARTY TRANSACTIONS:
During 1997 and 1996, FirstBank 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 $1,203,791 at December
31, 1997, and $1,416,864 at December 31, 1996. During 1997, $488,103 of new
loans were originated to this group. Repayments of $701,175 were made during
1997.
Related party deposits totaled approximately $2,451,000 and $2,450,000 at
December 31, 1997 and 1996, respectively.
NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES:
FirstBank is involved at times in various litigation arising out of the normal
course of business. In the opinion of FirstBank's legal counsel, there is no
pending or threatened litigation of any material consequence at this time.
FirstBank is negotiating the purchase of real property in Ridgeland, South
Carolina. If the negotiation is successful, FirstBank intends to hold the
property for a potential branch office at this location.
The Company has entered into contracts that provide certain officers salary
continuation plans for up to three years in the event of a change in control
of the Company.
YEAR 2000 CONSIDERATIONS
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed and developed without considering the
impact of the upcoming change in the century. If uncorrected, many
applications could fail or create erroneous results by or at the year 2000.
The year 2000 issue affects virtually all organizations.
The Corporation uses the services of outside software vendors for certain of
its data processing applications. Based on discussions with software vendors,
management does not expect the cost of addressing any year 2000 issue will be
a material event or uncertainty that would cause its reported financial
information not to be necessarily indicative of future operating results or
future financial condition, or that the costs or consequences of incomplete or
untimely resolution of any year 2000 issue represent a known material event or
uncertainty that is reasonably likely to affect its future financial results,
or cause its reported financial information not to be necessarily indicative
of future operating results or future financial condition.
40
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 15 - FINANCIAL INSTRUMENTS:
FirstBank 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 FirstBank has in particular classes of
financial instruments.
FirstBank'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. FirstBank 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 FirstBank to some degree of interest-rate risk.
FirstBank evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by FirstBank 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.
Standby letters of credit and financial guarantees written are conditional
commitments issued by FirstBank 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, 1997, expire in 1998. 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 FirstBank is based on management's credit evaluation of the customer.
FirstBank 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.
41
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 15 - FINANCIAL INSTRUMENTS (CONTINUED):
The estimated fair value of FirstBank's financial instruments at December 31,
1997 and 1996, are as follows:
1997 1996
---- ----
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
Financial assets:
Cash and cash equivalents $ 6,095,598 $ 6,095,598 $ 7,871,028 $ 7,871,028
Time deposits with banks 99,000 99,000 199,177 199,177
Securities available-
for-sale 2,182,412 2,182,412 2,485,075 2,485,075
Loans receivable - net 80,063,972 80,250,247 78,149,609 79,079,805
Accrued interest receivable 555,537 555,537 502,412 502,412
Financial liabilities:
Deposits 77,462,288 77,529,026 78,300,019 78,426,021
Federal Home Loan Bank
advances 5,050,000 5,059,257 5,600,000 5,601,896
Amounts due to depository
institutions 305,315 305,315 200,117 200,117
Unrecognized financial instruments:
Commitments to extend
credit 3,371,000 3,371,000 3,163,000 3,163,000
Lines-of-credit 10,327,000 10,327,000 8,212,000 8,212,000
Standby letters of credit 288,000 288,000 194,000 194,000
NOTE 16 - FIRST BANK OF THE MIDLANDS, IN ORGANIZATION:
On August 20, 1997, the Company's Board of Directors approved the sponsorship
of a new national bank, FirstBank of the Midlands (FBM), to be located in
Columbia, South Carolina, subject to regulatory approval. FBM will offer
general banking services in the Columbia area.
Upon the organization of FBM, the Company proposes to acquire all of the
common stock of FBM for $5.0 million. The acquisition of FBM's common stock is
expected to be primarily funded with the sale of up to $3.5 million of
additional common stock of the Company at a price that will be determined by
the Company's Board of Directors.
The Company expects to obtain up to $2.5 million in debt from a third party
financial institution to provide the remaining initial capital for FBM.
FBM will operate in office space leased under a noncancellable operating lease
with an initial term of 5 years beginning on April 1, 1998. The lease terms
provide for three, three-year renewal options. The landlord will be
responsible for improvements and property taxes on the leased property up to
the amount paid for 1997 taxes. FBM will be required to pay any property tax
increases over 1997 taxes. Annual base rent in lease years one through five is
$90,750. Subsequent lease renewals will increase lease payments by the greater
of 12.5% or the increase in the Consumer Price Index.
42
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 17 - 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, 1997,
that the Company meets all capital adequacy requirements to which the Company
is subject.
As of September 22, 1997, the most recent notification from the OCC
categorized FirstBank 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 and FirstBank's actual capital amounts and ratios are also
presented in the table as follows (in thousands of dollars):
MINIMUM REQUIRED
MINIMUM REQUIRED TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------ ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
At December
31, 1997:
Tier I Capital
(to Average
Assets):
Consolidated $ 7,854 8.7% $ 3,608 4.0% $ 4,509 5.0%
FirstBank 7,737 8.6% 3,607 4.0% 4,508 5.0%
Tier I Capital
(to Risk
Weighted
Assets):
Consolidated 7,854 12.1% 2,587 4.0% 3,880 6.0%
FirstBank 7,737 12.0% 2,587 4.0% 3,880 6.0%
43
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 17 - REGULATORY MATTERS (CONTINUED):
MINIMUM REQUIRED
MINIMUM REQUIRED TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------ ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
Total Capital
(to Risk
Weighted
Assets):
Consolidated $ 8,582 13.3% $ 5,173 8.0% $ 6,470 10.0%
FirstBank 8,465 13.1% 5,173 8.0% 6,467 10.0%
At December
31, 1996:
Tier I Capital
(to Average
Assets):
Consolidated 6,948 7.8% 3,578 4.0% 4,473 5.0%
FirstBank 6,889 7.7% 3,578 4.0% 4,472 5.0%
Tier I Capital
(to Risk
Weighted
Assets):
Consolidated 6,948 11.0% 2,528 4.0% 3,793 6.0%
FirstBank 6,889 10.9% 2,527 4.0% 3,790 6.0%
Total Capital
(to Risk
Weighted
Assets):
Consolidated 7,579 12.0% 5,057 8.0% 6,321 10.0%
FirstBank 7,520 11.9% 5,054 8.0% 6,319 10.0%
NOTE 18 - CONCENTRATION OF CREDIT RISK:
Although FirstBank has a diversified loan portfolio, a substantial portion of
its borrowers' ability to honor their contracts depends 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 19 - FIRST SECURITIES CORPORATION:
FSC completed its first year of operations with assets of approximately
$73,000 at December 31, 1997, gross commission income of $40,400 and a net
loss of $24,350 for the year ended December 31, 1997.
44
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 20 - CONDENSED FINANCIAL STATEMENTS:
Presented below are the condensed financial statements for
FirstBancorporation, Inc. (parent company only):
DECEMBER 31, DECEMBER 31,
1997 1996
---- ----
Balance Sheet:
Assets:
Cash $ 15,586 $ 19,394
Investment in banking subsidiary 7,864,255 6,985,696
Other assets 109,847 39,589
-------------------------------------
Total assets $ 7,989,688 $ 7,044,679
=====================================
Liabilities:
Amounts due to banking subsidiary $ 7,241 $ -
Other liabilities 1,446 -
Stockholders' equity 7,981,001 7,044,679
-------------------------------------
Total liabilities and
stockholders' equity $ 7,989,688 $ 7,044,679
=====================================
Statement of Income:
Dividends from banking subsidiary $ 100,000 $ 61,125
-------------------------------------
Expenses:
Compensation 16,915 -
Amortization 7,887 7,887
Other 31,275 20,304
-------------------------------------
Income before equity in undistributed
earnings of subsidiary 43,923 32,934
Applicable income tax benefit 21,310 8,907
Equity in undistributed earnings of
subsidiary 882,125 458,970
-------------------------------------
Net income $ 947,358 $ 500,811
=====================================
45
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 20 - CONDENSED FINANCIAL STATEMENTS (CONTINUED):
DECEMBER 31, DECEMBER 31,
1997 1996
---- ----
Statement of Cash Flows:
Cash flows from operating activities:
Net income $ 947,358 $ 500,811
Adjustments to reconcile net income
to net cash provided by operating
activities:
Amortization expense 7,887 7,887
Increase in other assets (78,145) (8,907)
Increase (decrease) in other
liabilities 8,687 (39,537)
Undistributed earnings of subsidiary (882,125) (458,970)
-----------------------------------
Net cash provided by operating
activities 3,662 1,284
Cash flows from financing activities:
Common stock issued - 18,010
Stock issuance cost (7,470) -
-----------------------------------
Net increase (decrease) in cash and
cash equivalents (3,808) 19,294
Cash at beginning of year 19,394 100
-----------------------------------
Cash at end of year $ 15,586 $ 19,394
===================================
THESE NOTES ARE INTEGRAL PART OF THE ACCOMPANYING CONSOLIDATED FINANCIAL
STATEMENTS
- ------------------------------------------------------------------------
46
<PAGE>
<PAGE>
CORPORATE BOARD OF DIRECTORS
Laurance H. Davis, Jr., Secretary, FirstBank, N.A., FirstBancorporation, Inc.,
Secretary, Bundy Appraisal and Management Company, Inc. [picture]
Richard L. Gray, President, Grayco Automotive, Inc. [picture]
Russell L. Jeter, President, Jeter Construction Company, Inc. [picture]
Robert A. Kerr, Sr. Retired Bank Executive, Banc One Corp. [picture]
James D. Neighbors Vice Chairman FirstBank, N.A., FirstBancorporation, Inc.
[picture]
Jerry H. Reeves, III, President, Resort Services, Inc. [picture]
Carson R. Rentz, President, Coastal Contractors, Inc. [picture]
William C. Robinson, Chairman of the Board, Robinson, Grant & Company, CPAs
[picture]
Colden R. Battey, Jr., Chairman of the Board of Directors, FirstBank, N.A. and
FirstBancorporation, Inc., Senior Partner, Harvey and Battey Law Firm
[picture]
James A. Shuford, President and CEO, FirstBank, N.A. & FirstBancorporation,
Inc. [Picture]
47
<PAGE>
<PAGE>
BEAUFORT EXECUTIVE BOARD OF DIRECTORS
(Seated Left-Right) Gene W. Grace, D.D.S., Dentist:
Joseph A. Mix, Owner, Island Outfitters, Investor:
Alice G. Wright, Personnel Administrator, Beaufort County
Schools: Col. W.R. VonHarten, Retired USMC
[Group Picture]
(Standing Left-Right) Owen K. Hand, Investment Advisor,
Hand & Tanner Financial Group, Inc.: Eugene F. Duncan,
Retired, Businessman, Farmer: Gen. E. M. Flanagan Jr.,
Retired, US Army: Col. Charles O. Hoelle, Retired, USMC,
Assistant Town Manager, Hilton Head Island.
BLUFFTON EXECUTIVE BOARD OF DIRECTORS
(Seated Left-Right) Dr. Michael K. Mikkelson, Physician:
Thomas C. McCullough, President, Automotive Technology Sales
[Group Picture](Standing Left-Right) Linda Ellis, Investor: James Parrish,
CPA. Parrish & Parrish, Inc.
(Not Shown) Thomas J. Wing, Bluffton Telephone:
H. Emmett McCracken, Jr., Chairman, Beaufort County Council
CORPORATE AND BANK OFFICERS
James A. Shuford III, President and CEO FirstBank, N.A. & FirstBancorporation,
Inc.
James L. Pate III, Senior Vice President, Chief Financial Officer
Bryan K. Newton, Senior Vice President, Senior Loan Officer
Richard E. Morgan, Jr., Senior Vice President, Senior Credit Officer
Christine W. Beckert, Vice President, Operations Officer
BEAUFORT
Catherine S. Diller, Assistant Vice President, Loan Officer
C. Renee Johnson, Assistant Vice President, Loan Officer
Julie A. Waters, Branch Manager
LADY'S ISLAND
Whitney L. McDaniel, Assistant Vice President, Branch Manager
BLUFFTON
Julian B. Weston, Vice President, Branch Manager
Kathy Lucas, Assistant Vice President, Mortgage Loan Officer
<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.
<PAGE>
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<ARTICLE> 9
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4127
<INT-BEARING-DEPOSITS> 99
<FED-FUNDS-SOLD> 1969
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1725
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<ALLOWANCE> 728
<TOTAL-ASSETS> 91698
<DEPOSITS> 77462
<SHORT-TERM> 4700
<LIABILITIES-OTHER> 1205
<LONG-TERM> 350
0
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<COMMON> 7
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<NET-INCOME> 947
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<LOANS-NON> 429
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</TABLE>
