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, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
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
or organization Identification 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 963,325 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.
----
Revenues for its most recent fiscal year: $9,331,045.
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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 which is evidenced by the limited number of
trades during the period of January 1, 1999 to March 8, 1999. 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
$17,339,850 (963,325 shares) as of March 8, 1999. For the purposes of this
calculation officers and directors of the registrant are considered
non-affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS
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PART I
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Page
Item 1. Description of Business 3
Item 2. Description of Property 18
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a
Vote of Security Holders 18
PART II
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Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters 18
Item 6. Management's Discussion and Analysis 19
Item 7. Financial Statements 29
Item 8. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 67
PART III
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Item 9. Directors, Executive Officers,
Promoters and Control Persons,
Compliance with Section 16(a)
of the Exchange Act 67
Item 10. Executive Compensation 68
Item 11. Security Ownership of Certain
Beneficial Owners and Management 69
Item 12. Certain Relationships and Related
Transactions 71
PART IV
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Item 13. Exhibits List and Reports on Form 8-K 71
THIS DOCUMENT CONTAINS 75 PAGES.
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PART I
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ITEM 1: DESCRIPTION OF BUSINESS
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General
FirstBancorporation, Inc. ("Company") is a multi-bank holding company
registered under the Bank Holding Company Act and regulated by the Federal
Reserve Board. FirstBank, N.A. ("Beaufort Bank") and FirstBank of the
Midlands, N.A. ("Midlands Bank") (collectively as the "Banks") are the
Company's only wholly-owned subsidiaries and the current business of the
Company consists primarily of directing the affairs of the two Banks.
In 1998 the Company opened the Midlands Bank in Columbia, South Carolina.
See Note 1 of Notes to Consolidated Financial Statements contained in Item 7
of this Report.
The Company uses the premises, furniture and equipment of the Banks to
conduct its operations.
The Banks are national banks regulated by the Office of the Controller of
the Currency ("OCC"). The Beaufort 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 converted to a national bank
charter on June 5, 1995. The Beaufort Bank reorganized as a wholly-owned
subsidiary of the Company on November 1, 1995. The Midlands Bank received its
national bank charter on September 1, 1998 and began operations on that date.
The Banks operate as community banks devoted to serving the personal
banking needs of residents of their primary market area, as well as the
commercial banking needs of small businesses owned and operated by those
residents. The Banks' 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 the primary market area. The
Banks also originate commercial loans and consumer loans. The Beaufort 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. The Midlands Bank conducts it business from its main office at 1900
Assembly Street, Columbia, South Carolina. See "Item 2. Description of
Property."
Proposed Merger with First National Corporation
On March 4, 1999, the Company signed a definitive merger agreement with
First National Corporation ("FNC") which is headquartered in Orangeburg, South
Carolina, pursuant to which the Company will be merged into FNC. The surviving
entity will be First National Corporation, a bank holding company with three
wholly-owned bank subsidiaries, First National Bank ("FNB"), The National Bank
of York County and Florence County National Bank. FNC expects to merge the
Beaufort Bank and the Midlands Bank into FNB. The agreement provides that each
share of the Company's stock will be exchanged for 1.222 shares of FNC common
stock. The merger is intended to constitute a tax-free reorganization and is
to be accounted for as a pooling-of-interests. Consummation of the merger is
subject to numerous conditions, including the receipt of applicable regulatory
approvals and approval by both the Company's and FNC's stockholders.
Personnel
As of December 31, 1998, the Company had 53 full-time and three part-time
employees, none of whom is represented by a collective bargaining unit. The
Company believes its relationship with its employees is good.
Market Area
The Beaufort Bank's primary market area is Beaufort County, South Carolina,
excluding Hilton Head Island. The economy of this area is based primarily on
retirement and tourism industries and the military. 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 is primarily residential. Beaufort County is
experiencing steady population growth which creates a continued demand for
mortgage loan funds. According to the 1990 U.S. Census, the population of
Beaufort County has
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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 Midlands Bank's primary market area is Richland and Lexington counties
including Columbia, South Carolina. The economy of the area is based
primarily on state government, education and the military. Columbia is the
state capital, home of the University of South Carolina and the base of Fort
Jackson, a U.S. Army training facility.
Selected Financial Data:
The following tables set forth certain information concerning the
consolidated financial position and results of operations of the Company at
the dates and years indicated:
At December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Financial
Condition Data
(in thousands):
Total assets $107,494 $91,699 $91,733 $83,047 $77,311
Loans receivable, net 82,583 80,064 78,150 72,026 68,900
Loans held for sale 1,740 676 663 251 --
Investment securities
held to maturity -- -- -- -- 2,755
Investment securities
available for sale 9,066 2,182 2,485 2,630 --
Interest-bearing
deposits with banks 4,665 1,969 3,349 1,548 218
Cash and amounts
due from banks 4,089 4,127 4,721 4,197 3,359
Deposits 87,753 77,462 78,300 74,905 69,273
FHLB borrowings and
other borrowings 6,350 5,050 5,600 1,000 1,000
Stockholders' equity 12,125 7,981 7,045 6,517 5,895
Selected Income Statement Data:
(In thousands, except per share amounts)
For the Years ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Total interest income $7,848 $7,542 $6,920 $6,296 $5,184
Total interest expense 3,565 3,423 3,281 3,106 2,220
Net interest income 4,283 4,119 3,639 3,190 2,964
Provision for loan losses 200 165 162 192 179
Net interest income after
provision for loan losses 4,083 3,954 3,477 2,998 2,785
Non interest income 1,483 952 737 587 512
SAIF recapitalization
assessment -- -- 445 -- --
Non interest expenses 4,178 3,378 2,946 2,707 2,474
Income before income taxes 1,387 1,528 823 878 823
Provision for income taxes 531 581 322 351 302
Net income before
cumulative
effect of a change
in accounting principle 856 947 501 527 521
Cumulative effect of a
change in accounting
principle, net of tax 90 -- -- -- --
Net income 766 947 501 527 521
Earnings per share 1.01 1.37 .73 .78 .78
Earnings per share,
assuming dilution .94 1.29 .69 .71 .71
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At or For the Year Ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Other Financial Data:
Net interest rate spread 3.89% 4.27% 3.95% 3.81% 3.95%
Net yield on average
interest earning assets 4.56 4.82 4.43 4.20 4.19
Return on average assets .76 1.04 .57 .65 .70
Return on average equity 7.96 12.73 7.41 8.51 9.29
Ratio of average equity
to average assets 9.49 8.16 7.71 7.64 7.49
Loan loss allowance to
total loans receivable 1.06 .90 .80 .65 .49
Net loan charge-offs to
average loans receivable .08 .08 .02 .09 .12
Ratio of non accrual
loans to total assets .45 .47 .44 .16 .35
Lending Activities
General. At December 31, 1998, the Company's total loans receivable, net
of loans in process, was $83.4 million, or 77.7% of total assets. The Company
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 $46.3 million of the total loans receivable
portfolio at December 31, 1998.
The Company's principal market area (the "PMA") for loans is the northern
two-thirds of Beaufort County and the Midlands area of South Carolina which
includes Richland and Lexington counties.
The Company concentrates its lending activities on first mortgage loans
secured by residential properties, and on other consumer and commercial loans
in the PMA. The Company's portfolio is comprised of adjustable rate
mortgages, which include provisions for periodic interest rate adjustments and
short-term loans, which reflect interest rate fluctuations, such as consumer,
commercial and real estate construction loans.
The Company's principal lending activity consists of the origination of
permanent and construction loans on residential real estate (single-family
dwellings and multifamily dwellings of up to four units), consumer loans and
commercial loans to small businesses. The Company retains in its loan
portfolio adjustable rate mortgage loans with terms of up to 30 years.
Federal Housing Administration ("FHA"),Veterans Administration ("VA") and
conventional fixed-rate mortgage loans are generally sold in the secondary
mortgage market. At December 31, 1998, approximately 57.6% of the Company's
total loan portfolio consisted of loans secured by first mortgage permanent
residential real estate loans. Of the total loan portfolio, approximately
85.1% of all loans are adjustable rate or short-term (maturities of less than
one year). The Company utilizes the Federal Home Loan Mortgage Corporation
("FHLMC") and other secondary sources (notably other financial institutions)
as sources for loan sales. The majority of loans are underwritten using
guidelines published by both, thus enabling the Company to market loans to
these entities. There are, due to the nature of adjustable rate mortgages in
the industry, unqualifiable risks resulting from increased cost to the
borrower as a result of periodic repricing. Despite the benefits of
adjustable rate mortgages to the Company's asset/liability management program,
they do pose potential additional risks, primarily because as interest rates
rise, the underlying payment by the borrower rises, increasing the potential
for default. At the same time, the marketability of the underlying property
may be adversely affected by higher interest rates. During 1998, the Company
originated a larger volume of fixed rate long-term loans than adjustable rate
long-term loans which resulted in an overall decrease in permanent mortgage
loans outstanding in the portfolio.
Construction financing is generally considered to involve a higher degree
of credit risk than long-term financing of residential properties. The
Company's risk f loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction. If the estimate of construction cost or the salability of the
property upon completion of the project proves to be inaccurate, the Company
may be required to advance funds beyond the amount originally committed to
permit completion of the development. If the estimate of value proves to be
inaccurate, the Company may be confronted, at or prior to maturity of the
loan, with a collateral source with insufficient value to assure full
repayment.
Although commercial real estate loans typically have shorter terms to
maturity and higher interest rates than residential mortgage loans, they also
involve greater credit risks than certain residential mortgage loans.
Commercial real estate and construction mortgage loans may involve large loan
balances to single borrowers or groups of related borrowers. In addition,
payment experience on loans secured by income producing properties is
typically dependent on the successful operation of the
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properties and thus may be subject to a greater extent to adverse conditions
in the real estate market, or in the economy generally.
The Company sells most of its fixed rate loans in the secondary mortgage
market as the loans are originated. The Company generally has the ability to
generate an adequate volume of loans within its market area without seeking
loan purchases from other institutions.
Using loan underwriting guidelines established by its Board of Directors,
the Company's first-mortgage real estate loans are granted for loan-to-value
ratios of 80% or less. If borrowers require additional financing, private
mortgage insurance insuring the Company's exposure above 80% is generally
required. Loan underwriting and credit policies are determined by the Board
of Directors and monitored for compliance by the Board's Loan Committee.
All real estate loans require that the borrower maintain hazard insurance
in an amount that is adequate to insure repayment of the loan in case of a
loss. The Company also requires various other types of insurance, such as
title, flood, casualty and, in some cases, life insurance on the borrower.
The Company solicits loan originations through newspaper advertisements,
officer, director, and employee referrals, and employs full-time loan
originators. Once an application has been received, the loan is underwritten
and either approved by the loan officer if within loan authority or forwarded
to one of the Company's loan review committees. These committees consist of
at least two directors and the Company's Chief Executive Officer. All loans
which do not require prior approval of the full Board of Directors are
approved by one of these four committees.
The Company makes consumer loans secured by junior liens on real estate,
including home improvement and home equity loans; loans secured by personal
property, such as automobiles, recreational vehicles or boats, as well as
loans to depositors of the institution on the security of their savings
accounts. The Company also offers unsecured personal loans and overdraft
lines of credit, which are in conjunction with its NOW accounts. At December
31, 1998, approximately 11.4% of the Company's total loan portfolio consisted
of these types of consumer loans. Consumer loans historically have had higher
rates of default than residential mortgage loans; although the Company's loan
loss experience to date has been favorable in comparison to industry averages.
The Company makes secured and unsecured loans for commercial, corporate and
business purposes, concentrating on loans to small businesses for purposes of
providing working capital, construction and leasehold improvements. Such
loans typically have variable interest rates that are indexed to prime rate or
a one- or three-year United States Treasury index. At December 31, 1998,
approximately 11.4% of the Company's total loan portfolio consisted of loans
secured by real estate other than permanent 1-4 family homes, and
approximately 11.4% consisted of other commercial loans, both unsecured and
secured by assets other than real estate. Commercial business loans are
advantageous to the Company because the loans are short-term; however, they
also involve more risk than residential mortgage loans because of the higher
potential for defaults and the difficulties involved in disposing of the
collateral, if any.
The following table presents information regarding loans receivable at
December 31, 1998 and 1997 (dollars in thousands):
1998 % of Total 1997 % of Total
---- ---------- ---- ----------
Real estate - mortgage $55,831 66.9% $60,017 74.3%
Real estate - construction 8,657 10.5 5,949 7.4
Commercial, financial,
and other 9,533 11.4 4,845 6.0
Consumer 9,538 11.4 10,078 12.5
Unearned interest (116) (.2) (97) (.2)
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Total loans $83,443 100.0% $80,792 100.0%
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Loan Maturity. The following table sets forth, as of December 31, 1998,
information regarding the dollar amount of loans maturing in the Company's
commercial and real estate-construction 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 $4,172 $5,052 $309 $9,533
Real estate-construction 8,432 225 -- 8,657
------- ------ ---- -------
Total $12,604 $5,277 $309 $18,190
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The following table sets forth the dollar amount of all Commercial and Real
estate-construction loans due after December 31, 1999 which have fixed
interest rates and have floating or adjustable interest rates.
Fixed Floating or
Rates Adjustable Rates
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(In thousands)
Commercial $3,753 $1,608
Real estate-construction 222 3
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Total $3,975 $1,611
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Loan Originations, Sales and Purchases. The Company's primary lending
activity has been the origination of one- to- four family residential mortgage
loans. The Company 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 Company 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.
Loan Commitments and Letters of Credit. The Company 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, 1998, the Company had total such commitments to extend credit of $3.1
million. See Note 17 of Notes to Consolidated Financial Statements contained
in Item 7 of this Report.
As an accommodation to its commercial business borrowers, the Company
issues standby letters of credit in favor of entities for whom the Company's
borrowers are performing work or other services. At December 31, 1998, the
Company had outstanding standby letters of credit of $493,000. See Note 17 of
Notes to Consolidated Financial Statements contained in Item 7 of this Report.
Loan Origination and Other Fees. In addition to interest earned on loans
and fees for making loan commitments, the Company 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 Company 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 Generally Accepted Accounting Principles,
loan origination fees and certain origination expenses are amortized over the
life of the related loan, and the Company 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
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method of amortization that approximates the level yield method.
Commitment fees to originate loans are deferred and, if the commitment is
exercised, recognized over the life of the loan as an adjustment of yield. If
the commitment expires unexercised, commitment fees are recognized in income
upon expiration of the commitment.
Nonperforming Assets and Delinquencies. When a borrower fails to make a
required payment when due, the Company 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 non-accrual 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 Company's Board of Directors is informed monthly as to the status of all
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 Company.
The following table sets forth information with respect to the Company's
non-performing assets at the dates indicated.
At December 31,
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1998 1997
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(Dollars in thousands)
Loans accounted for on a
non-accrual basis:
Residential $428 $405
Commercial 25 3
Consumer 27 21
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Total 480 429
Accruing loans which are contractually
past due 90 days or more:
Residential 650 27
Commercial 139 150
Consumer 21 28
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Total 810 205
Total of non-accrual loans and
90 day past due loans 1,290 634
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Real estate owned 40 127
Restructured loans 97 --
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Total nonperforming assets $1,427 $761
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Total loans delinquent 90 days
or more, accruing and non-accruing,
to net loans 1.55% .79%
Total loans delinquent 90 days
or more, accruing and non-accruing,
to total assets 1.20% .69%
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Gross interest income of $48,169 would have been recorded for the year
ended December 31, 1998 if non-accrual loans had been current according to
their original terms and had been outstanding throughout the entire year.
Interest income of $42,755 on such loans were included in net income for the
year as a result of cash payments received.
Foreclosed Real Estate. At December 31, 1998, the Company had foreclosed
real estate of $40,000 consisting of three unimproved lots. See Note 2 of
Notes to Consolidated Financial Statements contained in Item 7 of this Report
for a discussion of the Company's accounting for foreclosed real estate.
Allowance for Loan Losses. The Company 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 Company's control.
The following table sets forth an analysis of the Company's allowance for
loan losses for the years 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,
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1998 1997
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(Dollars in thousands)
Balance at beginning of year $ 728 $ 631
Charge-offs:
Residential 5 19
Commercial 29 21
Consumer 38 33
----- -----
Total charge-offs 72 73
Recoveries:
Residential 0 2
Commercial 2 --
Consumer 1 3
----- -----
Total recoveries 3 5
Net charge-offs 69 68
Provision for possible loan losses 200 165
----- -----
Balance at end of year $ 859 $ 728
===== =====
Ratio of allowance to total loans
outstanding at end of year 1.06% .90%
Ratio of net charge-offs to average
loans outstanding during year .08% .08%
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Investment Activities
At December 31, 1998, the sole equity investments of the Company were its
investment in the Banks. As national banks, the Company's subsidiaries are
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 of Atlanta,
certificates of deposit of federally insured institutions, certain bankers'
acceptances and federal funds. Subject to various restrictions, the Company
may also invest a portion of its assets in commercial paper and corporate debt
securities. The Banks are 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 Banks
invest in high yielding, non-investment grade securities, or "junk-bonds."
See Note 4 of Notes to Consolidated Financial Statements contained in Item 7
of this Report.
The following table sets forth the composition of the Company's securities
portfolio at the dates indicated. At December 31, 1998 and 1997, the
Company's entire securities portfolio was designated as available-for-sale.
At December 31,
--------------------------------------------------
1998 1997
---------------------- -----------------------
Carrying Percent of Carrying Percent of
Value(1) Portfolio Value(1) Portfolio
-------- --------- -------- ----------
(Dollars in thousands)
FHLB stock $567 6.3% $548 24.8%
Federal Reserve Bank stock 329 3.6 130 5.9
US Government and agency
obligations 4,070 44.8 99 4.5
Mortgage-backed securities 4,121 45.3 1,429 64.8
------ ----- ------ -----
Total $9,087 100.0% $2,206 100.0%
====== ===== ====== =====
- ------------
(1) The market value of the investment portfolio amounted to $9.1 million
and $2.2 million at December 31, 1998 and 1997, respectively.
All U.S. Government and agency securities had original maturities of less
than one year. At December 31, 1998, mortgage-backed securities were comprised
of $1.0 million of Government National Mortgage Association ("GNMA")
adjustable rate securities with adjustment intervals of one year and $3.1
million of Federal National Mortgage Association ("FNMA") fixed rate
mortgage-backed securities collateralized by fully amortizing ten year FNMA
mortgages. Investments increased at December 31, 1998 as compared to December
31, 1997 as a result of the opening of the Midlands Bank and its higher level
of non loan type investments, and as a result of lower demand for portfolio-
type loans during the year in the Beaufort Bank.
Deposits
General. Deposits are the primary source of funds for the Company's
lending and investment activities. None of the deposit instruments offered by
the Company 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
general economic activity. The Company's ability to attract and retain
deposits and the Company's cost of funds has been, and will continue to be,
significantly affected by market conditions.
Most of the Company's deposits are obtained from residents of South
Carolina, principally from residents in Beaufort, Richland and Lexington
counties, the Company's largest deposit markets. In the past, the Company 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, 1998, these deposits totaled approximately $5.2
million.
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The following table indicates the amount of jumbo certificates of deposit
by time remaining until maturity at December 31, 1998. Jumbo certificates of
deposit require minimum deposits of $100,000.
Maturity Period Amount
- --------------- ------
(In thousands)
Three months or less $ 4,266
Over three through twelve months 5,052
Over twelve months 942
--------
Total $ 10,260
========
The following table sets forth the balances and changes in dollar amounts
of savings deposits in the various types of deposit accounts offered by the
Company at the dates indicated.
At December 31,
-------------------------------------------------------
1998 1997
---------------------------- --------------------------
Percent Percent
of Increase of Increase
Amount Total (Decrease) Amount Total (Decrease)
------ ----- ---------- ------ ----- ----------
Non-interest
bearing $ 6,955 7.9% $ 280 $ 6,675 8.6% $ (494)
Now and money
markets 38,718 44.1 10,785 27,933 36.1 2,061
Regular savings 4,566 5.2 (610) 5,176 6.7 (794)
Certificates of
deposit maturing:
Within 1 year 32,210 36.7 1,830 30,380 39.1 (690)
After 1 year,
but within 3 years 5,007 5.8 (2,085) 7,092 9.2 (344)
After 3 years 297 .3 91 206 .3 (577)
------- ----- ------- ------- ----- ------
Total $87,753 100.0% $10,291 $77,462 100.0% $ (838)
======= ===== ======= ======= ===== ======
- -------------
(1) At December 31, 1998 and 1997, jumbo certificates amounted to $10.3
million and $8.8 million, respectively.
(2) IRA accounts included in certificate balances totaled $2.7 million and
$3.1 million at December 31, 1998 and 1997, respectively.
The following table sets forth the time deposits in the Company classified
by rates at the dates indicated.
At December 31,
-------------------
1998 1997
---- ----
(In thousands)
2.00 - 3.99% $ 261 $ 41
4.00 - 5.99% 29,854 22,675
6.00 - 7.99% 7,399 14,962
------- -------
Total. $37,514 $37,678
======= =======
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The following table sets forth the savings activities of the Company for
the years indicated.
Year Ended December 31,
-----------------------
1998 1997
---- ----
(In thousands)
Beginning balance $77,462 $78,300
Interest credited 3,412 3,127
Net increase (decrease)
in savings deposits. 6,879 (3,965)
-------- -------
Ending balance $87,753 $77,462
======= =======
Borrowing
The Company's subsidiaries can use the FHLB of Atlanta for advances to
support additional loan demand and other funding needs. At December 31, 1998,
the Company had a borrowing capacity of $11.0 million at the FHLB of Atlanta,
of which $4.25 million was outstanding. In addition, the Company has a $2.1
million loan outstanding with a commercial bank. This loan was obtained in
September 1998 for a portion of the initial capitalization of the Midlands
Bank. This loan has no prepayment penalty and is based on a prime lending
rate, adjusted annually. See Note 1 of Notes to Consolidated Financial
Statements contained in Item 7 of this Report.
The following tables set forth certain information regarding the Company's
short-term borrowings at the end of and during the years indicated.
At December 31,
-----------------
1998 1997
---- ----
Weighted average rate paid on:
FHLB borrowings - short-term 6.92% 6.50%
Commercial bank borrowing 7.50 --
Year Ended December 31,
-----------------------
(Dollars in thousands)
1998 1997
---- ----
Maximum amount of borrowing
outstanding at any month end:
FHLB borrowings - short-term $3,050 $4,700
Commercial bank borrowing 2,100 --
Approximate average short-term
borrowings outstanding with respect to:
FHLB borrowings short-term $1,119 $2,762
Commercial bank borrowing 702 --
Approximate weighted
average rate paid on:
FHLB borrowings short-term 6.47% 5.85%
Commercial bank borrowing 7.60 --
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Competition
The Company faces competition in its primary market areas for the
attraction of deposits (its primary source of lendable funds) and in the
origination of loans. Its most direct competition for deposits has
historically come from commercial banks, credit unions, thrifts operating in
its market area, and other financial institutions such as brokerage firms and
insurance companies. Major regional banks as well as South Carolina based
banks, local credit unions and securities brokerage firm operate in the
northern Beaufort county market. The Midlands Bank is a de novo bank which
faces competition from many financial institutions in Richland and Lexington
counties, a larger metropolitan market. Particularly in times of high
interest rates, the Banks face additional significant competition for
investors' funds from short-term money market securities and other corporate
and government securities. The Company's competition for loans comes from
commercial banks, thrift institutions, credit unions and mortgage bankers.
Subsidiary Activities
There are no other subsidiaries of the Company other than the Banks. The
Beaufort Bank has one wholly-owned subsidiary, First Securities Corporation
("First Securities"), that is engaged in the sale of alternative investments
including mutual funds, stocks, bonds and variable annuities. At December 31,
1998, the Beaufort Bank's investment in First Securities was $59,000.
REGULATION
Regulation of the Banks
General. As federally insured national banks, the Banks are subject to
extensive regulation. Lending activities and other investments must comply
with various statutory and regulatory requirements, including prescribed
minimum capital standards. The Banks are regularly examined by the OCC and
the FDIC and file periodic reports concerning their activities and financial
condition with those regulatory agencies. The Banks' 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 Banks, 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 Banks 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 maintains two separate insurance funds: the
Bank Insurance Fund ("BIF") and the SAIF. Beaufort Bank's deposit accounts
are insured by the FDIC under the SAIF, while Midlands Bank's deposit accounts
are insured by the FDIC under the BIF. The FDIC insures deposits at the Banks
to the maximum extent permitted by law.
Beaufort Bank and Midlands Bank currently pay deposit insurance premiums to
the FDIC based on a risk-based assessment system established by the FDIC for
all SAIF and BIF member institutions. Under applicable regulations, the FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period. The capital categories are:
well-capitalized, adequately capitalized, or undercapitalized. An institution
is also placed in one of three supervisory subcategories within each capital
group. The supervisory subgroup to which an institution is assigned is based
on a supervisory evaluation provided to the FDIC by the institution's primary
federal regulator and information that the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance funds. An institution's assessment rate depends on the capital
category and supervisory category to which it is assigned with the most
well-capitalized, healthy institutions receiving the lowest rates.
On September 30, 1996, the Deposit Insurance Funds Act ("Act") was enacted,
which, among other things, imposed a special one-time assessment on SAIF
member institutions, including Beaufort Bank, to recapitalize the SAIF. As a
result of the Act and the special one-time assessment, the FDIC reduced the
assessment schedule for SAIF members, effective January 1, 1997, to a range of
0% to 0.27%, with most institutions, including Beaufort Bank, paying 0%. This
assessment schedule is the
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same as that for the BIF, which reached its designated reserve ratio in 1995.
In addition, since January 1, 1997, SAIF members are charged an assessment of
0.065% of SAIF-assessable deposits for the purpose of paying interest on the
obligations issued by the Financing Corporation in the 1980s to help fund the
thrift industry cleanup. BIF-assessable deposits are charged an assessment to
help pay interest on the Financing Corporation bonds at a rate of
approximately .013%. Full pro rata sharing of the Financing Corporation
payments between BIF and SAIF members will occur until the earlier of December
31, 1999, or the date the BIF and SAIF are merged. Beaufort Bank's and
Midlands Bank's assessments expensed for the year ended December 31, 1998,
equaled $48,000 and $0, respectively.
The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the
past and may raise insurance premiums in the future. If such action is taken
by the FDIC, it could have an adverse effect on the earnings of the Banks.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or
the OCC. Management of the Banks does not know of any practice, condition or
violation that might lead to termination of their respective deposit
insurance.
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, 1998, the Banks were respectively categorized as "well
capitalized" under the OCC prompt corrective action regulations.
Standards for Safety and Soundness. The federal banking regulatory
agencies have prescribed regulatory standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; (iv) asset quality; (vii)
earnings and (vii) compensation, fees and benefits. The Guidelines set forth
the safety and soundness standards that the federal banking agencies use to
identify and address problems at insured depository institutions before
capital becomes impaired. If the OCC determines that either of the Banks fail
to meet any standard prescribed by the Guidelines, the agency may require the
Beaufort Bank or Midlands Bank to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDIA. Management is
aware of no conditions relating to these safety and soundness standards which
would require submission of a plan of compliance for the Banks.
Capital Requirements. The OCC's regulations establish two capital
standards for national banks: a leverage requirement
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<PAGE>
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, 1998, Beaufort
Bank's and Midlands Bank's Tier 1 leverage ratio was 8.2% and 63.1%.
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, 1998, Beaufort Bank's and Midlands Bank's risked-based
capital ratio was 14.0% and 111.7%, respectively.
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 adopted a rule that requires a bank's
interest rate risk exposure be quantified using either the measurement system
required by regulation 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 Banks, are exempt from the rule unless
otherwise determined by the OCC.
Dividends. Dividends from the Banks 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 Banks 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 Banks
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, 1998, management of the Banks
believed that they maintained sufficient liquid assets to meet its commitments
at that date.
Loans-to-One-Borrower. Federal law limits the amount of loans that the
Banks can extend to any one borrowers and the borrower's related entities.
Generally, this limit is 15% of a 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, 1998, Beaufort Bank's and
Midlands Bank's loans-to-one borrower limit was approximately $1.3 million and
$.7 million, respectively. At December 31, 1998, the Banks were 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
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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 $4.9 million of net transaction accounts, 3% of the next
$41.6 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, 1998, the Banks met their reserve
requirements.
Affiliate Transactions. The Company and the Banks are separate and distinct
legal entities. Various legal limitations restrict the Banks from lending or
otherwise supplying funds to the Company (an "affiliate"), generally limiting
such transactions with the affiliate to 10% of the Banks' capital and surplus
and limiting all such transactions to 20% of the Banks' 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 Banks 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 Beaufort Bank received a "satisfactory"
rating during its latest CRA examination. The Midlands Bank has not yet
received a 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 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
16
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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 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 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
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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 Banks -- Capital Requirements"
and Note 19 of Notes to Consolidated Financial Statements contained in Item 7
of this Report.
ITEM 2: DESCRIPTION OF PROPERTY
- -------------------------------
The Beaufort 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 Beaufort Bank. The Beaufort Bank also leases additional parking space
adjacent to the main office from First Patriots Partnership.
The Beaufort 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 Beaufort Bank.
The Beaufort Bank owns and operates an 8,700 square foot office located at
One Burnt Church Road, Bluffton, South Carolina. The Beaufort Bank occupies
approximately 3,850 square feet as a branch office and leases the remaining
space. The office was opened in 1993.
The Midlands Bank operates a 6,600 square foot main office location at 1900
Assembly Street, Columbia, South Carolina. The building is leased from a non
affiliated party.
ITEM 3: LEGAL PROCEEDINGS
- --------------------------
Periodically, there have been various claims and lawsuits involving the
Company such as claims to enforce liens, condemnation proceedings on
properties in which the Company holds security interests, claims involving the
making and servicing of real property loans and other issues incident the
Company's business. The Company 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 Company.
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, 1998.
PART II
- -------
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
- -------------------------------------------------------------------------
MATTERS
- -------
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 1998, 6,590 shares were traded at an average
price of approximately $17.73 per share based upon transfer records and the
per share price of any trades f which the Company is made aware. In addition,
during the year, the Company sold 193,422 new shares of common stock at $18.00
per share. The most recent trade of which the Company was aware was for
1,000 shares at a price of $19.00 on February 9, 1999. As of March 9, 1999
there were 837
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shareholders of record and an estimated 120 shareholders in street name. The
Company paid no cash or stock dividends during 1998 and no cash dividends have
been paid by the Company since its inception in 1986. Cash dividends may be
declared and paid only from retained earnings of the Company. Additional
regulatory restrictions apply. See Item 6, Managements' Discussion and
Analysis--Liquidity and Capital Resources contained in this Report.
The stock prices below represent the historical highs and lows by quarter
for the Company's stock:
Price per share
----------------
Quarter Ended High Low
------------- ---- ---
March 31, 1997 $11.82 $11.82
June 30, 1997 14.00 13.00
September 30, 1997 -- --
December 31, 1997 14.00 14.00
March 31, 1998 15.00 14.00
June 30, 1998 18.00 18.00
September 30, 1998 18.00 18.00
December 31, 1998 18.00 18.00
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------
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 Company. The information contained in this
section should be read in conjunction with the Consolidated Financial
Statements and accompanying Notes thereto contained in Item 7 of this Report.
Proposed Merger with First National Corporation
As previously discussed, on March 4, 1999, the Company entered into a
definitive merger agreement ("Agreement") with First National Corporation,
Orangeburg, South Carolina ("FNC") pursuant to which the Company will be
merged into FNC. The surviving entity will be FNC. The Agreement provides
that each share of the Company's common stock will be exchanged for 1.222
shares of FNC common stock. The merger is intended to be a tax-free
reorganization. Consummation of the merger is subject to numerous conditions,
including receipt of applicable regulatory approvals and approval by both the
Company's and FNC's stockholders.
Operating Strategy
The Company transacts its business through its two banking subsidiaries.
The Company'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. The
Company also originates commercial loans to small businesses and
professionals, home equity loans, construction loans and consumer loans. The
Company funds its assets primarily with retail deposits and, to a lesser
extent, FHLB of Atlanta advances.
The Company'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 the
yield on interest-earning assets equals or exceeds the rate paid on
interest-bearing liabilities, any positive interest rate spread will generate
net interest income. The Company's profitability is also affected by the
level of other operating income and expenses. Other operating income includes
service charges and fees and gain on sale of mortgage loans. Other operating
expenses primarily include compensation and benefits, occupancy and equipment
expenses, deposit insurance premiums and data processing expenses. The
Company'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 Company's business strategy is to operate its banking subsidiaries as
well-capitalized and profitable financial institutions dedicated to financing
community credit needs and providing quality customer service. The Company
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.
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Asset and Liability Management
The Company's asset and liability management program is designed to
decrease the Company's vulnerability to material changes in interest rates or
"interest rate risk." The principal determinant of the exposure of the
Company's earnings to interest rate risk is the timing difference between the
repricing or maturity of the Company's interest-earning assets and the
repricing or maturity of its interest-bearing liabilities. If the maturities
or repricings of the Company'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 Company's asset and liability policies are directed toward the
objectives of maintaining the interest rate sensitivity of the Company's
assets and matching the maturities of the Company's interest-earning assets
and interest-bearing liabilities to the extent practical. At December 31,
1998, the Company's total interest-bearing liabilities due within one year
exceeded interest-earning assets due within one year by approximately $14.0
million, resulting in a cumulative one-year negative gap to total earning
assets ratio of 13.9%. The Company 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 Company'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 construction loans. At December 31, 1998, residential
real estate mortgage loans that provided for repayment or interest-rate
adjustment within three years totaled approximately $38.3 million, and
represented approximately 45.9% of total loans receivable. The Company 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 Company
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 1998, the
Company originated approximately $14.3 million of ARM loans versus $26.1
million of fixed-rate loans. ARM loans are generally originated for retention
in the portfolio. When long-term rates fall, residential mortgage demand
typically favors fixed-rate lending. The prevailing lower rate environment of
1998 favored fixed rate lending and as a result overall loan portfolio growth
increased by only $2.7 million as a result of more loans being sold in the
secondary market.
Another strategic objective of the Company'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, 1998, consumer loans, including open-ended lines of credit
totaled approximately $9.5 million, or approximately 11.4% of total loans, and
commercial business loans totaled approximately $9.5 million, or 11.4% of
total loans. Consumer and commercial loans are considered to involve greater
credit risk than residential loans.
The Company'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. As of December 31, 1998,
the Company's total Now, Money Market and non interest-bearing demand deposit
accounts totaled $45.7 million or 52.1% of total deposits at that date.
20
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Interest Sensitivity Analysis
The following table presents the Company's interest sensitivity gap between
interest-earning assets and interest-bearing liabilities at December 31, 1998.
0-3 4-12 1-2 3-4
Months Months Years Years Year 5+ Total
------- ------ ----- ----- ------- -----
(Dollars in thousands)
Interest-earning
assets:
Loans and loans
held-for-sale $28,098 $23,093 $19,863 $9,396 $4,821 $85,271
GNMA mortgage-
backed securities 433 611 -- -- 3,077 4,121
Overnight and other
investments 11,381 -- -- -- 329 11,710
Total interest
earning assets 39,912 23,704 19,863 9,396 8,227 101,102
-------- ------- -------- ------ ------- ------
Interest-bearing
liabilities:
Regular savings 4,565 -- -- -- -- 4,565
NOW and money market
accounts 38,718 -- -- -- -- 38,718
Certificate accounts 14,626 17,593 5,008 287 -- 37,514
FHLB and other
borrowing -- 2,150 1,200 3,000 -- 6,350
-------- ------- -------- ------ ------- ------
Total rate
sensitive
liabilities 57,909 19,743 6,208 3,287 -- 87,147
-------- ------- -------- ------ ------- ------
Excess (deficiency)
of interest sensitive
assets over interest
sensitive liabilities $(17,997) $ 3,961 $13,655 $ 6,109 $8,227 $13,955
======== ======= ======= ======= ====== =======
Cumulative excess
(deficiency)
of interest sensitive
assets over
interest sensitive
liabilities $(17,997) $(14,036) $( 381) $ 5,728 $13,955
======== ======== ====== ======= =======
Ratio of interest-
earning assets to
interest-bearing
liabilities 68.9% 120.1%
Cumulative ratio of
interest-earning
assets to interest-
bearing liabilities 68.9% 81.9%
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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 year have been calculated using average daily balances during such year.
<PAGE>
<TABLE>
Year Ended December 31,
-------------------------------------------------------------
At 1998 1997
December 31,------------------------------ ---------------------------
1998
----------- Interest Interest
Yield/ Average and Yield/ Average and Yield/
Cost Balance Dividends Cost Balance Dividends Cost
---- ------- --------- ---- ------- ------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Total net loans(1) 8.46% $81,461 $ 7,156 8.78% $81,221 $ 7,282 8.97%
FHLB overnight investments 4.95 8,910 473 5.30 1,815 101 5.56
Other investments 5.85 3,634 219 6.03 2,485 159 6.40
---- -------- ------- ---- ------- ------- ----
Total interest-earning assets 7.99 94,005 7,848 8.35 85,521 7,542 8.82
Non-interest-earning assets 7,378 5,662
-------- -------
Total assets $101,383 $91,183
======== =======
Interest-bearing liabilities:
NOW and money market accounts 2.50 $33,440 1,026 3.07% $27,479 $818 2.98%
Other savings 2.32 4,689 108 2.31 5,479 126 2.30
Certificates of deposit 5.47 38,163 2,207 5.78 38,847 2,272 5.83
---- -------- ------- ---- ------- ------- ----
Total interest-bearing deposits 3.87 76,292 3,341 4.38 71,805 3,216 4.47
FHLB advances 5.57 2,954 171 5.79 3,429 207 6.03
Other borrowings 7.60 702 53 7.60 -- -- --
---- -------- ------- ---- ------- ------- ----
Total interest-bearing
liabilities 4.04 79,948 3,565 4.46 75,234 3,423 4.55
Non-interest-bearing liabilities:
Non-interest-bearing deposits 8,490 6,441
Other liabilities 3,320 2,065
-------- -------
Total liabilities 91,758 83,740
Stockholders' equity 9,625 7,443
-------- -------
Total liabilities and
stockholders' equity 101,383 91,183
Net interest income $ 4,283 $ 4,119
======= =======
Interest rate spread 3.95% 3.89% 4.27%
==== ==== ====
Net interest margin 4.56% 4.82%
==== ====
Ratio of average interest-earning
assets to average interest-
bearing liabilities 1.18 1.14
==== ====
- --------------
(1) Does not include interest on non-accrual loans.
</TABLE>
22
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Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on
net interest income of the Company. 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 Year Ended
December 31, 1998 December 31, 1997
Compared to Compared to
December 31, 1997 December 31, 1996
Increase (Decrease) Increase (Decrease)
Due to Due to
---------------------- ----------------------
Rate Volume Net Rate Volume Net
---- ------ --- ---- ------ ---
(In thousands)
Interest-earning assets:
Loans receivable(1) $(147) $ 21 $(126) $332 $316 $648
FHLB overnight investments (5) 377 372 (4) (3) (7)
Investments (10) 70 60 (4) (15) (19)
----- ---- ----- ---- ---- ----
Total interest income (162) 468 306 324 298 622
Interest-bearing liabilities:
Interest-bearing NOW and
MMA accounts 26 182 208 40 59 99
Other savings 1 (18) (17) (3) (23) (26)
Certificates of deposit (26) (40) (66) 19 (2) 17
FHLB and other borrowings 3 14 17 6 46 52
----- ---- ----- ---- ---- ----
Total interest expense 4 138 142 62 80 142
----- ---- ----- ---- ---- ----
Net interest income $(166) $330 $164 $262 $218 $480
===== ==== ==== ==== ==== ====
- ----------------
(1) Does not include interest on non-accrual loans.
Comparison of Financial Condition at December 31, 1998 and 1997
Total assets increased by $15.8 million from December 31, 1997 to December
31, 1998. Loans receivable, net, increased 3.2% from $80.8 million at
December 31, 1997 to $83.4 million at December 31, 1998. Interest-bearing
deposits with banks, interest-bearing time deposits with banks, securities
held-for-sale and loans held-for-sale also increased by $2.7 million, $2.0
million, $6.9 million and $1.1 million, respectively, from December 31, 1997
to December 31, 1998. Premises and equipment, net of depreciation, increased
from $1.3 million to $1,9 million during the year primarily as a result of the
opening of the Midlands Bank in 1998. These increases were funded by
increases in total deposits of $10.3 million, other borrowings of $2.1 million
and increases in stockholders' equity of $4.1 million. Stockholders' equity
increased primarily from the sale of $3.5 million of additional common stock
in 1998.
Comparison of Operations for the Fiscal Years Ended December 31, 1998 and 1997
Net Income. Net income decreased 19.1% from $947,000 in 1997 ($1.37 per
basic earnings per common share and $1.29 per share on a diluted basis) to
$766,000 in 1998 ($1.01 per basic earnings per common share and $.94 per share
on a diluted basis) primarily as a result of an increase of $35,000 in the
provision for loan losses, $800,000 in non interest expenses and $90,000 from
a cumulative effect of a change in accounting principle, net of tax. These
increases in expenses were partially offset by an increase in net interest
income of $163,000, an increase in non interest income of $531,000 and a
decline in income tax
23
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<PAGE>
expense of $50,000.
Net Interest Income. Net interest income increased 3.9% from $4.1 million
in 1997 to $4.3 million in 1998. The Company's interest rate spread decreased
from 4.27% in 1997 to 3.89% in 1998 as the average yield on interest-earning
assets decreased from 8.82% in 1997 to 8.35% in 1998 while the average rate
paid on interest-bearing liabilities only decreased from 4.55% in 1997 to
4.46% in 1998. Net interest margin declined from 4.82% to 4.56% during the
year.
Total interest and dividend income increased 4.0% from $7.5 million in 1997
to $7.8 million in 1998. Interest and fees on loans decreased from $7.3
million in 1997 to $7.2 million in 1998 because of a decrease in the average
yield from 8.97% in 1997 to 8.78% in 1998. The decline in interest income on
loans was offset by a increase in interest on overnight and other investments
of $432,000. The Company increased its short-term investments as a result of
the opening of the Midlands Bank. Also, the higher demand for fixed-rate
residential mortgage loans (which are typically sold in the secondary market)
reduced the demand for funds for portfolio loans.
Total interest expense increased 4.2% from $3.4 million in 1997 to $3.6
million in 1998. The average balance of interest-bearing liabilities
increased from $75.2 million in 1997 to $79.9 million in 1998 and the average
rate paid on interest-bearing liabilities decreased from 4.55% in 1997 to
4.46% in 1998.
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
Company's control. While the Company 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 increased from $165,000 in 1997 to $200,000
in 1998. At December 31, 1998, the Company's allowance for loan losses as a
percent of total loans was 1.06%.
Non-interest Income. Total non-interest income increased 55.8% from
$952,000 in 1997 to $1.5 million in 1998 primarily as a result of a higher
level of loan related fees attributable to loan sales and a higher level of
other service charges and fees attributable to larger numbers of transaction
deposit accounts.
Non-interest Expenses. Total non-interest expenses were $4.2 million in
1998 versus $3.4 million in 1997. Compensation expense increased by $353,000
due to the opening of the Midlands Bank, higher loan production and security
sales commissions, and general salary increases. Occupancy , furniture and
equipment, supplies and printing and marketing increased by $108,000,
$48,000, $27,000 and $56,000, respectively, in 1998 primarily as a result of
the opening of the Midlands Bank. Item processing and bank charges increased
by $23,000 as a result of increased transaction accounts.
Provision for Income Taxes. The Company pays Federal corporate income
taxes and South Carolina bank taxes. The provision for income taxes decreased
from $581,000 in 1997 to $531,000 in 1998 as a result of lower income before
income taxes. The effective tax rate was 38.3% in 1998 and 38.0% in 1997.
Liquidity and Capital Resources
The Company'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
24
<PAGE>
<PAGE>
and competition.
National banks are not subject to any prescribed regulatory liquidity
requirements. However, a bank must maintain 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 Company, through its subsidiary banks, generally maintains
sufficient cash and short-term investments to meet short-term liquidity needs.
At December 31, 1998, the Company had cash and cash equivalents of $8.8
million, interest-bearing time deposits with banks of $2.1 million, and
marketable securities available-for-sale of $9.1 million. At December 31,
1998, the Company also maintained an uncommitted credit facility with the FHLB
of Atlanta, which provided for immediately available advances up to an
aggregate amount of $11.0 million, of which $4.3 million was outstanding.
The Company's primary investing activity is the origination of construction
and permanent mortgage loans. During the years ended December 31, 1998 and
1997, the Company originated $52.1 million and $28.0 million of such loans,
respectively. At December 31, 1998, the Company had loan commitments totaling
$3.1 million, unused lines of credit of $12.7 million and standby letters of
credit totaling $493,000. Certificates of deposit that are scheduled to
mature in less than one year from December 31, 1998 totaled $32.2 million.
OCC regulations require banks to maintain specific amounts of regulatory
capital. As of December 31, 1998, the Company and its subsidiary banks
complied with all regulatory capital requirements as of that date and met all
requirements for being "well-capitalized" by regulators. See Note 19 of Notes
to Consolidated Financial Statements contained in Item 7 of this Report for
detail of the Banks' and Company's capital position and requirements.
Year 2000 Readiness Disclosure
The Company is a user of computers, computer software and equipment
utilizing embedded microprocessors that will be effected by the year 2000
issue. The year 2000 issue exists because many computer systems and
applications use two-digit date fields to designate a year. As the century
date change occurs, date-sensitive systems may recognize the year 2000 as
1900, or not at all. This inability to recognize or properly treat the year
2000 may cause erroneous results, ranging from system malfunctions to
incorrect or incomplete processing.
The Company's Y2K Task Force is chaired by its Chief Financial Officer who
oversees operational matters of the Company and includes a cross-section of
bank managers. The Audit Committee of the Board of Directors is charged with
oversight of the Y2K readiness effort. The Task Force makes a progress report
to the Board of Directors at least quarterly. Management has been active in
promoting customer confidence and public education on Y2K issues.
The Y2K Task Force has developed and is implementing a comprehensive plan
to make all information and non-information technology assets year 2000
compliant. The plan is comprised of the following phases:
1. Awareness - Educational initiatives on year 2000 issues and concerns.
This phase is complete.
2. Assessment - Develop a plan, identify and evaluate all vital systems
of the Company. This phase was completed as
of June 30, 1998.
3. Renovation - Upgrade or replace any critical system that is non-year
2000 compliant. This phase was substantially
completed as of December 31, 1998.
4. Validation - Testing all critical systems and third-party vendors for
year 2000 compliance. The validation phase was substantially complete as of
March 31, 1999 and will be complete by June 30, 1999. The Company replaced
most in-house equipment (teller station equipment, etc.) with year 2000
compliant equipment in 1997 when it underwent a system-wide data processing
conversion. The Company processes its core banking applications using Jack
Henry and Associates CIF 20/20 system ("JHA"). JHA now warrants its 20/20
product as being Y2K compliant. The Company is relying on the results of
proxy testing by JHA for certain date sensitive testing. The proxy testing,
which involved the use of live client data, tested the results of
transactions at various test dates before and after the year 2000 date change
and covered all of the applications used by the
25
<PAGE>
<PAGE>
Company. This proxy testing was completed in December 1998. The Company
successfully conducted connectivity testing during March 1999. Connectivity
testing involved The Company and its third-party service bureau each rolling
forward their computer systems to January 3, 2000 so that the Company could
process its own data files under simulated year 2000 conditions using all
applications. Other parties whose year 2000 compliance may effect the Company
include the Federal Home Loan Bank of Atlanta, The Federal Reserve Bank of
Richmond, brokerage firms, the Company's item processor and the operator of
the Company's automated teller machine network. These third parties have
indicated their compliance or intended compliance. Where it is possible to do
so, the Company has scheduled testing with these third parties. Where testing
is not possible, the Company will rely on certifications from vendors and
service providers.
5. Implementation - Placement of renovated systems on-line. The
Company believes that its mission critical systems over which it has control
are year 2000 compliant as of March 1999. Systems including electric and
telephone systems are beyond the control of the Company and will be addressed
in the Company's Contingency plan.
The Company estimates its total cost to identify, fix and replace computer
equipment, software programs or other equipment containing embedded
microprocessors that were not year 2000 compliant to be $100,000, of which
$65,000 has been incurred as of December 31, 1998. This excludes the cost of
the Company's 1997 computer conversion which was not considered to be
undertaken for the express purpose of Year 2000 remediation. System
maintenance or modification costs are charged to expense as incurred, while
the cost of new hardware, software or other equipment is capitalized and
amortized over their estimated useful lives.
Because the Company depends substantially on its computer systems and those
of third parties, the failure of these systems to be year 2000 compliant could
cause substantial disruption of the Company's business and could have a
material adverse financial impact on the Company. Failure to resolve year
2000 issues presents the following risks to the Company: (1) The Company
could lose customers to other financial institutions, resulting in a loss of
revenue, if the Company's third party service bureau is unable to properly
process customer transactions; (2) governmental agencies, such as the Federal
Home Loan Bank of Atlanta, and correspondent institutions could fail to
provide funds to the Company, which could materially impair the Company's
liquidity and affect The Company's ability to fund loans and deposit
withdrawals; (3) concern on the part of depositors that year 2000 issues
could impair access to their deposit account balances could result in The
Company experiencing deposit outflows prior to December 31, 1999; and (4) The
Company could incur increased personnel costs if additional staff is required
to perform functions that inoperative systems would have otherwise performed.
The Company has developed a Y2K Contingency Master Plan to minimize
disruption of service and risk of loss from safety and soundness,
profitability and customer confidence concerns. The Contingency Master Plan
is further defined in two specific types of contingency plans: the Business
Resumption Plan and the Remediation Contingency Plan.
The Business Resumption Contingency Plan addresses the actions the Company
would take if core business processes, such as paying and receiving, cannot be
carried out in the normal manner through the century date change due to system
or vendor failure. The Company's Business Resumption Contingency Plan follows
an industry-recognized four phase
approach:
. Organization Planning
. Business Impact Analysis
. Contingency Planning
. Validation
The first three phases are complete and the validation phase will be
complete by September 30, 1999. The Y2K Task Force and the existing Disaster
Recovery Control Group, has identified the interdependency between critical
systems and the core business processes, and has completed a risk assessment
of possible failure scenarios. An individual business resumption plan has
been drafted for each core business process under every failure scenario rated
medium or high risk.
A Remediation Contingency Plan is in place and will be implemented in the
event that a critical system will not meet regulatory deadlines for
renovation, validation or implementation. Management is confident that the
Remediation Contingency Plan will not need to be implemented, as all critical
systems have been renovated, validated and implemented within required time
frames.
26
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<PAGE>
Management believes that it is not possible to estimate the potential lost
revenue due to the year 2000 issue, as the extent and longevity of any
potential problem cannot be predicted. Because the majority of the Company's
loan portfolio consists of loans to individuals and small business
enterprises, management believes that year 2000 issues will not impair the
ability of the Company's borrowers to repay their debt.
There can be no assurances that the Company's year 2000 plan will
effectively address the year 2000 issue, that the Company's estimates of the
timing and costs of completing the plan will ultimately be accurate or that
the impact of any failure of the Company or its third-party vendors and
service providers to be year 2000 compliant will not have a material adverse
effect on the Company's business, financial condition or results of
operations. However, management of the Company is confident of its ability
to complete the transition into the next century with minimal disruption of
normal service levels.
The Company received an OCC year 2000 exam in October, 1998 and is
scheduled for a second on-site OCC Y2K examination in April, 1999.
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 Company'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.
27
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ITEM 7: FINANCIAL STATEMENTS
_____________________________
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 1998.
The Audit Committee oversees the Company'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 accountants 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 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 accountants.
/s/ William C. Robinson
- ------------------------
William C. Robinson
Audit Committee
March 22, 1999
28
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FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
==========================================
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
PAGE
----
Independent Auditors' Report 30
Consolidated Balance Sheets at December 31, 1998 and 1997 31
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996 32-33
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1998, 1997 and 1996 34-35
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 36-37
Notes to Consolidated Financial Statements 38-66
29
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<PAGE>
[LETTERHEAD OF J.W. HUNT AND COMPANY, LLP]
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 Subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1998. 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 Subsidiaries at December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
As discussed in Note 23 to the consolidated financial statements, on March 4,
1999, the Company's Board of Directors entered into a merger agreement whereby
the Company will be merged into another company.
/s/ J.W. Hunt and Company, LLP
Columbia, South Carolina
February 10, 1999
(except for Note 23, as to which
the date is March 4, 1999)
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FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
1998 1997
ASSETS ---- ----
------
Cash and amounts due from banks $ 4,088,540 $ 4,126,603
Interest-bearing deposits with banks 4,665,410 1,968,995
----------------------------
Total cash and cash equivalents 8,753,950 6,095,598
Interest-bearing time deposits with banks 2,099,000 99,000
Securities available-for-sale 9,066,478 2,182,412
Real estate loans held-for-sale 1,740,365 676,279
Loans receivable - net of loans in process 83,442,732 80,792,015
Less, allowance for loan losses (859,456) (728,043)
----------------------------
Loans receivable, net 82,583,276 80,063,972
----------------------------
Accrued interest receivable 595,812 555,537
Premises and equipment, net 1,932,254 1,288,233
Foreclosed real estate 39,559 126,500
Deferred organization costs - 123,233
Deferred tax asset 337,050 263,987
Prepaid expenses and other assets 346,396 224,064
----------------------------
Total assets $ 107,494,140 $ 91,698,815
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Demand deposits:
Non interest-bearing $ 6,955,291 $ 7,129,011
Interest-bearing 38,717,943 27,479,190
----------------------------
Total demand deposits 45,673,234 34,608,201
Savings deposits 4,565,381 5,176,093
Time deposits 37,514,044 37,677,994
----------------------------
Total deposits 87,752,659 77,462,288
Federal Home Loan Bank advances 4,250,000 5,050,000
Note payable 2,100,000 -
Amounts due to depository institutions
(non interest-bearing) 489,573 305,315
Advance payments by borrowers for taxes and
insurance 84,872 54,630
Accrued liabilities:
Interest payable 280,129 208,410
Expenses payable 166,252 173,025
Other 246,002 464,146
----------------------------
Total liabilities 95,369,487 83,717,814
----------------------------
STOCKHOLDERS' EQUITY:
Preferred stock - $0.01par value, shares
authorized - 1,000,000, issued and
outstanding - none
Common stock - $0.01 par value, shares
authorized - 2,000,000, issued and
outstanding - 887,637 - 1998; issued
and outstanding - 690,323 - 1997 8,876 6,903
Additional paid-in capital 9,622,883 6,248,777
Accumulated other comprehensive income (loss) (12,948) (14,497)
Retained earnings 2,505,842 1,739,818
----------------------------
Total stockholders' equity 12,124,653 7,981,001
----------------------------
Total liabilities and stockholders'
equity $ 107,494,140 $ 91,698,815
============================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
- -------------------------------------------------------------------------
STATEMENTS
- ----------
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FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME, YEARS ENDED DECEMBER 31, 1998, 1997, AND
1996
- ------------------------------------------------------------------------------
1998 1997 1996
INTEREST AND DIVIDEND INCOME: ---- ---- ----
Interest on loans $ 7,156,521 $ 7,281,594 $ 6,634,443
Interest on securities
available-for-sale 92,956 104,175 119,322
Other interest income 545,781 108,765 120,362
Dividends - Federal Reserve Bank and
Federal Home Loan Bank 52,630 47,555 45,931
Total interest and dividend ----------------------------------------
income 7,847,888 7,542,089 6,920,058
INTEREST EXPENSE: ----------------------------------------
Deposits 3,340,727 3,215,938 3,125,187
Federal Home Loan Bank advances 171,154 206,747 155,460
Note payable 53,375 - -
----------------------------------------
Total interest expense 3,565,256 3,422,685 3,280,647
----------------------------------------
NET INTEREST INCOME 4,282,632 4,119,404 3,639,411
PROVISION FOR LOAN LOSSES 200,000 165,000 162,000
NET INTEREST INCOME AFTER PROVISION ----------------------------------------
FOR LOAN LOSSES 4,082,632 3,954,404 3,477,411
NONINTEREST INCOME: ----------------------------------------
Loan related fees 519,797 210,522 116,180
Other service charges and fees 908,462 700,468 577,077
Rental income 54,898 40,915 43,603
----------------------------------------
Total noninterest income 1,483,157 951,905 736,860
NONINTEREST EXPENSES: ----------------------------------------
Compensation and benefits 2,108,575 1,755,139 1,553,094
Occupancy 400,294 291,413 275,314
Insurance 99,817 93,910 617,948
Furniture and equipment 307,801 259,928 234,915
Data processing 145,397 152,042 156,330
Item processing and bank charges 209,866 187,135 119,380
Professional fees 102,472 107,791 115,973
Supplies and printing 129,624 103,144 70,275
Marketing 143,686 87,393 61,942
Telephone and postage 139,600 119,477 101,552
Automobile 8,525 7,598 8,787
Regulatory fees 37,558 36,158 34,532
Automated teller system 49,336 43,232 13,667
Other expenses 295,904 133,952 27,253
----------------------------------------
Total noninterest expenses 4,178,455 3,378,312 3,390,962
INCOME BEFORE PROVISION FOR INCOME ----------------------------------------
TAXES AND CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE 1,387,334 1,527,997 823,309
PROVISION FOR INCOME TAXES 531,071 580,639 322,498
INCOME BEFORE CUMULATIVE EFFECT OF A ----------------------------------------
CHANGE IN ACCOUNTING PRINCIPLE 856,263 947,358 500,811
CUMULATIVE EFFECT OF A CHANGE IN ----------------------------------------
ACCOUNTING PRINCIPLE, NET OF TAX 90,239 - -
----------------------------------------
NET INCOME $ 766,024 $ 947,358 $ 500,811
========================================
(Continued) - 1.
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FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME, YEARS ENDED DECEMBER 31, 1998, 1997, AND
1996
- ------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
Average number of common shares
outstanding 758,052 690,285 686,042
Average number of common shares
outstanding, assuming dilution 815,898 735,507 725,813
Earnings per common share:
Income per share before
cumulative effect of a
change in accounting principle $ 1.13 $ 1.37 $ 0.73
Per share for cumulative effect
of a change in accounting
principle, net of tax (0.12)
----------------------------------------
Net income per share $ 1.01 $ 1.37 $ 0.73
========================================
Earnings per common share, assuming
dilution:
Income per share before
cumulative effect of a
change in accounting principle $ 1.05 $ 1.29 $ 0.69
Per share for cumulative effect
of a change in accounting
principle, net of tax (0.11)
----------------------------------------
Net income per share $ 0.94 $ 1.29 $ 0.69
========================================
(Concluded) - 2.
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<TABLE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY,
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
- ---------------------------------------------------------------------------------------------------------
- ---
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
NUMBER PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) EQUITY
--------- ------ ------- -------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance
December 31, 1995 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
----------
Comprehensive income:
Net income - - - 500,811 - 500,811
Change in unrealized
loss on securities
available-for-sale, net
of applicable deferred
income taxes - - - - 8,394 8,394
----------
Total comprehensive
income - - - - - 509,205
------------------------------------------------------------------------
Balance,
December 31, 1996 627,587 6,276 5,441,306 1,608,028 (10,931) 7,044,679
Stock issuance cost - - (7,470) - - (7,470)
Issuance of 62,736
shares of stock for
10% stock dividend 62,736 627 814,941 (815,568) - -
----------
Comprehensive income:
Net income - - - 947,358 - 947,358
Change in unrealized
loss on securities
available-for-sale, net
of applicable deferred
income taxes - - - - (3,566) (3,566)
----------
Total comprehensive
income - - - - - 943,792
------------------------------------------------------------------------
(Continued) - 1.
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FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY,
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
- ---------------------------------------------------------------------------------------------------------
- ---
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
NUMBER PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) EQUITY
--------- ------ ------- -------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1997 690,323 $ 6,903 $ 6,248,777 $ 1,739,818 $ (14,497) $ 7,981,001
Sale of shares 193,422 1,934 3,450,684 - - 3,452,618
Stock options exercised 3,892 39 38,042 - - 38,081
Stock issuance cost - - (114,620) - - (114,620)
----------
Comprehensive income:
Net income - - - 766,024 - 766,024
Change in unrealized
loss on securities
available-for-sale, net
of applicable deferred
income taxes - - - - 1,549 1,549
----------
Total comprehensive
income - - - - - 767,573
------------------------------------------------------------------------
Balance,
December 31, 1998 887,637 8,876 9,622,883 2,505,842 (12,948) 12,124,653
========================================================================
(Concluded) -
2.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------------
35
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FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS, YEARS ENDED DECEMBER 31, 1998, 1997 AND
1996
- ------------------------------------------------------------------------------
1998 1997 1996
Cash flows from operating activities: ---- ---- ----
Net income $ 766,024 $ 947,358 $ 500,811
Adjustments to reconcile net
income to net cash provided
(used) by operating activities:
Amortization of deferred loan fees
and discounts (63,854) (27,018) (3,654)
Provision for loan losses 200,000 165,000 162,000
Depreciation and amortization 469,506 266,762 202,949
Deferred income taxes (73,063) (78,815) (43,992)
Gain on sales of loans to investors (326,073) (146,632) (101,573)
Originations of loans sold to
investors (26,139,168) (14,164,921) (7,521,386)
Proceeds from sales of loans to
investors 26,465,241 14,311,553 7,622,959
Disbursements on loans serviced
for others (7,514,304) (1,611,484) (1,227,215)
Receipts on loans serviced for
others 3,232,079 1,710,947 1,226,719
Gain on sale of foreclosed real estate (6,859) (4,573) (50,393)
Net change in:
Interest receivable 40,275 (53,125) (5,967)
Prepaid expenses and other assets (307,794) (56,888) (65,965)
Real estate loans held for sale (1,064,086) (12,963) (411,966)
Accrued interest payable 71,719 89,351 14,398
Accrued expenses (6,773) (40,543) 162,695
Other liabilities (218,144) 284,913 56,585
--------------------------------------
Net cash provided (used) by operating
activities (4,475,274) 1,578,922 517,005
--------------------------------------
Cash flows from investing activities:
Purchases of securities available-
for-sale (12,284,468) (98,602) (97,315)
Purchases of interest-bearing time
deposits with banks (2,000,000) - -
Maturities of interest-bearing time
deposits with banks - 100,177 -
Proceeds from sales and maturities
of securities available-for-sale 7,700,927 387,060 350,613
Purchases of Federal Home Loan Bank
stock and dividends received (18,400) - (103,800)
Purchases of Federal Reserve Bank
stock (198,450) - -
Loans originations and principal
collections, net (480,751) (2,193,574) (6,546,392)
Proceeds from sales of foreclosed
real estate 161,887 149,534 530,500
Additions to premises and equipment (928,065) (387,101) (293,894)
Net cash used by investing --------------------------------------
activities (8,047,320) (2,042,506) (6,160,288)
--------------------------------------
Cash flows from financing activities:
Net increase in demand deposit
accounts 11,065,033 1,566,985 3,631,534
Net decrease in savings deposit
accounts (610,712) (793,429) (1,329,939)
Net increase (decrease) in time
deposits (163,954) (1,611,287) 1,093,499
Proceeds from Federal Home Loan Bank
advances 5,000,000 16,450,000 15,150,000
Repayment of Federal Home Loan Bank
advances (5,800,000) (17,000,000) (10,550,000)
Proceeds from note payable 2,100,000 - -
Increase (decrease) in amounts due
to depository institutions 184,258 105,198 (37,973)
Increase (decrease) in advance
payments by borrowers for
taxes and insurance 30,242 (21,843) (7,188)
Proceeds from issuance of common
stock 3,452,618 - -
Stock issuance costs (114,620) (7,470) -
Proceeds from stock options exercised 38,081 - 18,010
Net cash provided (used) by financing --------------------------------------
activities 15,180,946 (1,311,846) 7,967,943
--------------------------------------
(Continued) - 1.
36
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FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS,
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- ------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
Net increase (decrease) in cash and
cash equivalents $ 2,658,352 $(1,775,430) $ 2,324,660
Cash and cash equivalents at beginning
of year 6,095,598 7,871,028 5,546,368
-------------------------------------
Cash and cash equivalents at end
of year $ 8,753,950 $ 6,095,598 $ 7,871,028
=====================================
Supplemental disclosure of cash flow
information:
Cash paid for:
Interest on deposits and borrowings $ 3,493,537 $ 3,333,334 $ 3,110,789
=====================================
Income taxes $ 611,921 $ 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 $ 58,387 $ 43,951 $ 264,752
=====================================
(Concluded) - 2.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
- -------------------------------------------------------------------------
STATEMENTS
- ----------
37
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FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
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. (FirstBank).
In 1996, First Securities Corporation (FSC) was incorporated in South
Carolina. FSC was organized to provide alternative investment services in
FirstBank's service area. FSC began operations in the second quarter of 1997
and is a wholly-owned subsidiary of FirstBank.
In September 1998, FirstBank of the Midlands (FBM) commenced operations in
Columbia, South Carolina, following approval by the Comptroller of the
Currency and other regulators. Upon completion of its organization, the
common stock of FBM was acquired by the Company.
FirstBank and FBM (the Banks) operate as wholly-owned subsidiaries of the
Company. The Banks provide a variety of financial services to individuals and
small to middle-market businesses located within Beaufort County and Richland
County, South Carolina and surrounding areas. The Banks' primary deposit
products are savings and term certificate accounts and their primary lending
products are consumer and residential and commercial mortgage loans.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of the Company and its subsidiaries
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 subsidiaries, FirstBank and FBM. All significant
intercompany balances and transactions have been eliminated in consolidation.
38
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FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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 balance sheet and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of the
allowance for loan losses and the valuation of deferred tax assets.
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK:
Most of the Company's activities are with customers located within Beaufort
and Richland Counties and surrounding areas in South Carolina. Note 4
discusses the types of securities in which the Company invests. The types of
lending that the Company engages in is discussed in Note 5. The Company does
not have any significant concentrations to any one industry or customer.
CASH AND CASH EQUIVALENTS:
For purposes of presentation in the consolidated statements of cash flows,
cash and cash equivalents include cash and amounts due from banks, time
deposits and federal funds sold, all of which mature within ninety days.
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 excluded from
earnings and reported in other comprehensive income. Gains and losses on the
sale of securities available-for-sale are recorded on the trade date and are
determined 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 terms of the securities.
LOANS HELD FOR SALE:
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value in the aggregate. Net
unrealized losses, if any, are recognized through a valuation allowance by
charges to income.
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FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
LOANS HELD FOR SALE (CONTINUED):
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:
The Banks grant mortgage, commercial and consumer loans to customers. A
substantial portion of the loan portfolio is represented by mortgage loans in
Beaufort County. The ability of the Banks' debtors to honor their contracts
is dependent upon the real estate and general economic conditions in the
Banks' service areas.
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off generally are reported at
their outstanding unpaid principal balances adjusted for 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 mortgage and commercial loans is discontinued at
the time the loan is 90 days delinquent unless the credit is well-secured and
in process of collection. Credit card loans and other personal loans are
typically charged off no later than 180 days past due. In all cases, loans
are placed on nonaccrual or charged-off at an earlier date if collection of
principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual
or charged off is reversed against interest income. The interest on these
loans is accounted for on the cash-basis or cost-recovery method, until
qualifying for return to accrual. Loans are returned to accrual status when
all the principal and interest amounts contractually due are brought current
and future payments are reasonably assured.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance.
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FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
ALLOWANCE FOR LOAN LOSSES (CONTINUED):
The allowance for loan losses is evaluated on a regular basis by management
and is based upon management's periodic review of the collectibility of the
loans in light of historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as more information becomes
available.
A loan is considered impaired when, based on current information and events,
it is probable that a creditor will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms
of the loan agreement. Factors considered by management in determining
impairment include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are
not classified as impaired. Management determines the significance of payment
delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower's
prior payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan by loan basis
for commercial and construction loans by either the present value of expected
future cash flows discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if the loan is
collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated
for impairment. Accordingly, the Banks do not separately identify individual
consumer and residential loans for impairment disclosures.
MORTGAGE SERVICING:
Mortgage servicing assets are recognized as separate assets when rights are
acquired through purchase or through sale of mortgage loans. Capitalized
servicing rights are reported in other assets and are amortized into
noninterest income in proportion to, and over the period of, the estimated
future net servicing income of the underlying mortgage loans. Mortgage
servicing assets are evaluated for impairment based upon the fair value of the
rights as compared to amortized cost. Impairment is determined by stratifying
rights by predominant characteristics, such as interest rates and terms. Fair
value is determined using prices for similar assets with similar
characteristics, when available, or based upon discounted cash flows using
market-based assumptions. Mortgage servicing rights were not impaired at
December 31, 1998 and 1997.
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FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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, at the date of foreclosure, establishing a new cost basis.
Subsequent to 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 and changes
in the valuation allowance (if any) 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.
TRANSFERS OF FINANCIAL ASSETS:
Transfers of financial assets are accounted for as sales, when control over
the assets has been surrendered. Control over transferred assets is deemed to
be surrendered when (1) the assets have been isolated from the Company, (2)
the transferee obtains the right (free of conditions that constrain it from
taking advantage of that right) to pledge or exchange the transferred assets,
and (3) the Company does not maintain effective control over the transferred
assets through an agreement to repurchase them before their maturity.
MARKETING EXPENSES:
The costs of marketing are expensed as incurred.
DEFERRED ORGANIZATION COSTS, PREOPENING COSTS AND STOCK
OFFERING COSTS:
The Company adopted Statement of Position (SOP) 98-5, "Reporting on the Costs
of Start-Up Activities" in 1998. This SOP provides guidance on the financial
reporting of start-up costs and organization costs. It requires costs of
start-up activities and organization costs to be expensed as incurred. The
adoption of this SOP is reported as the cumulative effect of a change in
accounting principle. Adopting this SOP resulted in net income decreasing
$90,239 and basic earnings per common share and diluted earnings per common
share declining $0.12 and $0.11, respectively, in 1998.
42
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FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
DEFERRED ORGANIZATION COSTS, PREOPENING COSTS AND STOCK
OFFERING COSTS (CONTINUED):
Prior to adopting this SOP, deferred organization costs were amortized using
the straight-line method. Preopening costs associated with the organization
of FBM were expensed as incurred.
Stock offering costs have been charged to additional paid-in capital.
AMOUNTS DUE TO DEPOSITORY INSTITUTIONS:
The Banks invest 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. Contributions to the plan totaled
approximately $40,000, $31,000 and $18,000 for 1998, 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.
43
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<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
STOCK COMPENSATION PLANS:
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," encourages all entities to adopt a fair value based
method of accounting for employee stock compensation plans, whereby
compensation cost is measured at the grant date based on the value of the
award and is recognized over the service period, which is usually the vesting
period. However, it also allows an entity to continue to measure compensation
cost for those plans using the intrinsic value based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," whereby compensation cost is the excess, if any,
of the quoted market price of the stock at the grant date (or other
measurement date) over the amount an employee must pay to acquire the stock.
Stock options issued under the Company's stock option plans have no intrinsic
value at the grant date, and under Opinion No. 25 no compensation cost is
recognized for them. The Company has elected to continue with the accounting
methodology in Opinion No. 25 and, as a result, has provided pro forma
disclosures of net income and earnings per share and other disclosures, as if
the fair value based method of accounting had been applied.
EARNINGS PER COMMON SHARE:
Basic earnings per common share represent income available to common
stockholders divided by the weighted average number of shares outstanding
during the year. Diluted earnings per common share reflects additional common
shares that would have been outstanding if dilutive potential common shares
had been issued, as well as any adjustment to income that would result from
the assumed issuance. Potential common shares that may be issued by the
Company relate solely to outstanding stock options, and are determined using
the treasury stock method. All common share and per share amounts have been
restated to reflect stock dividends.
The computation of basic and diluted earnings per common share is shown as
follows:
YEAR ENDED
DECEMBER 31,
1998 1997 1996
---- ---- ----
EARNINGS PER COMMON SHARE:
Net income applicable to common stock $ 766,024 $ 947,358 $ 500,811
================================
Weighted average shares outstanding 758,052 690,285 686,042
================================
Basic earnings per common share $ 1.01 $ 1.37 $ 0.73
================================
44
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FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
EARNINGS PER COMMON SHARE (CONTINUED):
YEAR ENDED
DECEMBER 31,
1998 1997 1996
---- ---- ----
EARNINGS PER COMMON SHARE,
ASSUMING DILUTION:
Net income applicable to common stock $ 766,024 $ 947,358 $ 500,811
================================
Weighted average shares outstanding 758,052 690,285 686,042
Common stock equivalents - stock options 57,846 45,222(a) 39,771
--------------------------------
Total 815,898 735,507 725,813
================================
Earnings per common share, assuming
dilution $ 0.94 $ 1.29 $ 0.69
================================
(a) Options to purchase 3,500 shares of common stock were not included in the
computation of diluted earnings per common share because the options' exercise
prices were greater than the average market price of the common shares for
1997.
COMPREHENSIVE INCOME:
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," as of
January 1, 1998. Accounting principles generally require that recognized
revenue, expenses, gains and losses be included in net income. Although
certain changes in assets and liabilities, such as unrealized gains and losses
on securities available-for-sale, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income. The adoption of SFAS No. 130 had no
effect on the Company's net income or stockholders' equity. Currently, the
Company's only component of Other Comprehensive Income is its unrealized
losses on securities available-for-sale.
FINANCIAL INSTRUMENTS:
Credit-related financial instruments - In the ordinary course of business, the
Company has entered into commitments to extend credit, including commitments
under stand-by letters of credit. Such financial instruments are recorded in
the financial statements when they are funded.
45
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<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
SEGMENTS:
FirstBancorporation, Inc. through its banking subsidiaries, FirstBank and FMB,
provides a broad range of financial services to individuals and companies in
South Carolina. These services include demand, time, and savings deposits;
lending services; ATM processing; and similar financial services. While the
Company's decision makers monitor the revenue streams of the various financial
products and services, operations are managed and financial performance is
evaluated on a company-wide basis. Accordingly, all of the Company's banking
operations are considered by management to be aggregated in one reportable
operating segment.
FAIR VALUES OF FINANCIAL INSTRUMENTS:
The fair value of a financial instrument is the current amount that would be
exchanged between willing parties, other than in a forced liquidation. Fair
value is best determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for the Company's various
financial instruments. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows.
Accordingly, the fair value estimates may not be realized in an immediate
settlement of the instrument. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented may not necessarily
represent the underlying fair value of the Company.
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, excluding
Federal Home Loan Bank and Federal Reserve Bank stock, are based on quoted
market prices.
Real estate loans held-for-sale. Fair values of real estate loans
held-for-sale are based on carrying values.
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 nonperforming loans are
46
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<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED):
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 and note payable. Fair value of the
advances are estimated using discounted cash flow analyses based on the
Company's current incremental borrowing rate for similar types of borrowing
arrangements.
Accrued interest and amounts due to depository institutions. The
carrying amounts approximate their fair values.
Off-balance-sheet instruments. Fair values for off-balance-sheet,
credit-related financial instruments, 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.
ACCOUNTING PRONOUNCEMENTS:
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" is effective for 2000. This
Statement Establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statements of financial
position and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative, that is gains and losses, depends
on the intended use of the derivative and the resulting designation. The
adoption of this Statement in 2000 is not expected to have a material effect
on the Company's consolidated financial statements.
Statements of Financial Accounting Standards No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise," conforms the subsequent
accounting for securities retained after the securitization of mortgage loans
by a mortgage banking enterprise with the subsequent accounting for securities
retained after the securitization of other types of assets by a nonmortgage
banking enterprise. This Statement is effective in 1999 and is not expected
to have a material effect on the Company's consolidated financial statements.
47
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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, the Banks are 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,
1998 and 1997, was met by vault cash held by the Banks.
At December 31, 1998, the Banks had due from bank balances in excess of
federally insured limits of approximately $608,000. 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:
....................1998...................
GROSS
UNREA- GROSS
AMORTIZED LIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
Mortgage-backed securities $4,121,368 $ - $(20,884) $4,100,484
U.S. Government securities 4,070,744 - - 4,070,744
Federal Home Loan Bank
stock 566,500 - - 566,500
Federal Reserve Bank stock 328,750 - - 328,750
-----------------------------------------
Total 9,087,362 - (20,884) 9,066,478
=========================================
....................1997...................
GROSS
UNREA- GROSS
AMORTIZED LIZED 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
=========================================
48
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<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 4 - SECURITIES AVAILABLE-FOR-SALE (CONTINUED):
The mortgage-backed securities held at December 31, 1998, consist of GNMA
Adjustable Rate Mortgage Securities (ARMS) and mature generally between 10 and
24 years and FNMA fixed rate loans with maturities of 10 years. Such
securities held at December 31, 1997 consist solely of GNMA ARMS. The actual
lives of these securities may be shorter as a result of prepayments. The U.S.
Government securities mature in 1999. 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 three-year period ending December 31, 1998.
At December 31, 1998 and 1997, the FHLB stock was pledged as collateral on the
FHLB advances and securities with carrying values of approximately $873,000
and $1,154,000, respectively, were pledged to secure public deposits and for
other purposes as required and permitted by law.
The amortized cost and fair value of debt securities by contractual maturity
at December 31, 1998 follows:
AVAILABLE FOR SALE
------------------
AMORTIZED
COST FAIR VALUE
---- ----------
Within 1 year $4,070,744 $4,070,744
Over 1 year through 5 years - -
After 5 years through 10 years - -
Over 10 years 895,250 895,250
---------- ----------
4,965,994 4,965,994
Mortgage-backed securities 4,121,368 4,100,484
---------- ----------
Total $9,087,362 $9,066,478
========== ==========
49
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 5 - LOANS RECEIVABLE:
Loans receivable at December 31, 1998 and 1997, consisted of the following:
1998 1997
---- ----
Mortgage loans:
Permanent $57,817,138 $60,522,713
Construction 8,656,783 5,949,087
--------------------------
Total mortgage loans 66,473,921 66,471,800
--------------------------
Other loans:
Consumer loans 7,436,023 9,527,554
Commercial loans 9,532,788 4,792,661
--------------------------
Total other loans 16,968,811 14,320,215
--------------------------
Loans receivable $83,442,732 $80,792,015
==========================
Loans receivable above are net of approximately $116,000 and $97,000,
representing deferred loan origination fees net of related costs at December
31, 1998 and 1997, respectively. These deferred fees are primarily
attributable to permanent mortgage loans.
Loans receivable 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, 1998, the total loan portfolio
included adjustable rate loans totaling approximately $17.5 million, having
interest rate adjustments indexed to prime, and approximately $31.3 million of
adjustable rate loans, having interest rate adjustments indexed to the one or
three year U.S. Treasury bill adjusted to a constant maturity. Future market
factors may, in certain instances, affect the correlation of the interest rate
adjustment with the rates the Banks pay 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:
1998 1997 1996
---- ---- ----
Beginning balance $ 728,043 $ 630,557 $ 470,198
Provision (charged to income) 200,000 165,000 162,000
Recoveries of charge-offs 3,262 5,000 26,993
Charge-offs (71,849) (72,514) (28,634)
----------------------------------
Ending balance $ 859,456 $ 728,043 $ 630,557
==================================
Real estate mortgage loans include investments of approximately $544,000 and
$663,000 in participating interests on loans originated and serviced by other
financial institutions as of December 31, 1998 and 1997, respectively.
50
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<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 5 - LOANS RECEIVABLE (CONTINUED):
The following is a summary of information pertaining to impaired loans:
DECEMBER 31,
1998 1997
---- ----
Impaired loans without a valuation allowance $ 170,151 $ 73,081
Impaired loans with a valuation allowance 26,264 213,662
--------- ---------
Total impaired loans $ 196,415 $ 286,743
========= =========
Valuation allowance related to impaired loans $ 2,626 $ 55,970
========= =========
YEARS ENDED DECEMBER 31,
1998 1997 1996
---- ---- ----
Average investment in impaired loans $207,373 $392,316 $261,613
======== ======== ========
Interest income recognized on
impaired loans $ 13,928 $ 32,359 $ 26,263
======== ======== ========
Interest income recognized on a cash
basis on impaired loans $ 13,928 $ 32,359 $ 26,263
======== ======== ========
No additional funds are committed to be advanced in connection with impaired
loans.
NOTE 6 - SERVICING:
Loans serviced for others are not included in the accompanying consolidated
balance sheets. The unpaid principal balances of mortgage loans serviced for
others totaled approximately $14,456,000 and $10,798,000 at December 31, 1998
and 1997, respectively.
The balance of capitalized servicing rights included in other assets at
December 31, 1998 and 1997, was $72,452 and $41,152, respectively. The fair
values of these rights were approximately $72,300 and $41,100, respectively.
The fair value of servicing rights was determined using a discount rate of 8%
and a prepayment speed of 14.3%. No valuation allowances were required.
51
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<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 6 - SERVICING (CONTINUED):
The following summarizes mortgage servicing rights capitalized and amortized:
YEARS ENDED DECEMBER 31,
1998 1997
---- ----
Mortgage servicing rights capitalized $ 50,402 $ 42,776
======== ========
Mortgage servicing rights amortized $ 19,102 $ 1,624
======== ========
NOTE 7 - PREMISES AND EQUIPMENT:
Premises and equipment at December 31, 1998 and 1997, consists of the
following:
1998 1997
---- ----
Cost:
Land $ 497,656 $ 251,000
Buildings and leasehold improvements 646,965 461,576
Equipment and furnishings 2,319,965 1,820,046
---------------------------
Total cost 3,464,586 2,532,622
Less, accumulated depreciation and
amortization (1,532,332) (1,244,389)
---------------------------
Premises and equipment - net $ 1,932,254 $ 1,288,233
===========================
Depreciation expense charged to operations was $284,044, $245,995 and $182,662
in 1998, 1997, and 1996, respectively.
NOTE 8 - LEASES:
FirstBank leases its main office facility and additional office space and
parking under a noncancelable operating lease from 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 2003.
52
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<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 8 - LEASES (CONTINUED):
FBM leases office space under a noncancellable operating lease with an initial
term of 5 years beginning on September 1, 1998. The lease terms provide for
three, three-year renewal options. The landlord is responsible for
improvements and property taxes on the leased property up to the amount paid
for 1997 taxes. FBM is 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.
Aggregate future minimum lease payments under all operating leases are as
follows:
Year ending December 31:
1999 $ 262,011
2000 262,011
2001 262,011
2002 262,011
2003 229,172
Thereafter 1,137,532
-----------
Total minimum payments $ 2,414,748
===========
Total rental expense for the years ended December 31, 1998, 1997 and 1996, was
approximately $193,000, $161,000 and $161,000, respectively.
NOTE 9 - DEPOSITS:
Certificates of deposits, each with a minimum denomination of $100,000,
totaled approximately $10.3 million and $8.8 million at December 31, 1998 and
1997, respectively.
At December 31, 1998, the scheduled maturities of certificates of deposit are
as follows (in thousands of dollars):
1999 $ 32,219
2000 5,008
2001 287
-----------
$ 37,514
===========
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.
53
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<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 10 - FEDERAL HOME LOAN BANK ADVANCES:
FirstBank has an $11 million line-of-credit with the FHLB of Atlanta. At
December 31, 1998 and 1997, advances from the FHLB of Atlanta totaled $4.25
million and $5.05 million, respectively.
At December 31, 1998, the maturity dates and interest rates on the advances
were as follows (in thousands of dollars):
MATURITY DATE INTEREST RATE AND TYPE ADVANCE AMOUNT
------------- ---------------------- --------------
June 2001 6.92% fixed $ 250,000
June 2003 (callable June
2000) 5.40% fixed 1,000,000
June 2008 (callable June
2003) 5.51% fixed 3,000,000
----------
$4,250,000
==========
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.
Such advances during 1998 and 1997 are summarized as follows:
1998 1997
---- ----
Maximum amount of advances at any
month end $4,300,000 $6,300,000
==========================
Average borrowings during the year $2,954,000 $3,428,000
==========================
Weighted average interest rate
during the year 5.79% 6.03%
==========================
NOTE 11 - NOTE PAYABLE:
In connection with the organization of FBM, the Company borrowed $2,100,000
from a bank in August 1998. The loan principal is scheduled for repayment
monthly over five years, beginning October 1, 2003, and is subject to
repayment prior to consummation of the merger (see Note 23). Interest is due
monthly beginning October 1, 1998, through maturity in September 2008, at a
variable rate of prime less one percent (7.5% at December 31, 1998). The
common stock of each Bank serves as collateral.
The loan agreement contains certain loan convenants that, among other things,
place limits on additional borrowings and capital expenditures and, require
the Company and each subsidiary Bank to maintain their status as "well
capitalized" as defined by the regulations. The Company was in compliance
with these loan covenants.<PAGE>
54
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<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 12 - INCOME TAXES:
The Company files consolidated federal income tax returns on a calendar-year
basis.
The provision for income taxes for the three years ended December 31, 1998
consists of the following:
1998 1997 1996
---- ---- ----
Currently payable:
Federal $549,589 $589,579 $336,524
State 55,494 67,690 29,967
-----------------------------------
Total 605,083 657,269 366,491
-----------------------------------
Deferred tax benefit:
Federal (44,523) (70,061) (40,046)
State (29,489) (6,569) (3,947)
-----------------------------------
Total (74,012) (76,630) (43,993)
-----------------------------------
Total income taxes $531,071 $580,639 $322,498
===================================
Effective tax rate 38.3% 38.0% 39.2%
===================================
The provision for income taxes for 1998, 1997, and 1996 differed from amounts
computed by applying the statutory federal rate to income before income taxes
as follows:
1998 1997 1996
---- ---- ----
Income taxes at statutory rate on
pre-tax income $471,694 $519,519 $279,925
State income taxes, net of
federal tax benefit 36,626 40,339 17,173
Other, net 22,751 20,781 25,400
-----------------------------------
Total provision $531,071 $580,639 $322,498
===================================
55
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<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 12 - INCOME TAXES (CONTINUED):
The sources of deferred tax assets and liabilities at December 31, 1998 and
1997 are as follows:
1998 1997
---- ----
Deferred tax assets:
Allowance for loan losses $288,611 $254,739
Start-up costs 74,849 -
State tax net operating loss carryforward 27,503 -
Deferred loan fees - 34,896
Unrealized losses on securities available-
for-sale 7,936 8,885
Other 5,981 9,018
-----------------------
Total 404,880 307,538
-----------------------
Deferred tax liabilities:
Federal Home Loan Bank stock dividends (43,551) (43,551)
-----------------------
Net deferred tax asset before valuation
allowance 364,329 263,987
Less, valuation allowance (24,279) -
-----------------------
Net deferred tax asset $337,050 $263,987
=======================
At December 31, 1998, the Company had net operating loss (NOL) carryforwards
for state income tax purposes of approximately $586,000 available to offset
future state taxable income. The NOL carryforwards expire in the years 2010
through 2013. The valuation allowance represents management's estimate of the
allowance for the NOL deferred tax asset and specifically relates to
FirstBancorporation and FMB.
NOTE 13 - 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 and 1986 Incentive Stock Option Plan, 112,386 shares of
common stock were authorized and granted to outside directors and officers.
These options expire in 2006.
56
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<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 13 - STOCK OPTIONS (CONTINUED):
The Company applies APB Opinion 25 and related Interpretations in accounting
for the stock option plans. Accordingly, no compensation cost has been
recognized. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant dates for awards under the
plans consistent with the method prescribed by SFAS No. 123, the Company's net
income and earnings per share would have been adjusted to the pro forma
amounts indicated below:
YEARS ENDED DECEMBER 31,
1998 1997 1996
---- ---- ----
Net income As reported $766,024 $947,358 $500,811
Pro forma $754,441 $912,968 $476,352
Earnings per share - As reported $1.01 $1.37 $0.73
basic Pro forma $1.00 $1.32 $0.69
Earnings per share -
assuming dilution As reported $0.94 $1.29 $0.69
Pro forma $0.92 $1.24 $0.66
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
YEARS ENDED DECEMBER 31,
1998 1997 1996
---- ---- ----
Dividend yield 0.00% 0.00% 0.00%
Expected life 5-6 years 6-7 years 6-7 years
Expected volatility 27% 20% 20%
Risk-free interest rate 5.28% 6.0% 6.0%
57
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<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 13 - STOCK OPTIONS (CONTINUED):
A summary of the status of the Company's stock option plans is presented
below:
......1998...... ......1997...... ......1996......
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Fixed Options: ------ ----- ------ ----- ------ -----
Outstanding at beginning
of year 108,464 $ 8.06 105,885 $ 7.85 97,315 $7.76
Granted 4,491 16.71 5,700 13.61 10,571 9.60
Exercised (3,892) 11.08 - - (2,001) 8.18
Forfeited (4,459) $ 6.73 (3,121) 10.44 - -
Outstanding at end of ------- ------ ------- ------ ------- -----
year 104,604 $ 7.04 108,464 $ 8.06 105,885 $7.85
======= ======= =======
Options exercisable at
year end 81,073 $ 7.04 85,739 $ 7.05 76,893 $6.68
Weighted-average fair
value of options
granted during the year $ 16.71 $ 13.61 $ 9.60
Information pertaining to options outstanding at December 31, 1998 is as
follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------- ----------- ---- ----- ----------- -----
$6.41 - $6.73 70,230 5.7 years $ 6.43 74,689 $ 6.43
$10.30 - $11.82 28,874 6.7 years 10.83 10,443 10.99
$14.00 - $18.00 5,500 8.9 years 15.73 400 14.00
------- ------
Outstanding at end
of year 104,604 6.1 years 8.06 85,532 $ 7.02
======= ======
NOTE 14 - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES:
The Banks, as national banks, are 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
the Banks' 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, 1998, approximately $1,283,000 of
the Banks' retained earnings are available for distribution to the Company as
dividends without prior regulatory approval.
58
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 14 - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES
(CONTINUED):
Under FRB regulations, the Banks are also limited as to the amount it may loan
to the Company unless such loans are collateralized by specified obligations.
The maximum amount available for transfer from the Banks to the Company in the
form of loans or advances totaled approximately $2,845,000 at December 3l,
1998.
NOTE 15 - RELATED PARTY TRANSACTIONS:
During 1998 and 1997, FirstBank and in 1998, FBM 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
$1,462,900 at December 31, 1998, and $1,203,791 at December 31, 1997. During
1998, $1,110,593 of new loans were originated to this group. Repayments of
$851,484 were made during 1998.
Related party deposits totaled approximately $3,188,000 and $2,451,000 at
December 31, 1998 and 1997, respectively.
NOTE 16 - COMMITMENTS AND CONTINGENT LIABILITIES:
The Company is involved at times in various litigation arising out of the
normal course of business. In the opinion of the Company's legal counsel,
there is no pending or threatened litigation that will have a material effect
on the Company's consolidated financial statements.
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 Company uses the services of outside software vendors for certain of its
data processing applications. Based on discussions with software vendors and
the execution of its year 2000 plan to date, 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
59
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 16 - COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED):
YEAR 2000 CONSIDERATIONS (CONTINUED):
its reported financial information not to be necessarily indicative of future
operating results or future financial condition. Costs to address the year
2000 issue are estimated to total approximately $100,000, of which
approximately $65,000 was incurred in 1998.
NOTE 17 - OFF-BALANCE-SHEET ACTIVITIES:
The Company is a party to credit related financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit. Such commitments involve, to
varying degrees, elements of credit and interest-rate risk in excess of the
amount recognized in the consolidated balance sheets.
The Company's exposure to credit loss is represented by the contractual amount
of the commitments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
At December 31, 1998 and 1997, the following financial instruments were
outstanding whose contract amounts represent credit risk:
CONTRACT AMOUNT
---------------
1998 1997
---- ----
Commitments to grant loans $ 3,060,000 $ 3,371,000
Unfunded commitments under lines of credit 12,696,000 10,327,000
Commercial and standby letters of credit 493,000 288,000
Commitments to grant loans are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. These
commitments generally have fixed expiration dates and are generally
collateralized by real estate.
Unfunded commitments under lines of credit are generally unfunded balances on
loans closed and include unfunded lines on home equity loans, other open ended
loans, overdraft protection lines and construction loans. Construction loans
are generally for a fixed term and may require a fee to be paid. Lines of
credit are generally collateralized by real estate.
Unfunded commitments under commercial lines of credit, revolving credit lines
and overdraft protection agreements are commitments for possible future
extensions of credit to existing customers. These lines of credit are
uncollateralized and usually do not contain a specified maturity date and may
not be drawn upon to the total extent to which the Company is committed.
60
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 17 - OFF-BALANCE-SHEET ACTIVITIES (CONTINUED):
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those letters of
credit are primarily issued to support public and private borrowing
arrangements. Essentially standby letters of credit have expiration dates
within one year. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. The Company generally holds collateral supporting those
commitments if deemed necessary.
NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair value of the Company's financial instruments at December
31, 1998 and 1997, are as follows:
1998 1997
---- ----
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
Financial assets:
Cash and cash
equivalents $ 8,753,950 $ 8,753,950 $ 6,095,598 $ 6,095,598
Time deposits with
banks 2,099,000 2,099,000 99,000 99,000
Securities available-
for-sale 9,066,478 9,066,478 2,182,412 2,182,412
Real estate loans
held for sale 1,740,365 1,740,365 676,279 676,279
Loans receivable - net 82,583,276 82,643,199 80,063,972 80,250,247
Accrued interest
receivable 595,812 595,812 555,537 555,537
Financial liabilities:
Deposits 87,752,659 87,909,255 77,462,288 77,529,026
Federal Home Loan Bank
advances 4,250,000 4,318,856 5,050,000 5,059,257
Note payable 2,100,000 2,100,000 - -
Amounts due to
depository
institutions 489,573 489,573 305,315 305,315
Accrued interest
payable 280,129 280,129 208,410 208,410
Unrecognized financial
instruments:
Commitments to grant
loans 3,060,000 3,060,000 3,371,000 3,371,000
Lines-of-credit 12,696,000 12,696,000 10,327,000 10,327,000
Standby letters of
credit 493,000 493,000 288,000 288,000
61
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 19 - MINIMUM REGULATORY CAPITAL REQUIREMENTS:
The Company (on a consolidated basis) and the Banks are 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 and Banks'
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the Banks must meet
specific capital guidelines that involve quantitative measures of their
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. Prompt corrective action provisions are not
applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Banks 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, 1998 and 1997, that the Company and the Banks meet all capital adequacy
requirements to which they are subject.
As of September 22, 1997, the most recent notifications from the OCC
categorized FirstBank as well capitalized under the regulatory framework for
prompt corrective action. FBM has not received any notification from the OCC,
but was required to be well capitalized. To be categorized as well
capitalized, an institution must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the following tables.
There are no conditions or events since that notification that management
believes have changed the Banks' categories.
The Company's and the Banks' actual capital amounts and ratios are also
presented in the table as follows (in thousands of dollars):
MINIMUM REQUIRED
TO BE WELL
CAPITALIZED
MINIMUM REQUIRED UNDER PROMPT
FOR CAPITAL CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------ ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ----- -----
At December 31, 1998:
Tier I Capital (to
Average Assets):
Consolidated $12,131 11.1% $ 4,359 4.0% $5,449 5.0%
FirstBank 8,165 8.2% 4,007 4.0% 5,009 5.0%
FBM 4,673 63.1% 296 4.0% 444 5.0%
62
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 19 - MINIMUM REGULATORY CAPITAL REQUIREMENTS (CONTINUED):
MINIMUM REQUIRED
TO BE WELL
CAPITALIZED
MINIMUM REQUIRED UNDER PROMPT
FOR CAPITAL CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------ ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ----- -----
At December 31, 1998
(Continued):
Tier I Capital (to
Risk Weighted
Assets):
Consolidated $12,131 17.6% $ 2,752 4.0% $4,129 6.0%
FirstBank 8,165 12.8% 2,554 4.0% 3,831 6.0%
FBM 4,673 111.4% 168 4.0% 252 6.0%
Total Capital (to
Risk Weighted
Assets):
Consolidated $12,943 18.8% $ 5,504 8.0% $6,881 10.0%
FirstBank 8,964 14.0% 5,108 8.0% 6,386 10.0%
FBM 4,686 111.7% 335 8.0% 419 10.0%
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%
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%
NOTE 20 - first securities corporation:
FSC completed its first year of operations in 1997. Financial information
pertaining only to FSC is as follows:
DECEMBER 31,
1998 1997
---- ----
Total assets $ 61,007 $ 73,000
======== ========
63
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 20 - first securities corporation (CONTINUED):
YEARS ENDED DECEMBER 31,
1998 1997
---- ----
Gross commission income $137,797 $ 40,400
======== ========
Net loss $ 16,446 $ 24,350
======== ========
NOTE 21 - CONDENSED FINANCIAL STATEMENTS:
Presented below are the condensed financial statements for
FirstBancorporation, Inc.
(parent company only):
DECEMBER 31, DECEMBER 31,
1998 1997
---- ----
Balance Sheets:
Assets:
Cash $ 1,169,835 $ 15,586
Investment in banking subsidiaries 12,832,257 7,864,255
Other assets 222,561 109,847
-------------------------------
Total assets $14,224,653 $ 7,989,688
===============================
Liabilities:
Amounts due to banking subsidiaries $ - $ 7,241
Other liabilities - 1,446
Long-term debt 2,100,000 -
Stockholders' equity 12,124,653 7,981,001
-------------------------------
Total liabilities and
stockholders' equity $14,224,653 $ 7,989,688
===============================
Statements of Income:
Dividends from banking subsidiaries $ 860,000 $ 100,000
Interest 1,281 -
-------------------------------
Total income $ 861,281 $ 100,000
===============================
Expenses:
Interest $ 53,375 $ -
Compensation - 16,915
Amortization 8,076 7,887
Other 21,027 31,275
-------------------------------
Income before equity in undistributed
earnings of subsidiaries 778,803 43,923
Applicable income tax benefit 20,769 21,310
Equity in undistributed earnings of
subsidiaries (33,548) 882,125
-------------------------------
Net income $ 766,024 $ 947,358
===============================
64
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 21 - CONDENSED FINANCIAL STATEMENTS (CONTINUED):
DECEMBER 31, DECEMBER 31,
1998 1997
---- ----
Balance Sheets:
Assets:
Cash $ 1,169,835 $ 15,586
Statements of Cash Flows:
Cash flows from operating activities:
Net income $ 766,024 $ 947,358
Adjustments to reconcile net
income to net cash provided by
operating activities:
Amortization expense 23,090 7,887
Increase in other assets (27,913) (78,145)
Increase (decrease) in other
liabilities (8,687) 8,687
Equity in undistributed earnings
of subsidiaries 33,548 (882,125)
Net cash provided by operating -------------------------------
activities 786,062 3,662
Cash flows from investing activities:
Investment in FBM (5,107,892) -
-------------------------------
Net cash used in investing activities (5,107,892) -
Cash flows from financing activities:
Proceeds from issuance of long-term
debt 2,100,000 -
Common stock issued 3,490,699 -
Stock issuance cost (114,620) (7,470)
-------------------------------
Net cash provided (used) by
financing activities 5,476,079 (7,470)
-------------------------------
Net increase (decrease) in cash and
cash equivalents 1,154,249 (3,808)
Cash at beginning of year 15,586 19,394
-------------------------------
Cash at end of year $ 1,169,835 $ 15,586
===============================
NOTE 22 - OTHER COMPREHENSIVE INCOME:
The components of other comprehensive income and related tax effects are as
follows:
YEARS ENDED DECEMBER 31,
1998 1997 1996
---- ---- ----
Unrealized holding losses on
available-for-sale securities $20,846 $23,383 $17,631
Less: Reclassification adjustment
for gains (losses) realized in
income (expense) - - -
------- ------- -------
Net unrealized losses 20,846 23,383 17,631
Tax effect (7,898) (8,886) (6,700)
------- ------- -------
Net-of-tax amount $12,948 $14,497 $10,931
======= ======= =======
65
<PAGE>
<PAGE>
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 23 - SUBSEQUENT EVENTS:
The Boards of Directors of the Company and First National Corporation (FNC)
approved on March 4, 1999, a merger of the two companies. In the merger, the
Company's stockholders will receive 1.222 shares of FNC common stock for each
share of the Company's common stock. The merger is anticipated to be
accounted for as a pooling-of-interests and a tax-free reorganization.
Consummation of the merger is subject to several conditions, including the
receipt of applicable regulatory approvals and approval by the stockholders of
both companies.
THESE NOTES ARE AN INTEGRAL PART OF THE ACCOMPANYING CONSOLIDATED FINANCIAL
- ---------------------------------------------------------------------------
STATEMENTS
- ----------
66
<PAGE>
<PAGE>
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
None.
PART III
- --------
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
- ----------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
- -------------------------------------------------
The Company's Board of Directors presently consists of ten directors as
required by the Company's Bylaws. The Board of Directors is divided into
three classes with staggered terms, and each director is elected for a
three-year term after their initial election by shareholders. The executive
officers of the Company and the Banks are elected annually and hold office
until their respective successors have been elected and qualified or until
resignation or removal by the Board of Directors.
<TABLE>
The following table sets forth certain information regarding the Directors and Executive Officers of
the Company.
Year First Year
Principle occupation Elected Term
Name Age(1) During the past five years Director Expires
- ---- ------ -------------------------- -------- -------
<S> <C> <C> <C> <C>
Laurance H. Davis, Jr. 69 Secretary of Bundy Appraisal and 1986(2) 1999
Management, Inc., Beaufort, South
Carolina.
Jerry H. Reeves, III 68 President and owner of Resort 1993(2) 1999
Services, Inc., Bluffton, South
Carolina, a wholesale bed and
bath linen supplier.
Carson R. Rentz 75 President and owner of Coastal 1986(2) 1999
Contractors, Inc., Beaufort, South
Carolina, a residential and
commercial construction company.
Richard L. Gray 68 President of Grayco, a lumber and 1986(2) 2000
home products company.
Robert A. Kerr 78 Retired commercial bank executive. 1988(2) 2000
William C. Robinson 57 Certified public accountant, 1986(2) 2000
Robinson, Grant & Co., P.A.
James A. Shuford, III 47 President and Chief Executive Officer 1993(2) 2000
of the Company; President and
Chief Executive Officer of FirstBank, N.A.
and director of FirstBank of the Midlands, N.A.
</TABLE> 67
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C>
Colden R. Battey, Jr. 63 Chairman of the Board of the 1986(2) 2001
Company and FirstBank, N.A. and
director of FirstBank of the Midlands,
N.A.; Senior Partner of Harvey & Battey
Law Firm, Beaufort, South Carolina.
Russell L. Jeter 57 President and Owner of Jeter 1986(2) 2001
Construction Company, Beaufort,
South Carolina, a paving contractor.
James D. Neighbors 68 Retired; President of FirstBank, N.A. 1986(2) 2001
from 1986 to 1993.
</TABLE>
<PAGE>
- --------------
(1) At December 31, 1998.
(2) Includes prior service on the Board of Directors of FirstBank, N.A. and
its predecessor, The Savings Bank of Beaufort County, FSB.
Section 16(a) of the Exchange Act requires the Company's executive officers
and directors, and persons who own more than 10% of any registered class of
the Company's equity securities, to file reports of ownership and changes in
ownership with the SEC within prescribed time periods. Executive officers,
directors and greater than 10% shareholders are required by regulation to
furnish the Company with copies of all Section 16(a) forms they file.
On September 17, 1998, the Company, on behalf of officers and directors,
filed a Form 4 for each of the following directors and officers for shares
acquired in its secondary stock offering which closed on August 31, 1998:
Colden R. Battey, Jr., Laurance H. Davis, Jr., Richard L. Gray, Jr., Russell
L. Jeter, Robert A. Kerr, James D. Neighbors, Jerry H. Reeves, Carson R.
Rentz, William C. Robinson, James A. Shuford, III, James L. Pate, III,
Christine W. Beckert, and Richard E. Morgan, Jr. Based solely on its review
of the copies of such forms it has received and written representations
provided to the Company by the above referenced persons, the Company believes
that during the year ended December 31, 1998, all other filing requirements
applicable to its reporting officers, directors and greater than 10%
shareholders were properly and timely complied with.
ITEM 10: EXECUTIVE COMPENSATION
Summary Compensation Table. The following information is furnished for Mr.
Shuford. All compensation is paid by FirstBank, N.A.
Annual Compensation
----------------------------------------
Name and Other Annual All Other
Position Year Salary Bonus Compensation Compensation
---- ------ ----- ------------ ------------
James A. Shuford, III 1998 $117,605 $17,760 $10,259(1) $ 2,966(2)
President 1997 105,923 15,750 9,467 2,711
1996 99,781 4,900 9,510 1,767
- ------------
(1) Includes health and life insurance premium payments ($6,154) and
other perquisites ($4,105).
(2) Consists of matching contribution made by FirstBank, N.A. under the
401(k) Plan.
Employment Agreement. Effective November 15, 1995, the Company and
FirstBank, N.A. entered into an amended and restated employment agreement
("Agreement") with James A. Shuford, III, President and Chief Executive
Officer of the Company and FirstBank, N.A., to reflect the addition of the
Company as a party to Mr. Shuford's prior employment agreement dated October
20, 1993. The Agreement provides for an 18-month term which is extended each
month for an additional month. Currently, all
68
<PAGE>
<PAGE>
compensation and benefits provided to Mr. Shuford under the Agreement are
provided by FirstBank, N.A. The Agreement provides for annual salary review
by the Board of Directors of FirstBank, N.A. Mr. Shuford's current base
salary is $125,000. In addition, Mr. Shuford is eligible to participate in
all benefit or incentive plans which FirstBank, N.A. makes available to
similarly situated senior executive officers.
In the event of Mr. Shuford's termination without cause during the term of
the Agreement, FirstBank, N.A. is obligated to continue payment of Mr.
Shuford's then current base salary through the expiration of the current term
of the Agreement. In the event of Mr. Shuford's involuntary termination
following a change in control of the Company or FirstBank, N.A. (as defined in
the Agreement), FirstBank, N.A. is obligated to provide Mr. Shuford with a
payment equal to 2.999 times the highest base salary payable during any of the
five fiscal years preceding his termination. In addition, Mr. Shuford would
be eligible to receive continued coverage for a three-year period at
FirstBank, N.A.'s expense under its other employee benefit programs. Mr.
Shuford would receive similar payments and benefits in the event of his
resignation following a change in control upon the occurrence of certain
events, including a reduction in the level of his compensation prior to the
change in control. In the event that a change of control of the Company or
FirstBank, N.A. had occurred on January 1, 1999, based solely on the cash
compensation paid to Mr. Shuford during 1998 and excluding the value of any
other employee benefits which may be payable, Mr. Shuford would have received
a payment of approximately $374,875.
Option Grants. No options were granted to Mr. Shuford during the fiscal
year ended December 31, 1998.
Option Exercise/Value Table. The following information is provided for Mr.
Shuford.
Number of Dollar
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options Options
at Fiscal at Fiscal Year
Shares Year End(#) End($) Name
Acquired Dollar ----------------- ----------------
on Value Exer- Unexer- Exer- Unexer-
Exercise (#) Realized($) cisable cisable cisable cisable
------------ ----------- ------- ------- ------- --------
James A.
Shuford, III -- -- 2,426 13,341 17,661 102,592
Directors' Compensation
FirstBank, N.A. pays all directors' fees of FirstBancorporation, Inc. and
FirstBank, N.A. The Chairman of the Board receives a monthly fee of $800.
Each director who serves on the Executive Committee receives a monthly fee of
$600. Except for James A. Shuford, III, all other directors receive a monthly
fee of $500. FirstBank of the Midlands pays its directors fees. Its Chairman
receives $500 per month. All other outside directors receive $300 per month.
Mr. Shuford, who is an officer of the Company and FirstBank, N.A. and F. Wayne
Lovelace who is an officer of FirstBank of the Midlands, N.A. do not receive
fees. Total fees paid to directors during the fiscal year ended December 31,
1998 were $70,000.
Directors of the Company and of FirstBank, N.A. also participate in the
Company's stock option plan.
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Persons and groups who beneficially own in excess of 5% of the Company's
Common Stock are required to file certain reports with the Securities and
Exchange Commission ("SEC"), and furnish a copy to the Company, regarding such
ownership pursuant to the Securities Exchange Act of 1934, as amended
("Exchange Act"). Based upon such reports, the following table sets forth, as
of the Record Date, certain information as to those persons who were
beneficial owners of more than 5% of the outstanding
69
<PAGE>
<PAGE>
shares of Common Stock. Management knows of no persons other than those set
forth in (b) below who owned more than 5% of the outstanding shares of Common
Stock as of the Record Date.
(b) Security Ownership of Management
The table sets forth, as of the Record Date, information as to the shares
of Common Stock beneficially owned by each director and by all executive
officers and directors of the Company as a group.
Amount and Nature Percent of
of Beneficial Common Stock
Beneficial Owner Ownership(1) Outstanding
- ---------------- ------------ -----------
Directors
Colden R. Battey, Jr.,
Chairman of the Board 73,785(2) 7.66%
Russell L. Jeter 52,003 5.40
James D. Neighbors 15,697 1.63
Laurance H. Davis, Jr. 1,225 .13
Richard L. Gray 76,362 7.93
Robert A. Kerr 17,991 1.87
Jerry H. Reeves, III 7,737 .80
Carson R. Rentz 29,946 3.11
William C. Robinson 27,278 2.83
Named Executive Officer*
James A. Shuford, III, President** 4,690 .49
All Executive Officers and 314,674(3) 32.67
Directors as a group (11 persons)
- ------------
* Under SEC regulations, the term "named executive officer" is defined to
include the chief executive officer, regardless of compensation level,
and the four most highly compensated executive officers, other than the
chief executive officer, whose total annual salary and bonus for the
last completed fiscal year exceeded $100,000. Mr. Shuford was the
Company's only "named executive officer" for the fiscal year ended
December 31, 1998.
** Mr. Shuford is also a director of the Company.
(1) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed
to be the beneficial owner, for purposes of this table, of any shares of
the Company's Common Stock if he or she has voting and/or investment
power with respect to such security or has a right to acquire, through
the exercise of outstanding options or otherwise, beneficial ownership
at any time within 60 days from the Record Date. The table includes
shares owned by spouses, other immediate family members in trust, shares
held in retirement accounts or funds for the benefit of the named
individuals, and other forms of ownership, over which shares the named
persons possess voting and/or investment power.
(2) Includes pro-rata ownership of shares held by the Harvey & Battey Law
Firm pension plan, of which Mr. Battey is a senior partner, over which
Mr. Battey has voting and investment power of 6,514 shares. Includes
2,700 shares owned by the Harvey and Battey Law Firm over which Mr.
Battey has voting and investment power.
(3) Includes an aggregate of 5,260 shares subject to outstanding stock
options exercisable within 60 days of the Record Date.
(c) Changes in Control
Except for the merger agreement which is discussed in "Item 1: Description
of Business" of this Report, the Company is not aware of any arrangements,
including any pledge by a person of securities of the Company, the operation
of which may at a subsequent date result in a change in control of the
Company.
70
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ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
FirstBank, N.A., as successor to The Savings Bank of Beaufort County, FSB,
has entered into a noncancelable operating lease for its main office facility
and for additional office space and parking with First Patriots Partnership
("Partnership"), a partnership among Directors Battey, Gray, Jeter, Rentz, and
Kerr. These leases provide for lease terms 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. FirstBank, N.A. paid $122,852 in
related lease expense for fiscal year 1998.
FirstBank, N.A., as successor to The Savings Bank of Beaufort County, FSB,
has also entered into an operating lease with Director Gray for FirstBank,
N.A.'s Lady's Island Branch Office. The current lease term is five years
which expires in 2003 with one additional option to renew for five more years.
The lease is subject to rent escalations based on the Consumer Price Index for
All Urban Consumers published by the Bureau of Labor Statistics of the United
States Department of Labor. FirstBank, N.A. paid $41,594 in related lease
expense for fiscal year 1998.
FirstBank, N.A. and FirstBank of the Midlands, N.A. are required under
federal law not make any loan or extension of credit in any manner to any of
its executive officers or directors, or to any person who directly or acting
through or in concert with one or more persons, owns, controls, or has the
power to vote more than 10% of any class of voting securities of such
institution, or to any company controlled by such executive officer, director,
or person, or to any political or campaign committee the funds or services of
which will benefit such executive officer, director, or person or which is
controlled by such xecutive officer, director, or person, unless such loan or
extension of credit is made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other persons and does not involve more than the normal risk
of repayment or present other unfavorable features. FirstBank, N.A. and
FirstBank of the Midlands, N.A., therefore, are prohibited from making any new
loans or extensions of credit to FirstBank, N.A.'s and FirstBank of the
Midlands, N.A.'s executive officers and directors at different rates or terms
than those offered to the general public and has adopted a policy to this
effect. FirstBank, N.A. and FirstBank of the Midlands, N.A. make loans to its
directors, officers, and employees in the ordinary course of business on
substantially the same terms, including interest rate and collateral, as
similar loans to unrelated parties. Management believes that such loans do
not involve more than normal risk of collectibility or present other
unfavorable features. All loans to related parties, and any subsequent
renewal thereof, are approved by a majority of the board of directors of the
applicable bank, with the related party abstaining from the vote. At December
31, 1998, loans to executive officers and directors amounted to approximately
$1.5 million, all of which were performing according to their respective terms
at that date.
PART IV
- -------
ITEM 13: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a) Exhibits
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)
71
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<PAGE>
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 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)
10.9 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 Columbia, South Carolina Office (incorporated by
reference on Registration Statement on Form SB-2)
(21) Subsidiaries of the Registrant
(27) Financial Data Schedule
(b) The Company did not file any Reports on Form 8-K during the quarter ended
December 31, 1998.
72
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(D) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FirstBancorporation, Inc.
Dated: March 22, 1999
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, Chief Executive Officer
(Principal Finance and and Director (Principal
Accounting Officer) Executive Officer)
March 22, 1999 March 22, 1999
/s/ Colden R. Battey, Jr. /s/ Laurance H. Davis, Jr.
- ----------------------------- ---------------------------------
Colden R. Battey, Jr. Laurance H. Davis, Jr.
Director, Chairman of the Board Director, Secretary
March 22, 1999 March 22, 1999
/s/ Richard L. Gray /s/ Russell L. Jeter
- ----------------------------- ---------------------------------
Richard L. Gray Russell L. Jeter
Director Director
March 22, 1999 March 22, 1999
/s/ Robert A. Kerr, Sr.
- ----------------------------- ---------------------------------
Robert A. Kerr, Sr. James D. Neighbors
Director Director
March 22, 1999 March 22, 1999
/s/ Carson R. Rentz
- ----------------------------- -------------------------
Jerry H. Reeves, III Carson R. Rentz
Director Director
March 22, 1999 March 22, 1999
/s/ William C. Robinson
- -----------------------------
William C. Robinson
Director
March 22, 1999
73
<PAGE>
<PAGE>
Exhibit 21
Subsidiaries of Registrant
Parent
------
FirstBancorporation, Inc.
Jurisdiction or
Subsidiaries Percentage owned State of Incorporation
- ------------ ---------------- ----------------------
FirstBank, N.A. 100% United States
FirstBank of the Midlands, N.A. 100% United States
First Securities Corporation 100% South Carolina
--------------
(a) The operation of the Company's wholly-owned subsidiaries is included in
the Company's Financial statements contained in Item 7, Financial Statements
of this Report.
(b) First Securities Corporation is a wholly-owned subsidiary of FirstBank,
N.A.
74
<PAGE>
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