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Filed pursuant to Rule 424(b)1
Reg. No. 333-67011
(THE BANC CORPORATION LOGO)
1,000,000 SHARES OF COMMON STOCK
This is a public offering of our Common Stock. There is no established
public trading market for our Common Stock. The public offering price per share
for our Common Stock is $11.00. See "Underwriting" for the factors considered in
determining the public offering price. The public offering price may not reflect
the market price of our Common Stock after the offering.
Trading Symbol = Nasdaq National Market System -- "TBNC"
WE URGE YOU TO READ CAREFULLY THE "RISK FACTORS" SECTION BEGINNING ON PAGE
4, ALONG WITH THE REST OF THIS PROSPECTUS, BEFORE YOU MAKE YOUR INVESTMENT
DECISION.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Public Price................................................ $11.00 $11,000,000
Underwriting Discount....................................... $ .77 $ 770,000
Proceeds to Corporation..................................... $10.23 $10,230,000
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PLEASE NOTE THAT THESE SECURITIES:
- ARE NOT BANK ACCOUNTS OR DEPOSITS;
- ARE NOT FEDERALLY INSURED BY THE FDIC; AND
- ARE NOT INSURED BY ANY OTHER STATE OR FEDERAL AGENCY.
The shares of Common Stock are being offered by the Underwriters on a firm
commitment basis. The Underwriters have an option to purchase up to 150,000
additional shares of Common Stock on the same terms and conditions as set forth
above. See "Underwriting."
---------------------
STERNE, AGEE & LEACH, INC.
THE DATE OF THIS PROSPECTUS IS DECEMBER 10, 1998.
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[MAP OF LOCATIONS]
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PROSPECTUS SUMMARY
This summary highlights selected information from this Prospectus and does
not contain all of the information that you need to consider in making your
investment decision. To understand all of the terms of the offering of the
Common Stock, read this entire Prospectus carefully, especially the information
set forth under the heading "Risk Factors" beginning on page 4. Unless otherwise
indicated, the information in this Prospectus assumes that the Underwriters'
over-allotment option will not be exercised.
THE BANC CORPORATION AND THE BANK
The Banc Corporation is a registered bank holding company incorporated
under the laws of Delaware and headquartered in Birmingham, Alabama. The Banc
Corporation is the result of several recent mergers. The Banc Corporation was
established in April 1998 so that Warrior Capital Corporation, an Alabama bank
holding company, could merge into The Banc Corporation, and thereby change its
name to "The Banc Corporation" and its domicile from Alabama to Delaware.
Warrior merged with The Banc Corporation on September 24, 1998. Before it merged
with Warrior, The Banc Corporation was a shell corporation with no independent
operations.
The principal subsidiary of The Banc Corporation is The Bank, an Alabama
banking corporation headquartered in Birmingham, Alabama. The Bank is 99.75%
owned by The Banc Corporation. Prior to the merger of Warrior Capital
Corporation into The Banc Corporation, The Bank was a subsidiary of Warrior and
The Bank became a 99.75% owned subsidiary of The Banc Corporation when Warrior
merged into The Banc Corporation. The Bank has been in business as a full
service commercial and retail bank since it was established in 1957. Before its
name was changed in February 1998, The Bank was known as Warrior Savings Bank.
Since the Warrior Merger, The Banc Corporation has acquired one bank and three
bank holding companies. As a result, The Bank now has 17 branches in Alabama.
The Banc Corporation has also entered into an agreement that, if completed, will
add four thrift locations in the panhandle of Florida. The Warrior Merger and
the acquisitions, as well as their dates of completion, are summarized as
follows:
<TABLE>
<CAPTION>
WARRIOR MERGER AND ACQUISITION DATE
------------------------------ ----
<S> <C> <C>
- - Warrior Capital Corporation merges into The Banc September 24, 1998
Corporation, and The Bank (formerly known as Warrior
Savings Bank) becomes a subsidiary of The Banc Corporation
- - Commercial Bancshares of Roanoke, Inc. and its subsidiary, October 16, 1998
The Commercial Bank of Roanoke (2 branches)
- - City National Corporation and its subsidiary, City October 30, 1998
National Bank of Sylacauga (3 branches)
- - First Citizens Bancorp, Inc. and its subsidiary, First October 30, 1998
Citizens Bank of Monroe County (3 branches)
- - Commerce Bank of Alabama (4 branches) November 6, 1998
- - Emerald Coast Bancshares, Inc. and its subsidiary, Emerald Pending
Coast Bank (4 branches)
</TABLE>
These acquisitions are collectively referred to in this Prospectus as the
"Acquisitions." As a result of the Acquisitions, the Corporation will have
assets of approximately $486.5 million, loans of approximately $309.3 million,
deposits of approximately $414.5 million and stockholders equity of
approximately $48.6 million.
The Banc Corporation's management team has historically been successful in
the integration of multiple community banking organizations. The Banc
Corporation plans to capitalize on this experience to achieve projected revenue
enhancements and cost savings after the Acquisitions. The Banc Corporation has
also retained the existing Board of Directors at each of its acquired banks in
order to insure personalized, responsive, quality service for individuals and
local and regional businesses. The Banc Corporation believes that its operating
philosophy of decentralized decision making supplemented by centralized policy
oversight, credit review and management systems will result in significant
internal loan and deposit growth. The Banc
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Corporation's growth strategy also includes opening new branches as well as the
acquisition of other financial institutions and branches.
The principal executive offices of The Banc Corporation and The Bank are
located at 17 North 20th Street, Birmingham, Alabama 35203, and its telephone
number is (205) 326-2265. When the term "Corporation" is used in this
Prospectus, it refers to The Banc Corporation and its predecessor, Warrior, and
its respective subsidiaries and affiliates, including The Bank, unless the
context requires otherwise.
THE OFFERING
Common Stock offered by the
Corporation.............. 1,000,000(1)
Common Stock outstanding
after this offering....... 10,647,858(1)
Net Proceeds............... $9.9 million (after underwriting discount and
estimated offering expenses of $330,000).
Use of Proceeds............ To repay the Corporation's $6.3 million of
outstanding debt existing under a $10 million
line of credit. The remainder will be used as
working capital to position the Corporation for
future internal growth, possible acquisitions and
general corporate purposes.
Nasdaq NMS Symbol.......... TBNC
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(1) Excludes up to 150,000 shares of Common Stock which may be sold by the
Corporation upon exercise of the over-allotment option granted to the
Underwriters. See "Underwriting."
RISK FACTORS
You should read the "Risk Factors" section on page 4 carefully for a
discussion of specific risks related to an investment in the Common Stock.
NASDAQ LISTING
These shares have been approved for listing on the Nasdaq National Market
System under the trading symbol "TBNC".
MARKET AND DIVIDEND POLICY
To date, there is no established public trading market for the Corporation
Common Stock. There were approximately 925 holders of record of Corporation
Common Stock as of November 20, 1998. The Corporation has not paid dividends
this year, although Warrior paid cash dividends in the past. Any dividends paid
by the Corporation in the future will be subject to certain state law
restrictions, federal regulatory restrictions and contractual restrictions. Any
future payment of cash or stock dividends will depend on the Corporation's
financial condition, results of operations and other factors deemed relevant by
the Board of Directors.
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SUMMARY CONSOLIDATED AND PRO FORMA FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
--------------------------
AS OF AND FOR THE NINE
MONTHS ENDED AS OF AND
SEPTEMBER 30, 1998(3) FOR THE NINE
-------------------------- MONTHS AS OF AND FOR THE
CORPORATION ENDED YEAR ENDED DECEMBER 31,(5)(7)
EMERALD CORPORATION SEPTEMBER 30, -----------------------------------------
CBS CBS 1998 1997 1996 1995 1994
----------- ----------- ------------- -------- -------- -------- --------
(1)(5) (4)(5) (5)(7)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF FINANCIAL CONDITION
DATA:
Total assets....................... $486,496 $408,830 $366,200 $307,713 $250,955 $200,739 $149,515
Loans, net of unearned income...... 309,269 250,028 236,311 179,005 141,228 101,484 70,213
Allowance for loan losses.......... 4,419 3,733 3,422 2,129 1,690 1,477 1,246
Investment securities.............. 109,261 99,939 81,405 73,911 73,302 64,905 53,242
Deposits........................... 414,529 348,140 313,107 264,162 219,644 173,106 131,701
Other borrowed funds............... 14,800 10,300 3,000 559 1,849 2,300 --
Stockholders' equity............... 48,621 42,601 42,601 39,981 27,442 25,146 17,000
STATEMENT OF OPERATIONS DATA:
Interest income.................... 26,293 22,170 19,955 22,590 17,593 13,820 10,800
Interest expense................... 12,578 10,646 9,263 10,401 7,886 5,932 4,086
-------- -------- -------- -------- -------- -------- --------
Net interest income.......... 13,715 11,524 10,692 12,189 9,707 7,888 6,714
Provision for loan losses.......... 3,567 3,228 2,884 1,516 896 550 167
Noninterest income................. 3,060 2,638 1,924 2,205 1,956 1,621 1,461
Noninterest expense................ 14,214 11,960 10,483 9,913 8,663 7,285 5,524
-------- -------- -------- -------- -------- -------- --------
(Loss) income before tax benefit... (1,006) (1,026) (751) 2,965 2,104 1,674 2,484
(Loss) income tax benefit.......... (872) (880) (762) 891 647 326 638
-------- -------- -------- -------- -------- -------- --------
Net (loss) income............ $ (134)(2) $ (146)(2) $ 11(2) $ 2,074 $ 1,457 $ 1,348 $ 1,846
======== ======== ======== ======== ======== ======== ========
PER SHARE DATA:
Net (loss) income -- basic(6)...... $ (0.01) $ (0.02) $ -- $ 0.29 $ 0.21 $ 0.21 $ 0.34
Book value......................... 4.48 4.44 4.43 4.39 3.99 3.79 3.18
ASSET QUALITY RATIOS:
Allowance for loan losses to
nonperforming loans.............. 241.08% 203.66% 189.69% 114.65% 82.28% 190.34% 210.47%
Allowance for loan losses to loans,
net of unearned income........... 1.43 1.49 1.45 1.19 1.20 1.46 1.77
Nonperforming loans to loans, net
of unearned income............... 0.59 0.73 0.76 1.04 1.45 0.76 0.84
Net loan charge-offs to average
loans............................ 1.02(8) 1.23(8) 1.05(8) 0.66 0.58 0.37 0.25
CAPITAL RATIOS:
Leverage ratio..................... 9.89% 10.34% 11.63% 14.17% 12.31% 12.54% 11.42%
Average stockholders' equity to
average total assets............. 10.61 10.93 12.18 10.59 12.08 12.65 11.56
Tier 1 risk-based capital ratio.... 13.46 14.02 15.24 19.49 16.72 21.58 20.68
Total risk-based capital ratio..... 14.71 15.27 16.49 20.55 17.77 22.83 21.93
</TABLE>
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(1) Pro forma to reflect (a) the proposed Emerald Merger in which Emerald Coast
Bancshares, Inc. will be merged with and into the Corporation in exchange
for approximately 1,379,958 shares of Corporation Common Stock with the
merger being accounted for using the pooling of interests method, and (b)
the acquisition of Commercial Bancshares of Roanoke, Inc. for $7.3 million
in cash on October 16, 1998 which was accounted for using the purchase
method.
(2) Includes approximately $900,000 of non-recurring legal, accounting and
printing merger-related expenses, approximately $350,000 of non-recurring
expenses associated with opening new offices in Birmingham and Decatur, and
approximately $138,000 of non-recurring expenses related to Year 2000
preparations.
(3) The statement of financial condition data is presented as if the business
combinations had occurred on September 30, 1998. The statement of operations
data is presented as if such business combinations had occurred on January
1, 1998.
(4) Pro forma to reflect the CBS Purchase but excluding the effect of the
proposed Emerald Merger.
(5) The Summary Financial Data gives retroactive effect to the merger of The
Banc Corporation and Warrior Capital Corporation on September 24, 1998, and
the mergers of Commerce Bank of Alabama on November 6, 1998 and First
Citizens Bancorp, Inc. and City National Corporation on October 30, 1998
with the Corporation.
(6) Basic earnings per share is based on the weighted average number of shares
outstanding for the period. Basic earnings per share does not reflect the
effect (which is not material) of any possible dilution from outstanding
stock options under the Corporation Incentive Plan. See
"Business -- Incentive Plans."
(7) Excludes the effect of both the CBS Purchase and the proposed Emerald
Merger.
(8) On an annualized basis.
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RISK FACTORS
In addition to the other information contained in this Prospectus, you
should consider carefully the risk factors described below in evaluating the
Corporation and your decision to invest in the Corporation Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Forward Looking Statements" and "Business" for a description of
other factors ing the business of the Corporation generally.
RISK THAT INTEGRATING THE ACQUISITIONS COULD HAVE A NEGATIVE EFFECT ON EARNINGS
As a result of the acquisitions of City National Corporation, First
Citizens Bancorp, Inc. and Commerce Bank of Alabama (the "Completed Mergers")
and Commercial Bancshares of Roanoke, Inc. (the "CBS Purchase"), the Corporation
has acquired four additional banks which has increased the Corporation's asset
size from $118.3 million as of September 30, 1998, to $408.8 million. The
Corporation has also agreed to acquire by merger Emerald Coast Bancshares, Inc.
and its subsidiary Emerald Coast Bank (the "Emerald Merger"). As a result of the
proposed Emerald Merger, the Corporation plans to acquire and operate a thrift,
which will further increase the Corporation's asset size to $486.5 million as of
September 30, 1998. Assuming the Emerald Merger is completed, the Corporation
will increase its number of branch locations from five to 21, and the resulting
market area of the Corporation will extend from Decatur and Guntersville in
north Alabama, to Destin and Panama City in the Florida panhandle. To be
successful, the Corporation must integrate the operations of Commerce Bank of
Alabama ("Commerce"), First Citizens Bancorp, Inc. ("First Citizens"), City
National Corporation ("City National"), Emerald Coast Bancshares, Inc.
("Emerald") and Commercial Bancshares of Roanoke, Inc. ("CBS") (collectively,
the "Companies") and their subsidiaries with those of the Corporation and The
Bank. The Corporation faces a significant challenge in integrating and managing
the businesses of these companies. To integrate the Acquisitions operationally,
the Corporation must:
- consolidate management and responsibility;
- consolidate the data processing operations;
- combine the employee benefit plans;
- create joint account and lending products;
- develop a unified marketing plan;
- develop a unified investment policy and adjust the combined investment
portfolio to comply with such policy;
- develop a unified loan policy and reestablish lending authority; and
- develop a unified loan loss reserve policy.
Integrating the Acquisitions may detract attention from the day-to-day
business of the Corporation or result in unexpected costs to the Corporation.
The future prospects of the Corporation will depend on a number of factors,
including, among others:
- the Corporation's ability to integrate the businesses acquired in the
Acquisitions at a reasonable cost;
- its ability to compete effectively in new market areas;
- its success in retaining earning assets, including loans, acquired in the
Acquisitions;
- its ability to generate new earning assets;
- its ability to achieve cost savings, which the Corporation estimates will
equal $400,000, and revenue enhancements, which the Corporation estimates
will equal $850,000 annually from the Acquisitions; and
- its ability to attract and retain qualified management and other
appropriate personnel.
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If the Corporation fails to achieve any of these goals, that failure might
have a material adverse effect on the financial condition and results of
operations of the Corporation. See "Business -- Acquisitions" and
"Business -- Strategy."
FAILURE TO COMPLETE THE EMERALD MERGER
The Corporation has agreed to merge with Emerald, but the Emerald Merger
has not been completed and has not been approved by the necessary regulatory
agencies. The Corporation believes that the Emerald Merger will be approved and
will be completed; however, there is the possibility that the Emerald Merger
will not be approved by the necessary regulatory agencies or that the regulatory
agencies will require unacceptable changes to the terms or structure of the
Emerald Merger as a condition to granting approval. If the Corporation is unable
to complete the Emerald Merger, the Corporation would have fewer assets and
deposits, less stockholders equity, be less diverse and cover fewer banking
markets than it anticipates having after the Emerald Merger. In addition, the
Corporation could achieve fewer cost savings or less revenue enhancements than
it currently anticipates achieving from the Acquisitions. See "-- Risk that
Integrating the Acquisitions Could Have a Negative Effect on Earnings." All of
these factors could have a material adverse effect on the Corporation's
financial condition or results of operations. See "Business -- Acquisitions" and
"Business -- Strategy."
ABILITY TO SUSTAIN GROWTH; PROFITABILITY AND POTENTIAL NEED FOR ADDITIONAL
CAPITAL
The Corporation believes its growth will depend on its ability to expand
its business through:
- internal growth;
- the opening of new branch offices in new markets; and
- the acquisition of other financial institutions or branches.
The Corporation's ability to grow profitably through the opening of new
branches depends primarily on, among other things, the Corporation's ability to:
- identify profitable or growing markets and acquire or establish branch
locations in those markets at a reasonable cost;
- attract the necessary deposits to operate these new branches profitably;
and
- locate sound loans and investment opportunities in those markets.
Acquiring other financial institutions or branch offices involves these
same risks, but also involves additional risks, including, among others:
- adversely changing results of operations at the acquired entities;
- unforeseen liabilities or asset quality problems of the acquired
entities;
- greater than anticipated costs of integrating acquired businesses;
- adverse personnel relations;
- loss of customers; and
- deterioration of local economic conditions.
Furthermore, the Corporation's continued growth and profitability depend on
the Corporation's ability:
- to manage its growth;
- to attract and retain skilled employees;
- to finance its growth, if necessary, at an acceptable cost; and
- to expand the capabilities of the Corporation's management information
systems.
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The Corporation's growth strategy could have a material adverse effect on
the Corporation's financial condition and results of operations if the
Corporation is not able to manage its growth successfully or address adequately
all of the changing demands its planned growth may create. See
"Business -- Acquisitions" and "Business -- Strategy".
ADEQUACY OF ALLOWANCE FOR LOAN LOSSES
Lending money is an essential part of the banking business. However,
borrowers do not always repay their loans. The risk of non payment is affected
by, among other things:
- the duration of the loan;
- credit risks of a particular borrower;
- changes in economic and industry conditions; and
- in the case of a collateralized loan, uncertainties as to the future
value of the collateral.
The Corporation attempts to maintain an appropriate allowance for loan
losses to provide for potential losses in its loan portfolio. The amount of the
allowance for loan losses is periodically determined by management based upon
consideration of several factors, including, among others:
- an ongoing review of the quality, mix and size of the overall loan
portfolio;
- historical loan loss experience;
- evaluation of non-performing loans;
- assessment of economic conditions and their effects on the existing
portfolio; and
- the amount and quality of collateral, including guarantees, securing
loans.
There is no precise method of predicting loan losses; therefore, there can
be no assurance that the allowance for loan losses will be sufficient to absorb
future loan losses. Excess loan losses could have a material adverse effect the
Corporation's financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Allocation of the Allowance for Loan Losses."
INTEREST RATE RISK AND ASSET/LIABILITY MANAGEMENT
The Corporation's operating results are dependent to a significant degree
on its net interest income. Net interest income is the difference between
interest earned and interest paid. The Corporation earns interest on loans,
interest-bearing deposits in other financial institutions and investment and
mortgage-backed securities. The Corporation pays interest on deposits and funds
it borrows. Like most banks, The Bank's interest earned and interest paid will
change as interest rates fluctuate. That will, in turn, cause assets and
liabilities to reprice. Interest rates fluctuate, and therefore assets and
liabilities reprice, due to a variety of factors, including general economic
conditions, the policies of various regulatory authorities and other factors
beyond the Corporation's control.
When interest rates are rising, the interest income earned on assets may
not increase as rapidly as the interest expense paid on the Corporation's
liabilities. As a result, the earnings of the Corporation may be adversely
affected when the cost of the Corporation's liabilities increases more rapidly
than the income earned on the Corporation's assets. The degree to which earnings
might be adversely affected depends upon the rapidity and extent of any increase
in interest rates. In addition, rising interest rates may decrease the
Corporation's earnings by diminishing loan demand and increasing the risk of
delinquencies as adjustable-rate loans reprice and the payment amounts increase.
As a result of declining interest rates, the Corporation's investment
portfolio has experienced significant appreciation in value which can be
realized through the sale of these investments. The Corporation intends to use
the proceeds from any such sales to fund new loans. However, if the Corporation
cannot generate enough
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loans to absorb these proceeds, the Corporation instead would reinvest the funds
in investment securities, which because of the recent decline in interest rates,
may provide a lower rate of return to the Corporation than loans. If this were
to occur, it could have a material adverse effect on the Corporation's financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
GEOGRAPHIC CONCENTRATION; SIGNIFICANCE OF LOCAL ECONOMIC CONDITIONS
Substantially all of the Corporation's deposits and assets at September 30,
1998, were derived from operations in relatively rural markets of Alabama.
Consequently, the Corporation's profitability may be negatively affected by
factors that have a significant impact on agriculture, including weather. Some
of The Bank's market areas have experienced severe weather in 1998, primarily
heavy rains and flooding. See "Business."
The success of the Corporation depends on the general economic conditions
in the geographic markets served by The Bank. Although current economic
conditions in these markets are favorable, there is no assurance that favorable
economic conditions will continue. Adverse changes in economic conditions in the
geographic markets that the banks serve would likely impair The Bank's ability
to collect loans and could otherwise negatively affect the Corporation's
financial condition and results of operations. See "Business."
COMPUTER TECHNOLOGIES AND YEAR 2000 COMPLIANCE
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Corporation's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could cause a system failure or miscalculations resulting in
disruptions of operations, including, among other things, a temporary inability
to process transactions, send statements or engage in similar normal business
activities.
The Corporation believes that all of its material applications will be Year
2000 compliant before the end of 1999 and does not expect the costs of becoming
compliant to have a material adverse effect on the financial condition or
results of operations of the Corporation. However, because of the many
uncertainties associated with Year 2000 compliance issues, and because the
Corporation's assessment is necessarily based on information from its acquired
entities as well as third party vendors, there can be no assurance that the
Corporation's assessment is correct. For a discussion of the Corporation's
assessment of its potential Year 2000 exposure and the status of the
Corporation's program to become Year 2000 compliant, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000 Readiness Disclosure."
SUPERVISION AND REGULATION
Bank holding companies and banks operate in a highly regulated environment
and are subject to extensive supervision and examination by several federal and
state regulatory agencies. The Corporation is subject to the Bank Holding
Company Act (the "BHCA") and to regulation and supervision by the Federal
Reserve Board (the "Federal Reserve"). The Bank is subject to supervision and
regulation by the Federal Deposit Insurance Corporation (the "FDIC") and state
regulatory authorities. Additionally, Emerald will be subject to supervision and
regulation by the Office of Thrift Supervision (the "OTS"). These regulations
are intended primarily for the protection of depositors and consumers, rather
than for the benefit of stockholders. The Corporation is subject to changes in
federal and state law, as well as changes in regulatory and governmental
policies, income tax laws and accounting principles. The Corporation cannot
predict the future effect of any of those potential changes, but they could
materially adversely affect the Corporation's business and operations.
The Federal Reserve has adopted a policy that requires a bank holding
company, such as the Corporation, to serve as a source of financial strength to
its banking subsidiaries. The Federal Reserve has ordered bank holding companies
to contribute cash to any of their bank subsidiaries that are troubled based
upon this "source of strength" policy. Any such required cash contribution could
decrease funds available for
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distributions to stockholders. In addition, the Federal Reserve could require a
bank holding company, in certain circumstances, to guarantee the capital plan of
an undercapitalized banking subsidiary. Neither the Bank nor any of the banks
acquired, or to be acquired, in the Acquisitions is currently undercapitalized,
but there is no guarantee that they will not become undercapitalized in the
future.
The Federal Reserve has also established a required leverage ratio to
evaluate the capital adequacy of bank holding companies. The leverage ratio is
equal to Tier 1 Capital (stockholders' equity plus minority interest in
subsidiary, less goodwill and unrealized gain on securities available for sale)
divided by its average total consolidated assets. Bank holding companies are
required to maintain a minimum leverage ratio of 3% and bank holding companies
with a leverage ratio of 6% are deemed "well capitalized."
As of September 30, 1998, the Corporation's leverage ratio was 11.63%.
Additionally, the Corporation's Tier 1 capital to risk-based assets ratio was
15.24% and the Corporation's total capital to risk-based assets ratio was
16.49%. All three of these ratios are in excess of the "well capitalized"
standard set by the Federal Reserve. See "Supervision and Regulation."
GOVERNMENT REGULATION AND LEGISLATION
Regulatory agencies such as the FDIC and the Alabama Banking Department can
prohibit or limit The Bank's activities or force The Bank to take prompt
corrective action if the agencies deem The Bank's activities to be unsafe or
unsound. From time to time, legislation is proposed or enacted that would
increase the cost of doing business, limit or expand permissible activities or
affect the competitive balance between banks and other financial and
non-financial institutions. Congress, the Alabama legislature and various state
and federal bank regulatory agencies frequently propose changes to the laws and
regulations governing the operations and taxation of banks and other financial
institutions. The recent authorization of interstate branching is likely to
increase branching and merger activity and enhance competition among financial
institutions. It is impossible to predict the likelihood of additional changes
and the effects these changes might have on the Corporation or the banks
acquired, or to be acquired, in the Acquisitions. See "Supervision and
Regulation."
ANTI-TAKEOVER CONSIDERATIONS
The Corporation's Restated Certificate of Incorporation, its Bylaws and
Delaware law all contain provisions that could discourage potential acquisition
proposals, delay or prevent a change in control of the Corporation and limit the
price that investors may be willing to pay in the future for shares of
Corporation Common Stock. Among other things, the Corporation has a classified
board of directors that is divided into three classes serving staggered terms so
that no more than one-third of the seats of on the Board of Directors will be up
for election at each annual meeting of stockholders. Additionally, the
Corporation can issue, without further stockholder approval, preferred stock
with rights and privileges that could be senior to the Corporation Common Stock.
Further, Delaware law, subject to certain exceptions, prohibits the
Corporation, without approval of the Board of Directors, from engaging in a
broad range of business combinations with any "interested stockholder" for a
period of three years following the date that such stockholder became an
interested stockholder. An "interested stockholder" is generally a stockholder
who owns 15% of the outstanding Corporation Common Stock. See
"Management -- Classified Board of Directors," "Description of Capital
Stock -- Certain Provisions of the Corporation's Certificate and Delaware Law"
and "-- Possible Adverse Effects of the Issuance of Preferred Stock."
FDIC INSURANCE
Although deposits at The Bank will be insured by the FDIC to the maximum
amount permitted by law, shares of Corporation Common Stock are not bank or
deposit accounts. Thus, shares of Corporation Common Stock are not federally
insured by the FDIC or any other governmental agency.
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DIVIDEND HISTORY AND RESTRICTIONS ON ABILITY TO PAY DIVIDENDS
The Corporation has never paid dividends, and there can be no assurance
that dividends will be paid in the future. The Corporation will conduct its
principal business operations through its subsidiaries. The Corporation will
derive cash available to pay dividends primarily, if not entirely, from
dividends paid to the Corporation by its subsidiaries. Certain state and federal
legal and regulatory restrictions will limit the subsidiaries' ability to pay
dividends to the Corporation. The Corporation's ability to pay dividends to its
stockholders will depend on the Corporation's earnings and financial condition,
liquidity and capital requirements, the general economic and regulatory climate,
the Corporation's ability to service any equity or debt obligations senior to
the Corporation Common Stock and other factors deemed relevant by the
Corporation's Board of Directors. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Corporation," "Supervision and
Regulation" and "Dividend Policy."
DEPENDENCE ON MANAGEMENT
At this stage of the Corporation's development, its prospects for success
depend, to a significant degree, on the efforts of James A. Taylor, the
Corporation's Chairman of the Board and Chief Executive Officer. There is no
assurance that Mr. Taylor's services will remain available to the Corporation
indefinitely or that the Corporation will be successful under his management.
The Corporation maintains key employee insurance on Mr. Taylor in the amount of
$6 million. See "Management" and "Principal Stockholders."
COMPETITION
The banking business is highly competitive. The Bank competes as a
financial intermediary with other commercial banks, savings associations, credit
unions, mortgage banking companies, securities brokerage companies, insurance
companies and money market mutual funds operating in Alabama, the Florida
panhandle and elsewhere. Many of these competitors have substantially greater
resources and lending limits than the Corporation and The Bank and offer certain
services that the Corporation and The Bank do not provide. In addition,
non-depository institution competitors are generally not subject to the
extensive regulation applicable to the Corporation and The Bank. Pursuant to the
Riegle-Neal Interstate Banking and Branching Efficiency Act, commercial banks
may now acquire financial institutions nationwide, further increasing
competition. See "Business -- Competition."
MONETARY POLICY
Interest rates are largely dependent on the rate of interest charged by the
Federal Reserve from time to time for funds that it makes available to financial
institutions. Monetary policy has been volatile in recent months, and monetary
and fiscal authorities' actions may have an adverse effect on the deposit
levels, net interest margin, loan demand or the business and earnings of the
Corporation. See "Supervision and Regulation."
POSSIBLE ADVERSE EFFECTS OF THE ISSUANCE OF PREFERRED STOCK
The Corporation is authorized to issue up to 5,000,000 shares of preferred
stock, $.001 per share (the "Corporation Preferred Stock"). The Corporation's
Board of Directors may designate the rights and preferences of the Corporation
Preferred Stock. If Corporation Preferred Stock were to be issued, its effects
on the holders of Corporation Common Stock could include, among other things:
- reduction of the amount of money otherwise available for the payment of
dividends on Corporation Common Stock if dividends are payable on
Corporation Preferred Stock;
- restrictions on dividends on Corporation Common Stock if dividends on
Corporation Preferred Stock are in arrears;
- dilution of the voting power of Corporation Common Stock if the
Corporation Preferred Stock has voting rights, including a possible
"veto" power if the Corporation Preferred Stock has class voting rights;
- dilution of the equity interest of holders of Corporation Common Stock if
Corporation Preferred Stock is convertible, and is converted into
Corporation Common Stock; and
9
<PAGE> 12
- restrictions on the rights of holders of Corporation Common Stock to
share in the Corporation's assets upon liquidation until satisfaction of
any liquidation preference granted to the holders of Corporation
Preferred Stock.
Holders of Corporation Common Stock have no preemptive rights to purchase
or otherwise acquire any Corporation Preferred Stock that may be issued. See
"Description of Capital Stock."
CONTROL BY CERTAIN STOCKHOLDERS
As of November 6, 1998, the Corporation's directors and executive officers
own or control approximately 43.6% of the outstanding shares of Corporation
Common Stock without regard to Corporation Common Stock to be issued in this
Offering or the proposed Emerald Merger. See "Principal Stockholders."
Accordingly, if the directors and executive officers were to act in concert,
they would likely control the Corporation's Board of Directors and therefore the
business and policies of the Corporation. Furthermore, such control could
preclude any unsolicited acquisition of the Corporation and, consequently,
adversely affect the market price of the Corporation Common Stock.
ABSENCE OF ESTABLISHED PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
To date, there has been no established public market for the Corporation
Common Stock. There is no guarantee:
- that any market for the Corporation Common Stock will develop;
- that any market for the Common Stock that develops will be liquid;
- that you will be able to sell your Corporation Common Stock; or
- that you will be able to sell your Corporation Common Stock at any
particular price.
If a public market for the Corporation Common Stock develops, the market
price of Corporation Common Stock could fluctuate significantly due to
variations in quarterly and yearly results of operations, general trends in the
banking industry and other factors. Additionally, in recent years and especially
in recent months there have been price and volume fluctuations in the stock
market that often have been unrelated or disproportionate to the operating
performance of affected companies. These broad fluctuations might adversely
affect the market price of the Corporation Common Stock. See "Underwriting" for
the factors considered in determining the public offering price.
These shares have been approved for listing on the Nasdaq National Market
System under the trading symbol "TBNC".
DILUTION
If you purchase shares of Corporation Common Stock in this Offering, and
1,000,000 shares are sold at the public offering price of $11.00 per share, the
net tangible book value of your shares as of September 30, 1998 will be $4.92.
This is $6.08 less than your purchase price.
10
<PAGE> 13
FORWARD LOOKING STATEMENTS
You should note, in particular, that this Prospectus contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, relating to, without limitation, future economic performance, plans
and objectives of management for future operations and other financial items
that are based on the beliefs of management, as well as assumptions made by and
currently available to management. The words "estimate," "project," "intend,"
"anticipate," "expect" and similar expressions are intended to identify
forward-looking statements. These forward-looking statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those contemplated by the forward-looking statements. The cautionary
statements in the preceding "Risk Factors" section, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in this
Prospectus identify important factors the Corporation believes could cause
actual results to differ materially from those set forth in the forward looking
statements. You are cautioned not to place undue reliance on these forward
looking statements, which speak only to the date of this Prospectus. In addition
to considering factors set forth elsewhere in this Prospectus, you should
consider carefully the preceding risk factors before making a decision to
invest. These risk factors are not intended to represent a complete list of all
the general or specific risks that may affect the Corporation, and the order of
presentation of the preceding risks is not intended to be indicative of their
relative importance nor is the preceding intended to be inclusive of all risks
with respect to an investment in the Corporation Common Stock. You should
recognize that other risks including general economic factors and business
strategies, may be significant. In addition, the risks described above may
affect the Corporation to a greater extent than indicated. The Corporation
undertakes no obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date of
this Prospectus or to reflect the occurrence of unanticipated events. All
subsequent written and oral forward-looking statements attributable to the
Corporation or persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements contained or referred to above.
11
<PAGE> 14
USE OF PROCEEDS
The net proceeds to the Corporation from the sale of 1,000,000 shares of
Common Stock offered hereby are estimated to be approximately $9.9 million,
after deducting the underwriting discount and estimated offering expenses
payable by the Corporation of approximately $330,000, based on the public
offering price of $11.00 per share. The Corporation intends to use approximately
$6.3 million of the net proceeds to discharge its remaining outstanding
indebtedness existing under a $10 million line of credit maturing on January 1,
1999 with an interest rate of LIBOR plus 150 basis points (6.75% as of November
1, 1998). The Corporation originally borrowed $7.3 million under the line of
credit to fund the CBS Purchase and has since used the available credit for
working capital purposes. The Corporation intends to use the balance of the net
proceeds for general corporate purposes and working capital to position the
Corporation for future internal growth and possible acquisitions of other
financial institutions or their assets and related liabilities. The Corporation
frequently evaluates acquisition opportunities and from time to time enters into
discussions regarding possible acquisitions. However, other than the proposed
Emerald Merger, the Corporation does not have any specific plans, arrangements,
agreements or understandings with any other person for any acquisitions at the
current time.
The Corporation will invest a portion of the remaining net proceeds in The
Bank, where such proceeds would be available for general corporate purposes,
including uses in The Bank's lending and investment activities. Pending such
uses, the net proceeds will be invested in a variety of short-term assets,
including federal funds, interest-bearing deposits in other banks and similar
investments.
DIVIDEND POLICY
The Corporation has never declared or paid any dividends on its capital
stock, though its predecessor Warrior paid cash dividends of $236,000 and
$213,000 in 1997 and 1996, respectively. The Corporation will derive cash
available to pay dividends, primarily, if not entirely, from dividends paid to
the Corporation by its subsidiaries. There are certain restrictions on The
Bank's ability to pay dividends or otherwise transfer funds to the Corporation
and on the Corporation's ability to pay dividends. Regulatory restrictions on
dividends paid by The Bank and by the Corporation are discussed under
"Supervision and Regulation -- Dividends." The Corporation is also subject to
certain restrictions on the payment of dividends contained in its loan agreement
for the $10 million line of credit. However, the Corporation will repay $6.3
million of such indebtedness with a portion of the net proceeds of this Offering
thereby eliminating such restrictions. In the event that the Corporation incurs
additional debt after this Offering, the Corporation expects that any lender
would likely impose certain restrictions on the Corporation's ability to pay
dividends. The Corporation's ability to pay dividends to its stockholders will
depend on the Corporation's earnings and financial condition, liquidity and
capital requirements, the general economic and regulatory climate, the
Corporation's ability to service any equity or debt obligations senior to the
Corporation Common Stock and other factors deemed relevant by the Corporation's
Board of Directors. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Supervision and Regulation."
12
<PAGE> 15
CAPITALIZATION
The following table sets forth the actual capitalization and certain
capital ratios of the Corporation at September 30, 1998, and the pro forma
capitalization and certain capital ratios of the Corporation at September 30,
1998, as adjusted to reflect the sale by the Corporation of the shares of Common
Stock offered hereby at the public offering price of $11.00 per share and, after
deducting the estimated underwriting discount and offering expenses payable by
the Corporation, the application of the net proceeds as set forth under "Use of
Proceeds."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
----------------------
ACTUAL PRO FORMA
------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt.............................................. $ 3,000 $ 3,000
Stockholders' equity:
Preferred Stock, $.001 par value, 5,000,000 shares
authorized, no shares issued and outstanding........... -- --
Common Stock, $.001 par value, 25,000,000 shares
authorized, 9,599,443 shares issued and
outstanding-actual; 10,599,443 shares issued
and outstanding -- pro forma........................... 10 11
Additional paid-in surplus................................ 26,631 36,530
Retained earnings......................................... 15,405 15,405
Unrealized gains (losses) on securities available-
for-sale, net of taxes................................. 555 555
-------- --------
Total stockholders' equity........................ 42,601 52,501
-------- --------
Total capitalization.............................. $ 45,601 $ 55,501
======== ========
Capital ratios:
Leverage(1)............................................... 11.63% 14.39%
Risk-based capital(2)
Tier 1................................................. 15.24 18.35
Total.................................................. 16.49 19.56
</TABLE>
- ---------------
(1) Leverage ratio is defined as Tier 1 capital (using current risk-based
capital guidelines) as a percent of adjusted total assets. See "Supervision
and Regulation -- Capital Regulations."
(2) The pro forma risk-based capital ratios have been computed assuming the net
proceeds of this Offering, after payment of the Corporation's indebtedness,
are invested in assets carrying a risk-weight that is equivalent to the
Corporation's average risk-weight at September 30, 1998. See "Supervision
and Regulation -- Capital Regulations."
13
<PAGE> 16
DILUTION
The net tangible book value of the Corporation Common Stock as of September
30, 1998, was $42.2 million, or $4.40 per share of Corporation Common Stock. Net
tangible book value per share represents the equity of the Corporation's
stockholders, less intangible assets, divided by the number of shares of
Corporation Common Stock outstanding. The dilution of the net tangible book
value per share represents the difference between the amount per share paid by
purchasers of Corporation Common Stock in this Offering and the pro forma net
tangible book value (liquidation value) per share of Corporation Common Stock
immediately after completion of this Offering. After (i) giving effect to the
sale by the Corporation of 1,000,000 shares of Corporation Common Stock offered
hereby at the public offering price of $11.00 per share and the application of
the estimated net proceeds therefrom, and (ii) deducting the estimated
underwriting discount and offering expenses payable by the Corporation, the pro
forma net tangible book value of the Corporation as of September 30, 1998, would
have been $52.1 million, or $4.92 per share. This represents an immediate
increase in net tangible book value of $.52 per share to existing investors and
an immediate dilution in net tangible book value of $6.08 per share to new
investors purchasing Corporation Common Stock in this Offering, as illustrated
in the following table:
<TABLE>
<CAPTION>
<S> <C>
Public offering price per share.......... $11.00
Net tangible book value per share
before this offering................ 4.40
Increase in net tangible book value per
share attributable to new
investors........................... .52
------
Pro forma net tangible book value per
share after this Offering.............. 4.92
------
Dilution between offering price and net
tangible book value per share.......... $ 6.08
======
</TABLE>
The following table summarizes, on a pro forma basis, as of September 30,
1998, the tangible book value of the outstanding shares and the total
consideration and average price paid per share by the new investors for the
shares purchased in this Offering.
<TABLE>
<CAPTION>
SHARES(1) TANGIBLE EQUITY AVERAGE
-------------------- --------------------- PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Equity at September 30, 1998.............. 9,599,443 90.6% $42,199,000 81.0% $ 4.40
New investors............................. 1,000,000 9.4 9,900,000(2) 19.0 11.00
---------- ----- ----------- -----
Total........................... 10,599,443 100.0% $52,099,000 100.0%
========== ===== =========== =====
</TABLE>
- ---------------
(1) Does not include total shares of Corporation Common Stock issuable upon
exercise of options under the Corporation Incentive Plan. See
"Management -- Incentive Plans."
(2) Net of underwriting discount of $770,000 and estimated offering expenses of
approximately $330,000.
14
<PAGE> 17
THE BANC CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth selected financial data for the Corporation
derived from the Corporation's Supplemental Consolidated Financial Statements
which are restated to retroactively reflect the Completed Mergers (which
excludes Emerald and CBS). The selected financial data should be read in
conjunction with the Supplemental Consolidated Financial Statements of the
Corporation and the related notes thereto included in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED STATEMENT OF
FINANCIAL CONDITION DATA:
Total assets............... $366,200 $285,530 $307,713 $250,955 $200,739 $149,515 $143,280
Loans, net of unearned
income................... 236,311 173,093 179,005 141,228 101,484 70,213 66,023
Investment securities...... 81,405 78,008 73,911 73,302 64,905 53,242 55,576
Deposits................... 313,107 252,072 264,162 219,644 173,106 131,701 125,044
Stockholders' equity....... 42,601 28,847 39,981 27,442 25,146 17,000 16,819
SELECTED STATEMENT OF INCOME
DATA:
Interest income............ 19,955 16,457 22,590 17,593 13,820 10,800 10,626
Interest expense........... 9,263 7,637 10,401 7,886 5,932 4,086 3,882
-------- -------- -------- -------- -------- -------- --------
Net interest
income............ 10,692 8,820 12,189 9,707 7,888 6,714 6,744
Provision for loan
losses................... 2,884 848 1,516 896 550 167 298
Noninterest income......... 1,924 1,670 2,205 1,956 1,621 1,461 1,573
Noninterest expense........ 10,483 7,188 9,913 8,663 7,285 5,524 5,425
-------- -------- -------- -------- -------- -------- --------
Income (loss) before tax... (751) 2,454 2,965 2,104 1,674 2,484 2,594
Income tax expense
(benefit)................ (762) 868 891 647 326 638 590
-------- -------- -------- -------- -------- -------- --------
Net income.......... $ 11 $ 1,586 $ 2,074 $ 1,457 $ 1,348 $ 1,846 $ 2,004
======== ======== ======== ======== ======== ======== ========
PER SHARE DATA:
Net income -- basic........ $ -- $ .23 $ .29 $ .21 $ .21 $ .34 $ .38
Book value................. 4.44 3.01 4.39 3.99 3.79 3.18 3.14
Dividends.................. -- .09 .09 .08 .08 .07 --
PERFORMANCE RATIOS:
Return on average assets... --%(1) .75%(1) .75% .66% .76% 1.26% 1.43%
Return on average equity... .04 (1) 7.51 (1) 7.05 5.49 6.02 10.91 12.79
ASSET QUALITY RATIOS:
Allowance for loan losses
to nonperforming loans... 189.69 96.43 114.65 82.28 190.34 210.47 188.97
Allowance for loan losses
to loans, net of
unearned................. 1.45 1.23 1.19 1.20 1.46 1.77 1.89
Nonperforming loans to
loans, net of unearned
income................... .76 1.28 1.04 1.45 .76 .84 1.00
Net loan charge-offs to
average loans............ 1.05 (1) .35 (1) .66 .58 .37 .25 .22
CAPITAL RATIOS:
Leverage ratio............. 11.63% 10.13% 14.17% 12.31% 12.54% 11.42% 11.82%
Tier 1 risk-based capital
ratio.................... 15.24 14.15 19.49 16.72 21.58 20.68 22.29
Total risk-based capital
ratio.................... 16.49 15.19 20.55 17.77 22.83 21.93 23.54
</TABLE>
- ---------------
(1) On an annualized basis.
15
<PAGE> 18
THE BANC CORPORATION AND SUBSIDIARIES
CONDENSED PRO FORMA COMBINED STATEMENT OF FINANCIAL CONDITION (UNAUDITED)
The following summary includes (i) the condensed supplemental consolidated
statement of financial condition of The Banc Corporation as of September 30,
1998, (ii) the condensed consolidated statement of financial condition of
Emerald Coast Bancshares, Inc. ("Emerald") as of September 30, 1998, (iii) the
condensed consolidated statement of financial condition of Commercial Bancshares
of Roanoke, Inc. ("CBS") as of September 30, 1998, (iv) adjustments to give
effect to the purchase method combination with CBS and the proposed pooling of
interests method business combination with Emerald and (v) the pro forma
combined condensed statement of financial condition of The Banc Corporation and
The Bank as if such combinations had occurred on September 30, 1998.
These pro forma statements should be read in conjunction with the
accompanying notes and the separate consolidated statements of financial
condition of The Banc Corporation, Emerald and CBS. The pro forma information
provided below may not be indicative of future results.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
-----------------------------------------------------------------
HISTORICAL
-------------------------------------
THE EMERALD COMMERCIAL
BANC COAST BANCSHARES PRO FORMA PRO FORMA
CORPORATION BANCSHARES OF ROANOKE ADJUSTMENTS COMBINED
----------- ---------- ---------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks.................. $ 13,770 $ 3,355 $ 1,146 $ 450 (a) $ 18,721
Interest bearing deposits in other
banks.................................. 208 -- 200 -- 408
Federal funds sold....................... 6,120 2,382 7,475 -- 15,977
Investment securities available for
sale................................... 81,405 9,322 2,356 -- 93,083
Investment securities held to maturity... -- -- 15,918 260 (c) 16,178
Loans, net of unearned................... 236,311 59,241 13,717 -- 309,269
Less: Allowance for loan losses.......... (3,422) (686) (311) -- (4,419)
-------- ------- ------- ------- --------
Net loans.......................... 232,889 58,555 13,406 -- 304,850
-------- ------- ------- ------- --------
Premises and equipment, net.............. 22,419 2,160 276 500 (c) 25,355
Intangibles, net......................... 402 -- -- 290 (c) 692
Other assets............................. 8,987 1,442 803 -- 11,232
-------- ------- ------- ------- --------
Total assets.................... $366,200 $77,216 $41,580 $ 1,500 $486,496
======== ======= ======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing.................... $ 43,235 $ 7,896 $ 6,115 $ -- $ 57,246
Interest-bearing....................... 269,872 58,493 28,918 -- 357,283
-------- ------- ------- ------- --------
Total deposits.................. 313,107 66,389 35,033 -- 414,529
Long term borrowings..................... 3,000 -- -- -- 3,000
Accrued expenses and other liabilities... 7,492 5,257 297 7,300 (c) 20,185
-------- ------- ------- ------- --------
Total liabilities............... 323,599 71,646 35,330 7,300 437,714
Stockholders' Equity
Common Stock........................... 10 3,130 20 -- (a) 11
1 (b)
(3,130)(b)
(20)(c)
Surplus................................ 26,631 3,130 3,527 450 (a) 33,340
6,259 (b)
(3,130)(b)
(3,527)(c)
Retained earnings (accumulated
deficit)............................. 15,405 (738) 2,669 (2,669)(c) 14,667
Accumulated other comprehensive
income............................... 555 48 34 (34)(c) 603
-------- ------- ------- ------- --------
Total stockholders' equity...... 42,601 5,570 6,250 (5,800) 48,621
-------- ------- ------- ------- --------
Total liabilities and
stockholders' equity.......... $366,200 $77,216 $41,580 $ 1,500 $486,496
======== ======= ======= ======= ========
</TABLE>
16
<PAGE> 19
NOTES TO CONDENSED PRO FORMA COMBINED
STATEMENT OF FINANCIAL CONDITION (UNAUDITED)
(a) To record proceeds from the sale of 57,000 shares of The Banc Corporation
common stock issued under options exercised by officers of Emerald prior to
the Emerald Merger.
(b) To record the exchange of 1,379,958 shares of The Banc Corporation common
stock for all of the outstanding shares of Emerald accounted for as a
pooling of interests.
<TABLE>
<S> <C>
Outstanding shares of acquired corporation.................. 683,000
Conversion ratio............................................ 2.02044
----------
The Banc Corporation shares to be issued.................... 1,379,958
Par value of shares to be issued at $.001 per share......... $ 1
Total common stock and surplus of acquired corporation...... 6,260
----------
Excess recorded as an increase in contributed capital..... 6,259
----------
To eliminate acquired corporations capital stock
Common stock at par value................................. (3,130)
Surplus................................................... (3,130)
----------
(6,260)
----------
Net change in equity.............................. $ --
==========
</TABLE>
(c) Purchase of 100% of the outstanding common stock of the CBS for
approximately $7.3 million in cash. The stock was purchased with proceeds
borrowed from a commercial bank. The excess of cost over book value was
allocated to the carrying value of the premises, equipment, securities and
goodwill.
17
<PAGE> 20
THE BANC CORPORATION AND SUBSIDIARIES
CONDENSED PRO FORMA COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)
The following summaries include (i) the condensed supplemental consolidated
statements of income of The Banc Corporation for the nine months ended September
30, 1998, and the years ended December 31, 1997 and 1996, (ii) the condensed
consolidated statements of operations of Emerald on a historical basis for the
nine months ended September 30, 1998, the year ended December 31, 1997 and the
four months ended December 31, 1996, (iii) the condensed consolidated statements
of income of CBS for the nine months ended September 30, 1998 and the year ended
December 31, 1997, (iv) adjustments to give affect to the proposed purchase
method combination with CBS and the proposed pooling of interests method
business combination with Emerald, (v) the pro forma combined condensed
consolidated statements of income (loss) of The Banc Corporation as if the CBS
Purchase had occurred on January 1, 1997 and as if the Emerald Merger had
occurred on January 1, 1996. Note that for purchase method combinations, Article
11 of Regulation S-X requires pro forma statements of income to be presented for
only the most recent fiscal year and interim period. Accordingly, the condensed
consolidated statements of income of CBS are included in the pro forma combined
information only for the nine months ended September 30, 1998 and the year ended
December 31, 1997.
These pro forma statements should be read in conjunction with the
accompanying notes, the supplemental consolidated statements of income of The
Banc Corporation, and separate consolidated financial statements of Emerald and
CBS. The pro forma information may not necessarily be indicative of future
results.
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED SEPTEMBER 30, 1998
------------------------------------------------------------------
HISTORICAL
-------------------------------------
THE EMERALD COMMERCIAL
BANC COAST BANCSHARES PRO FORMA PRO FORMA
CORPORATION BANCSHARES OF ROANOKE ADJUSTMENTS COMBINED
----------- ---------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income............................. $ 19,955 $ 4,123 $ 2,215 $ -- $ 26,293
Interest expense............................ 9,263 1,932 1,013 370 (a) 12,578
---------- -------- -------- ----- -----------
Net interest income................ 10,692 2,191 1,202 (370) 13,715
Provision for loan losses................... 2,884 339 344 -- 3,567
---------- -------- -------- ----- -----------
Net interest income after provision
for loan losses.................. 7,808 1,852 858 (370) 10,148
Noninterest income.......................... 1,739 397 714 -- 2,850
Gain on sale of securities.................. 185 25 -- -- 210
Noninterest expenses........................ 10,483 2,254 1,450 27 (a) 14,214
---------- -------- -------- ----- -----------
Income (loss) before income
taxes............................ (751) 20 122 (397) (1,006)
Income tax expense (benefit)................ (762) 8 29 (147)(a) (872)
---------- -------- -------- ----- -----------
Net income (loss).................. $ 11 $ 12 $ 93 $(250) $ (134)
========== ======== ======== ===== ===========
Basic earnings (loss) per share............. $ -- $ 0.02 $ 0.47 $ (0.01)
========== ======== ======== ===========
Average number of shares
outstanding -- basic...................... 9,454,880 626,000 200,000 10,719,675
========== ======== ======== ===========
</TABLE>
<TABLE>
<C> <S> <C>
(a) To reflect interest expense (6.75%) on $7.3 million in debt
incurred to purchase stock of CBS........................... $370
Depreciation on allocation of purchase price to premises and
equipment (30 year period).................................. 13
Amortization of goodwill (15 year period)................... 14
----
Decrease in income before tax benefit....................... $397
====
Income tax benefit at 37%................................... $147
====
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------------------
HISTORICAL
--------------------------------------
THE EMERALD COMMERCIAL
BANC COAST BANCSHARES PRO FORMA PRO FORMA
CORPORATION BANCSHARES OF ROANOKE ADJUSTMENTS COMBINED
----------- ---------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income..................... $ 22,590 $ 3,114 $ 3,114 $ -- $ 28,818
Interest expense.................... 10,401 1,551 1,307 493 (a) 13,752
---------- -------- -------- ----- ----------
Net interest income....... 12,189 1,563 1,807 (493) 15,066
Provision for loan losses........... 1,516 333 401 -- 2,250
---------- -------- -------- ----- ----------
Net interest income after
provision for loan
losses.................. 10,673 1,230 1,406 (493) 12,816
Noninterest income.................. 1,993 110 980 -- 3,083
Gain on sale of securities.......... 212 5 -- 217
Noninterest expenses................ 9,913 1,936 2,010 36 (a) 13,895
---------- -------- -------- ----- ----------
Income before income
taxes................... 2,965 (591) 376 (529) 2,221
Income tax expense (benefit)........ 891 (195) 68 (196)(a) 568
---------- -------- -------- ----- ----------
Net income (loss)......... $ 2,074 $ (396) $ 308 $(333) $ 1,653
========== ======== ======== ===== ==========
Basic earnings (loss) per share..... $ 0.29 $ (0.63) $ 1.54 $ 0.20
========== ======== ======== ==========
Average number of shares
outstanding....................... 7,174,772 626,000 200,000 8,439,567
========== ======== ======== ==========
</TABLE>
<TABLE>
<S> <C>
(a) To reflect interest expense (6.75%) on $7.3 million in
debt incurred to purchase stock of CBS.................. $493
Depreciation on allocation of purchase price to premises
and equipment (30 year period).......................... 17
Amortization of goodwill (15 year period)............... 19
----
Decrease in income before tax benefit................... $529
====
Income tax benefit at 37%............................... $196
====
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------
HISTORICAL
---------------------------
THE EMERALD
BANC COAST PRO FORMA PRO FORMA
CORPORATION BANCSHARES(1) ADJUSTMENTS COMBINED
----------- ------------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income................................ $ 17,593 $ 381 $ -- $ 17,974
Interest expense............................... 7,886 139 -- 8,025
---------- -------- -------- ----------
Net interest income.................. 9,707 242 -- 9,949
Provision for loan losses...................... 896 70 -- 966
---------- -------- -------- ----------
Net interest income after provision
for loan losses.................... 8,811 172 -- 8,983
Noninterest income............................. 1,904 10 -- 1,914
Gain on sale of securities..................... 52 -- -- 52
Noninterest expenses........................... 8,663 793 -- 9,456
---------- -------- -------- ----------
Income (loss) before income taxes.... 2,104 (611) -- 1,493
Income tax expense (benefit)................... 647 (257) -- 390
---------- -------- -------- ----------
Net income (loss).................... $ 1,457 $ (354) $ -- $ 1,103
========== ======== ======== ==========
Basic earnings (loss) per share................ $ 0.21 $ (0.57) $ 0.14
========== ======== ==========
Average number of shares outstanding........... 6,791,381 626,000 8,056,176
========== ======== ==========
</TABLE>
- ---------------
(1) Operations of Emerald since August of 1996, date of inception.
19
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BASIS OF PRESENTATION
The following provides a narrative discussion and analysis of significant
changes in the Corporation's results of operations and financial condition. This
discussion should be read in conjunction with the supplemental consolidated
statements and selected financial data included elsewhere in this document. The
principal subsidiary of the Corporation is The Bank, a bank organized and
existing under the laws of Alabama and headquartered in Birmingham, Alabama. The
Corporation is the result of a recent merger with Warrior Capital Corporation, a
registered Alabama bank holding company. The Corporation was established in
April 1998 so that Warrior could merge into the Corporation and thereby change
its name to "The Banc Corporation" and its domicile from Alabama to Delaware.
Warrior merged with the Corporation on September 24, 1998. Before it merged with
Warrior, The Corporation was a shell corporation with no independent operations.
See "Business." On October 30, 1998, First Citizens Bancorp, Inc., an Alabama
corporation, and City National Corporation, an Alabama corporation, were merged
into the Corporation. On November 6, 1998, Commerce Bank of Alabama, an Alabama
banking corporation, was merged into The Bank. The financial results for all
periods presented herein have been restated to include the financial results of
all of the above-mentioned Completed Mergers, which were accounted for as
poolings of interests.
This discussion contains information and forward-looking statements that
are based on the Corporation's belief as well as certain assumptions made by,
and information currently available to, the Corporation with respect to the
adequacy of the allowance for loan losses, the effect of legal proceedings on
the Corporation's financial condition, results of operations and liquidity, Year
2000 compliance issues and market risk disclosures, as well as other
information. The risks and uncertainties that may affect operations,
performance, growth projections and the results of the Corporation's business
include, but are not limited to, fluctuations in the economy, the relative
strength and weakness in the commercial and consumer sector and in the real
estate market, the actions taken by the Federal Reserve for the purpose of
managing the economy, interest rate movements, the impact of competitive
products, services and pricing, timely development by the Corporation of
technology enhancements for its products and operating systems, legislation and
similar matters. Although management of the Corporation believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to be correct. Such
forward-looking statements are subject to certain risks, uncertainties and
assumptions prove to be significantly different, actual results may vary
materially from those anticipated, estimated, projected or expected. See
"Forward Looking Statements."
YEAR 2000 READINESS DISCLOSURE
The Year 2000 problem is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Corporation's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could cause a system failure or miscalculations resulting in
disruptions of operations, including, among other things, a temporary inability
to process transactions, send statements or engage in similar normal business
activities.
The Corporation has a five-step plan to resolve the Year 2000 Issue:
- establishing awareness of and educating key personnel with respect to the
Year 2000 issues and the Corporation's plan to address those potential
problems;
- identifying significant systems and assessing potential Year 2000 issues
relating to those systems;
- renovating and repairing noncompliant systems;
- testing and validating solutions; and
- implementing those solutions.
20
<PAGE> 23
To date, the Corporation has completed the first three steps and is well
into the fourth step. The Corporation has determined that it must upgrade
significant portions of its software and hardware so that those systems will
properly utilize dates beyond December 31, 1999. The Corporation presently
believes that with these upgrades of its existing software and hardware,
potential Year 2000 issues can be mitigated.
The Corporation adopted a Year 2000 Merger Policy to address Year 2000
issues related to the Acquisitions. The Year 2000 Merger Policy is designed to
act as a guide for both the Corporation and its acquired entities in addressing
the Year 2000 issues. The Corporation is using this policy to ensure that both
the Corporation and its acquired entities follow a logical and planned process
for identifying, assessing and remediating Year 2000 issues and testing and
implementing those solutions.
The Corporation is utilizing both internal and external resources to
reprogram, replace and test software and other components of its systems for
Year 2000 modifications. Modifications have been scheduled to ensure that
mission-critical systems are completed in time to allow for extended testing.
The Corporation's systems are divided into two categories, those maintained
internally by the Corporation's information systems personnel and those provided
by external vendors. For internally maintained systems, revisions are currently
being made and are expected to be implemented by the first quarter of 1999. The
Corporation has already installed the Year 2000 releases provided by vendors on
60% of its core-business systems and is on target to complete century date
testing and validation of these core business systems by year-end, 1998. For the
remainder of the externally maintained systems, the Corporation has received
written confirmation from its vendors that each system will be made Year 2000
compliant in 1999. The Corporation will continue to assess, with its vendors,
the status of their Year 2000 compliance and install any necessary additional
code releases through 1999.
The majority of the Corporation's software is supplied by third parties
affecting most significant systems of the Corporation. The Corporation has begun
formal communications with all of its significant suppliers and large customers
to determine the extent to which the Corporation is vulnerable to those third
parties' failure to remediate their own Year 2000 issues. The Corporation is
applying the majority of its resources that are allocated to the Year 2000 Issue
to installing and testing vendor releases. To date, the Corporation is not aware
of any external agent with a Year 2000 issue that would have a material adverse
effect on the Corporation's financial condition or results of operations.
The projected total cost of the Year 2000 project is currently estimated at
approximately $500,000 and is being funded through operating cash flows. As of
this date, the Corporation has incurred $140,000 in expenses, with $2,000 and
$138,000 expensed in 1997 and 1998, respectively. The majority of the remaining
cost will be spent on converting each of the recently acquired banks to a
centralized data processing system. These conversions are scheduled to be
completed in the first half of 1999. The costs of the project and the date on
which the Corporation plans to complete Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third party modification plans and other factors. However, there can be no
assurance that these estimates will be achieved, and actual results could differ
materially from those plans.
The Corporation believes it has an effective program in place to resolve
the Year 2000 Issue in a timely manner. However, disruptions in the economy that
are beyond the Corporation's control resulting from Year 2000 issues could
materially adversely affect the Corporation. Furthermore, the Corporation has no
means of ensuring that third parties that it does not control will be Year 2000
compliant. The Corporation believes that failure of third parties to address
their Year 2000 problems in a timely fashion presents the greatest likelihood of
the Corporation not being Year 2000 compliant. Such a failure could materially
adversely impact the Corporation's operations, the estimated costs of the Year
2000 project and the target dates for completion. The effect of non-compliance
by third parties is not determinable at this time. The Corporation could be
subject to litigation for computer systems product failure, including equipment
shutdown or failure to properly date business records. The amount of potential
liability, if any, and lost revenue cannot be reasonably estimated at this time.
21
<PAGE> 24
The Corporation is currently developing contingency plans in the event that
efforts to renovate the Corporation's systems are not fully successful or are
not completed in accordance with current expectations. The contingency plans
address risk factors related to the Acquisitions, including the inadequate
allocation of resources to Year 2000 issues by one or more of the acquired
entities; and the potential costs of completing renovation or replacement of
non-compliant systems of one or more of the acquired entities. These contingency
plans have not been completed.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1998, compared with nine months ended
September 30, 1997
Net income decreased $1.575 million, or 99.3% to $11,000 for the nine
months ended September 30, 1998, from $1.586 million for the nine months ended
September 30, 1997, primarily because of (a) increased loan loss reserves and
(b) non-recurring charges related to (i) start up costs attributable to the
opening of new branches in Birmingham and Decatur; (ii) expenses incurred for
the Corporation's recent Completed Mergers and the CBS Purchase and (c) expenses
incurred in connection with Year 2000 compliance. Without these non-recurring
charges and Year 2000 related expenses, net income for the nine months ended
September 30, 1998 would have been approximately $1.2 million. Net interest
income increased $1.9 million, or 21.2% to $10.7 million for the period ended
September 30, 1998, from $8.8 million for the nine months ended September 30,
1997. Interest income increased $3.5 million, or 21.3% to $20.0 million for the
period ended September 30, 1998 from $16.5 million for the period ended
September 30, 1997. Interest expense increased $1.6 million, or 21.3% to $9.2
million for the period ended September 30, 1998 from $7.6 million for the period
ended September 30, 1997. The increase in interest income is attributable to an
increase in average earning assets, due primarily to the opening of a branch
office in Birmingham, Alabama on July 1, 1998. Loans increased $63.2 million or
36.5% to $236.3 million at September 30, 1998, from $173.1 million at September
30, 1997. The increase in interest expense is mainly attributable to the opening
of the new branch in Birmingham which grew its deposits to approximately $30.0
million at September 30, 1998.
The provision for loan losses was $2.9 million for the nine months ended
September 30, 1998 compared to $848,000 for the same period in 1997. The
Corporation's allowance for loan losses as a percentage of loans was 1.45% at
September 30, 1998 compared to 1.2% at September 30, 1997. Loans have increased
$63.2 million, or 36.5% to $236.3 million at September 30, 1998, compared to
$173.1 million at September 30, 1997. Loans increased approximately $22 million
during the third quarter of 1998 at the Birmingham branch and approximately $9
million as a result of the acquisition of Commerce and its branches
(Albertville, Guntersville, Gadsden and Rainbow City). The Corporation has
funded the allowance for loan losses to support the increase in loan volume. See
"-- Provision and Allowance for Loan Losses."
Non-interest income increased $254,000, or 15.2% to $1.9 million for the
nine months ended September 30, 1998 from $1.7 million for the corresponding
period in 1997. The increase is primarily attributable to an increase in service
fees on deposit accounts.
Non-interest expense increased $3.3 million, or 45.8% to $10.5 million for
the period ended September 30, 1998 from $7.2 million for the period ended
September 30, 1997. The increase is partially attributable to increases in
salaries and employee benefits and occupancy expenses due to the opening of new
offices in Birmingham and Decatur. Another major component of the increase in
non-interest expense is approximately $900,000 incurred in legal, accounting and
printing expenses related to the Acquisitions. The Corporation has also incurred
approximately $140,000 of expenses related to Year 2000 preparations.
Year ended December 31, 1997, compared with years ended December 31, 1996 and
1995
The Corporation's net income increased $617,000, or 42.3% to $2.1 million
in 1997 from $1.5 million in 1996, which in turn increased $109,000, or 8.1%
from $1.3 million in 1995. Return on average assets in 1997 was .75%, compared
to .66% in 1996 and .76% in 1995. Return on average equity was 7.05% in 1997
compared to 5.49% in 1996 and 6.02% in 1995.
22
<PAGE> 25
Net interest income increased $2.5 million, or 25.6% to $12.2 million in
1997 from $9.7 million in 1996, which in turn increased $1.8 million, or 23.1%
from $7.9 million in 1995. The increase in net interest income was due to an
increase in average earning assets to $257.7 million, or 27.9% in 1997 from
$201.5 million in 1996, which increased 25.0% from $161.2 million in 1995.
The provision for loan losses was $1.5 million in 1997, compared to
$896,000 in 1996 and $550,000 in 1995. The Corporation's allowance for loan
losses as a percentage of its loans was 1.2% at December 31, 1997, compared to
1.2% at December 31, 1996 and 1.5% at December 31, 1995. The allowance for loan
losses as a percentage of period end nonperforming loans was 114.6% at December
31, 1997, compared to 82.3% at December 31, 1996 and 190.3% at December 31,
1995. The Corporation had net charge-offs of $1.1 million in 1997, resulting in
a ratio of net charge-offs to average loans of .7%. This compares to $683,000
and .6% in 1996 and $319,000 and .4% in 1995.
Noninterest income increased $249,000, or 12.7% to $2.2 million in 1997
from $2.0 million in 1996, which increased $335,000, or 20.7% from $1.6 million
in 1995.
Noninterest expense increased $1.3 million, or 14.4% to $9.9 million in
1997 from $8.7 million in 1996, which increased $1.4 million, or 18.9% from $7.3
million in 1995.
NET INTEREST INCOME
The largest component of the Corporation's net income is its net interest
income, which is the difference between the income earned on interest earning
assets and interest paid on deposits and borrowings used in support of such
assets. Net interest income is determined by the rates earned on the
Corporation's interest earning assets and the rates paid on its interest-bearing
liabilities, the relative amounts of interest earning assets and
interest-bearing liabilities, and the degree of mismatch and the maturity and
repricing characteristics of its interest-earning assets and interest-bearing
liabilities. Net interest income divided by average interest-earning assets
represents the Corporation's net interest margin.
23
<PAGE> 26
Average Balances, Income, Expenses and Rates. The following tables depict,
on a tax-equivalent basis for the periods indicated, certain information related
to the Corporation's average balance sheet and its average yields on assets and
average costs of liabilities. Such yields are derived by dividing income or
expense by the average balance of the corresponding assets or liabilities.
Average balances have been derived from quarterly averages.
CONSOLIDATED AVERAGE BALANCES, INTEREST/INCOME/EXPENSE AND YIELD/RATES
TAXABLE EQUIVALENT BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- ---------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- ------- ------ -------- ------- ------ -------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Loans, net of unearned income(1)... $163,788 $16,683 10.19% $117,960 $12,448 10.55% $ 85,229 $ 8,915 10.46%
Investment securities
Taxable.......................... 67,773 4,407 6.50 54,851 3,552 6.48 50,072 3,259 6.51
Tax-exempt....................... 8,441 661 7.83 9,771 799 8.17 10,076 854 8.47
-------- ------- -------- ------- -------- -------
Total investment
securities................. 76,214 5,068 6.65 64,622 4,351 6.73 60,148 4,113 6.84
Federal funds sold............... 16,559 924 5.58 18,126 932 5.14 15,052 941 6.25
Other investments................ 1,140 83 7.28 812 65 8.00 745 68 9.13
-------- ------- -------- ------- -------- -------
Total interest-earning
assets..................... 257,701 22,758 8.83 201,520 17,796 8.83 161,174 14,037 8.71
Non interest-earning assets:
Cash and due from banks............ 10,973 8,840 8,986
Premises and equipment............. 4,251 3,501 3,489
Accrued interest and other
assets........................... 6,726 7,340 4,624
Allowance for loan losses.......... (1,993) (1,517) (1,377)
-------- -------- --------
Total assets................. $277,658 $219,684 $176,896
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Demand deposits.................... $ 38,817 1,333 3.43 $ 32,452 995 3.07 $ 34,270 1,230 3.59
Savings deposits................... 31,946 1,076 3.37 31,058 1,087 3.50 27,323 905 3.31
Time deposits...................... 138,332 7,940 5.74 98,028 5,776 5.89 66,621 3,796 5.70
Federal funds purchased............ 143 7 4.90 96 8 8.33 33 -- --
Other borrowings................... 909 45 4.95 524 20 3.82 17 1 5.88
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities................ 210,147 10,401 4.95 162,158 7,886 4.86 128,264 5,932 4.62
Non-interest bearing liabilities
Demand deposits.................. 35,859 28,673 24,392
Accrued interest and other
liabilities.................... 2,243 2,308 1,865
Shareholders' equity............. 29,409 26,545 22,375
-------- -------- --------
Total liabilities and
shareholders' equity....... $277,658 $219,684 $176,896
======== ======== ========
Net interest income/net interest
spread............................. 12,357 3.88% 9,910 3.97% 8,105 4.09%
===== ===== =====
Net yield on earning assets.......... 4.79% 4.92% 5.03%
===== ===== =====
Taxable equivalent adjustment:
Investment securities(2)........... 168 203 217
------- ------- -------
Net interest income.................. $12,189 $ 9,707 $ 7,888
======= ======= =======
</TABLE>
- ---------------
(1) Nonaccrual loans are included in loans net of unearned income.
(2) Interest income and yields are presented on a fully taxable equivalent basis
using a tax rate of 34 percent.
24
<PAGE> 27
Analysis of Changes in Net Interest Income. The following table sets
forth, on a taxable equivalent basis, the effect which the varying levels of
earning assets and interest-bearing liabilities and the applicable rates have
had on changes in net income for the years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,(1)
---------------------------------------------------------
1997 VS. 1996 1996 VS. 1995
--------------------------- ---------------------------
CHANGES DUE TO CHANGES DUE TO
INCREASE -------------- INCREASE --------------
(DECREASE) RATE VOLUME (DECREASE) RATE VOLUME
---------- ----- ------ ---------- ----- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in:
Income from earning assets:
Interest and fees on loans............ $4,235 $(439) $4,674 $3,533 $ 79 $3,454
Interest on securities:
Taxable............................. 855 15 840 293 (16) 309
Tax-exempt.......................... (138) (34) (104) (55) (30) (25)
Interest on federal funds............. (8) 79 (87) (9) (172) 163
Interest on other investments......... 18 (6) 24 (3) (8) 5
------ ----- ------ ------ ----- ------
Total interest income............ 4,962 (385) 5,347 3,759 (147) 3,906
------ ----- ------ ------ ----- ------
Expense from interest-bearing liabilities:
Interest on demand deposits.............. 338 143 195 (235) (178) (57)
Interest on savings deposits............. (11) (42) 31 182 52 130
Interest on time deposits................ 2,184 (191) 2,375 1,980 131 1,849
Interest on federal funds sold........... (1) (5) 4 8 8 --
Interest on other borrowings............. 5 (10) 15 19 (3) 22
------ ----- ------ ------ ----- ------
Total interest expense........... 2,515 (105) 2,620 1,954 10 1,944
------ ----- ------ ------ ----- ------
Net interest income.............. $2,447 $(280) $2,727 $1,805 $(157) $1,962
====== ===== ====== ====== ===== ======
</TABLE>
- ---------------
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the changes in rate.
Interest Sensitivity. The Corporation monitors and manages the pricing and
maturity of its assets and liabilities in order to diminish the potential
adverse impact that changes in interest rates could have on net interest income.
The principal monitoring technique employed by the Corporation is the
measurement of the Corporation's interest rate sensitivity "gap," which is the
positive or negative dollar difference between assets and liabilities that are
subject to interest rate repricing within a given period of time. The objective
of the Corporation's Asset/Liability Management (ALM) function is to maintain a
consistent level of net interest income in a rising, falling or static interest
rate environment. ALM monitors the pricing of both interest earning assets and
interest bearing liabilities and the maturities of each. Interest rate
sensitivity can be managed by repricing assets or liabilities, selling
securities available for sale, replacing an asset or liability at maturity or by
adjusting the interest rates during the life of an asset or liability.
The Corporation evaluates interest rate sensitivity risk and then
formulates guidelines regarding asset generation and repricing, funding sources
and pricing and off-balance sheet commitments in order to decrease interest rate
sensitivity risk. The Corporation uses computer simulations to measure the net
income effect of various interest rate scenarios. The modeling reflects interest
rate changes and the related impact on net income over specified periods of
time.
The goal of liquidity management is to provide adequate funds to meet
changes in loan and lease demand or any potential unexpected deposit
withdrawals. Additionally, management strives to maximize its earnings by
investing its excess funds in securities and other securitized loan assets with
maturities matching its offsetting liabilities. See the "Selected Loan Maturity
and Interest Rate Sensitivity" and the "Maturity Distribution of Investment
Securities" tables.
25
<PAGE> 28
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The Corporation has developed policies and procedures for evaluating the
overall quality of its credit portfolio and the timely identification of
potential problem credits. The Corporation reviews the appropriate level of the
allowance for loan losses based on results of the internal monitoring and
reporting system, analysis of economic conditions in its markets and a review of
historical statistical data for both the Corporation and other financial
institutions. The Corporation's judgment as to the adequacy of the allowance is
based on a number of assumptions about future events, which it believes to be
reasonable but which may or may not be valid. Thus, there can be no assurance
that charge-offs in future periods will not exceed the allowance for loan losses
or that additional increases in the allowance for loan losses will not be
required. The adequacy of the allowance for loan losses and the effectiveness of
the Corporation's monitoring and analysis system are also reviewed periodically
by the banking regulators.
Additions to the allowance for loan losses, which are expensed as the
provision for loan losses on the Corporation's income statement, are made
periodically to maintain the allowance at an appropriate level based on
management's analysis of the potential risk in the loan portfolio. Loan losses
and recoveries are charged or credited directly to the allowance. The amount of
the provision is a function of the levels of loans outstanding, the level of
nonperforming loans, historical loan loss experience, the amount of loan losses
actually charged against the reserve during a given period and current and
anticipated economic conditions. Total loans net of unearned income increased
32.0% for the nine months ended September 30, 1998 from $179.0 million at
December 31, 1997 to $236.3 million. Additionally, net charge-offs increased
47.7% over the same period from $1.1 million at December 31, 1997 to $1.6
million, and changes in the distribution of loans by category resulted in an
increase of 43.3% in combined financial and agricultural loans from $57.9
million at December 31, 1997 to $82.9 million at September 30, 1998. In light of
these factors and the increased demand for loans in the Birmingham market, the
Corporation increased its allowance for loan losses to $3.4 million at September
30, 1998 from $2.1 million at December 31, 1997.
The following table summarizes certain information with respect to the
Corporation's allowance for loan losses and the composition of charge-offs and
recoveries for the periods indicated.
26
<PAGE> 29
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
NINE MONTHS ENDED --------------------------------------------------
SEPTEMBER 30, 1998 1997 1996 1995 1994 1993
------------------ -------- -------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Allowance for loan losses
balance at beginning of
period..................... $ 2,129 $ 1,690 $ 1,477 $ 1,246 $ 1,251 $ 1,097
Charge-offs:
Commercial, financial and
agricultural.......... 785 522 67 7 125 20
Real estate.............. 229 57 46 58 -- 13
Consumer................. 968 779 731 403 149 268
-------- -------- -------- -------- ------- -------
Total charge-offs... 1,982 1,358 844 468 274 301
Recoveries:
Commercial, financial and
agricultural.......... 39 40 22 24 3 17
Real estate.............. 38 23 5 3 1 5
Consumer................. 314 218 134 122 99 135
-------- -------- -------- -------- ------- -------
Total recoveries.... 391 281 161 149 103 157
-------- -------- -------- -------- ------- -------
Net charge-offs.............. 1,591 1,077 683 319 171 144
Provision for loan losses.... 2,884 1,516 896 550 166 298
-------- -------- -------- -------- ------- -------
Allowance for loan
losses-balance at end of
period..................... $ 3,422 $ 2,129 $ 1,690 $ 1,477 $ 1,246 $ 1,251
======== ======== ======== ======== ======= =======
Loans at end of period, net
of unearned income......... $236,311 $179,005 $141,228 $101,484 $70,213 $66,022
Ratio of ending allowance to
ending loans............... 1.45% 1.19% 1.20% 1.46% 1.77% 1.89%
Average loans, net of
unearned income............ $202,920 $163,788 $117,960 $ 85,229 $68,600 $66,271
Ratio of net charge-offs to
average loans.............. 1.05 (1) 0.66% 0.58% 0.37% 0.25% 0.22%
Net charge-offs as a
percentage of:
Provision for loan
losses................ 55.2% 71.0% 76.2% 58.0% 103.0% 48.3%
Allowance for loan
losses................ 62.0%(1) 50.6% 40.4% 21.6% 13.7% 11.5%
Allowance for loan losses as
a percentage of
non-performing loans....... 189.7% 114.6% 82.3% 190.3% 210.5% 189.0%
</TABLE>
- ---------------
(1) On an annualized basis.
27
<PAGE> 30
Allocation of Allowance. The Corporation historically has allocated its
allowance for loan losses to specific loan categories. Although the allowance is
allocated, it is available to absorb losses in the entire loan portfolio.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ----------------- ----------------- ----------------- -----------------
PERCENT PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic
Commercial, financial
and agricultural... $1,677 49% $ 684 32% $ 483 29% $ 340 23% $ 170 14%
Real estate --
construction....... 171 5 120 6 69 4 62 4 50 4
Real estate --
mortgage........... 342 10 787 37 640 38 573 38 574 46
Consumer............. 1,198 35 512 24 478 28 496 34 440 35
Other................ 34 1 26 1 20 1 6 1 12 1
------ --- ------ --- ------ --- ------ --- ------ ---
$3,422 100% $2,129 100% $1,690 100% $1,477 100% $1,246 100%
====== === ====== === ====== === ====== === ====== ===
<CAPTION>
DECEMBER 31,
-----------------
1993
-----------------
PERCENT
AMOUNT OF TOTAL
------ --------
<S> <C> <C>
Domestic
Commercial, financial
and agricultural... $ 164 13%
Real estate --
construction....... 39 3
Real estate --
mortgage........... 564 45
Consumer............. 471 38
Other................ 13 1
------ ---
$1,251 100%
====== ===
</TABLE>
Nonperforming Assets. The following table represents the Corporation's
nonperforming assets for the dates indicated.
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ------------------------------------
1998 1997 1996 1995 1994 1993
------------- ------ ------ ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual..................................... $1,540 $ 978 $1,478 $420 $249 $159
Past Due (contractually past due 90 days or
more)........................................ 264 879 576 356 343 503
Restructured................................... -- -- -- -- -- --
------ ------ ------ ---- ---- ----
Total................................ $1,804 $1,857 $2,054 $776 $592 $662
====== ====== ====== ==== ==== ====
</TABLE>
A delinquent loan is generally placed on nonaccrual status when it becomes
90 days or more past due and management believes, after considering economic and
business conditions and collection efforts, that the borrower's financial
condition is such that the collection of interest is doubtful. When a loan is
placed on nonaccrual status, all interest which has been accrued on the loan but
remains unpaid is reserved and deducted from earnings as a reduction of reported
interest income. No additional interest income is accrued on the loan balance
until the collection of both principal and interest becomes reasonably certain.
When a problem loan is finally resolved, there may ultimately be an actual
write-down or charge-off of the principal balance of the loan, which would
necessitate additional charges to earnings. If the above past due loans had been
current in accordance with their original terms, approximately $94,000 would
have been earned on these loans in 1997.
28
<PAGE> 31
EARNING ASSETS
Loans. Loans are the largest category of earning assets and typically
provide higher yields than the other types of earning assets. Associated with
the higher loan yields are the inherent credit and liquidity risks which
management attempts to control and counterbalance. At September 30, 1998, total
loans net of unearned income were $236.3 million, an increase of $57.6 million
from $179.0 million at December 31, 1997. Average loans increased $39.1 million
for the same period. Loans averaged $163.8 million in 1997 compared to $118.0
million in 1996 and $85.2 million in 1995. At December 31, 1997, total loans net
of unearned income were $179.0 million compared to $141.2 million at December
31, 1996, and $101.4 million at December 31, 1995.
DISTRIBUTION OF LOANS BY CATEGORY
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- --------------------------------------------------
1998 1997 1996 1995 1994 1993
------------- -------- -------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural.................... $ 82,918 $ 57,872 $ 40,769 $ 23,488 $ 9,777 $ 8,824
Real estate -- construction....... 12,101 9,660 5,604 4,272 2,881 2,074
Real estate -- mortgage........... 82,266 67,152 54,249 39,682 32,975 30,396
Consumer.......................... 58,148 42,542 39,879 34,293 25,236 25,366
Other............................. 1,758 2,995 2,130 443 669 688
-------- -------- -------- -------- ------- -------
Total loans............. 237,191 180,221 142,631 102,178 71,538 67,348
Unearned income................... (880) (1,216) (1,403) (694) (1,325) (1,325)
Allowance for loan losses......... (3,422) (2,129) (1,690) (1,477) (1,246) (1,251)
-------- -------- -------- -------- ------- -------
Net loans............... $232,889 $176,876 $139,538 $100,007 $68,967 $64,772
======== ======== ======== ======== ======= =======
</TABLE>
The repayment of loans in the loan portfolio as they mature is also a
source of liquidity for the Corporation. The following table sets forth the
Corporation's loans maturing within specified intervals at December 31, 1997.
SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
RATE STRUCTURE FOR LOANS
MATURING OVER ONE YEAR
MATURITY --------------------------
- ---------------------------------------------- FLOATING
OVER ONE PREDETERMINED OR
ONE YEAR YEAR THROUGH OVER INTEREST ADJUSTABLE
OR LESS FIVE YEARS FIVE YEARS TOTAL RATE RATE
- -------- ------------ ---------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C>
$86,338 $76,512 $17,371 $180,221 $92,354 $1,529
======== ======= ======= ======== ======= ======
</TABLE>
The information presented in the above table is based on the contractual
maturities of the individual loans, including loans which may be subject to
renewal at their contractual maturity. Renewal of such loans is subject to
review and credit approval, as well as modification of terms upon their
maturity. Consequently, management believes this treatment presents fairly the
maturity and repricing structure of the loan portfolio.
Investment Securities. The investment securities portfolio is a
significant component of the Corporation's total earning assets. Total
securities averaged $76.2 million in 1997, compared to $64.6 million in 1996 and
$60.1 million in 1995. At December 31, 1997, the total securities portfolio was
$73.9 million.
29
<PAGE> 32
The following table sets forth the book value of the securities held by the
Corporation at the dates indicated.
INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
U.S. Treasury and U.S. Government agencies.................. $58,730 $59,820
State and political subdivisions............................ 11,244 13,013
Other investments........................................... 3,527 476
------- -------
Total investment securities....................... $73,501 $73,309
======= =======
</TABLE>
The following table shows the scheduled maturities and average yields of
securities held at December 31, 1997.
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES
<TABLE>
<CAPTION>
MATURING
--------------------------------------------------------------------------------------
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE WITHIN FIVE WITHIN TEN AFTER TEN
YEAR YEARS YEARS YEARS TOTAL
-------------- --------------- --------------- --------------- ---------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------- ----- ------- ----- ------- ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury and Govt Agencies.... $1,112 6.05% $12,113 6.60% $17,606 7.19% $ 5,346 7.24% $36,177 6.97%
State and political subdivision.... 50 4.20 677 7.17 1,777 6.55 5,195 6.79 7,699 6.75
Other securities................... 260 7.20 3,067 6.35 -- -- -- -- 3,327 6.42
------ ------- ------- ------- -------
Total securities available
for sale.................. $1,422 6.18% $15,857 6.58% $19,383 7.13% $10,541 7.02% $47,203 6.89%
====== ==== ======= ===== ======= ==== ======= ==== ======= =====
Securities held to maturity:
U.S. Treasury and Govt Agencies.... $7,900 5.01% $ 9,820 6.38% $ 4,833 7.19% $ -- --% $22,553 6.07%
State and political subdivision.... 564 7.62 1,472 5.74 1,112 4.86 397 4.77 3,545 5.65
Other securities................... -- -- 200 10.10 -- -- -- -- 200 10.10
------ ------- ------- ------- -------
Total securities held to
maturity.................. $8,464 5.18% $11,492 6.36% $ 5,945 6.75% $ 397 4.77% $26,298 6.05%
====== ==== ======= ===== ======= ==== ======= ==== ======= =====
</TABLE>
Short-Term Investments. Short-term investments, which consist primarily of
federal funds sold, averaged $ 16.6 million in 1997, compared to $ 18.1 million
in 1996 and $ 15.1 million in 1995. These funds are a primary source of the
Corporation's liquidity and are generally invested on an overnight basis.
DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES
Deposits. Average total deposits increased $54.8 million, or 28.8% to
$245.0 million during 1997, from $190.2 million in 1996. Average total deposits
increased $37.6 million, or 24.6% to $190.2 million during 1996, from $152.6
million in 1995.
30
<PAGE> 33
The following table sets forth the deposits of the Corporation by category
at the dates indicated.
AVERAGE DEPOSITS
<TABLE>
<CAPTION>
AVERAGE FOR THE YEAR
---------------------------------------------------------------------
1997 1996 1995
--------------------- --------------------- ---------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE
OUTSTANDING PAID OUTSTANDING PAID OUTSTANDING PAID
----------- ------- ----------- ------- ----------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand deposits... $ 35,859 --% $ 28,673 --% $ 24,392 --%
Interest bearing demand deposits....... 38,817 3.43 32,452 3.07 34,270 3.59
Savings deposits....................... 31,946 3.37 31,058 3.50 27,323 3.31
Time deposits.......................... 138,332 5.75 98,028 5.89 66,621 5.70
-------- -------- --------
Total average deposits....... $244,954 4.95 $190,211 4.86 $152,606 4.62
======== ======== ========
</TABLE>
Deposits, and particularly core deposits, have historically been the
Corporation's primary source of funding and have enabled the Corporation to meet
successfully both its short-term and long-term liquidity needs. The Corporation
anticipates that such deposits will continue to be its primary source of funding
in the future. The Corporation's loan to deposit ratio was 67.8% at December 31,
1997, compared to 64.3% at December 31, 1996. The maturity distribution of the
Corporation's time deposits over $100,000 at December 31, 1997 is shown in the
following table.
MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
- -------------------------------------------------
UNDER 3-6 6-12 OVER
3 MONTHS MONTHS MONTHS 12 MONTHS TOTAL
- -------- ------ ------ --------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
$15,834 $6,416 $19,786 $8,559 $50,595
======= ====== ======= ====== =======
</TABLE>
Approximately 31.3 % of the Corporation's time deposits over $100,000 had
scheduled maturities within three months. The Corporation believes that large
denomination certificate of deposit customers tend to be extremely sensitive to
interest rate levels, making these deposits less reliable sources of funding for
liquidity planning purposes than core deposits. While some financial
institutions partially fund their balance sheets using large certificates of
deposits obtained through brokers, these broker deposits are generally expensive
and are unreliable as long-term funding sources. Accordingly, the Corporation
does not actively solicit brokered deposits.
REGULATORY CAPITAL TABLE
The table below represents the Corporation's actual regulatory and minimum
regulatory capital requirements at December 31, 1997 (Dollars in thousands):
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------- ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital.............. $41,466 20.55% $16,142 8.00% $20,178 10.00%
(to Risk Weighted
Assets)
Tier 1 Capital............. 39,337 19.49 8,073 4.00 12,110 6.00
(to Risk Weighted
Assets)
Tier 1 Capital............. 39,337 14.17 11,104 4.00 13,880 5.00
(to Average Assets)
</TABLE>
31
<PAGE> 34
IMPACT OF INFLATION
Unlike most industrial companies, the assets and liabilities of financial
institutions such as the Corporation and The Bank are primarily monetary in
nature. Therefore, interest rates have a more significant effect on the
Corporation's performance than do the effects of changes in the general rate of
inflation and changes in prices. In addition, interest rates do not necessarily
move in the same direction or in the same magnitude as the prices of goods and
services. Management seeks to manage the relationships between interest
sensitive assets and liabilities in order to protect against wide interest rate
fluctuations, including any resulting from inflation. See "-- Net Interest
Income: Interest Sensitivity."
REGULATORY MATTERS
In June 1997, the FASB issued SFS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. This statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The statement
is effective for fiscal years beginning after December 15, 1997. Management
intends to comply with this standard in 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." This statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. This statement is effective for financial statements for
periods beginning after December 15, 1997. The corporation intends to comply
with this standard in 1998.
32
<PAGE> 35
BUSINESS
GENERAL
The Banc Corporation (the "Corporation") is a bank holding company
registered under the Bank Holding Company Act ("BHCA"), incorporated under the
laws of Delaware in April 1998 and headquartered in Birmingham, Alabama. The
Corporation was established so that Warrior Capital Corporation ("Warrior")
could merge into the Corporation and thereby change its name to "The Banc
Corporation" and its domicile from Alabama to Delaware. Warrior merged with the
Corporation on September 24, 1998. Before it merged with Warrior, the
Corporation was a shell corporation with no independent operations.
As of September 30, 1998, on a pro forma basis (assuming completion of the
proposed Emerald Merger), the Corporation had assets of approximately $486.5
million, loans of approximately $309.3 million, deposits of approximately $414.5
million and stockholders equity of approximately $48.6 million. The principal
subsidiary of the Corporation is The Bank, an Alabama banking corporation
headquartered in Birmingham, Alabama. The Bank is 99.75% owned by the
Corporation. Through The Bank, the Corporation has 17 locations in
Alabama -- Birmingham (which opened July 1, 1998), Warrior, Morris and Mt. Olive
(all suburbs of Birmingham), Decatur (which opened September 14, 1998),
Roanoke(2) (acquired October 16, 1998), Sylacauga, Childersburg, Mignon,
Monroeville(2) and Frisco City (all acquired October 30, 1998) and Albertville,
Gadsden, Guntersville and Rainbow City (all acquired November 6, 1998). Assuming
completion of the Emerald Merger, the Corporation will have four thrift
locations in Florida -- Panama City Beach, Destin, Seagrove and Bay Point (all
located in the panhandle of Florida along the Gulf Coast). With the exception of
Birmingham, the Corporation operates in non-metropolitan areas. The Corporation
targets individuals and local and regional businesses that prefer local bank
decision making and service.
The principal executive offices of the Corporation and The Bank are located
at 17 North 20th Street, Birmingham, Alabama 35203, and its telephone number is
(205) 326-2265. As used in this Prospectus, the term "Corporation" refers to The
Banc Corporation and its predecessor, Warrior, and its respective subsidiaries
and affiliates, including The Bank, unless the context requires otherwise.
THE ACQUISITIONS
The Corporation has recently acquired three bank holding companies together
with their subsidiary banks and one additional bank and has agreed to acquire a
bank which is in the process of converting to a federally chartered thrift. The
Corporation estimates that it will achieve cost savings of approximately
$400,000 and annual revenue enhancements of approximately $850,000 from the
Acquisitions. The statistical information below is derived from FDIC and 1995
U.S. Census Bureau data.
CBS. On October 16, 1998, the Corporation acquired Commercial Bancshares
of Roanoke, Inc. ("CBS") in exchange for $7.3 million in cash in a transaction
that was accounted for as a purchase. Prior to its acquisition by the
Corporation, CBS was a bank holding company organized and existing under the
laws of Delaware. Commercial Bank of Roanoke, an Alabama banking corporation,
was the bank subsidiary of CBS located in Randolph County with two branches in
the city of Roanoke. Simultaneously with the CBS Acquisition, CBS sold its
subsidiary, Commercial Bancshares Services, Inc., a Delaware corporation, which
engages in data processing services for community banks. At the same time,
Commercial Bank was merged with and into The Bank. As of September 30, 1998, CBS
had total assets of approximately $41.6 million, total deposits of approximately
$35.0 million, and total stockholders' equity of approximately $6.3 million. As
of June 30, 1998, CBS had an approximate deposit market share of 14.6% in
Randolph County. As of 1995, Randolph County had a population of 20,233. The
labor force is primarily employed in manufacturing, transportation and wholesale
trade.
City National. On October 30, 1998, the Corporation acquired City National
Corporation ("City National") in exchange for approximately 2,000,000 shares of
Corporation Common Stock in a transaction that was accounted for as a pooling of
interests. Prior to its acquisition by the Corporation, City National was a bank
holding company organized and existing under the laws of the State of Alabama.
Through its bank subsidiary, City National Bank of Sylacauga ("City National
Bank"), City National provides community
33
<PAGE> 36
banking services in Talladega County. Following the City National merger, City
National Bank was merged with and into The Bank. As of September 30, 1998, City
National had total assets of approximately $80.1 million, deposits of
approximately $66.9 million and shareholders' equity of approximately $11.6
million. City National Bank is based in Sylacauga and has additional branches in
Mignon and Childersburg. As of June 30, 1998, City National had an approximate
deposit market share of 11.3% in Talladega County. As of 1995, Talladega County
had a population of 76,737. The labor force is primarily employed in
manufacturing, retail trade and service.
First Citizens. On October 30, 1998, the Corporation acquired First
Citizens Bancorp, Inc. ("First Citizens") in exchange for approximately 663,243
shares of Corporation Common Stock in a transaction that was accounted for as a
pooling of interests. Prior to its acquisition by the Corporation, First
Citizens was a bank holding company organized and existing under the laws of the
State of Alabama. Through its bank subsidiary, First Citizens Bank of Monroe
County ("First Citizens Bank"), First Citizens provided community banking
services through two locations in Monroeville and one in Frisco City, Alabama.
Following the First Citizens merger, First Citizens Bank was merged with and
into The Bank. As of September 30, 1998, First Citizens had total consolidated
assets of approximately $38.8 million, total consolidated deposits of
approximately $34.9 million and total consolidated shareholders' equity of
approximately $3.2 million. As of June 30, 1998, First Citizens had an
approximate deposit market share of 13.8% in Monroe County. As of 1995, Monroe
County had a population of 24,550. The local labor force is primarily employed
in manufacturing, retail trade and service.
Commerce. On November 6, 1998, the Corporation acquired Commerce Bank of
Alabama ("Commerce") in exchange for approximately 1,536,615 shares of
Corporation Common Stock in a transaction that was accounted for as a pooling of
interests. Prior to its acquisition by the Corporation, Commerce, established in
1995, was an Alabama banking corporation with four full-service banking offices
located in Albertville, Guntersville, Gadsden and Rainbow City, Alabama. The
Alberville and Guntersville branches are located in Marshall County. The Gadsden
and Rainbow City branches are located in Etowah County. As of September 30,
1998, Commerce had total assets of approximately $129.5 million, deposits of
approximately $118.3 million, and shareholders' equity of approximately $6.3
million. As of June 30, 1998, Commerce had an approximate deposit market share
of 4.3% in Etowah County and an approximate deposit market share of 6.8% in
Marshall County. As of 1995, Etowah County had a population of 100,259, and
Marshall County had a population of 78,195. The labor force in both counties is
primarily employed in manufacturing, retail trade and service.
Emerald. The Corporation entered into a Reorganization Agreement and Plan
of Merger (the "Emerald Plan of Merger"), dated as of June 2, 1998, with Emerald
Coast Bancshares, Inc. ("Emerald"), pursuant to which Emerald will be merged
with and into the Corporation (the "Emerald Merger") in exchange for
approximately 1,379,958 shares of Corporation Common Stock. Emerald is a bank
holding company organized and existing under the laws of the State of Florida.
Emerald's subsidiaries include Emerald Coast Bank, a Florida banking
corporation, and Emerald Coast Financial Management, Inc., a Florida
corporation. Emerald has four locations in Florida -- Panama City Beach, Destin,
Seagrove and Bay Point (all located in the panhandle of Florida along the Gulf
Coast). The Panama City and Bay Point branches are located in Bay County. The
Destin and Seagrove branches are located in Walton County. As of September 30,
1998, Emerald had total assets of approximately $77.2 million, deposits of
approximately $66.4 million and shareholders' equity of approximately $5.6
million. As of June 30, 1998, Emerald had an approximate deposit market share of
2.9% in Bay County and an approximate deposit market share of 9.2% in Walton
County. As of 1995, Bay County had a population of 142,690 and Walton County had
a population of 33,615. The labor forces in Bay and Walton Counties are
primarily employed in tourism, service, retail trade and manufacturing.
Prior to the Emerald Merger, Emerald Coast Bank will be converted from a
state chartered bank to a federally chartered thrift regulated by the Office of
Thrift Supervision (the "OTS"). In September 1998, the directors of Emerald
determined that a savings association/thrift charter was desirable as opposed to
the existing bank charter for two primary reasons. First, Emerald Coast Bank was
less than three years old and could not be acquired by an out-of-state bank
holding company such as the Corporation until August 31, 1999.
34
<PAGE> 37
A federally-chartered thrift's acquisition is not subject to such restrictions.
Second, a thrift charter provides greater branching capabilities within and
outside Florida and allows for more services to be offered to customers. The
Emerald Merger is subject to normal conditions for a transaction of this type,
including regulatory approval. The Emerald shareholders have approved the
Emerald Merger, and the Emerald Merger is expected to close in the fourth
quarter of 1998.
MARKET AREAS
Through The Bank, the Corporation operates in Birmingham, Alabama and its
suburbs of Warrior, Morris and Mount Olive, Alabama in relatively rural northern
Jefferson County. The Bank opened a new location in Decatur, Alabama, on
September 14, 1998. The Corporation also recently acquired new branches of The
Bank in Roanoke(2), Childersburg, Sylacauga, Mignon, Albertville, Guntersville,
Gadsden, Rainbow City, Monroeville(2) and Frisco City, Alabama. See "-- General"
and "-- The Acquisitions."
STRATEGY
Operations. With the exception of its Birmingham, Alabama operations
(commenced July 1, 1998), the Corporation operates in non-metropolitan areas.
The Corporation targets individuals and local and regional businesses that
prefer local bank decision making and personalized service. As a result of this
strategy, the Corporation operates on a decentralized basis, emphasizing each
branch's local knowledge and authority to make credit decisions. The Corporation
believes this strategy enables The Bank to generate high yielding loans and to
attract and retain low cost core deposits that provide substantially all of The
Bank's funding requirements. The Corporation will supplement this decentralized
management approach with centralized policy oversight, credit review and
management systems. The Corporation plans to implement its administrative and
operations policies at each of the branches acquired in the Acquisitions while
retaining each acquired bank's local management and its Board of Directors as an
advisory board to capitalize on their knowledge of the local community.
The Bank focuses on residential mortgage, consumer, commercial and real
estate construction lending to customers in each of its local markets. The Bank
also offers a variety of deposit programs to individuals and to businesses and
other organizations at interest rates generally consistent with local market
conditions. In addition, The Bank offers individual retirement and KEOGH
accounts, safe deposit and night depository facilities and additional services
such as the sale of traveler's checks, money orders and cashier's checks.
Growth. The Corporation believes its future growth will depend primarily
on the expansion of the business of its banking subsidiaries through internal
growth, the opening of new branch offices in new markets and the acquisition of
other financial institutions and branches. The ability to grow profitably
through the opening or acquisition of new branches will depend primarily on,
among other things, the Corporation's ability to identify profitable, growing
markets and branch locations within such markets, attract necessary deposits to
operate such branches profitably and locate sound loans and investment
opportunities within such markets. See "Risk Factors -- Ability to Sustain
Growth; Profitability and Potential Need for Additional Capital."
LENDING ACTIVITIES
General. Through its banking subsidiaries, the Corporation offers a range
of lending services, including real estate, consumer and commercial loans,
primarily to individuals and businesses and other organizations that are located
in or conduct a substantial portion of their business in The Bank's local
markets. The Corporation's total loans at September 30, 1998, were $236.3
million, or 73.0% of total earning assets. The interest rates charged on loans
vary with the degree of risk, maturity and amount of the loan and are further
subject to competitive pressures, money market rates, availability of funds and
government regulations. The Corporation has no foreign loans or loans for highly
leveraged transactions.
Loan Portfolio
Real Estate Loans. Loans secured by real estate are the primary component
of the Corporation's loan portfolio, constituting $94.4 million, or 39.8% of
total loans at September 30, 1998. The Corporation's primary
35
<PAGE> 38
type of real estate loan is single family first mortgage loans, typically
structured with fixed or adjustable interest rates, based on market conditions.
Fixed rate loans usually have a term of five years, with payments through the
date of maturity generally based on a 15 to 30-year amortization schedule.
Adjustable rate loans generally have a term of 15 years. The Bank ordinarily
charges an origination fee on these loans.
The Bank's nonresidential mortgage loans include commercial, industrial and
raw land loans. The commercial real estate loans are typically used to provide
financing for retail establishments, office buildings and complexes and
manufacturing facilities. The Bank generally requires nonresidential mortgage
loans to have an 80% loan-to-value ratio and usually underwrites its commercial
loans on the basis of the borrower's cash flow and ability to service the debt
from earnings, rather than on the basis of the value of the collateral. Terms
are typically five years and may have payments through the date of maturity
based on a 15 to 20-year amortization schedule. Construction loans usually have
a term of less than twelve months and generally require personal guarantees.
Consumer Loans. Consumer lending includes installment lending to
individuals in The Bank's markets and consists of loans to purchase automobiles,
recreational vehicles, mobile homes and appliances. Consumer loans constituted
$58.1 million, or 24.5% of the Corporation's loan portfolio at September 30,
1998. Consumer loans are underwritten based on the borrower's income, current
debt, credit history and collateral. The terms of consumer loans generally range
from three to five years on automobile loans and one to three years on other
loans.
Commercial, Financial, and Agricultural Loans. The Bank makes loans for
commercial purposes in various lines of business. These loans are typically made
on terms up to five years at fixed or variable rates and are secured by accounts
receivable, inventory or, in the case of equipment loans, the financed
equipment. The Bank attempts to reduce its credit risk on commercial loans by
limiting the loan to value ratio to 65% on loans secured by accounts receivable
or inventory and 75% on equipment loans. The Bank also makes unsecured
commercial loans. Commercial, financial, and agricultural loans constituted
$82.9 million, or 35.0% of the Corporation's loan portfolio at September 30,
1998.
Credit Procedures and Review
Loan Approval. There are credit risks associated with making any loan.
These include prepayment risks, risks resulting from uncertainties in the future
value of collateral, risks resulting from changes in economic and industry
conditions and risks inherent in dealing with individual borrowers. In
particular, longer maturities increase the risk that economic conditions will
change and adversely affect collectibility.
The Corporation attempts to minimize loan loses through various means and
uses generally recognized underwriting criteria. In particular, on larger
credits, the Corporation generally relies on the cash flow of a debtor as the
source of repayment and secondarily on the value of the underlying collateral.
In addition, the Corporation attempts to utilize shorter loan terms in order to
reduce the risk of a decline in the value of such collateral.
The Corporation addresses repayment risks by adhering to internal credit
policies and procedures that include officer and customer lending limits, a
multi-layered loan approval process for larger loans, periodic documentation
examination and follow-up procedures for any exceptions to credit policies. The
point in the Corporation's loan approval process at which a loan is approved
depends on the size of the borrower's credit relationship with the Corporation.
Loan Review. The Corporation has a continuous loan review process designed
to promote early identification of credit quality problems. All loan officers
are charged with the responsibility of reviewing at least quarterly all past due
loans in their respective portfolios. The Bank's loan officers establish a watch
list of loans to be reviewed quarterly by The Bank's Board of Directors. The
Loan Committee, which includes the Chief Lending Officer of The Bank along with
other officers, also conducts a regular centralized internal review that tests
compliance with loan policy and documentation requirements for all loans over
$250,000 and for a sampling of smaller loans.
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<PAGE> 39
DEPOSITS
The principal sources of funds for The Bank are core deposits, consisting
of demand deposits, interest-bearing transaction accounts, money market
accounts, savings deposits and certificates of deposit. Transaction accounts
include checking money market and negotiable order of withdrawal (NOW) accounts
that customers use for cash management and that provide The Bank with a source
of fee income and cross-marketing opportunities, as well as a low-cost source of
funds. Time and savings accounts also provide a relatively stable and low-cost
source of funds. The largest source of funds for The Bank is certificates of
deposit. Certificates of deposit in excess of $100,000 are held primarily by
customers in The Bank's local markets.
Deposit rates are set weekly by senior management of The Bank, subject to
approval by management of the Corporation. Management believes that the rates
The Bank offers are competitive with those offered by competing institutions in
The Bank's local markets. The Bank focuses on customer service, not high rates,
to attract and retain deposits.
COMPETITION
The Bank encounters strong competition both in making loans and in
attracting deposits. Competition among financial institutions is based on
interest rates offered on deposit accounts, interest rates charged on loans and
other credit and service charges, the quality and scope of the services
rendered, the convenience of banking facilities and, in the case of loans to
commercial borrowers, relative lending limits. Some competing institutions also
may offer certain services, such as trust services, that The Bank does not offer
at this time. In addition, most of the Corporation's non-bank competitors are
not subject to the same extensive federal regulations that govern bank holding
companies and federally insured banks. See "Supervision and Regulation."
MARKET INFORMATION
There has been no established public trading market for the Corporation
Common Stock. Therefore, when Corporation Common Stock has been traded, it has
been traded in privately negotiated transactions. Management is unaware of any
recent trades of Corporation Common Stock. Prior to the Warrior Merger, the last
known trades of Warrior Common Stock occurred in January and April 1998 for
$4.79 per share (after taking into account a 300-for-1 exchange in the Warrior
Merger in September 1998). The Corporation's management is unaware of any other
trades of Warrior Common Stock in the past two fiscal years. See "Underwriting"
for the factors considered in determining the public offering price.
As of September 30, 1998, the Corporation had not paid any dividends though
Warrior had paid dividends in the past.
As of November 20, 1998, there were approximately 925 holders of record of
Corporation Common Stock without regard to Corporation Common Stock issued in
this Offering or the proposed Emerald Merger.
PROPERTIES
The Corporation owns the John A. Hand Building, a 21-story office building
located at 17 North 20th Street, Birmingham, Alabama 35203, in which the
Corporation's headquarters are located and in which a branch of The Bank is
located. The Corporation also owns each of The Bank's locations in Warrior,
Morris, Mt. Olive, Decatur, Albertville, Guntersville, Rainbow City,
Monroeville, Sylacauga, Childersburg, Mignon and Roanoke. The Corporation leases
The Bank's locations in Gadsden and Frisco City.
EMPLOYEES
As of November 6, 1998, the Corporation and The Bank had approximately 222
employees. Emerald currently employees 43 people.
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<PAGE> 40
LEGAL PROCEEDINGS
While the Corporation may from time to time be a party to various legal
proceedings arising in the ordinary course of its business, the Corporation
believes that there are no proceedings threatened or pending against the
Corporation at this time that will individually, or in the aggregate,
materially, adversely effect the Corporation's business or financial condition.
AVAILABLE INFORMATION
At your request, we will provide to you, without charge, a copy of any of
the exhibits to our Registration Statement incorporated by reference in this
Prospectus. If you want more information, write or call us at:
The Banc Corporation
17 North 20th Street
Birmingham, Alabama 35203
Attention: Debbie Peoples
Telephone: (205) 326-2265
Facsimile: (205) 326-3479
Our fiscal year ends December 31. We intend to provide to our stockholders
annual reports containing audited financial statements and other appropriate
reports. You may read and copy any reports, statements or other information we
file with the SEC at the SEC's public reference rooms at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C., and they should be available
for inspection and copying at the regional offices of the SEC located at Seven
World Trade Center, 13th Floor, New York, New York, and at Citicorp Center, 500
West Madison Street, Chicago, Illinois.
You can request copies of these documents upon payment of a duplicating fee
by writing to the SEC at Public Reference Section, 450 Fifth Street N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. Our SEC filings are
available to the public on the SEC Internet site at http:\\www.sec.gov.
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<PAGE> 41
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information about the executive
officers and directors of the Corporation as of November 20, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH CORPORATION
---- --- -------------------------
<S> <C> <C>
James A. Taylor........................ 56 Chairman of the Board, Chief Executive
Officer and Director
J. Daniel Sizemore..................... 50 President, Chief Operating Officer and
Director
David R. Carter........................ 46 Executive Vice President and Chief
Financial Officer
James A. Taylor, Jr.................... 33 Executive Vice President, General
Counsel and Director
Marie Swift............................ 57 Secretary and Director
James R. Andrews, M.D.................. 56 Director
Charles Barkley........................ 35 Director
Neal R. Berte.......................... 58 Director
W.T. Campbell, Jr...................... 51 Director
Peter N. Dichiara(2)................... 42 Director
Steven C. Hays......................... 42 Director
Larry R. House......................... 54 Director
Thomas E. Jernigan, Jr.(2)............. 33 Director
Randall E. Jones....................... 45 Director
James Mailon Kent, Jr.(1).............. 57 Director
Mayer Mitchell......................... 65 Director
Ronald W. Orso, M.D.(1)................ 52 Director
Harold Ripps(2)........................ 59 Director
Richard M. Scrushy..................... 45 Director
Michael E. Stephens.................... 55 Director
Larry D. Striplin, Jr.(1).............. 69 Director
T. Mandell Tillman..................... 50 Director
Johnny Wallis.......................... 69 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
James A. Taylor has been Chairman of the Board and Chief Executive Officer
of the Corporation since its incorporation in 1998. Mr. Taylor served as
President of the Corporation from its incorporation until November 1998. Mr.
Taylor served as Chairman of the Board, President and Chief Executive Officer of
Warrior from October 1997 until the Warrior Merger. Mr. Taylor was Founder,
Chairman of the Board and Chief Executive Officer of Alabama National
BanCorporation ("ANB"), a publicly-traded bank holding company based in
Birmingham, Alabama, from its incorporation in 1986 until his retirement in
April 1996. From 1981 until 1996, Mr. Taylor served as Chairman of the Board and
Chief Executive Officer of various banks and bank holding companies that
ultimately comprised ANB. Mr. Taylor is also on the Board of Directors of the
American Sports Medicine Institute.
39
<PAGE> 42
J. Daniel Sizemore has been a director of the Corporation and President and
Chief Operating Officer of the Corporation since the Commerce Merger. Mr.
Sizemore served as a Consultant to The Bank from April 1998 until November 1998.
Mr. Sizemore served as President, Chief Executive Officer and a director of
Commerce from April 1995 until the Commerce Merger on November 6, 1998. Mr.
Sizemore served as President of AmSouth Bank in Marshall County from 1987
through 1994. He has worked in the financial service business since 1970.
David R. Carter has been Executive Vice President and Chief Financial
Officer of the Corporation since the Warrior Merger. Mr. Carter served as
Executive Vice President and Chief Financial Officer of Warrior from April 1998
until the Warrior Merger. Mr. Carter served as a consultant to Warrior from
January 1998 until April 1998. From June 1995 through January 1998, Mr. Carter
served as the Chief Financial Officer of Roxco, Ltd., a regional construction
company. From February 1981 through January 1995, Mr. Carter served in various
capacities with Trustmark, a publicly-traded bank holding company based in
Jackson, Mississippi, including Chief Financial Officer from September 1988
until January 1995.
James A. Taylor, Jr. has been Executive Vice President and General Counsel
of the Corporation since the Warrior Merger. Mr. Taylor was a director of
Warrior from October 1997 until the Warrior Merger and served as Executive Vice
President and General Counsel of Warrior from April 1998 until the Warrior
Merger. From June 1996 until April 1998, Mr. Taylor served as Vice
President -- Legal Services for MedPartners, Inc. ("MedPartners"), a
publicly-traded healthcare company. From July 1994 until December 1996, Mr.
Taylor served as outside general counsel to ANB. From August 1990 until March
1996, Mr. Taylor was in private practice with a law firm in Birmingham, Alabama.
Mr. Taylor is the son of James A. Taylor.
Marie Swift has been a director and Secretary of the Corporation since the
Warrior Merger and served as a director of Warrior from its incorporation in
1982 until the Warrior Merger. Ms. Swift has been President of The Bank of
Warrior since January 1998 prior to that she served as Senior Vice President of
The Bank beginning in 1982.
James R. Andrews, M.D. has been a director of the Corporation since the
Warrior Merger and served as a director of Warrior from October 1997 until the
Warrior Merger. Dr. Andrews served as a director of ANB from 1989 until 1996.
Dr. Andrews has practiced as an orthopedic surgeon specializing in
sports-related injuries for over 25 years.
Charles Barkley has been a director of the Corporation since the Warrior
Merger and served as a director of Warrior from October 1997 until the Warrior
Merger. Mr. Barkley has been a professional basketball player for over 14 years
and currently plays with the Houston Rockets of the National Basketball
Association.
Neal R. Berte, Ph.D. has been a director of the Corporation since September
1998. Dr. Berte has been the President of Birmingham-Southern College since
1975.
W.T. Campbell, Jr.has been a director of the Corporation since the City
National Merger. Mr. Campbell served as President of City National and Chairman
of the Board of Directors of City National until the City National Merger. Mr.
Campbell was a director of City National from its inception in 1984 until the
City National Merger on October 30, 1998, and was a director of City National
Bank. Mr. Campbell is a practicing attorney in Sylacauga, Alabama with the firm
of McKay and Campbell.
Peter N. Dichiara has been a director of the Corporation since the Warrior
Merger and served as a director of Warrior from 1984 until the Warrior Merger.
Mr. Dichiara has been the President of City Wholesale Grocery, a grocery supply
company based in Birmingham, Alabama for since October 1983.
Steven C. Hays has been a director of the Corporation since the Commerce
Merger. Mr. Hayes served as a director of Commerce from April 1995 until the
Commerce Merger on November 6, 1998. Mr. Hayes also served as Executive Vice
President of Steel Processing Services, Inc. from 1981 until the sale of the
company in 1993. He presently manages a number of personal investments.
Larry R. House has been a director of the Corporation since the Warrior
Merger and served as a director of Warrior from October 1997 until the Warrior
Merger. From 1985 to 1992, he was Chief Operating Officer of HEALTHSOUTH
Rehabilitation Corporation, now HEALTHSOUTH Corporation, a publicly-traded
40
<PAGE> 43
provider of rehabilitative health care services ("HEALTHSOUTH"). From 1992 to
1993, Mr. House was President of HEALTHSOUTH International, Inc. From 1993 to
1998, Mr. House served as Chairman of the Board and Chief Executive Officer of
MedPartners. Mr. House is a member of the Board of Directors of the American
Sports Medicine Institute.
Thomas E. Jernigan, Jr. has been a director of the Corporation since the
Warrior Merger and served as a director of Warrior from October 1997 until the
Warrior Merger. Mr. Jernigan has been the President of Marathon Corporation, a
privately-held investment management company based in Birmingham, Alabama for
over two years. Mr. Jernigan's father holds the title of "Director Emeritus," a
non-voting position.
Randall E. Jones has been a director of the Corporation since the Commerce
Merger. Mr. Jones served as a director of Commerce from April 1995 until the
Commerce Merger on November 6, 1998. Mr. Jones is the owner and President of
Randy Jones Insurance Agency, Inc., representing Nationwide Insurance Company
since 1978. He is a past president of the Albertville Rotary Club and the
Albertville Chamber of Commerce.
James Mailon Kent, Jr. has been a director of the Corporation since the
Warrior Merger and served as a director of Warrior from October 1997 until the
Warrior Merger. Mr. Kent served as a director of ANB from 1988 until 1996 and
served as Vice Chairman of ANB from 1988 until 1994. Mr. Kent has been the owner
of Mailon Kent Insurance Agency in Birmingham, Alabama for over 20 years.
Mayer Mitchell has been a director of the Corporation since the Warrior
Merger. He served as Chairman and Chief Executive Officer of The Mitchell
Company, a real estate development firm based in Mobile, Alabama, from September
1955 until his retirement from the company on December 31, 1986. He is currently
the owner of Mitchell Brothers, Inc., a private investment company. Mr. Mitchell
is a former National President and Chairman of the Board of Directors of the
American Israel Public Affairs Committee (AIPAC) and a past member of the Board
of Directors of AmSouth Bank N.A. of Mobile and Altus Bank of Mobile.
Ronald W. Orso, M.D. has been a director of the Corporation since the
Warrior Merger and served as a director of Warrior from October 1997 until the
Warrior Merger. Dr. Orso served as a director of ANB from 1988 until 1997. Dr.
Orso has practiced in the field of obstetrics and gynecology for over 23 years.
He is the past Chairman of the Department of Obstetrics and Gynecology and the
past president of the Medical Staff at Baptist Medical Center in Birmingham.
Harold Ripps has been a director of the Corporation since the Warrior
Merger. He is a trustee of Colonial Properties Trust. In 1969, Mr. Ripps founded
The Rime Companies, a real estate development, construction and management firm,
headquartered in Birmingham, Alabama, specializing in the development of multi-
family properties. Mr. Ripps has served The Rime Companies in an executive
capacity since that time.
Richard M. Scrushy has been a member of the Board of Directors of the
Corporation since the Warrior Merger. Since 1984, Mr. Scrushy is Chairman of the
Board and Chief Executive Officer of HEALTHSOUTH. Mr. Scrushy has been a
director of MedPartners since January 1993 and served as its Chairman of the
Board of Directors from January 1998 through October 1998.
Michael Stephens has been a director of the Corporation since the Warrior
Merger. He has been the Chairman and Chief Executive Officer of S Enterprises,
Inc. He founded and was Chairman and Chief Executive Officer of ReLife, a
publicly-traded rehabilitation company based in Birmingham, Alabama from 1986
until 1994. Mr. Stephens also serves on the Board of Directors of Rehabilitation
Designs of America based in Kansas City, Kansas, and PsychPartners, Inc. based
in Birmingham, Alabama.
Larry D. Striplin, Jr. has been a member of the Board of Directors of the
Corporation since the Warrior Merger and served as a director of Warrior from
October 1997 until the Warrior Merger. Since December 1995, Mr. Striplin has
been the Chairman and Chief Executive Officer of Nelson-Brantley Glass
Contractors, Inc. and Chairman and Chief Executive Officer of Clearview
Properties, Inc. Until December 1995, Mr. Striplin had been Chairman of the
Board and Chief Executive Officer of Circle "S" Industries, Inc., a
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<PAGE> 44
privately-owned bonding wire manufacturer. Mr. Striplin is a member of the Board
of Directors of MedPartners and Kulicke & Suffa, Inc., a publicly-traded
manufacturer of electronic equipment.
T. Mandell Tillman has been a director of the Corporation since the
Commerce Merger. Mr. Tillman was a director of Commerce from April 1995 until
the Commerce Merger on November 6, 1998. Mr. Tillman has served as Chairman of
the Board of Real Property Services, Inc. since 1985. He holds the MAI and CRE
designations.
Johnny Wallis has been a director of the Corporation since the Warrior
Merger and served as director of Warrior from its incorporation in 1982 until
the Warrior Merger. Mr. Wallis served as the Chairman of the Board, President
and Chief Executive Officer of Warrior until October 1997. Mr. Wallis served as
President of The Bank until January 1998, and continues to serve as Chief
Executive Officer of The Bank.
CLASSIFIED BOARD OF DIRECTORS
Pursuant to the terms of the Corporation's Restated Certificate of
Incorporation (the "Corporation Certificate") and the Corporation's Bylaws (the
"Corporation Bylaws"), the Board of Directors of the Corporation is divided into
three classes, with each class being as nearly equal in number as reasonably
possible. One class holds office for a term that will expire at the annual
meeting of stockholders to be held in 1999, a second class holds office for a
term that will expire at the annual meeting of stockholders to be held in 2000,
and a third class holds office for a term that will expire at the annual meeting
of stockholders to be held in 2001. Each director holds office for the term to
which he is elected and until his successor is duly elected and qualified. At
each annual meeting of stockholders of the Corporation, the successors to the
class of directors whose terms expire at such meeting are elected to hold office
for a term expiring at the annual meeting of stockholders held in the third year
following the year of their election. Messrs. Barkley, Campbell, Jernigan, Jr.,
Mitchell, Ripps, Taylor, Jr., and Tillman have terms expiring in 1999, Messrs.
Dichiara, Hays, House, Jones, Scrushy, Stephens and Wallis and Ms. Swift have
terms expiring in 2000, and Messrs. Taylor, Berte, Kent, Sizemore and Striplin
and Drs. Andrews and Orso have terms expiring in 2001. The Board of Directors
elects officers annually, and such officers serve at the discretion of the Board
of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Corporation currently has two committees: the
Audit Committee and the Compensation Committee.
The Audit Committee is responsible for reviewing and supervising the
financial controls of the Corporation. The Audit Committee makes recommendations
to the Board of Directors of the Corporation with respect to the Corporation's
financial statements and the appointment of independent auditors, reviews
significant audit and accounting policies and practices, meets with the
Corporation's independent public accountants concerning, among other things, the
scope of audits and reports, and reviews the performance of overall accounting
and financial controls of the Corporation. The Audit Committee consists of
Messrs. Ripps, Dichiara and Jernigan, Jr.
The Compensation Committee is responsible for reviewing the performance of
the officers of the Corporation and recommending to the Board of Directors of
the Corporation's annual salary and bonus amounts for all officers of the
Corporation. The Compensation Committee consists of Messrs. Striplin and Kent
and Dr. Orso.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
There was no Compensation Committee of the Board of Directors of the
Corporation during 1997. During 1997, Mr. Wallis and Ms. Swift were responsible
for the recommendation to the Board of all compensation levels. Messrs. Kent and
Striplin and Dr. Orso now comprise the Compensation Committee.
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<PAGE> 45
EXECUTIVE OFFICER COMPENSATION
Executive Officer Compensation. The following table presents certain
information concerning compensation paid or accrued for services rendered to the
Corporation in all capacities during the years ended December 31, 1995, 1996 and
1997, for the chief executive officer and the four other most highly compensated
executive officers of the Corporation whose total annual salary and bonus in the
last fiscal year exceeded $100,000 (collectively, the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION(1) AWARDS
----------------------------------------------- -------------
OTHER SECURITIES
ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION HELD YEAR SALARY ($) BONUS ($) COMPENSATION(2) OPTIONS (#)
- -------------------------------- ---- ---------- --------- --------------- -------------
<S> <C> <C> <C> <C> <C>
James A. Taylor.................................... 1997 $ 25,000 $ -- $ 4,200 --
Chairman of the Board and 1996 -- -- -- --
Chief Executive Officer 1995 -- -- -- --
J. Daniel Sizemore................................. 1997 $108,233 $39,706 $15,700 1,000
President and Chief Operating 1996 103,161 30,000 21,236 1,000
Officer 1995 92,911 0 10,112 20,000
Johnny Wallis(3)................................... 1997 $108,450 $37,025 $25,636 --
1996 104,100 14,300 21,652 --
1995 95,741 19,584 19,014 --
Marie Swift(4)..................................... 1997 $ 75,150 $26,250 $22,180 --
1996 74,800 10,625 18,604 --
1995 75,150 16,000 16,506 --
</TABLE>
- ---------------
(1) Dollar value of perquisites and other benefits were less than the lesser of
$50,000 or 10% of total salary and bonus for each Named Executive Officer.
(2) Represents the dollar value of board fees received and insurance premiums
paid by the Corporation with respect to life, health, dental and disability
insurance and automobile allowance for the benefit of the Named Executive
Officer.
(3) Mr. Wallis served as Chairman of the Board, President and Chief Executive
Officer of the Corporation from its incorporation in 1982 until October
1997. Mr. Wallis served as President of The Bank until January 1998 and
continues to serve as Chief Executive Officer of The Bank.
(4) Ms. Swift has been a director and secretary of the Corporation since the
Warrior Merger and served as a director of Warrior from its incorporation in
1982 until the Warrior Merger. Ms. Swift served as President of The Bank
from January 1998 until November 6, 1998. Prior to that she served as Senior
Vice President of The Bank beginning in 1982.
DIRECTOR COMPENSATION
Directors of the Corporation receive $1,500 compensation for each board
meeting attended and a retainer of $1,500 per quarter for serving as directors
of the Corporation. Directors are eligible to receive grants of stock options
under The Banc Corporation 1998 Stock Incentive Plan (the "Corporation Incentive
Plan"). See "-- Executive Officer Compensation -- Option Grants in 1997" and
"Principal Stockholders of the Corporation."
EMPLOYMENT AGREEMENTS
Pursuant to the Executive Employment Agreement entered into between the
Corporation and James A. Taylor (the "Taylor Agreement") in October 1997, Mr.
Taylor will serve as Chairman of the Board and Chief Executive Officer of the
Corporation and Chairman of the Board of The Bank. In addition, Mr. Taylor will
be elected to serve as a director of the Corporation and each of its
subsidiaries. Mr. Taylor will receive a minimum annual base compensation of
$150,000, $200,000 and $250,000 in the first three years of the Taylor
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<PAGE> 46
Agreement plus a bonus of 15% of the base amount per quarter. In the event of a
change of control or an initial public offering of Corporation Common Stock
prior to the second anniversary of the Taylor Agreement, the base compensation
shall be $250,000.
Pursuant to the Taylor Agreement, Mr. Taylor will be entitled to receive
other benefits such as a car allowance and country club dues and may participate
in other executive compensation plans. The agreement is for a term of three
years which is renewable daily for an additional three-year term and terminable
by the Corporation only upon three years' notice. If Mr. Taylor is terminated
for any reason other than cause (including constructive termination), he shall
receive three years base compensation, directors' fees and all benefits or their
cash equivalents and be entitled to a "gross-up" payment to cover any excise tax
imposed on any severance payment to Mr. Taylor.
The Corporation entered into a Deferred Compensation Agreement with Mr.
Taylor on July 23, 1998. That agreement provides that the Corporation shall fund
the premium of two life insurance policies on Mr. Taylor's life which will
provide a split dollar benefit to the Corporation and Mr. Taylor's estate in the
event of his death. Upon the termination of Mr. Taylor's employment for reasons
other than death or Cause (as defined in the agreement), Mr. Taylor will become
entitled to receive 15 annual payments in the approximate amount of $188,000
commencing April 15, 2007.
Pursuant to the Employment Agreement (the "Sizemore Agreement") entered
into among the Corporation, The Bank and J. Daniel Sizemore November 6, 1998,
Mr. Sizemore will serve as President and Chief Operating Officer of the
Corporation, President and Chief Executive Officer of The Bank and President of
the Bank's Albertville branch. In addition, Mr. Sizemore serves as a director of
the Corporation and each of its subsidiary banks. Mr. Sizemore will receive a
minimum annual compensation of $270,000 including salary, director's fees and
bonuses. The Sizemore Agreement also provides that Mr. Sizemore will be entitled
to receive other benefits such as a car allowance, country club dues and life
insurance and may participate in other executive compensation plans. The
agreement is for a term of three years which is renewable daily for a three year
term and terminable by the Employer only upon three years' notice. If Mr.
Sizemore is terminated for any reason other than cause as defined in the
agreement, Mr. Sizemore shall receive his annual compensation for three years
following termination and may not, directly or indirectly, carry on or do
similar business or solicit similar business with any customer of the
Corporation in any county where the Corporation or its subsidiaries do business
on the date of termination.
Pursuant to the Employment Agreement entered into among the Corporation,
The Bank and W.T. Campbell, Jr. (the "Campbell Agreement") on October 30, 1998,
Mr. Campbell will serve as the Chairman of the Board for The Bank of Sylacauga.
Mr. Campbell will receive a minimum annual salary of $135,000. The Campbell
Agreement provides that Mr. Campbell will be entitled to receive other benefits
including a life insurance policy and may participate in other executive
compensation plans. The Campbell Agreement is for a term of three years and is
terminable by the Corporation only upon prior notice for a period equal to the
remaining term. If Mr. Campbell is terminated for any reason other than cause as
defined in the Campbell Agreement, Mr. Campbell shall receive his annual
compensation for three years following termination and may not, directly or
indirectly, carry on or do similar business or solicit similar business with any
customer of the Corporation in any county where the Corporation or its
subsidiaries do business.
INCENTIVE PLANS
Corporation Incentive Plan. The objectives of the Corporation Incentive
Plan are to further the growth and development of the Corporation and its
subsidiaries by (1) encouraging selected Participants who contribute or are
expected to contribute materially to the Corporation's success to obtain
proprietary interests in the Corporation to encourage them to promote the best
interests of the Corporation and (2) affording the Corporation a means of
attracting qualified personnel. A total of 1,000,000 shares of Corporation
Common Stock are covered by the Corporation Incentive Plan. Such shares of
Corporation Common Stock may be in whole or in part, authorized but unissued
shares or issued shares which have been reacquired by the Corporation. The
Corporation Incentive Plan authorizes the grant of options to purchase
Corporation Common Stock intended to qualify as incentive stock options
("Incentive Options") under Section 422 of the
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<PAGE> 47
Internal Revenue Code of 1986, as amended (the "Code"), and the grant of options
that do not qualify as Incentive Options ("Non-Qualified Options") under Section
422 of the Code.
The Corporation Incentive Plan is administered by the Compensation
Committee of the Board of Directors of the Corporation (the "Compensation
Committee"). The Compensation Committee, subject to the approval of the Board of
Directors and the provisions of the Corporation Incentive Plan, has full power
to determine the types of awards to be granted, to select the individuals to
whom awards will be granted, to fix the number of shares that each optionee may
purchase, to set the terms and conditions of each option, and to determine all
other matters relating to the Corporation Incentive Plan. The Corporation
Incentive Plan provides that the Compensation Committee will select grantees
from among employees, officers, directors, consultants, agents, independent
contractors and other persons who contributed are expected to contribute
materially to the success of the Corporation or its subsidiaries.
The option exercise price of each option shall be determined by the
Compensation Committee, but shall not be less than 100% of the fair market value
of the shares on the date of grant in the case of Incentive Options. No
Incentive Option may be granted to any employee who owns at the date of grant
stock representing in excess of 10% of the combined voting power of all classes
of stock of the Corporation or a subsidiary unless the exercise price for stock
subject to such options is at least 110% of the fair market value of such stock
at the time of grant and the option term does not exceed five years. The
aggregate fair market value of stock with regard to which Incentive Options are
exercisable by an individual for the first time during any calendar year may not
exceed $100,000. The terms and conditions of each option shall be fixed from
time to time by the Compensation Committee. The Compensation Committee has
approved grants under the Corporation Incentive Plan, effective November 5,
1998, of options to purchase 439,000 and at December 4, 1998, of options to
purchase 20,000 shares, at an exercise price equal to the higher of (i) the
Offering price hereunder or (ii) "Fair Market Value" (as defined in the
Corporation Incentive Plan) on the date of the grant.
The Commerce Option Plan. On May 4, 1995, the Commerce Shareholders
adopted the Commerce Bank of Alabama Incentive Stock Option Plan (the "Commerce
Option Plan") for the benefit of key employees of Commerce. The Commerce Option
Plan authorizes the grant of options to purchase Commerce Common Stock intended
to qualify as Incentive Options and the grant of Non-Qualified Options.
The Commerce Option Plan was assumed by the Corporation pursuant to the
merger of Commerce with and into The Bank. As of September 30, 1998, there were
outstanding under the Commerce Option Plan options to purchase 35,500 shares of
Commerce Common Stock at prices between $10 and $14.50 per share. These options
will be converted into options to purchase 82,384 shares of Corporation Common
Stock at prices between $4.30 and $6.24 per share.
CERTAIN RELATIONSHIPS AND RELATED ACQUISITIONS
The Bank has entered into transactions with its directors, executive
officers, significant shareholders and their affiliates. Such transactions were
made in the ordinary course of business on substantially the same terms and
conditions, including interest rates and collateral, as those then prevailing
for comparable transactions with other customers, and did not, in the opinion of
management of The Bank involve more than normal credit risk or present other
unfavorable features.
In September 1997, Warrior purchased shares of Warrior Common Stock at a
price of $4.79 per share from the following Warrior directors who are now
directors of the Corporation: Johnny Wallis, 436,200; Marie Swift, 172,500; and
Peter N. Dichiara, 90,000. In October 1997, the following directors of the
Corporation purchased the following number of shares of Warrior Common Stock at
$4.79 per share: James R. Andrews, 210,000; Charles Barkley, 210,000; Larry R.
House, 208,800; James Mailon Kent, Jr., 210,000; Mayer Mitchell, 105,000; Harold
Ripps, 210,000; Michael A. Stephens, 210,000; and Larry D. Striplin, 210,000.
(The dollar amounts and the share numbers set forth above have been adjusted to
take into account the 300-for-one exchange effected in the Warrior Merger in
September 1998.)
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During 1997, Warrior purchased the John A. Hand Building, a 21-story office
building in downtown Birmingham, from Taylor Acquisition Corporation, a
corporation owned by James A. Taylor, Chairman and Chief Executive Officer of
the Corporation, and certain family members including his son, James A. Taylor,
Jr., Executive Vice President and General Counsel of the Corporation. Warrior
purchased the building in exchange for 460,500 shares of Warrior Common Stock,
valued at $4.79 per share, and Warrior assumed $1,513,000 in outstanding debt on
the property. James A. Taylor received 368,400 shares of Warrior Common Stock,
valued at $4.79 per share, and James A. Taylor, Jr. received 30,000 shares of
Warrior Common Stock, valued at $4.79 per share. Other members of the Taylor
family received the remaining 62,100 shares of Warrior Common Stock. The
building, property and related equipment were appraised at $3,718,000 at the
time of the transaction.
During 1998, Warrior sold a total of 495,000 shares of Warrior Common Stock
at $4.79 per share to various executive officers and directors of the
Corporation. James A. Taylor, James A. Taylor, Jr., Richard M. Scrushy and James
R. Andrews each purchased 210,000, 105,000, 105,000 and 75,000 shares,
respectively.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
stock ownership of the Corporation as of November 6, 1998: (i) each director and
Named Executive Officer of the Corporation, (ii) all directors and executive
officers as a group, and (iii) each stockholder known by the Corporation to be
the beneficial owner of more than 5% of the outstanding Corporation Common
Stock. Except as otherwise indicated, each person or entity listed below has
sole voting and investment power with respect to all shares shown to be
beneficially owned by him or it except to the extent such power is shared by a
spouse under applicable law.
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF SHARES OF OF COMMON
THE CORPORATION STOCK
NAME POSITION HELD COMMON STOCK(1) OWNED(2)
- ---- ------------- ------------------- -----------
<S> <C> <C> <C>
James A. Taylor.................. Chairman of the Board, Chief 703,400(3)(10) 7.20%
Executive Officer and
Director
J. Daniel Sizemore............... President, Chief Operating 83,854(7) *
Officer and Director
James A. Taylor, Jr.............. Executive Vice President, 145,000(11) 1.50
General Counsel and
Director
Marie Swift...................... Director and Secretary 53,500(12) *
James R. Andrews, M.D............ Director 286,000(12) 2.96
Charles Barkley.................. Director 211,000(12) 2.19
Neal R. Berte.................... Director 1,000(12) *
W.T. Campbell, Jr................ Director 421,468(12) 4.37
Peter N. Dichiara................ Director 211,000(4)(12) 2.19
Steven C. Hays................... Director 74,642(8)(12) *
Larry R. House................... Director 104,800(12) 1.09
Thomas E. Jernigan............... Director Emeritus(6) 417,600 4.33
Thomas E. Jernigan, Jr........... Director 2,000(13) *
Randall E. Jones................. Director 48,574(12) *
James Mailon Kent, Jr............ Director 212,000(13) 2.20
Mayer Mitchell................... Director 106,000(12) 1.10
Ronald W. Orso, M.D.............. Director 211,000(5)(12) 2.19
Harold Ripps..................... Director 211,000(12) 2.19
Richard M. Scrushy............... Director 211,000(12) 2.19
Michael Stephens................. Director 211,000(12) 2.19
Larry D. Striplin, Jr............ Director 212,000(13) 2.20
T. Mandell Tillman............... Director 47,878(9)(12) *
Johnny Wallis.................... Director 106,000(12) 1.10
--------
All executive officers and
directors as a group (24
persons)....................... 4,301,716(14) 43.60%
</TABLE>
- ---------------
* Less than one percent.
(1) Under Section 13(d) of the Exchange Act, beneficial ownership includes,
without limitation, securities owned by certain of such person's family
members and securities of which that person has the right to acquire
beneficial ownership within 60 days such as the shares of Corporation
Common Stock subject to currently exercisable options.
(2) Percent for each named individual is calculated by treating any shares
subject to options that are held by the named individual and that are
exercisable within the next 60 days as if outstanding, but treating such
option shares held by others and treating shares subject to options held by
the named individual but not exercisable within 60 days as not outstanding.
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<PAGE> 50
(3) Does not include 32,100 shares owned by his wife, or 30,000 shares owned by
his son, Brett Taylor of which he disclaims ownership. Mr. Taylor's address
is 17 North 20th Street, Birmingham, Alabama 35203.
(4) Includes 210,000 shares owned by City Wholesale Grocery Co., Inc. of which
he is the President.
(5) Includes 210,000 shares as Trustee of Birmingham OB/GYN, P.A. Pension Plan.
(6) Director Emeritus is a non-voting position.
(7) Includes 2,784 shares owned by his wife, 2,320 shares owned by his children
and 51,055 shares subject to options.
(8) Includes 4,021 shares as custodian for his children.
(9) Includes 464 shares owned by his wife.
(10) Includes 125,000 shares subject to options.
(11) Includes 10,000 shares subject to options.
(12) Includes 1,000 shares subject to options.
(13) Includes 2,000 shares subject to options.
(14) Includes 218,055 shares subject to options.
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<PAGE> 51
SUPERVISION AND REGULATION
The supervision and regulation of bank holding companies and their
subsidiaries is intended primarily for the protection of depositors, the deposit
insurance funds of the FDIC and the banking system as a whole, not for the
protection of bank holding companies' shareholders or creditors. Various
supervisory and regulatory agencies have broad enforcement power over bank
holding companies and banks, including the power to impose substantial fines and
other penalties for violation of laws and regulations.
The following description summarizes some of the laws to which the
Corporation and The Bank are subject. References herein to applicable statutes
and regulations are brief summaries thereof, do not purport to be complete and
are qualified in their entirety by reference to such statutes and regulations.
THE CORPORATION
The Corporation is a bank holding company registered under the BHCA, and
the Corporation is subject to supervision, regulation and examination by the
Federal Reserve. The BHCA and other federal laws restrict the types of
activities in which bank holding companies may engage and subject them to a
range of supervisory requirements and activities, including regulatory
enforcement actions for violations of laws and regulations.
Regulatory Restrictions on Dividends; Source of Strength. It is the policy
of the Federal Reserve that bank holding companies pay cash dividends on common
stock only out of income available over the past year and only if prospective
earnings retention is consistent with a bank holding company's expected future
needs and financial condition. This policy provides that bank holding companies
should not maintain a level of cash dividends that undermines the bank holding
company's ability to serve as a source of strength to its banking subsidiaries.
The Corporation's principal source of funds to pay dividends on the shares
of Corporation Common Stock will be cash dividends that the Corporation receives
from The Bank. The payment of dividends by The Bank to the Corporation is
subject to certain restrictions imposed by federal banking laws, regulations and
authorities. As of September 30, 1998, an aggregate of approximately $3.1
million was available for payment of dividends by The Bank to the Corporation
under applicable restrictions, without regulatory approval. See "Supervision and
Regulation -- The Bank."
The federal banking statutes prohibit federally insured banks from making
any capital distributions (including a dividend payment) if, after making the
distribution, the institution would be "undercapitalized" as defined by statute.
Federal regulatory authorities also may prohibit an insured bank from engaging
in an unsafe or unsound practice, as determined by the relevant authority, in
conducting an activity. Paying dividends could be deemed an unsafe or unsound
practice, depending on a bank's financial condition. A regulatory authority
could impose stricter limits on The Bank's payment of dividends to the
Corporation if the authority deemed those limits appropriate to meet
requirements governing capital adequacy.
Under Federal Reserve policy, a bank holding company is expected to act as
a source of financial strength to each of its banking subsidiaries and commit
resources to their support. Such support may be required at times when, absent
this Federal Reserve policy, a holding company may not be inclined to provide
it. As discussed below, a bank holding company in certain circumstances could be
required to guarantee the capital plan of an undercapitalized banking
subsidiary.
In the event of a bank holding company's bankruptcy under Chapter 11 of the
U.S. Bankruptcy Code, the trustee will be deemed to have assumed and is required
to cure immediately any deficit under any commitment of the debtor holding
company imposed by any of the federal banking agencies to maintain the capital
of an insured depository institution. Any claim for breach of such a commitment
generally will have priority over most other unsecured claims.
Activities "Closely Related" to Banking. The BHCA prohibits a bank holding
company, with certain limited exceptions, from acquiring direct or indirect
ownership or control of any voting shares of any company that is not a bank or
from engaging in any activities other than those of banking, managing or
controlling banks and certain other subsidiaries, or furnishing services to or
performing services for its subsidiaries. One principal
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<PAGE> 52
exception to these prohibitions allows the acquisition of interests in companies
whose activities are found by the Federal Reserve, or order or regulation, to be
so closely related to banking or managing or controlling banks, as to be a
proper incident thereto. Some of the activities that have been determined to be
closely related to banking include: making or servicing loans, performing
certain data processing services, acting as an investment or financial advisor
to certain investment trusts and investment companies and providing securities
brokerage services. Other activities approved by the Federal Reserve include
consumer financial counseling, tax planning and tax preparation, futures and
options advisory services, check guaranty services, collection agency and credit
bureau services and personal property appraisals. In approving acquisitions by
bank holding companies of companies engaged in banking-related activities, the
Federal Reserve considers a number of factors and weighs the expected benefits
to the public (such as greater convenience and increased competition or gains in
efficiency) against the risks of possible adverse effects (such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest, or unsound banking practices). The Federal Reserve is also empowered
to differentiate between activities commenced de novo and activities commenced
through acquisition of a going concern.
Securities Activities. The Federal Reserve has approved applications by
bank holding companies to engage, through nonbank subsidiaries, in certain
securities-related activities (underwriting of municipal revenue bonds,
commercial paper, consumer receivable-related securities and one-to-four family
mortgage-backed securities), provided that the subsidiaries would not be
"principally engaged" in such activities for purposes of Section 20 of the
Glass-Steagall Act. In limited situations, holding companies may be able to use
such subsidiaries to underwrite and deal in corporate debt and equity
securities.
Safe and Sound Banking Practices. Bank holding companies are not permitted
to engage in unsafe and unsound banking practices. The Federal Reserve's
Regulation Y, for example, generally requires a bank holding company to give the
Federal Reserve prior notice of any redemption or repurchase of its own equity
securities, if the consideration to be paid, together with the consideration
paid for any repurchases or redemptions in the preceding year, is equal to 10%
or more of the holding company's consolidated net worth. The Federal Reserve may
oppose the transaction if it believes that the transaction would constitute an
unsafe or unsound practice or would violate any law or regulation. Depending
upon the circumstances, the Federal Reserve could take the position that paying
a dividend would constitute an unsafe or unsound banking practice.
The Federal Reserve has broad authority to prohibit activities of bank
holding companies and their nonbanking subsidiaries that represent unsafe and
unsound banking practices or which constitute violations of laws or regulations,
and can assess civil money penalties for certain activities conducted on a
knowing and reckless basis, if those activities caused a substantial loss to a
depository institution. The penalties can be as high as $1,000,000 for each day
the activity continues.
Anti-Tying Restrictions. Bank holding companies and their affiliates are
prohibited from tying the provision of certain services, such as extensions of
credit, to other services offered by a holding company or its affiliates.
Capital Adequacy Requirements. The Federal Reserve has adopted a system
using risk-based capital guidelines to evaluate the capital adequacy of bank
holding companies. Under the guidelines, specific categories of assets are
assigned different risk weights, based generally on the perceived credit risk of
the asset. These risk weights are multiplied by corresponding asset balances to
determine a "risk-weighted" asset base. The guidelines require a minimum total
risk-based capital ratio of 8.0% (of which at least 4.0% is required to consist
of Tier 1 capital elements). Total capital is the sum of Tier 1 and Tier 2
capital. As of September 30, 1998, the Corporation's ratio of Tier 1 capital to
total risk-weighted assets was 15.24% and its ratio of total capital to total
risk-weighted assets was 16.49%. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Capital Resources."
In addition to the risk-based capital guidelines, the Federal Reserve has
established a required leverage ratio as an additional tool to evaluate the
capital adequacy of bank holding companies. The leverage ratio is a company's
Tier 1 capital divided by its average total consolidated assets. Certain
highly-rated bank holding companies must maintain a minimum leverage ratio of
3.0%, but other bank holding companies may be
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<PAGE> 53
required to maintain a leverage ratio of up to 200 basis points above that
regulatory minimum. As of September 30, 1998, the Corporation's leverage ratio
was 11.63%.
The federal banking agencies' risk-based and leverage ratios are minimum
supervisory ratios generally applicable to banking organizations that meet
certain specified criteria, assuming that they have the highest regulatory
rating. Banking organizations not meeting these criteria are expected to operate
with capital positions well above the minimum ratios. The federal bank
regulatory agencies may set capital requirements for a particular banking
organization that are higher than the minimum ratios when circumstances warrant.
Federal Reserve guidelines also provide that banking organizations experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets.
Imposition of Liability for Undercapitalized Subsidiaries. Bank regulators
are required to take "prompt corrective action" to resolve problems associated
with insured depository institutions whose capital declines below certain
levels. In the event an institution becomes "undercapitalized," it must submit a
capital restoration plan. The capital restoration plan will not be accepted by
the regulators unless each company having control of the undercapitalized
institution guarantees the subsidiary's compliance with the capital restoration
plan up to a certain specified amount. Any such guarantee from a depository
institution's holding company is entitled to a priority of payment in
bankruptcy.
The aggregate liability of the holding company of an undercapitalized bank
is limited to the lesser of 5% of the institution's assets at the time it became
undercapitalized or the amount necessary to cause the institution to be
"adequately capitalized." The bank regulators have greater power in situations
where an institution becomes "significantly" or "critically" undercapitalized or
fails to submit a capital restoration plan. For example, a bank holding company
controlling such an institution could be required to obtain prior Federal
Reserve approval of proposed dividends or could be required to consent to a
consolidation or to divest the troubled institution or other affiliates.
Acquisitions by Bank Holding Companies. The BHCA requires every bank
holding company to obtain the prior approval of the Federal Reserve before it
may acquire all or substantially all of the assets of any bank, or ownership or
control of any voting shares of any bank, if, after such acquisition, it would
own or control, directly or indirectly, more than 5% of the voting shares of
such bank. In approving bank acquisitions by bank holding companies, the Federal
Reserve is required to consider the financial and managerial resources and
future prospects of the bank holding company and the banks concerned, the
convenience and needs of the communities to be served, and various competitive
factors.
Control Acquisitions. The Change in Bank Control Act prohibits a person or
group of persons from acquiring "control" of a bank holding company unless the
Federal Reserve has been notified and has not objected to the transaction. Under
a rebuttable presumption established by the Federal Reserve, the acquisition of
10% or more of a class of voting stock of a bank holding company with a class of
securities registered under Section 12 of the Exchange Act would, under the
circumstances set forth in the presumption, constitute acquisition of control of
that bank holding company.
In addition, any company is required to obtain the approval of the Federal
Reserve under the BHCA before acquiring 25% (5% in the case of an acquiror that
is a bank holding company) or more of the outstanding Common Stock of the
Corporation, or otherwise obtaining control or a "controlling influence" over
the Corporation.
Thrift Holding Company. Upon completion of the proposed Emerald Merger,
the Corporation will be a registered thrift holding company under the Home
Owner's Loan Act (the "HOLA") and will be subject to additional regulatory
scrutiny and examination by the Office of Thrift Supervision (the "OTS"). The
Corporation will be required to obtain OTS approval prior to acquiring, directly
or indirectly, more than 10% of the voting shares of, or otherwise obtaining
control (as defined in the relevant OTS regulations) over another thrift or
holding company of a thrift.
Qualified Thrift Lender. Under the HOLA, as amended by Federal Deposit
Insurance Corporation Improvements Act ("FDICIA"), as a thrift, Emerald must
maintain a minimum of 60% of its total portfolio
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<PAGE> 54
assets (as defined in the statute) in certain investments (generally, loans
relating to residential or manufactured housing) on a monthly average basis in
nine out of every twelve months in order to remain a "Qualified Thrift Lender."
A savings association that fails to become or remain a Qualified Thrift Lender
must either become a bank (other than a savings bank) or become subject to
certain restrictions on operations similar to those applicable to national
banks. In addition, in the event that Emerald fails to remain a Qualified Thrift
Lender, a portion of its bad debt reserve will be subject to taxation.
Restrictions on Distribution of Subsidiary Thrift Dividends and Assets. As
a thrift, Emerald will be subject to OTS regulations that restrict its ability
to make capital distributions such as dividends to the Corporation. Under these
regulations, a thrift that meets its fully phased-in capital requirements is
permitted to make capital distributions without OTS approval during any calendar
year up to 100% of its net income to date during that year plus an amount that
would reduce its surplus capital ratio (as measured at the beginning of the
calendar year) by one-half. Any proposed capital distributions in excess of this
amount are subject to objection by the OTS. A thrift that has capital
immediately prior to, and on a pro forma basis after giving effect to, a
proposed capital distribution that is equal to or in excess of its minimum
capital requirement, but less than its fully phased-in capital requirement, may
make capital distributions from 25% to 75% of net income during the most recent
four quarters (minus distributions previously made over that period), depending
on how close it is to meeting its fully phased-in capital requirement. A thrift
that fails to meet its minimum capital requirements is not authorized to make
any capital distributions without prior written approval from the OTS. All
thrifts must provide notice to the OTS prior to making any capital
distributions.
THE BANK
The deposits of The Bank, an Alabama-chartered banking corporation, are
insured by the Bank Insurance Fund ("BIF") of the FDIC. The Bank is not a member
of the Federal Reserve System; therefore, The Bank is subject to supervision and
regulation by the FDIC and the Alabama Banking Department. Such supervision and
regulation subjects The Bank to special restrictions, requirements, potential
enforcement actions and periodic examination by the FDIC and the Alabama Banking
Department. Because the Federal Reserve regulates the bank holding company
parent of The Bank, the Federal Reserve also has supervisory authority that
directly affects The Bank.
Branching. Alabama law permits an Alabama-chartered bank such as The Bank
to establish a branch anywhere in Alabama if the branch is approved in advance
by the Alabama Banking Department. The branch also must be approved by the FDIC
which considers a number of factors, including financial history, capital
adequacy, earnings prospects, character of management, needs of the community
and consistency with corporate powers.
Restrictions on Acquisitions With Affiliates and Insiders. Acquisitions
between The Bank and its respective nonbanking subsidiaries and affiliates,
including the Corporation, are subject to Section 23A of the Federal Reserve
Act. In general, Section 23A imposes limits on the amount of such transactions,
and also requires certain levels of collateral for loans to affiliated parties.
It also limits the amount of advances to third parties that are collateralized
by the securities or obligations of the Corporation or its subsidiaries.
Affiliate transactions also are subject to Section 23B of the Federal
Reserve Act which generally requires that certain transactions between The Bank
and its respective affiliates be on terms substantially the same, or at least as
favorable to such bank, as those prevailing at the time for comparable
transactions with or involving other nonaffiliated persons.
The restrictions on loans to directors, executive officers, principal
shareholders and their related interests (collectively referred to herein as
"insiders") contained in the Federal Reserve Act and Regulation O promulgated
pursuant to apply to all insured institutions and their subsidiaries and holding
companies. These restrictions include limits on loans to one borrower and
conditions that must be met before such a loan can be made. There is also an
aggregate limitation on all loans to insiders and their related interests. These
loans cannot exceed the institution's total unimpaired capital and surplus, and
the FDIC may determine that a lesser amount is appropriate. Insiders are subject
to enforcement actions for knowingly accepting loans in violation of applicable
restrictions.
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Restrictions on Distribution of Subsidiary Bank Dividends and
Assets. Dividends paid by The Bank have provided a substantial part of the
Corporation's operating funds and, for the foreseeable future, it is anticipated
that dividends paid by The Bank to the Corporation will continue to be the
Corporation's principal source of operating funds. Capital adequacy requirements
limit the amount of cash dividends that may be paid by The Bank. Under federal
law, The Bank can not pay a dividend if, after paying the dividend, The Bank
would be "under-capitalized." The FDIC may declare a dividend payment to be
unsafe or unsound even though The Bank would continue to meet its capital
requirements after the dividend.
Because the Corporation is a legal entity separate and distinct from its
subsidiaries, its right to participate in the distribution of assets of any
subsidiary upon that subsidiary's liquidation or reorganization will be
subordinate to the claims of the subsidiary's creditors. In the event of a
liquidation or other dissolution of an insured depository institution, the
claims of depositors and other general or subordinated creditors are entitled to
a priority of payment over the claims of holders of any obligation of the
institution to its shareholders, including any depository institution holding
company (such as the Corporation) or any shareholder or creditor thereof.
Examinations. The FDIC periodically examines and evaluates insured banks.
Based upon such an evaluation, the FDIC may revalue the assets of the
institution and require that it establish specific reserves to compensate for
the difference between the FDIC-determined value and the book value of such
assets. The Alabama Banking Department also conducts examinations of state banks
but may accept the results of a federal examination in lieu of conducting an
independent examination.
Capital Adequacy Requirements. The FDIC has adopted regulations
establishing minimum requirements for the capital adequacy of insured
institutions. The FDIC may establish higher minimum requirements if, for
example, a bank has previously received special attention or has a high
susceptibility to interest rate risk.
The FDIC's risk-based capital guidelines generally require state banks to
have a minimum of Tier 1 capital to total risk-weighted assets of 4.0% and a
ratio of total capital to total risk-weighted assets of 8.0%. The capital
categories have the same definitions for The Bank as for the Corporation. As of
December 31, 1997, The Bank's ratio of Tier 1 capital to total risk-weighted
assets was 14.37%, and its ratio of total capital to total risk-weighted assets
was 15.46%. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation -- Corporation."
Corrective Measures for Capital Deficiencies. Federal banking regulators
are required to take "prompt corrective action" with respect to
capital-deficient institutions. Agency regulations define, for each capital
category, the levels at which institutions are "well-capitalized," "adequately
capitalized," "under capitalized," "significantly under capitalized" and
"critically under capitalized." A "well capitalized" bank has a total risk based
capital ratio of 10.0% or higher; a Tier 1 risk based capital ratio of 6.0% or
higher; a leverage ratio of 5.0% or higher; and is not subject to any written
agreement, order or directive requiring it to maintain a specific capital level
for any capital measure. An "adequately capitalized" bank has a total risk based
capital ratio of 8.0% or higher; a Tier 1 risk based capital ratio of 4.0% or
higher; a leverage ratio of 4.0% or higher (3.0% or higher if the bank was rated
a CAMEL 1 in its most recent examination report and is not experiencing
significant growth); and does not meet the criteria for a well capitalized bank.
A bank is "under capitalized" if it fails to meet any one of the ratios required
to be adequately capitalized. The Bank is classified as "well capitalized" for
purposes of the FDIC's prompt corrective action regulations.
In addition to requiring undercapitalized institutions to submit a capital
restoration plan, applicable regulations contain broad restrictions on certain
activities of undercapitalized institutions including asset growth,
acquisitions, branch establishment and expansion into new lines of business.
With certain exceptions, an insured depository institution is prohibited from
making capital distributions, including dividends, and is prohibited from paying
management fees to control persons if the institution would be undercapitalized
after any such distribution or payment.
As an institution's capital decreases, the FDIC's enforcement actions
become more severe. A significantly undercapitalized institution is subject to
mandated capital raising activities, restrictions on interest rates paid and
transactions with affiliates, removal of management, and other restrictions. The
FDIC has only very
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limited discretion in dealing with a critically undercapitalized institution and
is virtually required to appoint a receiver or conservator.
Banks with risk-based capital and leverage ratios below the required
minimums may also be subject to certain administrative actions, including the
termination of deposit insurance upon notice and hearing, or a temporary
suspension of insurance without a hearing in the event the institution has no
tangible capital.
Deposit Insurance Assessments. The Bank must pay assessments to the FDIC
for federal deposit insurance protection. The FDIC has adopted a risk based
assessment system as required by FDICIA. Under this system, FDIC-insured
depository institutions pay insurance premiums at rates based on their risk
classification. Institutions assigned to higher-risk classifications (that is,
institutions that pose a greater risk of loss to their respective deposit
insurance funds) pay assessments at higher rates than institutions that pose a
lower risk. An institution's risk classification is assigned based on its
capital levels and the level of supervisory concern the institution poses to the
regulators. In addition, the FDIC can impose special assessments in certain
instances. The current range of BIF assessments is between 0% and 0.27% of
deposits.
The FDIC established a process for raising or lowering all rates for
insured institutions semi-annually if conditions warrant a change. Under this
new system, the FDIC has the flexibility to adjust the assessment rate schedule
twice a year without seeking prior public comment, but only within a range of
five cents per $100 above or below the premium schedule adopted. Changes in the
rate schedule outside the five cent range above or below the current schedule
can be made by the FDIC only after a full rulemaking with opportunity for public
comment.
On September 30, 1996, President Clinton signed into law an act that
contained a comprehensive approach to recapitalizing the Savings Association
Insurance Fund ("SAIF") and to assure the payment of the Financial Corporation's
("FICO") bond obligations. Under this act, banks insured under the BIF are
required to pay a portion of the interest due on bonds that were issued by FICO
to help shore up the ailing Federal Savings and Loan Insurance Corporation in
1987. The BIF rate must equal one-fifth of the SAIF rate through year-end 1999,
or until the insurance funds are merged, whichever occurs first. Thereafter, BIF
and SAIF payers will be assessed pro rata for the FICO bond obligations. With
regard to the assessment for the FICO obligation, the current BIF rate is .0126%
of deposits.
Enforcement Powers. The FDIC and the other federal banking agencies have
broad enforcement powers, including the power to terminate deposit insurance,
impose substantial fines and other civil and criminal penalties and appoint a
conservator or receiver. Failure to comply with applicable laws, regulations and
supervisory agreements could subject the Corporation or its banking
subsidiaries, as well as officers, directors and other institution-affiliated
parties of these organizations, to administrative sanctions and substantial
civil money penalties. The appropriate federal banking agency may appoint the
FDIC as conservator or receiver for a banking institution (or the FDIC may
appoint itself, under certain circumstances) if any one or more of a number of
circumstances exist, including, without limitation, the fact that the banking
institution is undercapitalized and has no reasonable prospect of becoming
adequately capitalized; fails to become adequately capitalized when required to
do so; fails to submit a timely and acceptable capital restoration plan; or
materially fails to implement an accepted capital restoration plan. The Alabama
Banking Department also has broad enforcement powers over The Bank, including
the power to impose orders, remove officers and directors, impose fines and
appoint supervisors and conservators.
Brokered Deposit Restrictions. Adequately capitalized institutions cannot
accept, renew or roll over brokered deposits except with a waiver from the FDIC,
and are subject to restrictions on the interest rates that can be paid on such
deposits. Undercapitalized institutions may not accept, renew or roll over
brokered deposits.
Cross-Guarantee Provisions. The Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA") contains a "cross-guarantee" provision
which generally makes commonly controlled insured depository institutions liable
to the FDIC for any losses incurred in connection with the failure of a commonly
controlled depository institution.
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Community Reinvestment Act. The Community Reinvestment Act of 1977 ("CRA")
and the regulations issued thereunder are intended to encourage banks to help
meet the credit needs of their service area, including low and moderate income
neighborhoods, consistent with the safe and sound operations of the banks. These
regulations also provide for regulatory assessment of a bank's record in meeting
the needs of its service area when considering applications to establish
branches, merger applications and applications to acquire the assets and assume
the liabilities of another bank. FIRREA requires federal banking agencies to
make public a rating of a bank's performance under the CRA. In the case of a
bank holding company, the CRA performance record of the banks involved in the
transaction are reviewed in connection with the filing of an application to
acquire ownership or control of shares or assets of a bank or to merge with any
other bank holding company. An unsatisfactory record can substantially delay or
block the transaction.
Consumer Laws and Regulations. In addition to the laws and regulations
already discussed herein, The Bank is also subject to certain consumer laws and
regulations that are designed to protect consumers in transactions with banks.
While the following list is not exhaustive, these laws and regulations include
the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds
Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity
Act and the Fair Housing Act, among others. These laws and regulations mandate
certain disclosure requirements and regulate the manner in which financial
institutions must deal with customers when taking deposits or making loans to
such customers. The Bank must comply with the applicable provisions of these
consumer protection laws and regulations as part of their ongoing customer
relations.
INSTABILITY OF REGULATORY STRUCTURE
Various legislation, including proposals to overhaul the bank regulatory
system, expand the powers of banking institutions and bank holding companies and
limit the investments that a depository institution may make with insured funds,
is from time to time introduced in Congress. Such legislation may change banking
statutes and the operating environment of the Corporation and its banking
subsidiaries in substantial and unpredictable ways. The Corporation cannot
determine the ultimate effect that potential legislation, if enacted, or
implementing regulations with respect thereto, would have upon the financial
condition or results of operations of the Corporation or its subsidiaries.
EXPANDING ENFORCEMENT AUTHORITY
One of the major additional burdens imposed on the banking industry by
FDICIA is the increased ability of banking regulators to monitor the activities
of banks and their holding companies. In addition, the Federal Reserve and FDIC
have extensive authority to police unsafe or unsound practices and violations of
applicable laws and regulations by depository institutions and their holding
companies. For example, the FDIC may terminate the deposit insurance of any
institution which it determines has engaged in an unsafe or unsound practice.
The agencies can also assess civil money penalties, issue cease and desist or
removal orders, seek injunctions and publicly disclose such actions. FDICIA,
FIRREA and other laws have expanded the agencies' authority in recent years, and
the agencies have not yet fully tested the limits of their powers.
EFFECT ON ECONOMIC ENVIRONMENT
The policies of regulatory authorities, including the monetary policy of
the Federal Reserve, have a significant effect on the operating results of bank
holding companies and their subsidiaries. Among the means available to the
Federal Reserve to affect the money supply are open market operations in U.S.
Government securities, changes in the discount rate on member bank borrowings
and changes in reserve requirements against member bank deposits. These means
are used in varying combinations to influence overall growth and distribution of
bank loans, investments and deposits, and their use may affect interest rates
charged on loans or paid for deposits.
Federal Reserve monetary policies have materially affected the results of
operations of commercial banks in the past and are expected to continue to do so
in the future. The Corporation cannot predict the nature of future monetary
policies and the effect of such policies on the business and earnings of the
Corporation and its subsidiaries.
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<PAGE> 58
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The Corporation's authorized capital stock consists of 5,000,000 shares of
Preferred Stock, par value $.001 per share, and 25,000,000 shares of Common
Stock, par value $.001 per share.
CORPORATION COMMON STOCK
Holders of Corporation Common Stock are entitled to one vote for each share
held of record on all matters to be submitted to a vote of the stockholders and
do not have pre-emptive rights. Cumulative voting is not permitted. This means
that the holders of shares entitled to exercise more than 50 percent of the
voting rights in the election of directors, for example, will be able to elect
all the Corporation's Directors.
The holders of Corporation Common Stock are entitled to dividends and other
distributions as and if declared by the Board of Directors out of funds legally
available therefor. Upon the liquidation, dissolution or winding up of the
Corporation, the holders of Corporation Common Stock would be entitled to share
pro rata in the distribution of all assets, if any, of the Corporation remaining
after payment or provision for payment of all the Corporation's debts and
obligations and preferred liquidation payments, if any, to holders of any
outstanding shares of Corporation Preferred Stock. Shares of the Corporation
Common Stock are not subject to any redemption provisions and are not
convertible into any other security or other property of the Corporation. No
share of Corporation Common Stock is subject to any call or assessment. The
Corporation Common Stock presently outstanding is, and the Corporation Common
Stock to be outstanding upon completion of this Offering will be, fully paid and
non-assessable.
CORPORATION PREFERRED STOCK
The Board of Directors of the Corporation, without further stockholder
authorization, is authorized to issue shares of Corporation Preferred Stock in
one or more series and to determine and fix the rights, preferences and
privileges of each series, including dividend rights and preferences over
dividends on Corporation Common Stock and over one or more other series of
Corporation Preferred Stock, conversion rights, voting rights (in addition to
those provided by law), redemption rights and the terms of any sinking fund
therefor, and rights upon liquidation, dissolution or winding up, including
preferences over Corporation Common Stock and over one or more other series of
Corporation Preferred Stock. Although the Corporation has no present plans to
issue any shares of Corporation Preferred Stock, the issuance of shares of
Corporation Preferred Stock, or the issuance of rights to purchase such shares,
may have the effect of delaying, deferring or preventing a change in control of
the Corporation or an unsolicited acquisition proposal.
CERTAIN PROVISIONS OF THE CORPORATION'S CERTIFICATE AND DELAWARE LAW
Classified Board of Directors. The Corporation's Restated Certificate of
Incorporation and the Corporation's Bylaws divide the Board of Directors of the
Corporation into three classes of directors, as nearly equal in number as is
reasonably possible, serving staggered terms so that directors' terms expire
either at the 1999, 2000, or 2001 annual meeting of stockholders of the
Corporation, and every three years thereafter as to each class. See
"Management -- Classified Board of Directors."
The Corporation believes that classification of the Board of Directors into
classes will help to assure the continuity and stability of the Board of
Directors and the Corporation's business strategies and policies as determined
by the Board of Directors, since, generally, a majority of the directors at any
given time will have had prior experience as directors of the Corporation. The
Corporation believes that this, in turn, will permit the Board of Directors to
more effectively represent the interests of stockholders.
With three classes, at least two annual meetings of stockholders, instead
of one, will generally be required to effect a change in the majority of the
Board of Directors. This classification may discourage proxy contests for the
election of directors or purchases of a substantial block of Corporation Common
Stock because classification tends to prevent a change in control of the Board
of Directors in a relatively short period of time.
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<PAGE> 59
This classification could also have the effect of discouraging a third party
from making a tender offer or otherwise attempting to obtain control of the
Corporation. Under the General Corporation Law of the State of Delaware
("DGCL"), unless the certificate of incorporation otherwise provides, a director
on a classified board may be removed by the stockholders of the corporation only
for cause. The Corporation's Certificate of Incorporation does not provide
otherwise.
Advance Notice Provisions for Stockholder Proposals and Stockholder
Nominations of Directors. The Corporation's Restated Certificate of
Incorporation provides that, at an annual meeting of stockholders, only such
business shall be conducted as shall have been properly brought before the
meeting. To be properly brought before an annual meeting, business must be (a)
specified in the formal notice of the meeting (or any approved supplement
thereto) given by or at the direction of the Board of Directors, (b) otherwise
properly brought before the meeting by or at the direction of the Board of
Directors, or (c) otherwise properly brought before the meeting by a
stockholder. For business to be properly brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the Secretary of the Corporation.
Delaware Takeover Statute. The Corporation is subject to Section 203 of
the DGCL which, subject to certain exceptions, prohibits a Delaware corporation
from engaging in any of a broad range of business combinations with any
"interested stockholder" for a period of three years following the date that
such stockholder became an interested stockholder, unless: (i) prior to such
date, the Board of Directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder; (ii) upon consummation of the transaction which resulted
in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (A) by persons
who are directors and also officers and (B) by employee stock plans in which
employee participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer;
or (iii) on or after such date, the business combination is approved by the
Board of Directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the interested
stockholder. An "interested stockholder" is defined as any person that is (a)
the owner of 15% or more of the outstanding voting stock of the corporation or
(b) an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder.
LIMITATIONS ON LIABILITY OF OFFICERS AND DIRECTORS
The Corporation's Restated Certificate of Incorporation contains a
provision that eliminates or limits director liability to the Corporation and
its stockholders for monetary damages arising from acts or omissions in the
director's capacity as a director. The provision does not, however, eliminate or
limit the personal liability of a director (i) for any breach of such director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under the Delaware statutory provision making directors
personally liable, under a negligence standard, for unlawful dividends or
unlawful stock purchases or redemptions, or (iv) for any transaction from which
the director derived an improper personal benefit. This provision in the
Corporation's Certificate of Incorporation affords persons who serve on the
Board of Directors of the Corporation protection against awards of monetary
damages resulting from breaches of their duty of care (except as indicated
above). As a result of this provision, the ability of the Corporation or a
stockholder thereof to successfully prosecute an action against a director for a
breach of his duty of care is limited. However, the provision does not affect
the availability of equitable remedies such as an injunction or rescission based
upon a director's breach of his duty of care. The SEC takes the position that
these kinds of provisions will have no effect on claims arising under the
federal securities laws.
In addition, the Corporation's Restated Certificate of Incorporation and
the Corporation's Bylaws provide for mandatory indemnification rights, subject
to limited exceptions, to any director, officer, employee, or agent
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<PAGE> 60
of the Corporation who, by reason of the fact that he or she is a director,
officer, employee, or agent of the Corporation, is involved in a legal
proceeding of any nature. Such indemnification rights include reimbursement for
expenses incurred by such director, officer, employee, or agent in advance of
the final disposition of such proceeding in accordance with the applicable
provisions of the DGCL.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for Corporation Common Stock is SunTrust
Bank.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no established public trading market
for securities of the Corporation. The Corporation cannot predict the effect, if
any, that market sales of shares or the availability of shares for sale will
have on the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of Corporation Common Stock in the public market after the
lapse of the restrictions described below could adversely affect the prevailing
market price and the ability of the Corporation to raise equity capital in the
future.
Upon completion of this Offering, without giving effect to the proposed
Emerald Merger, the Company will have outstanding 10,647,858 shares of Common
Stock. Of these shares, 5,199,858 shares, including the 1,000,000 shares of
Common Stock to be sold in this Offering (excluding 150,000 shares subject to
the Underwriters' over-allotment option), will be freely tradeable without
restriction or limitation under the Securities Act, except to the extent such
shares are subject to the agreement with the Underwriters described below, and
except for any shares purchased by "affiliates" (as defined under the Securities
Act) of the Corporation. The remaining 5,448,000 shares are "restricted
securities" within the meaning of Rule 144 ("Rule 144") adopted under the
Securities Act (the "Restricted Shares"). The Restricted Shares were issued and
sold by the Corporation in private transactions in reliance upon exemptions from
registration under the Securities Act and all of such shares may be sold in the
public market subject to compliance with Rule 144.
The Corporation's directors and officers have agreed not to offer, sell or
otherwise dispose of any of their Corporation Common Stock for a period of 180
days after the date of this Prospectus (the "Lock-up Period") without the prior
written consent of the Underwriters. See "Underwriting." Following the Lock-up
Period, such shares will be eligible for sale in the public market, except
Restricted Shares which are subject to the conditions and restrictions of Rule
144 adopted under the Securities Act as described below.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
shares for at least a one-year period (as computed under Rule 144) is entitled
to sell within any three-month period a number of shares that does not exceed
the greater of (i) 1% of the then outstanding shares of Common Stock
(approximately 106,478 shares after giving effect to this Offering), and (ii)
the average weekly trading volume in the Corporation's Common Stock during the
four calendar weeks immediately preceding the date on which the notice of sale
is filed with the Commission. Sales under Rule 144 are also subject to certain
provisions relating to the manner and notice of sale and the availability of
current public information about the Corporation. A person (or persons whose
shares are aggregated) who is not deemed an affiliate of the Corporation at any
time during the three months immediately preceding a sale, and who has
beneficially owned shares for at least a two-year period (as computed under Rule
144), would be entitled to sell such shares under Rule 144(k) without regard to
the volume limitation and other conditions described above. The foregoing
summary of Rule 144 is not intended to be a complete description thereof.
There are an aggregate of 1,000,000 shares reserved for issuance under the
Corporation Incentive Plan. Pursuant to the Corporation Incentive Plan, the
Compensation Committee of the Corporation's Board of Directors granted options
to purchase 439,000 shares of Common Stock on November 5, 1998 and 20,000 shares
of Common Stock on December 4, 1998 at an exercise price equal to the higher of
(i) the Offering price hereunder or (ii) "Fair Market Value" (as defined in the
Corporation Incentive Plan) on the date of the grant. As of September 30, 1998,
there were outstanding options under the Commerce Option Plan to
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<PAGE> 61
purchase 35,500 shares of Commerce Common Stock. These options have been
converted into options to purchase 82,384 shares of Corporation Common Stock. As
soon as practicable following the consummation of this Offering, the Corporation
intends to file a registration statement under the Securities Act to register
these shares of Common Stock. See "Management -- Incentive Plans." After the
effective date of that registration statement, shares of Common Stock issued
pursuant to the Corporation Incentive Plan and covered by that registration
statement will be available for sale in the open market subject to the Lock-up
Period. If the Corporation does not file such a registration statement, holders
of shares issuable upon exercise of options will be able to sell such shares in
reliance on Rule 701 adopted under the Securities Act, subject to the Lock-up
Period. Generally, shares subject to Rule 701 are subject to the resale
restrictions of Rule 144. With respect to resales by non-affiliates, however, 90
days after the date of this Prospectus such shares may be resold without
conforming to Rule 144 except for its manner of sale requirements. With respect
to sales by affiliates, 90 days after the date of this Prospectus, all Rule 144
limitations will continue to apply except for the one-year holding period.
Securities issued in reliance on Rule 701 are restricted securities and at the
expiration of the Lock-up Period, may be sold by persons other than affiliates
subject only to the manner of sale provisions of Rule 144 and by affiliates
under Rule 144 without compliance with its one-year minimum holding period.
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<PAGE> 62
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, acting through Sterne, Agee & Leach, Inc., as
representative of the several underwriters (the "Representative"), have agreed,
severally, to purchase from the Corporation the number of shares of Corporation
Common Stock set forth opposite their respective names:
<TABLE>
<CAPTION>
NAME OF UNDERWRITER NUMBER OF SHARES PERCENTAGE
- ------------------- ---------------- ----------
<S> <C> <C>
Sterne, Agee & Leach, Inc................................... 510,000 51%
Advest, Inc. ............................................... 70,000 7
J.C. Bradford & Co. ........................................ 70,000 7
Legg Mason Wood Walker, Incorporated........................ 70,000 7
Morgan Keegan & Company, Inc. .............................. 70,000 7
Raymond James & Associates, Inc. ........................... 70,000 7
The Robinson-Humphrey Company, LLC ......................... 70,000 7
Ryan, Beck & Co., Inc. ..................................... 70,000 7
--------- ---
Total............................................. 1,000,000 100%
========= ===
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain terms and conditions, and that the
Underwriters will purchase all of the shares of Corporation Common Stock offered
hereby, if any of such shares are purchased.
The Corporation has agreed to sell the Underwriters 1,000,000 shares of
Corporation Common Stock at a discount of seven percent (7%) of the public
offering price. The Underwriters propose to initially offer the shares of
Corporation Common Stock they purchase directly to the public at the public
offering price on the cover page of this Prospectus and to certain dealers at a
price less a concession not in excess of $.46 per share. The Underwriters may
allow and such dealers may reallow a concession not in excess of $.10 per share
to certain other dealers. The Representative has informed the Corporation that
the Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
The following table sets forth the nature of the compensation paid to the
Underwriters, the amounts of discounts and commissions to be paid for each
security and in total overallotments.
COMPENSATION PAID TO UNDERWRITERS
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- --------
<S> <C> <C>
Amount of Discount.......................................... $ .77 $770,000
Other compensation.......................................... N/A 75,000(1)
------- --------
Total............................................. $ .77 $845,000(1)
</TABLE>
- ---------------
(1) In the event that this Offering is not closed by December 31, 1998 as a
result of the actions or inactions of the Corporation, the Corporation has
agreed to reimburse the Representative for its out-of-pocket expenses
incurred in connection with this Offering up to a maximum of $75,000.
The Corporation will incur various expenses in registering the Corporation
Common Stock. The Corporation's estimated expenses of this Offering, excluding
underwriting discount, are as follows:
<TABLE>
<S> <C>
Registration fee............................................ $ 4,000
Printing costs.............................................. 75,000
Legal fees and expenses..................................... 125,000
Accounting fees and expenses................................ 100,000
Miscellaneous............................................... 26,000
--------
Total............................................. $330,000
========
</TABLE>
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This Offering of the shares of Corporation Common Stock is made for
delivery when, as and if accepted by the Underwriters and subject to prior sale
and to withdrawal, cancellation or modification of the offer without notice. The
Underwriters reserve the right to reject any order for the purchase of the
shares.
The Corporation granted the Underwriters an option, exercisable not later
than 30 days from the date of the effectiveness of this Offering (the date of
this Prospectus), to purchase up to an aggregate of 150,000 additional shares of
Corporation Common Stock at the offering price to cover over-allotments. To the
extent the Underwriters exercise this option, each of the Underwriters will have
a firm commitment to purchase approximately the same percentage of their
original purchase as reflected in the table. The Corporation will be obligated,
pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments, if any,
incurred in connection with the sale of the 1,000,000 shares of Corporation
Common Stock offered in this Offering. If purchased, the Underwriters will sell
these additional shares on the same terms as those on which the 1,000,000 shares
are being offered.
As of the date hereof, although the Corporation registered approximately
4.2 million shares of Corporation Common Stock with the SEC in October of 1998,
all of which are freely tradeable, there has been no established public trading
market for the Corporation Common Stock to affect the offering price. The
offering price of $11.00 per share was determined by negotiations between the
Corporation and the Representative. This price is not based upon earnings or any
history of operations and should not be construed as indicative of the present
or anticipated future value of the Corporation Common Stock. Several factors
were considered in determining the offering price of the Corporation Common
Stock, including estimates of the business potential and earnings prospects of
the Corporation, an assessment of the Corporation's management, the
consideration of the above factors in relation to the market valuation of other
community banks and community bank holding companies in the Southeast, the size
of this Offering, the desire that the security being offered be attractive to
individuals and the Underwriters' experience in dealing with public offerings
for financial institutions.
The Corporation has received approval to list the Corporation Common Stock
on the Nasdaq National Market System under the symbol "TBNC" in order to
establish a trading market upon completion of this Offering; however, there can
be no assurance that an active trading market will develop or that the price at
which shares of Corporation Common Stock will sell after this Offering will not
be lower than the offering price.
Rule 101 of Regulation M of the Exchange Act ("Regulation M") prohibits the
Underwriters and any broker-dealer participating in this Offering ("Dealer")
from purchasing, bidding for or inducing any person to bid for the Corporation
Common Stock for up to five business days prior to this Offering until the
termination of this Offering ("Restricted Period").
In connection with and during this Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the market price of
the Corporation Common Stock. These transactions may include stabilization
transactions under which persons may bid for or purchase shares to stabilize its
market price. The Underwriters may also create a "short position" for their own
account by selling more shares in this Offering than they are committed to
purchase, and in that case they may purchase shares in the open market after
this offering is completed to cover all or a part of their short position. The
Underwriters may also cover all or a portion of their short position, up to
150,000 shares, by exercising their over-allotment option described above and on
the cover of this Prospectus. Also, the Representative, on behalf of the
Underwriters, may impose "penalty bids", under contractual arrangements with the
Underwriters, that allow it to reclaim from an underwriter (or dealer
participating in this Offering) for the account of the other Underwriters, the
selling concession on the shares that the Underwriters distribute in this
Offering, but later purchase for their account in the open market. Any of these
transactions may maintain the price of the shares at a higher level than the
level which the shares might otherwise bear in the open market. None of these
transactions is required, and if the Underwriters, selling agents or others
engage in these transactions, they may also stop at any time.
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Except for the grant or exercise of options pursuant to benefit plans
described in this Prospectus, the Corporation, all of its executive officers and
directors and certain other stockholders of the Corporation have agreed not to
offer, sell, commit to sell, grant any option to purchase or otherwise transfer
any shares of Common Stock or any stock option or other security or agreement
convertible with or exchangeable for any shares of Common stock for a period of
180 days following the date of the closing of this Offering without the prior
written consent of the Representative.
A group of affiliates of the Representative beneficially owns, in the
aggregate, 210,000 shares of the Corporation Common Stock which were acquired as
Warrior Common Stock in the private placement subscribed in October 1997, at a
purchase price of $4.79 per share. The Representative currently provides
brokerage services to the Corporation for its investment portfolio at
competitive commission rates. After this Offering, it is anticipated that the
Representative will continue to provide brokerage services as well as 401(k)
management services and trust services to the Corporation.
The Corporation has agreed to indemnify the Underwriters and their
controlling persons, if any, against certain civil liabilities, including
liabilities under the Securities Act, or will contribute to payments which the
Underwriters or any such controlling persons may be required to make in respect
thereof. The Underwriters have agreed to indemnify the Corporation against any
liabilities by reason of misstatement or omissions to state material facts in
connection with the statements made in this Prospectus based on information
relating to Underwriters and furnished in writing by the Underwriters
specifically for inclusion in this Prospectus.
The foregoing is a summary of the principal terms of the Underwriting
Agreement and is a materially complete summary of such principal terms. However,
this summary is subject to the definitive terms and conditions of the
Underwriting Agreement, a copy of which is filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. See
"Business -- Available Information."
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of
Corporation Common Stock offered hereby will be passed upon for the Corporation
by Haskell Slaughter & Young, L.L.C., Birmingham, Alabama. Burr & Forman LLP,
Birmingham, Alabama, is acting as counsel to the Underwriters with respect to
certain legal matters. A representative of Burr & Forman LLP beneficially owns
21,000 shares of Corporation Common Stock acquired as Warrior Common Stock in
the private placement subscribed in October 1997, at a purchase price of $4.79
per share.
EXPERTS
The supplemental consolidated financial statements of The Banc Corporation
at December 31, 1997, and for each of the two years in the period ended December
31, 1997, appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, and at December 31, 1995,
and for the year then ended, by Dudley, Hopton-Jones, Sims & Freeman PLLP
independent auditors, as set forth in their respective reports thereon appearing
elsewhere herein, and are included in reliance upon such reports given upon the
authority of such firms as experts in accounting and auditing.
Mauldin & Jenkins, LLC, independent public accountants, served as the
independent accountants for Commerce for the years ended December 31, 1997 and
1996.
Cochran Wheeler & Kennedy served as the independent accountants for
Commerce for the year ended December 31, 1995.
Dudley, Hopton-Jones, Sims & Freeman, PLLP, independent public accountants,
served as the independent accountants for First Citizens, City National and CBS.
Saltmarsh, Cleveland & Gund, independent public accountants, serve as the
independent accountants for Emerald.
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CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANTS
On June 16, 1998, the Corporation approved the engagement of Ernst & Young
LLP as its independent auditors for the three years ending December 31, 1998 to
replace the firm of Dudley, Hopton-Jones, Sims & Freeman PLLP who were the
auditors of Warrior Capital Corporation ("Warrior"), the predecessor of the
Corporation. The Board of Directors of the Corporation approved the change in
auditors on June 16, 1998. The reports of Dudley, Hopton-Jones, Sims & Freeman
PLLP on Warrior's financial statements for the past two fiscal years did not
contain an adverse opinion or a disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principles.
In connection with the audits of Warrior's financial statements for each of
the two fiscal years ended December 31, 1997, and in the subsequent interim
period, there were no disagreements with Dudley, Hopton-Jones, Sims & Freeman
PLLP on any matters of accounting principles or practices, financial statement
disclosure or auditing scope and procedures which, if not resolved to the
satisfaction of Dudley, Hopton-Jones, Sims & Freeman PLLP would have caused
Dudley, Hopton-Jones, Sims & Freeman PLLP to make reference to the matter in
their report. The Corporation has requested Dudley, Hopton-Jones, Sims & Freeman
PLLP to furnish it a letter addressed to the Commission stating whether it
agrees with the above statements. A copy of that letter, dated November 6, 1998,
is filed as Exhibit 16 to this Registration Statement.
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<PAGE> 66
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
THE BANC CORPORATION AND SUBSIDIARY
Report of Independent Auditors.............................. F-4
Report of Independent Auditors.............................. F-5
Supplemental Consolidated Statements of Financial Condition
as of December 31, 1997 and 1996.......................... F-6
Supplemental Consolidated Statements of Income for the Years
Ended December 31, 1997, 1996, and 1995................... F-7
Supplemental Consolidated Statements of Cash Flows for the
Years Ended December 31, 1997, 1996, and 1995............. F-8
Supplemental Consolidated Statements of Changes in
Stockholders' Equity for the Years Ended December 31,
1997, 1996 and 1995....................................... F-9
Notes to Supplemental Consolidated Financial Statements..... F-10
Condensed Supplemental Consolidated Statement of Financial
Condition as of September 30, 1998 (Unaudited)............ F-29
Condensed Supplemental Consolidated Statements of Income and
Comprehensive Income for the Nine Months Ended September
30, 1998 and 1997 (Unaudited)............................. F-30
Condensed Supplemental Consolidated Statement of Changes in
Stockholders' Equity for the Nine Months Ended September
30, 1998 (Unaudited)...................................... F-31
Condensed Supplemental Consolidated Statements of Cash Flow
for the Nine Months Ended September 30, 1998 and 1997
(Unaudited)............................................... F-32
Notes to Condensed Supplemental Consolidated Financial
Statements for the Nine Months Ended September 30, 1998
and 1997 (Unaudited)...................................... F-33
WARRIOR CAPITAL CORPORATION AND SUBSIDIARY
Independent Auditor's Report................................ F-34
Consolidated Statements of Financial Condition as of
December 31, 1997 and 1996................................ F-35
Consolidated Statements of Income and Comprehensive Income
for the Years Ended December 31, 1997, 1996, and 1995..... F-36
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995...... F-37
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996, and 1995......................... F-38
Notes to Consolidated Financial Statements.................. F-39
Condensed Consolidated Statement of Financial Condition as
of September 30, 1998 (Unaudited)......................... F-51
Condensed Consolidated Statements of Income and
Comprehensive Income for the Nine Months Ended September
30, 1998 and 1997 (Unaudited)............................. F-52
Condensed Consolidated Statement of Changes in Stockholders'
Equity for the Nine Months Ended September 30, 1998
(Unaudited)............................................... F-53
Condensed Consolidated Statements of Cash Flow for the Nine
Months Ended September 30, 1998 and 1997 (Unaudited)...... F-54
Notes to Condensed Consolidated Financial Statements for the
Nine Months Ended September 30, 1998 and 1997
(Unaudited)............................................... F-55
COMMERCE BANK OF ALABAMA
Independent Auditor's Report................................ F-56
Independent Auditor's Report................................ F-57
Balance Sheets as of December 31, 1997 and 1996............. F-58
Statements of Operations for the Years Ended December 31,
1997 and 1996............................................. F-59
Statements of Stockholders' Equity for the Years Ended
December 31, 1997 and 1996................................ F-60
Statements of Cash Flows for the Years Ended December 31,
1997 and 1996............................................. F-61
Notes to Financial Statements............................... F-62
Condensed Statement of Financial Condition as of September
30, 1998 (Unaudited)...................................... F-75
</TABLE>
F-1
<PAGE> 67
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Condensed Statements of Operations and Comprehensive (Loss)
Income for the Nine Months Ended September 30, 1998 and
1997 (Unaudited).......................................... F-76
Condensed Statement of Changes in Stockholders' Equity for
the Six Months Ended June 30, 1998 (Unaudited)............ F-77
Condensed Consolidated Statements of Cash Flow for the Nine
Months Ended September 30, 1998 and 1997 (Unaudited)...... F-78
Note to Condensed Financial Statements for the Nine Months
Ended September 30, 1998 and 1997 (Unaudited)............. F-79
Independent Auditors' Report................................ F-80
Balance Sheet as of December 31, 1995....................... F-81
Statement of Operations for the period from organization
through December 31, 1995................................. F-82
Statement of Cash Flows for the period from organization
through December 31, 1995................................. F-83
Statement of Stockholders' Equity for the period from
organization through December 31, 1995.................... F-84
Notes to the Financial Statements........................... F-85
FIRST CITIZENS BANCORP, INC. AND SUBSIDIARY
Independent Auditor's Report................................ F-94
Consolidated Statements of Financial Condition as of
December 31, 1997 and 1996................................ F-95
Consolidated Statements of Income and Comprehensive Income
for the Years Ended December 31, 1997, 1996 and 1995...... F-96
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995...... F-97
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995.......................... F-98
Notes to Consolidated Financial Statements.................. F-99
Condensed Consolidated Statement of Financial Condition as
of September 30, 1998 (Unaudited)......................... F-110
Condensed Consolidated Statements of Income and
Comprehensive Income for the Nine Months Ended September
30, 1998 and 1997 (Unaudited)............................. F-111
Condensed Consolidated Statement of Changes in Stockholders'
Equity for the Nine Months Ended September 30, 1998
(Unaudited)............................................... F-112
Condensed Consolidated Statements of Cash Flow for the Nine
Months Ended September 30, 1998 and 1997 (Unaudited)...... F-113
Note to Condensed Consolidated Financial Statements for the
Nine Months Ended September 30, 1998 and 1997
(Unaudited)............................................... F-114
CITY NATIONAL CORPORATION AND SUBSIDIARY
Independent Auditor's Report................................ F-115
Consolidated Statements of Financial Condition as of
December 31, 1997 and 1996................................ F-116
Consolidated Statements of Income and Comprehensive Income
for the Years Ended December 31, 1997, 1996 and 1995...... F-117
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995...... F-118
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995.......................... F-119
Notes to Consolidated Financial Statements.................. F-120
Condensed Consolidated Statement of Financial Condition as
of September 30, 1998 (Unaudited)......................... F-132
Condensed Consolidated Statements of Operations and
Comprehensive (Loss) Income for the Nine Months Ended
September 30, 1998 and 1997 (Unaudited)................... F-133
Condensed Consolidated Statement of Changes in Stockholders'
Equity for the Nine Months Ended September 30, 1998
(Unaudited)............................................... F-134
Condensed Consolidated Statements of Cash Flow for the Nine
Months Ended September 30, 1998 and 1997 (Unaudited)...... F-135
Note to Condensed Consolidated Financial Statements for the
Nine Months Ended September 30, 1998 and 1997
(Unaudited)............................................... F-136
</TABLE>
F-2
<PAGE> 68
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
EMERALD COAST BANCSHARES, INC. AND SUBSIDIARY
Independent Auditor's Report................................ F-137
Consolidated Statements of Financial Condition as of
December 31, 1997 and 1996................................ F-138
Consolidated Statements of Operations for the Year Ended
December 31, 1997 and the Four Months Ended December 31,
1996...................................................... F-139
Consolidated Statements of Changes in Stockholders' Equity
for the Year Ended December 31, 1997 and the Four Months
Ended December 31, 1996................................... F-140
Consolidated Statements of Cash Flows for the Year Ended
December 31, 1997 and the Four Months Ended December 31,
1996...................................................... F-141
Notes to Consolidated Financial Statements.................. F-142
Condensed Consolidated Statement of Financial Condition as
of September 30, 1998 (Unaudited)......................... F-153
Condensed Statements of Operations and Comprehensive Income
(Loss) for the Nine Months Ended September 30, 1998 and
1997 (Unaudited).......................................... F-154
Condensed Consolidated Statement of Changes in Stockholders'
Equity for the Nine Months Ended September 30, 1998
(Unaudited)............................................... F-155
Condensed Statements of Cash Flow for the Nine Months Ended
September 30, 1998 and 1997 (Unaudited)................... F-156
Note to Condensed Consolidated Financial Statements for the
Nine Months Ended September 30, 1998 and 1997
(Unaudited)............................................... F-157
COMMERCIAL BANCSHARES OF ROANOKE, INC AND SUBSIDIARIES
Independent Auditor's Report................................ F-158
Consolidated Statements of Financial Condition as of
December 31, 1997 and 1996................................ F-159
Consolidated Statements of Income and Comprehensive Income
for the Years Ended December 31, 1997, 1996 and 1995...... F-160
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995...... F-161
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995.......................... F-162
Notes to Consolidated Financial Statements.................. F-163
Condensed Consolidated Statement of Financial Condition as
of September 30, 1998 (Unaudited)......................... F-175
Condensed Consolidated Statements of Income and
Comprehensive Income for the Nine Months Ended September
30, 1998 and 1997 (Unaudited)............................. F-176
Condensed Consolidated Statement of Changes in Stockholders'
Equity for the Nine Months Ended September 30, 1998
(Unaudited)............................................... F-177
Condensed Consolidated Statements of Cash Flow for the Nine
Months Ended September 30, 1998 and 1997 (Unaudited)...... F-178
Note to Condensed Consolidated Financial Statements for the
Nine Months Ended September 30, 1998 and 1997
(Unaudited)............................................... F-179
</TABLE>
F-3
<PAGE> 69
REPORT OF INDEPENDENT AUDITORS
The Board Of Directors
The Banc Corporation
We have audited the supplemental consolidated statements of financial
condition of The Banc Corporation and subsidiary (formed as a result of the
consolidation of The Banc Corporation, Warrior Capital Corporation, Commerce
Bank of Alabama, First Citizens Bancorp, Inc. and City National Corporation) as
of December 31, 1997 and 1996 and the related supplemental consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the two years in the period ended December 31, 1997. The supplemental
consolidated financial statements give retroactive effect to the mergers of The
Banc Corporation and Warrior Capital Corporation on September 24, 1998, Commerce
Bank of Alabama on November 6, 1998, First Citizens Bancorp, Inc. on October 30,
1998 and City National Corporation on October 30, 1998 which have been accounted
for using the pooling of interests method as described in the notes to the
supplemental consolidated financial statements. These supplemental financial
statements are the responsibility of the management of The Banc Corporation. Our
responsibility is to express an opinion on these supplemental financial
statements based on our audits. The supplemental financial statements of The
Banc Corporation and subsidiary for the year ended December 31, 1995 were
audited by other auditors whose report dated November 6, 1998 expressed an
unqualified opinion.
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 financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the supplemental financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of The Banc Corporation at December 31, 1997 and 1996, and
the consolidated results of its operations and its cash flows for each of the
two years in the period ended December 31, 1997, after giving retroactive effect
to the mergers of Warrior Capital Corporation, Commerce Bank of Alabama, First
Citizens Bancorp, Inc. and City National Corporation, as described in the notes
to the supplemental consolidated financial statements, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Birmingham, Alabama
November 6, 1998
F-4
<PAGE> 70
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
The Banc Corporation
We have audited the supplemental consolidated statements of income,
stockholders' equity, and cash flows of The Banc Corporation (formed as a result
of the consolidation of The Banc Corporation, Warrior Capital Corporation,
Commerce Bank of Alabama, First Citizens Bancorp, Inc. and City National
Corporation) for the year ended December 31, 1995. The supplemental consolidated
financial statements give retroactive effect to the mergers of The Banc
Corporation and Warrior Capital Corporation on September 24, 1998, Commerce Bank
of Alabama on November 6, 1998, First Citizens Bancorp, Inc. on October 30, 1998
and City National Corporation on October 30, 1998 which have been accounted for
using the pooling of interests method as described in the notes to the
supplemental consolidated financial statements. These supplemental financial
statements are the responsibility of the management of The Banc Corporation. Our
responsibility is to express an opinion on these supplemental financial
statements based on our audits. We did not audit the financial statements of
Commerce Bank of Alabama which statements reflect a net loss of $470,000 and net
increase in cash and due from banks of $645,000 for the period April 6, 1995
(inception date) to December 31, 1995. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Commerce Bank of Alabama, is based solely on
the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, based on our audit, the supplemental financial statements
referred to above present fairly, in all material respects, the consolidated
results of operations for the Banc Corporation and its cash flows for the year
ended December 31, 1995, after giving retroactive effect to the mergers of
Warrior Capital Corporation, Commerce Bank of Alabama, First Citizens Bancorp,
Inc. and City National Corporation, as described in the notes to the
supplemental consolidated financial statements, in conformity with generally
accepted accounting principles.
Birmingham, Alabama Dudley, Hopton-Jones, Sims & Freeman PLLP
November 6, 1998
F-5
<PAGE> 71
THE BANC CORPORATION AND SUBSIDIARY
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 11,524 $ 12,853
Interest bearing deposits in other banks.................... 200 200
Federal funds sold.......................................... 27,605 13,470
Securities available for sale............................... 47,613 49,435
Securities held-to-maturity (market value of $26,309 in 1997
and $23,816 in 1996)...................................... 26,298 23,867
Loans....................................................... 180,221 142,631
Unearned income............................................. (1,216) (1,403)
-------- --------
Loans, net of unearned income............................... 179,005 141,228
Less allowance for loan losses.............................. (2,129) (1,690)
-------- --------
Net loans......................................... 176,876 139,538
Premises and equipment, net................................. 11,704 6,513
Accrued interest receivable................................. 2,836 2,541
Stock in FHLB and Federal Reserve Bank...................... 649 245
Other assets................................................ 2,408 2,293
-------- --------
$307,713 $250,955
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing demand............................... $ 36,174 $ 30,562
Interest-bearing demand................................... 48,298 39,257
Savings................................................... 28,102 26,967
Certificates of deposit $100,000 and over................. 50,595 39,622
Other time................................................ 100,993 83,236
-------- --------
Total deposits.................................... 264,162 219,644
Advances from FHLB.......................................... -- 1,600
Federal funds purchased and securities sold under agreements
to repurchase............................................. 316 --
Other borrowed funds........................................ 243 249
Accrued expenses and other liabilities...................... 3,011 2,018
-------- --------
Total liabilities................................. 267,732 223,511
Stockholders' equity:
Preferred stock, par value $.001 per share; authorized
5,000,000; -0- issued.................................. -- --
Common stock, par value $.001 per share; authorized
25,000,000 shares; 9,100,122 and 6,876,327 shares
issued and outstanding, respectively................... 9 7
Surplus................................................... 24,222 13,588
Retained earnings......................................... 15,520 13,872
Net unrealized gain (loss) on securities available for
sale................................................... 230 (23)
-------- --------
Total stockholders' equity........................ 39,981 27,444
-------- --------
$307,713 $250,955
======== ========
</TABLE>
See notes to supplemental consolidated financial statements.
F-6
<PAGE> 72
THE BANC CORPORATION AND SUBSIDIARY
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------- ------- ------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Interest income:
Interest and fees on loans................................ $16,683 $12,448 $8,915
Interest on taxable securities............................ 4,407 3,552 3,259
Interest on tax exempt securities......................... 493 596 637
Interest on federal funds sold............................ 924 932 941
Interest and dividends on other investments............... 83 65 68
------- ------- ------
Total interest income............................. 22,590 17,593 13,820
Interest expense:
Interest on deposits...................................... 10,349 7,858 5,931
Interest on short term borrowings......................... 7 8 --
Interest expense on other borrowings...................... 45 20 1
------- ------- ------
Total interest expense............................ 10,401 7,886 5,932
------- ------- ------
Net interest income......................................... 12,189 9,707 7,888
Provision for loan losses................................... 1,516 896 550
------- ------- ------
Net interest income after provision for loan losses......... 10,673 8,811 7,338
Noninterest income:
Service charges and fees.................................. 1,794 1,619 1,378
Securities gains.......................................... 212 52 72
Other..................................................... 199 285 171
------- ------- ------
Total noninterest income.......................... 2,205 1,956 1,621
Noninterest expense:
Salaries and employee benefits............................ 5,476 4,635 3,858
Occupancy and equipment................................... 1,564 1,372 1,107
Other..................................................... 2,873 2,656 2,320
------- ------- ------
Total noninterest expenses........................ 9,913 8,663 7,285
------- ------- ------
Income before income taxes.................................. 2,965 2,104 1,674
Income tax expense.......................................... 891 647 326
------- ------- ------
Net income........................................ $ 2,074 $ 1,457 $1,348
======= ======= ======
Average common shares outstanding........................... 7,175 6,791 6,302
Average common shares outstanding, assuming dilution........ 7,246 6,883 6,339
Basic and diluted net income per common share............... $ .29 $ .21 $ .21
Dividends per common share.................................. .09 .08 .08
</TABLE>
See notes to supplemental consolidated financial statements.
F-7
<PAGE> 73
THE BANC CORPORATION AND SUBSIDIARY
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 2,074 $ 1,457 $ 1,348
Adjustments to reconcile net income to net cash provided by
operations:
Depreciation and amortization............................. 753 655 498
Net accretion of securities............................... (259) (76) (43)
Gain on sale of securities available for sale............. (212) (52) (72)
Provision for loan losses................................. 1,516 896 550
Increase in accrued interest receivable................... (295) (331) (413)
(Increase) decrease in other assets....................... (115) 12 (533)
Deferred income taxes (benefit)........................... 190 (121) (347)
(Decrease) increase in other liabilities.................. (37) 238 693
-------- -------- --------
Net cash provided by operating activities................... 3,615 2,678 1,681
INVESTING ACTIVITIES
Proceeds from maturity of interest bearing deposits......... -- 202 --
Proceeds from sales of securities available for sale........ 23,219 9,107 8,465
Proceeds from sales of securities held to maturity.......... -- -- 931
Proceeds from maturities of securities available for sale... 8,951 10,071 5,744
Proceeds from maturities of securities held to maturity..... 12,137 10,178 5,768
Purchase of securities available for sale................... (29,624) (26,304) (21,566)
Purchase of securities held to maturity..................... (14,568) (11,330) (8,028)
Net increase in loans....................................... (38,854) (40,685) (31,239)
Purchase of premises and equipment.......................... (1,386) (2,183) (2,216)
Purchases of FHLB stock..................................... (404) (226) --
-------- -------- --------
Net cash used in investing activities....................... (40,529) (51,170) (42,141)
FINANCING ACTIVITIES
Net increase in demand and savings deposits................. 15,788 41,085 11,639
Net increase in certificates of deposit and other time
deposits.................................................. 28,730 6,000 29,562
Increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase............ 316 (1,000) 1,000
(Increase) decrease in federal funds sold................... (14,135) 3,890 (6,270)
(Decrease) increase in FHLB advances........................ (1,600) 1,600
Payment on assumed debt..................................... (1,513) -- --
(Payments) advances of other borrowed funds................. (6) (5) 80
Increase in notes payable................................... -- -- 29
Proceeds from issuance and reissuance of common stock....... 17,890 1,505 5,501
Repurchase of common stock.................................. (9,496) (16) --
Dividends paid.............................................. (389) (364) (369)
-------- -------- --------
Net cash provided by financing activities................... 35,585 52,695 41,172
-------- -------- --------
(Decrease) increase in cash and cash equivalents............ (1,329) 4,203 712
Cash and cash equivalents at beginning of year.............. 12,853 8,650 7,938
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 11,524 $ 12,853 $ 8,650
======== ======== ========
</TABLE>
See notes to supplemental consolidated financial statements.
F-8
<PAGE> 74
THE BANC CORPORATION AND SUBSIDIARY
SUPPLEMENTAL CONSOLIDATED STATEMENTS
OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
(GAIN) LOSS
ON
SECURITIES TOTAL
COMMON RETAINED AVAILABLE FOR TREASURY STOCKHOLDERS'
STOCK SURPLUS EARNINGS SALE STOCK EQUITY
------ ------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995................ $6 $ 6,583 $11,816 $(1,405) $ $17,000
Net income................................ 1,348 1,348
Dividends declared........................ (369) (369)
Issuance of 1,276,616 shares of common
stock, net of direct costs.............. 1 5,500 5,501
Net change in unrealized loss on
securities available for sale, net of
taxes of $858........................... 1,666 1,666
Balance at December 31, 1995.............. 7 12,083 12,795 261 25,146
-- ------- ------- ------- ------- -------
Net income................................ 1,457 1,457
Dividends declared........................ (364) (364)
Issuance of 246,016 shares of common
stock, net of direct costs.............. 1,505 1,505
Purchase of 7,454 shares of treasury
stock................................... (16) (16)
Retirement of 7,454 shares of treasury
stock................................... (16) 16 --
Change in unrealized loss on securities
available for sale, net of taxes of
$147.................................... (284) (284)
-- ------- ------- ------- ------- -------
Balance at December 31, 1996.............. 7 13,588 13,872 (23) 27,444
Net income................................ 2,074 2,074
Dividends declared........................ (389) (389)
Issuance of 2,238,715 shares of common
stock, net of direct costs.............. 2 8,429 8,431
Acquisition of building through issuance
of 460,500 shares of common stock....... 2,205 2,205
Purchase of 1,990,908 shares of treasury
stock................................... (9,496) (9,496)
Reissuance of treasury stock.............. 9,459 9,459
Retirement of 14,908 shares of treasury
stock................................... (37) 37 --
Change in unrealized loss on securities
available for sale, net of taxes of
$131.................................... 253 253
-- ------- ------- ------- ------- -------
Balance at December 31, 1997.............. $9 $24,222 $15,520 $ 230 $ -- $39,981
== ======= ======= ======= ======= =======
</TABLE>
See notes to supplemental consolidated financial statements.
F-9
<PAGE> 75
THE BANC CORPORATION AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Banc Corporation and its subsidiary ("Corporation") provide banking and
consumer finance services to markets in Alabama. The Corporation was formed as a
result of the merger of The Banc Corporation, Warrior Capital Corporation
(Warrior), Commerce Bank of Alabama (Commerce), First Citizens Bancorp, Inc.
(First Citizens) and City National Corporation (City National). All banks were
merged into one subsidiary, The Bank.
BASIS OF PRESENTATION
The supplemental consolidated financial statements of the Corporation have
been restated to give retroactive effect to the mergers of The Banc Corporation
and Warrior on September 24, 1998, Commerce on November 6, 1998, First Citizens
on October 30, 1998 and City National on October 30, 1998 which have been
accounted for using the pooling of interests method as described in Note 14. All
significant intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS AND CASH FLOW DISCLOSURES
Cash and cash equivalents included cash and due from banks. For the years
ended December 31, 1997, 1996, and 1995 the Corporation paid interest of
$10,268,000, $7,633,000 and $5,548,000, respectively. For the years ended
December 31, 1997, 1996, and 1995 the Corporation paid income taxes of $889,000,
$796,000 and $580,000, respectively.
During 1997 the Corporation issued 460,500 shares of stock and assumed debt
of $1,513,000 in exchange for a building valued at $3,718,000.
The Corporation's subsidiary bank is required to maintain reserve balances
with the Federal Reserve Bank. The amount of reserve balances maintained as of
December 31, 1997 was $1,859,000.
INVESTMENT SECURITIES
Investment securities are classified as either held-to-maturity, available
for sale or trading at the time of purchase. The Corporation defines
held-to-maturity securities as debt securities which management has the positive
intent and ability to hold to maturity.
Held-to-maturity securities are reported at cost, adjusted for amortization
of premiums and accretion of discounts which are recognized in interest income
using the effective yield method.
Securities available for sale are reported at fair value and consist of
bonds, notes, debentures, and certain equity securities not classified as
trading securities nor as securities to be held to maturity. Unrealized holding
gains and losses, net of deferred taxes, on securities available for sale are
reported as a separate component of stockholders' equity until realized.
Gains and losses on the sale of securities available for sale are
determined using the specific-identification method.
F-10
<PAGE> 76
THE BANC CORPORATION AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are stated at the amount of unpaid principal, reduced by unearned
discount and an allowance for loan losses. Interest income with respect to loans
is accrued on the principal amount outstanding, except for interest on certain
consumer loans, which is recognized over the term of the loan using a method
which approximates a level yield.
Accrual of interest is discontinued on a loan when management believes,
after considering economic and business conditions and collection efforts, that
the loan is impaired. Any unpaid interest previously accrued on those loans is
reversed from income. Interest income generally is not recognized on specific
impaired loans unless the likelihood of further loss is remote. Interest
payments received on such loans are applied as a reduction of the loan principal
balance. Interest income on other nonaccrual loans is recognized only to the
extent of interest payments received.
Impaired loans are specifically reviewed loans for which it is probable
that the Corporation will be unable to collect all amounts due according to the
terms of the loan agreement. Impairment is measured by comparing the recorded
investment in the loan with the present value of expected future cash flows
discounted at the loan's effective interest rate, at the loans observable market
price, or the fair value of the collateral if the loan is collateral dependent.
A valuation allowance is provided to the extent that the measure of the impaired
loans is less than the recorded investment. A loan is not considered impaired
during a period of delay in payment if the ultimate collectibility of all
amounts due is expected. Larger groups of homogenous loans such as consumer
installment and residential real estate mortgage loans are collectively
evaluated for impairment. Payments received on impaired loans for which the
ultimate collectibility of principal is uncertain are generally applied first as
principal reductions.
The allowance for loan loss is established through a provision for loan
losses charged to expenses. Loans are charged against the allowance for loan
losses when management believes the collectibility of principal is unlikely. The
allowance is the amount that management believes will be adequate to absorb
possible losses on existing loans which may become uncollectible, based on
evaluation of the collectibility of loans and prior loan loss experience. The
evaluations take into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, and current economic conditions that may affect the borrower's
ability to pay.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed over the estimated service lives of the
assets using certain straight-line and accelerated methods, generally using five
to fifty years for premises and five to ten years for furniture and equipment.
Expenditures for maintenance and repairs are charged to operations as
incurred; expenditures for renewals and betterments are capitalized and written
off by depreciation charges. Property retired or sold is removed from the asset
and related accumulated depreciation accounts and any profit or loss resulting
therefrom is reflected in the statement of income.
INTANGIBLE ASSETS
Intangible assets, primarily goodwill, are included in other assets, net of
amortization calculated on a straight-line basis over a twenty-five-year period.
The Corporation reviews on a regular basis the carrying value of goodwill
to determine if any impairment has occurred or if the period of recoverability
has changed. If this review indicates that goodwill will not be recoverable, as
determined based on the undiscounted cash flows of the entity acquired over the
remaining amortization period, the carrying value of the goodwill will be
reduced by the estimated shortfall of such cash
F-11
<PAGE> 77
THE BANC CORPORATION AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
flows. At December 31, 1997 and 1996 goodwill, net of accumulated amortization
of $291,000 and $273,000 totaled $414,000 and $432,000 respectively.
OTHER REAL ESTATE
Other real estate, acquired through partial or total satisfaction of loans,
is carried at the lower of cost or net realized value. At the date of
acquisition, losses are charged to the allowance for loan losses. Gain or loss
from the sale of other real estate is included in other expense.
INCOME TAXES
The supplemental consolidated financial statements are prepared on the
accrual basis. The Corporation accounts for income taxes using the liability
method pursuant to Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to reverse.
OFF BALANCE SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business the Bank has entered into off balance
sheet financial instruments consisting of commitments to extend credit,
commitments under credit card arrangements and commercial letters of credit and
standby letters of credit. Such financial instruments are recorded in the
financial statements when they become payable.
PER SHARE AMOUNTS
Earnings per share computations are based on the weighted average number of
shares outstanding during the periods presented.
Earnings per share, assuming dilution computations, are based on the
weighted average number of shares outstanding during the period, plus the
dilutive effect of stock options. All per share amounts have been restated to
reflect SFAS No. 128, Earnings per Share.
STOCK-BASED COMPENSATION
SFAS No. 123, Accounting for Stock-Based Compensation, (Statement 123)
establishes a "fair value" based method of accounting for stock-based
compensation plans and encourages entities to adopt that method of accounting
for their employee stock compensation plans. 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 APB Opinion No. 25, Accounting
for Stock Issued to Employees, (Opinion 25). The Corporation has elected to
follow Opinion 25 and related interpretations in accounting for its employee
stock options. Under Opinion 25, because the exercise price of the Corporation's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Statement 123 requires the disclosure of pro forma net income and earnings
per share determined as if the Corporation had accounted for its employee stock
options under the fair value method of that statement. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model. Option valuation models require the input of subjective assumptions.
Because these assumptions are subjective, the effects of applying Statement 123
for pro forma disclosures are not likely to be representative of the effects on
reported net income for future years.
F-12
<PAGE> 78
THE BANC CORPORATION AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TRANSFER OF ASSETS AND LIABILITIES
On January 1, 1997, the Corporation adopted SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
except for the provisions relating to repurchase agreements, securities lending
and other similar transactions and pledged collateral, which have been delayed
until after December 31, 1997 by SFAS No 127, Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125, and amendment of FASB Statement
No. 125. SFAS 125 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities based on a
consistent application of a "financial-components approach" that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered
and derecognizes liabilities when extinguished. SFAS 125 provides standards for
consistently distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. The adoption of SFAS 125 resulted in no
material impact on the Corporation's financial condition or results of
operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income. This statement establishes standards for
reporting the components of comprehensive income and requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be included in a financial statement that is displayed with
the same prominence as other financial statements. Comprehensive income includes
net income as well as certain items that are reported directly within a separate
component of shareholders' equity and bypass net income. The provisions of this
statement are effective beginning with 1998 interim reporting. These disclosure
requirements will have no impact on the Corporation's financial condition or
results of operations.
In June 1997, the Financial Accounting Standards Board (FASB) also issued
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information. This statement changes the way public companies report segment
information in annual financial statements and requires public companies to
report selected segment information in interim financial reports to
shareholders. Under the Statement's "management approach," public companies are
to report financial and descriptive information about their operating segments.
Operating segments are revenue-producing components of an enterprise for which
separate financial information is produced internally and are subject to
evaluation by the chief operating decision maker in deciding how to allocate
resources to segments. This statement is effective for fiscal years beginning
after December 15, 1997; however, it is not required to be applied for interim
reporting in the initial year of application. These disclosure requirements will
have no material impact on financial position or results of operations.
F-13
<PAGE> 79
THE BANC CORPORATION AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. INVESTMENT SECURITIES
The amounts at which investment securities are carried and their
approximate fair values at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Investment securities available for sale:
Equity securities........................... $ 261 $ -- $ (38) $ 223
U.S. Treasury and agency securities......... 23,309 55 (50) 23,314
State, county and municipal securities...... 7,699 353 -- 8,052
Mortgage-backed securities.................. 12,867 101 (29) 12,939
Corporate debt.............................. 3,067 18 -- 3,085
------- ---- ----- -------
Total............................... $47,203 $527 $(117) $47,613
======= ==== ===== =======
Investment securities held to maturity:
U.S. Treasury and agency securities......... $16,444 $ 21 $ (56) $16,409
State, county and municipal securities...... 3,545 61 (13) 3,593
Mortgage-backed securities.................. 6,109 25 (38) 6,096
Corporate debt.............................. 200 11 -- 211
------- ---- ----- -------
Total............................... $26,298 $118 $(107) $26,309
======= ==== ===== =======
</TABLE>
The amounts at which investment securities are carried and their
approximate fair values at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Investment securities available for sale:
Equity securities............................ $ 276 $ -- $ (41) $ 235
U.S. Treasury and agency securities.......... 26,269 35 (386) 25,918
State, county and municipal securities....... 10,237 490 (43) 10,684
Mortgage-backed securities................... 12,661 73 (136) 12,598
------- ---- ----- -------
Total................................ $49,443 $598 $(606) $49,435
======= ==== ===== =======
Investment securities held to maturity:
U.S. Treasury and agency securities.......... 20,063 17 (177) 19,903
State, county and municipal securities....... 2,776 85 (22) 2,839
Corporate debt............................... 200 15 -- 215
Mortgage-backed securities................... 828 28 -- 856
------- ---- ----- -------
Total................................ $23,867 $145 $(199) $23,813
======= ==== ===== =======
</TABLE>
Securities with an amortized cost of $29,447,000 and $22,176,000 at
December 31, 1997 and 1996, respectively, were pledged to secure United States
government deposits and other public funds and for other purposes as required or
permitted by law.
The amortized cost and estimated fair values of investment securities at
December 31, 1997, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
F-14
<PAGE> 80
THE BANC CORPORATION AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SECURITIES AVAILABLE
FOR SALE
-----------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less..................................... $ 1,642 $ 1,641
Due after one year through five years....................... 11,727 11,759
Due after five years through ten years...................... 16,008 16,241
Due after ten years......................................... 4,698 4,810
Mortgage-backed securities.................................. 12,867 12,939
Equity securities........................................... 261 223
------- -------
$47,203 $47,613
======= =======
</TABLE>
<TABLE>
<CAPTION>
SECURITIES HELD
TO MATURITY
-----------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less..................................... $ 8,465 $ 8,434
Due after one year through five years....................... 9,716 9,755
Due after five years through ten years...................... 1,611 1,621
Due after ten years......................................... 397 403
Mortgage-backed securities.................................. 6,109 6,096
------- -------
$26,298 $26,309
======= =======
</TABLE>
Gross realized gains on sales of securities available for sale in 1997,
1996 and 1995 were $240,000, $82,000 and $126,000, respectively, and gross
realized losses for the same periods were $28,000, $30,000, and $54,000,
respectively.
3. LOANS
At December 31, 1997 and 1996 the composition of the loan portfolio was as
follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Commercial and industrial................................... $ 57,872 $ 40,769
Real estate -- construction................................. 9,660 5,604
Real estate -- mortgage..................................... 67,152 54,249
Consumer.................................................... 42,542 39,879
All other loans............................................. 2,995 2,130
-------- --------
Total loans....................................... $180,221 $142,631
======== ========
</TABLE>
At December 31, 1997 and 1996 the Corporation's recorded investment in
loans considered to be impaired under SFAS No. 114 was $249,000 and $180,000,
respectively. There was approximately $26,000 and $14,000 at December 31, 1997
and 1996, respectively, in the allowance for loan losses specifically allocated
to $249,000 and $127,000 of impaired loans, respectively. No specific reserve
was required for $53,000 of impaired loans at December 31, 1996. The average
recorded investment in impaired loans during 1997 and 1996 was approximately
$232,000 and $215,000, respectively. No material amount of interest income was
recognized on impaired loans for the years ended December 31, 1997, 1996, and
1995.
The Corporation has no commitments to loan additional funds to the
borrowers whose loans are on nonaccrual.
F-15
<PAGE> 81
THE BANC CORPORATION AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. ALLOWANCE FOR LOAN LOSSES
A summary of the allowance for loan losses for the years ended December 31,
1997, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year.............................. $ 1,690 $1,477 $1,246
Provision for loan losses................................. 1,516 896 550
Loan charge-offs.......................................... (1,358) (844) (468)
Recoveries................................................ 281 161 149
------- ------ ------
Balance at end of year.................................... $ 2,129 $1,690 $1,477
======= ====== ======
</TABLE>
5. PREMISES AND EQUIPMENT
Components of premises and equipment at December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 1,642 $ 1,400
Premises.................................................... 4,380 3,641
Furniture and equipment..................................... 4,961 4,698
Leasehold Improvements...................................... 209 209
------- -------
11,192 9,948
Less accumulated depreciation and amortization.............. (4,164) (3,435)
------- -------
Net book value of premises and equipment in service......... 7,028 6,513
------- -------
Real estate and equipment under renovation.................. 4,676 --
------- -------
Total............................................. $11,704 $ 6,513
======= =======
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1996, and 1995
was $723,000, $635,000, and $478,000, respectively.
6. OTHER REAL ESTATE
Other real estate acquired in satisfaction of indebtedness ("foreclosure")
is carried in other assets and totaled $156,000 and $198,000 at December 31,
1997 and 1996, respectively.
7. DEPOSITS
The following schedule details interest expense on deposits:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest-bearing demand.................................... $ 1,333 $ 995 $ 1,230
Savings.................................................... 1,076 1,087 905
Certificates of deposit $100,000 and over.................. 2,402 2,080 998
Other time................................................. 5,538 3,696 2,798
------- ------ -------
Total............................................ $10,349 $7,858 $ 5,931
======= ====== =======
</TABLE>
F-16
<PAGE> 82
THE BANC CORPORATION AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1997, the scheduled maturities of time deposits are as
follows (in thousands):
<TABLE>
<S> <C>
1998........................................................ $ 62,159
1999........................................................ 56,515
2000........................................................ 24,179
2001........................................................ 1,990
2002 and thereafter......................................... 6,745
--------
$151,588
========
</TABLE>
8. BORROWED FUNDS
The following is a summary of other borrowed funds:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1996
----- ------
(IN THOUSANDS)
<S> <C> <C>
Treasury, tax and loan notes................................ $175 $175
Notes payable............................................... 68 74
---- ----
$243 $249
==== ====
</TABLE>
The notes payable carry a fixed interest rate of 8% and mature in 2005. The
treasury tax, and loan notes are a revolving credit arrangement with the Federal
Reserve Bank and carry an adjustable interest rate of 25 basis points below the
federal funds rate.
9. INCENTIVE STOCK OPTION PLAN
Commerce, which merged with the Corporation on November 6, 1998, enters
into certain Incentive Stock Option Agreements with certain key employees. The
options vest in six months and expire ten years from the grant date. The
exercise price of the options equals the fair market value of Commerce stock at
the date of grant. The exercise prices range from $10 to $14.50 Options must be
exercised in a minimum of 1,000 shares per purchase unless less than 1,000
shares remain under the options.
First Citizens, which merged with the Corporation on October 30, 1998,
granted options to purchase 5,000 shares of Citizens stock to its CEO on January
9, 1996. The exercise price was $28.96. The exercise price of the options equals
the fair market value of First Citizens stock at the date of grant. For purposes
of the disclosures below, the number of shares and exercise prices for these
options have been converted to equivalent amounts for the Corporation based on
the exchange ratios in the Commerce and Citizens mergers.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
-------- --------- -------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Under option, beginning of year...... 125,515 $4.50 64,213 $4.30 -- $ --
Granted............................ 5,838 6.24 72,977 4.67 64,213 4.30
Exercised.......................... -- -- 11,675 4.30 -- --
-------- -------- -------
Under option, end of year............ 131,353 4.58 125,515 4.50 64,213 4.30
======== ======== =======
Exercisable at end of year........... 125,515 117,342 64,213
======== ======== =======
Weighted-average fair value per
option of options granted during
the year........................... $ 2.74 $ 1.68 $ 4.30
======== ======== =======
</TABLE>
F-17
<PAGE> 83
THE BANC CORPORATION AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A further summary about options outstanding at December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE IN YEARS PRICE OUTSTANDING PRICE
- -------- ----------- ------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$3.49 41,455 8.0 $3.49 41,455 $3.49
4.30 52,538 7.5 4.30 52,538 4.30
6.24 37,360 8.6 6.24 31,522 6.24
------- -------
131,353 8.0 4.58 125,515 4.50
======= =======
</TABLE>
As permitted by Statement of Financial Accounting Standard No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123), the Corporation
recognizes compensation cost for stock-based employee compensation awards in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees.
The Corporation recognized no compensation cost for stock-based employee
compensation awards for the years ended December 31, 1997 and 1996. If the
Corporation had recognized compensation cost in accordance with SFAS No. 123,
net income and net income per share would have been reduced as follows (dollar
amounts in thousands, except per share data):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net income:
As reported............................................... $2,074 $1,457 $1,348
Pro forma................................................. 1,993 1,447 1,267
Basic net income per share:
As reported............................................... $ .29 $ .21 $ .21
Pro forma................................................. .28 .21 .20
Diluted net income per share:
As reported............................................... $ .29 $ .21 $ .21
Pro forma................................................. .28 .21 .20
</TABLE>
The fair value of the options granted in 1997 was based upon the discounted
value of future cash flows of the options using the following assumptions:
<TABLE>
<S> <C>
Risk-free interest rate..................................... 6.13%
Expected life of the options................................ 10 years
Expected dividends (as a percent of the fair value of the
stock).................................................... 0.00%
Expected volatility......................................... 0.001%
</TABLE>
10. RETIREMENT PLANS
Warrior, which merged with the Corporation on September 24 1998, sponsors a
defined benefit plan that provides retirement, disability and death benefits.
All employees of Warrior over age 21 are eligible to participate in the plan
after the completion of one year of service.
Benefits under the Plan depend upon a participant's years of credited
service with the Corporation and his average monthly earnings for the five-year
period prior to the retirement or termination of employment. A participant is
20% vested in his or her accrued benefits after completion of two years of
service. Vesting increases 20% per year for the next four years with the
participant becoming fully vested upon completion of six years of service. An
employee who completes ten years of service and attains age fifty-five is
eligible for early retirement benefits. Plan assets consist primarily of
Corporation certificates of deposit.
The Corporation contributes amounts to the pension funds sufficient to
satisfy funding requirements of the Employee Retirement Income Security Act.
F-18
<PAGE> 84
THE BANC CORPORATION AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net pension cost is composed of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1997 1996
----- -----
<S> <C> <C>
Service..................................................... $ 30 $ 31
Interest cost on projected benefit obligations.............. 55 47
Actual return on assets..................................... (53) (50)
Net amortization and deferral............................... (3) --
----- -----
Net periodic pension costs.................................. $ 29 $ 28
===== =====
Actuarial present value of benefit obligation:
Vested.................................................... $ 700 $ 768
Nonvested................................................. 12 9
----- -----
Accumulated benefit obligation.............................. $ 712 $ 777
===== =====
Actuarial present value of projected benefit obligation..... $(725) $(783)
Plan assets at fair value................................... 789 774
----- -----
Excess of plan assets over projected benefit obligation..... 64 (9)
Unamortized net assets at transition........................ (17) (18)
Unrecognized net gain....................................... (12) 41
----- -----
Prepaid pension cost........................................ $ 35 $ 14
===== =====
</TABLE>
The weighted average discount rate used in determining actuarial present
value of the projected benefit obligation was seven percent for 1997 and 1996.
The assumed long-term rate of return on plan assets was seven percent in 1997
and 1996.
Warrior also sponsors a profit-sharing plan which permits participants to
make contributions by salary reduction pursuant to Section 401(k) of the
Internal Revenue Code. Employees may contribute a maximum of 15% of compensation
for the plan year. The Corporation matches contributions at its discretion. In
addition, the plan allows the Corporation to make discretionary contributions.
In 1997 the Corporation's contributions to the plan were $20,000.
Commerce, which merged with the Corporation on November 6, 1998, sponsors a
profit-sharing plan which permits participants to make contributions by salary
reduction pursuant to Section 401(k) of the Internal Revenue Code. The Plan
covers substantially all employees who meet certain age and length of service
requirements. The Corporation matches contributions at its discretion. In
addition, the plan allows the Corporation to make discretionary contributions.
In 1997 and 1996 the Corporation's contributions to the plan were $16,000 and
$42,000, respectively.
City National, which merged with the Corporation on October 30, 1998,
sponsors a profit-sharing plan which permits participants to make contributions
by salary reduction pursuant to Section 401(k) of the Internal Revenue Code. The
Corporation matches contributions at its discretion up to a maximum of 8% of
compensation. In addition, the plan allows the Corporation to make discretionary
contributions of up to 6% of employee compensation. In 1997 and 1996 the
Corporation's contributions to the plan were $124,000 and $100,000,
respectively.
First Citizens, which merged with the Corporation on October 30, 1998,
sponsors a profit-sharing plan which permits participants to make contributions
by salary reduction pursuant to Section 401(k) of the Internal Revenue Code.
Employees may contribute a maximum of 15% of compensation for the plan year. In
addition, the plan allows the Corporation to make discretionary contributions.
In 1997 and 1996 the Corporation's contributions to the plan were $10,000 and
$5,000, respectively.
F-19
<PAGE> 85
THE BANC CORPORATION AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES
The components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Current:
Federal................................................... $ 730 $ 671 $ 599
State..................................................... 133 97 74
Benefit of net operating loss carryforwards............... (162) -- --
----- ----- -----
Total current expense....................................... 701 768 673
Tax effect of temporary differences......................... 190 (121) (347)
----- ----- -----
Total provision for income taxes............................ $ 891 $ 647 $ 326
===== ===== =====
</TABLE>
Significant components of the Corporation's deferred tax assets and
liabilities as of December 31, 1997 and 1996 are listed below (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ----
<S> <C> <C>
Deferred tax assets:
Provision for loan losses................................. $ 651 $513
NOL carryover............................................. 114 291
AMT credit carryover...................................... 95 101
Other..................................................... 72 54
------ ----
Total deferred assets............................. 932 959
Deferred tax liabilities:
Difference in book and tax basis of assets acquired....... 816 --
Depreciation.............................................. 207 119
Section 481 cash to accrual basis adjustment.............. 138 184
Unrealized gain on securities............................. 180 --
Other..................................................... 182 241
------ ----
Total deferred tax liabilities.................... 1,523 544
------ ----
Net deferred tax (liability)/asset................ $ (591) $415
====== ====
</TABLE>
The effective tax rate differs from the expected tax using statutory rate
of 34%. Reconciliation between the expected tax and the actual provision for
income taxes follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ----- -----
<S> <C> <C> <C>
Expected tax at 34% of income tax before taxes.............. $1,008 $ 715 $ 569
Add (deduct):
State income taxes, net of federal tax benefit............ 72 61 46
Effect of interest income exempt from Federal income
taxes.................................................. (185) (219) (220)
Unallowable interest deduction............................ 20 33 19
Other items -- net........................................ (24) 57 (88)
------ ----- -----
Income tax expense.......................................... $ 891 $ 647 $ 326
====== ===== =====
</TABLE>
At December 31, 1997 and 1996, the Corporation had net operating loss
carryforwards for federal tax purposes of $308,000 and $785,000, respectively,
that expire in years 2010 thru 2011.
Income taxes paid were $889,000, $796,000, and $580,000 for the years ended
December 31, 1997, 1996, and 1995, respectively. Applicable income tax expense
of $78,000, $19,000, and $27,000 on securities gains and losses for the years
ended December 31, 1997, 1996, and 1995, respectively, is included in the
provision for income taxes.
F-20
<PAGE> 86
THE BANC CORPORATION AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. RELATED PARTY TRANSACTIONS
The Corporation has entered into transactions with its directors, executive
officers, significant shareholders and their affiliates (related parties). Such
transactions were made in the ordinary course of business on substantially the
same terms and conditions, including interest rates and collateral, as those
prevailing at the same time for comparable transactions with other customers,
and did not, in the opinion of management, involve more than normal credit risk
or present other unfavorable features. The aggregate amount of loans to such
related parties at December 31, 1997 and 1996 were $7,240,000 and $3,702,000,
respectively. Activity during 1997 in loan to related parties included advances
of approximately $5,492,000 and payments of approximately $1,954,000.
During 1997 the Corporation purchased a twenty-one story building in
downtown Birmingham from Taylor Acquisition Corporation, a corporation owned by
James A. Taylor, Sr., Chairman and CEO of the Corporation and certain family
members. The building was purchased through a merger transaction in which the
Taylors' received 1,535 shares of Warrior common stock (equivalent to 460,500
shares of the Corporation) and, in addition, the Corporation assumed $1,513,000
in outstanding debt on the property. The building and related equipment have
been capitalized at the appraised fair value of $3,718,000.
13. COMMITMENTS AND CONTINGENCIES
The supplemental consolidated financial statements do not reflect the
Corporation's various commitments and contingent liabilities which arise in the
normal course of business and which involve elements of credit risk, interest
rate risk and liquidity risk. These commitments and contingent liabilities are
commitments to extend credit and standby letters of credit. The following is a
summary of the Corporation's maximum exposure to credit loss for loan
commitments and standby letters of credit (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
------- -------
<S> <C> <C>
Commitments to extend credit................................ $16,480 $13,005
Standby letters of credit................................... 606 601
</TABLE>
Commitments to extend credit and standby letters of credit all include
exposure to some credit loss in the event of nonperformance of the customer. The
Corporation's credit policies and procedures for credit commitments and
financial guarantees are the same as those for extension of credit that are
recorded in the supplemental consolidated statement of financial condition.
Because these instruments have fixed maturity dates, and because many of them
expire without being drawn upon, they do not generally present any significant
liquidity risk to the Corporation.
The Corporation is party to litigation and claims arising in the normal
course of business. Management, after consultation with legal counsel, believes
that the liabilities, if any, arising from such litigation and claims will not
be material to the supplemental consolidated financial statements.
F-21
<PAGE> 87
THE BANC CORPORATION AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. BUSINESS COMBINATIONS
The Corporation has completed the following business combinations during
1998 (dollar amounts in thousands):
<TABLE>
<CAPTION>
ACCOUNTING
DATE INSTITUTION TOTAL ASSETS CONSIDERATION TREATMENT
- ---- ----------- ------------ ------------- ----------
<S> <C> <C> <C> <C>
September 24.......... Warrior Capital $ 83,662 5,448,000 shares of Pooling
Corporation common stock
October 16............ Commercial Bancshares of 41,692 $7,300 cash Purchase
Roanoke, Inc.
October 30............ City National 83,996 2,000,000 shares of Pooling
Corporation common stock
October 30............ First Citizens Bancorp, 35,096 663,243 shares of common Pooling
Inc. stock
November 6............ Commerce Bank of Alabama 104,962 1,536,615 shares of Pooling
common stock
</TABLE>
The following table presents net interest income, net income and net income
per common share as reported by Warrior, Commerce, First Citizens, City National
and on a combined basis (dollar amounts in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Net interest income:
Warrior................................................... $ 3,152 $2,826 $2,803
Commerce.................................................. 3,485 1,886 713
First Citizens............................................ 1,742 1,429 1,023
City National............................................. 3,810 3,566 3,349
------- ------ ------
Combined.................................................. $12,189 $9,707 $7,888
======= ====== ======
Net income (loss):
Warrior................................................... $ 798 $ 790 $ 898
Commerce.................................................. 228 (293) (469)
First Citizens............................................ 423 400 194
City National............................................. 625 560 725
------ ------ ------
Combined.................................................. $2,074 $1,457 $1,348
====== ====== ======
Net income (loss) per equivalent share of Corporation:
Warrior................................................... $ .26 $ .29 $ .33
Commerce.................................................. .15 (.20) (.49)
First Citizens............................................ .68 .64 .32
City National............................................. .31 .28 .36
Combined.................................................. $ .29 $ .21 $ .21
</TABLE>
The Corporation has a business combination pending with Emerald Coast
Bancshares, Inc. (Emerald) of Panama City, Florida. Emerald had assets of $77
million as of September 30, 1998. The consideration is to be 1,379,958 shares of
stock of the Corporation and the transaction is expected to be accounted for as
a pooling of interests.
F-22
<PAGE> 88
THE BANC CORPORATION AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. REGULATORY RESTRICTIONS
The primary source of funds available to the Corporation is the payment of
dividends by its subsidiary. Banking regulations limit the amount of dividends
that may be paid without prior approval of The Bank's regulatory agency.
Approximately $2,182,000 in retained earnings are available to be paid as
dividends by The Bank at December 31, 1997.
The Corporation is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -- and possible additional
discretionary -- actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Corporation must meet specific capital guidelines that involve quantitative
measures of the Corporation's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The Corporation's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997 that the
Corporation meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the FDIC
categorized the Corporation as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized the
Corporation must maintain minimum total risk-based, Tier I risk-based, Tier I
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the institution's
category.
The Corporation and its subsidiary's actual capital amounts and ratios are
also presented in the table (in thousands).
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ADEQUACY ACTION
ACTUAL PURPOSES PROVISIONS
------------------ ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets):
Corporation...................... $41,466 20.55% $16,142 8.00% $20,178 10.00%
Bank............................. 30,350 15.46 15,705 8.00 19,631 10.00
Tier I Capital
(to Risk Weighted Assets):
Corporation...................... 39,337 19.49 8,073 4.00 12,110 6.00
Bank............................. 28,221 14.37 7,856 4.00 11,783 6.00
Tier I Capital
(to Average Assets):
Corporation...................... 39,337 14.17 11,104 4.00 13,880 5.00
Bank............................. 28,221 10.08 11,199 4.00 13,999 5.00
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets):
Corporation...................... $28,723 17.77% $12,931 8.00% $16,164 10.00%
Bank............................. 28,807 17.84 12,918 8.00 16,147 10.00
</TABLE>
F-23
<PAGE> 89
THE BANC CORPORATION AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ADEQUACY ACTION
ACTUAL PURPOSES PROVISIONS
------------------ ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Tier I Capital
(to Risk Weighted Assets):
Corporation...................... 27,033 16.72 6,467 4.00 9,701 6.00
Bank............................. 27,117 16.80 6,456 4.00 9,685 6.00
Tier I Capital
(to Average Assets):
Corporation...................... 27,033 12.31 8,784 4.00 10,980 5.00
Bank............................. 27,117 12.40 8,747 4.00 10,934 5.00
</TABLE>
16. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Corporation 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.
Available-for-sale securities. Fair values for securities are based
on quoted market prices. The carrying values of restricted equity
securities approximate fair 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 in conjunction with
securitization transactions, adjusted for differences in loan
characteristics. Fair values for commercial real estate and commercial
loans are estimated using discounted cash flow analyses using interest
rates currently being offered for loans with similar terms to borrowers of
similar credit quality. Fair values for impaired loans are estimated using
discounted cash flow analyses or underlying collateral values, where
applicable.
Deposit liabilities. The fair values disclosed for demand deposits
are, by definition, equal to the amount payable on demand at the reporting
date (that is, their carrying amounts). The carrying amounts of
variable-rate, fixed-term money market accounts and certificates of deposit
("CDs") approximate their fair values at the reporting date. Fair values
for fixed-rate CDs are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits.
Short-term borrowings. The carrying amount of federal funds purchased
and other short-term borrowings maturing within 90 days approximate their
fair values.
Accrued interest. The carrying amounts of accrued interest
approximate their fair values.
Limitations. Fair value estimates are made at a specific point of
time and are based on relevant market information which is continuously
changing. Because no quoted market prices exist for a significant portion
of the Corporation's financial instruments, fair values for such
instruments are based on management's assumptions with respect to future
economic conditions, estimated discount rates, estimates of the amount and
timing of future cash flows, expected loss experience, and other factors.
These estimates are subjective in nature involving uncertainties and
matters of significant judgment; therefore, they cannot be determined with
precision. Changes in the assumptions could significantly affect the
estimates.
F-24
<PAGE> 90
THE BANC CORPORATION AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The estimated fair values of the Corporation's financial instruments are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------- ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks...................... $ 11,524 $ 11,524 $ 12,853 $12,853
Interest bearing deposit in other banks...... 200 200 200 200
Federal funds sold........................... 27,605 27,605 13,470 13,470
Securities available for sale................ 47,613 47,613 49,435 49,435
Securities held-to-maturity.................. 26,298 26,309 23,867 23,816
Loans, net of unearned income................ 176,876 179,208 139,538 139,990
Accrued interest receivable.................. 2,836 2,836 2,541 2,541
Financial liabilities:
Deposits..................................... 264,162 261,568 219,644 219,590
Advances from FHLB and other borrowed
funds..................................... 243 243 1,849 1,849
Federal funds purchased and securities sold
under agreements to repurchase............ 316 316 -- --
</TABLE>
17. OTHER NONINTEREST EXPENSE
Other noninterest expense consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Professional fees........................................... $ 420 $ 319 $ 228
Directors fees.............................................. 293 249 297
Insurance and assessments................................... 180 163 157
Postage, stationery and supplies............................ 340 397 276
Advertising................................................. 168 132 176
Other operating expense..................................... 1,472 1,396 1,186
------ ------ ------
Total............................................. $2,873 $2,656 $2,320
====== ====== ======
</TABLE>
18. CONCENTRATIONS OF CREDIT RISK
All of the Corporation's loans, commitments and standby letters of credit
have been granted to customers in the Corporation's market area. The
concentrations of credit by type of loan or commitment are set forth in Notes 3
and 13, respectively.
The Bank maintains due from bank accounts at various commercial banks in
Alabama. The total cash balances are insured by the FDIC up to $100,000. Total
uninsured balances held at these commercial banks amounted to $6,786,000 and
$9,320,000 at December 31, 1997 and 1996, respectively.
F-25
<PAGE> 91
THE BANC CORPORATION AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. NET INCOME PER SHARE
The following table sets forth the computation of basic net income per
common share and diluted net income per common share (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Numerator:
For basic net income per common share and diluted net
income per common share, net income.................... $2,074 $1,457 $1,348
====== ====== ======
Denominator:
For basic net income per common share, weighted shares
outstanding............................................ 7,175 6,791 6,302
Effect of dilutive securities:
Stock options.......................................... 71 92 37
------ ------ ------
For diluted net income per common share..................... 7,246 6,883 6,339
====== ====== ======
Basic and diluted net income per common share............... $ .29 $ .21 $ .21
====== ====== ======
</TABLE>
20. PARENT CORPORATION
The condensed financial information for The Banc Corporation (Parent
Corporation only) is presented as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
------- -------
<S> <C> <C>
Statements of financial condition
Assets:
Cash...................................................... $ 6,767 $ 342
Investment in subsidiary.................................. 28,824 26,666
Intangibles, net.......................................... 415 432
Premises and equipment -- net............................. 4,822 153
Other assets.............................................. 267 85
------- -------
$41,095 $27,678
======= =======
Liabilities:
Accounts payable and deferred taxes....................... $ 816 $ --
Dividends payable......................................... 40 38
Accrued expenses and other liabilities.................... 258 198
Stockholders' equity........................................ 39,981 27,442
------- -------
$41,095 $27,678
======= =======
</TABLE>
F-26
<PAGE> 92
THE BANC CORPORATION AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Statements of income
Income:
Dividends from subsidiary................................. $ 269 $ 401 $ 447
Interest.................................................. 67 2 5
Other income.............................................. 95 124 73
------ ------ ------
431 527 525
Expense:
Directors' fees........................................... 136 98 89
Salaries and benefits..................................... 94 77 59
Other..................................................... 68 46 59
------ ------ ------
298 221 207
Income before income taxes and equity in undistributed
earnings of subsidiary.................................... 133 306 318
Income tax benefit/(expense).............................. 48 (27) 53
------ ------ ------
Income before equity in undistributed earnings of
subsidiary................................................ 181 279 371
Equity in undistributed earnings of subsidiary.............. 1,893 1,178 977
------ ------ ------
Net income........................................ $2,074 $1,457 $1,348
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Statements of cash flows
Cash flows from operating activities
Net income.................................................. $ 2,074 $ 1,457 $ 1,348
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization and depreciation expense.................. 25 21 36
Undistributed earnings of subsidiary................... (1,893) (1,178) (977)
Increase in other liabilities.......................... 62 (139) 42
Increase in other assets............................... (182) 70 (116)
------- ------- -------
Net cash provided by operating activities................... 86 231 333
Net cash used in investing activities
Purchases of premises and equipment......................... (141) -- (153)
Cash used in financing activities
Dividends paid.............................................. (389) (364) (369)
Proceeds from issuance of common stock...................... 17,878 -- --
Repurchase of common stock.................................. (9,496) (16) --
(Decrease) increase notes payable........................... -- (30) 30
Payment on assumed debt..................................... (1,513) -- --
------- ------- -------
Net cash provided (used) by financing activities............ 6,480 (410) (339)
</TABLE>
F-27
<PAGE> 93
THE BANC CORPORATION AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net increase in cash........................................ 6,425 (179) (159)
Cash and cash equivalents at beginning of year.............. 342 521 680
------- ------- -------
Cash and cash equivalents at end of year.................... $ 6,767 $ 342 $ 521
======= ======= =======
</TABLE>
21. SUBSEQUENT EVENTS
During the third quarter of 1998, the Corporation sold $9,196,000 of
securities held-to-maturity. The remaining securities held to maturity with a
carrying value of $25,623,000 were transferred to securities available-for-sale.
F-28
<PAGE> 94
THE BANC CORPORATION
CONDENSED SUPPLEMENTAL CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (UNAUDITED)
AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
---------------
(IN THOUSANDS)
<S> <C>
ASSETS
Cash and due from banks..................................... $ 13,770
Interest bearing deposits in other banks.................... 208
Federal funds sold.......................................... 6,120
Investment securities available for sale.................... 81,405
Loans, net of unearned...................................... 236,311
Less: Allowance for loan losses............................. (3,422)
--------
Net loans............................................. 232,889
--------
Premises and equipment, net................................. 22,419
Other assets................................................ 9,389
--------
Total assets...................................... $366,200
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing....................................... $ 43,235
Interest-bearing.......................................... 269,872
--------
Total deposits.................................... 313,107
Accrued expenses and other liabilities...................... 7,492
Long term borrowings........................................ 3,000
--------
Total liabilities................................. 323,599
Stockholders' Equity
Common stock, par value $.001 per share; authorized
25,000,000 shares; 9,599,443 shares issued and
outstanding............................................ 10
Surplus................................................... 26,631
Retained earnings......................................... 15,405
Accumulated other comprehensive income.................... 555
--------
Total stockholders' equity........................ 42,601
--------
Total liabilities and stockholders' equity........ $366,200
========
</TABLE>
See Notes to Unaudited Condensed Supplemental Consolidated Financial Statements.
F-29
<PAGE> 95
THE BANC CORPORATION
CONDENSED SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(IN THOUSANDS EXCEPT
PER SHARE DATA)
<S> <C> <C>
Interest income............................................. $19,955 $16,457
Interest expense............................................ 9,263 7,637
------- -------
Net interest income............................... 10,692 8,820
Provision for loan losses................................... 2,884 848
------- -------
Net interest income after provision for loan
losses........................................... 7,808 7,972
Noninterest income.......................................... 1,739 1,573
Net gain on sale of securities.............................. 185 97
Noninterest expenses........................................ 10,483 7,188
------- -------
(Loss) income before income taxes................. (751) 2,454
Income tax (benefit) expense................................ (762) 868
------- -------
Net income........................................ 11 1,586
Other comprehensive income, net of tax:
Unrealized gain on securities available for sale.......... 324 195
------- -------
Comprehensive income........................................ $ 335 $ 1,781
======= =======
Average common shares outstanding........................... 9,455 6,866
Average common shares outstanding, assuming dilution........ 9,523 6,935
Basic and diluted net income per common share............... $ -- $ 0.23
</TABLE>
See Notes to Unaudited Condensed Supplemental Consolidated Financial Statements.
F-30
<PAGE> 96
THE BANC CORPORATION
CONDENSED SUPPLEMENTAL CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMMON RETAINED COMPREHENSIVE STOCKHOLDERS'
STOCK SURPLUS EARNINGS INCOME EQUITY
------ ------- -------- ------------- -------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997............... $ 9 $24,221 $15,519 $231 $39,980
Net income................................. -- -- 11 -- 11
Issuance of 501,627 shares of common
stock.................................... 1 2,410 -- -- 2,411
Redemption of common stock................. -- -- (4) -- (4)
Dividends paid by pooled subsidiary........ -- -- (121) -- (121)
Other comprehensive income................. -- -- -- 324 324
--- ------- ------- ---- -------
Balance at September 30, 1998.............. $10 $26,631 $15,405 $555 $42,601
=== ======= ======= ==== =======
</TABLE>
See Notes to Unaudited Condensed Supplemental Consolidated Financial Statements.
F-31
<PAGE> 97
THE BANC CORPORATION
CONDENSED SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net cash provided by operating activities................... $ 1,403 $ 3,199
-------- --------
Cash flows from investing activities:
Increase in interest bearing deposits in other banks...... (8) --
Net decrease (increase) in federal funds sold............. 20,755 (1,890)
Proceeds from sales of securities available for sale...... 24,100 16,121
Proceeds from maturities of investment securities
available for sale..................................... 17,107 4,935
Purchases of investment securities available for sale..... (39,568) (25,638)
Proceeds from maturities of investment securities held to
maturity............................................... 15,028 6,157
Purchases of investment securities held to maturity....... (23,520) (5,486)
Proceeds from sales of other investments.................. 113
Purchases of other investments............................ (31) (293)
Net increase in loans..................................... (59,328) (32,269)
Purchases of premises and equipment....................... (9,319) (690)
-------- --------
Net cash used in investing activities............. (54,671) (39,053)
-------- --------
Cash flows from financing activities:
Net increase in deposit accounts.......................... 48,943 32,429
Principal payments on long-term debt...................... (5) (5)
Net increase (decrease) in advance from FHLB.............. 3,000 (1,600)
Net increase in short-term borrowings..................... 561 1,154
Proceeds from issuance of common stock.................... 2,411 7
Redemption of common stock................................ (4) (28)
Cash dividends paid by pooled subsidiary.................. (121) (348)
-------- --------
Net cash provided by financing activities......... 54,785 31,609
-------- --------
Net increase (decrease) in cash and due from banks.......... 1,517 (4,245)
Cash and due from banks at beginning of period.............. 12,253 15,943
-------- --------
Cash and due from banks at end of period.................... $ 13,770 $ 11,698
======== ========
Supplemental Cash Flow Information:
Selected cash payments and noncash activities were as
follows:
Cash payments for income taxes......................... $ 345 $ 745
Cash payments for interest............................. 8,620 7,022
</TABLE>
See Notes to Unaudited Supplemental Condensed Consolidated Financial Statements.
F-32
<PAGE> 98
THE BANC CORPORATION
NOTES TO CONDENSED SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
1. ACCOUNTING AND REPORTING POLICIES
The accompanying unaudited condensed supplemental consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and, accordingly, do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, the
accompanying unaudited condensed supplemental consolidated financial statements
contain all adjustments (consisting of only normal recurring entries) necessary
to present fairly the financial position, results of operations and cash flows
for the interim periods. All interim amounts are subject to year-end audit, and
the results of operations for the interim periods reported herein are not
necessarily indicative of results of operations to be expected for the year.
The Banc Corporation and its subsidiary ("Corporation") provide banking and
consumer finance services to markets in Alabama. The Corporation was formed as a
result of the merger of The Banc Corporation, Warrior Capital Corporation
(Warrior), Commerce Bank of Alabama (Commerce), First Citizens Bancorp, Inc.
(First Citizens) and City National Corporation (City National). All banks were
merged into one subsidiary, The Bank.
2. INCOME TAXES
Investment tax credits are accounted for by the flow-through method whereby
they reduce income taxes currently payable and the provision for income taxes in
the period the assets giving rise to such credits are placed in service. To the
extent such credits are not currently utilized on the Corporation's tax return,
deferred tax assets are recognized for the carryforward amount.
For the year 1998 the Corporation is expected to have available
approximately $1,500,000 in general business tax credits related to the
renovation of the John Hand building. For the period ending September 30, 1998
the Corporation has recognized a benefit, net of the tax effect of the related
reduction in the tax basis of the asset, of approximately $700,000. Any credit
not utilized on the Corporation's 1998 tax return will not expire until the year
2008.
3. RELATED PARTY TRANSACTION
During 1998 the Corporation received $2,370,000 from the sale of common
stock to various directors and executive officers of the Corporation. The stock
was issued as part of a private offering initiated in 1997.
4. INVESTMENT SECURITIES
As of September 30, 1998 the Corporation transferred securities with a
carrying value of $25,623,000 and fair value of $25,821,000 from the held to
maturity category to available for sale. The unrealized gain of $198,000 has
been recognized in comprehensive income net of deferred income taxes of $79,000.
The securities were transferred in order to provide liquidity to the Corporation
to meet the increasing loan demand being generated from its Birmingham branch
which opened on July 1, 1998.
F-33
<PAGE> 99
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
and Stockholders
Warrior Capital Corporation and Subsidiary
Warrior, Alabama
We have audited the accompanying consolidated statements of financial
condition of Warrior Capital Corporation and subsidiary as of December 31, 1997
and 1996 and the related consolidated statements of income and comprehensive
income, changes in stockholders' equity and cash flows for each of the years in
the three-year period ended December 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Warrior Capital
Corporation and subsidiary at December 31, 1997 and 1996 and the consolidated
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
DUDLEY, HOPTON-JONES, SIMS & FREEMAN PLLP
Birmingham, Alabama
February 5, 1998
F-34
<PAGE> 100
WARRIOR CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 3,538 $ 3,388
Federal funds sold.......................................... 17,000 9,250
Investment securities available for sale.................... 223 235
Investment securities held to maturity (fair value $23,808
and $20,695, respectively)................................ 23,795 20,712
Loans, net of unearned income............................... 32,394 31,028
Less: Allowance for loan losses............................. (650) (634)
------- -------
Net loans......................................... 31,744 30,394
------- -------
Premises and equipment, net................................. 5,764 1,154
Accrued interest receivable................................. 853 739
Intangible, net............................................. 415 432
Other assets................................................ 330 335
------- -------
TOTAL ASSETS...................................... $83,662 $66,639
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing demand............................. $12,294 $10,018
Interest-bearing demand................................ 12,677 10,054
Savings................................................ 16,459 15,670
Certificates of deposit $100,000 and over.............. 2,482 1,924
Other time............................................. 19,973 21,225
------- -------
TOTAL DEPOSITS.................................... 63,885 58,891
Accrued expenses and other liabilities...................... 1,052 216
------- -------
TOTAL LIABILITIES................................. 64,937 59,107
Minority interest in subsidiary............................. 19 17
Stockholders' equity
Preferred stock, par value $10 per share; authorized
1,476; -0- issued...................................... -- --
Common stock, par value $1 per share; authorized 30,000
shares; 16,510 and 9,054 shares issued and outstanding,
respectively........................................... 16 9
Surplus................................................... 11,054 436
Retained earnings......................................... 7,673 7,111
Accumulated other comprehensive loss...................... (37) (41)
------- -------
TOTAL STOCKHOLDERS' EQUITY........................ 18,706 7,515
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $83,662 $66,639
======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-35
<PAGE> 101
WARRIOR CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans................................ $3,530 $3,358 $3,323
Interest on investment securities:
Taxable................................................ 1,086 989 935
Exempt from federal income tax......................... 124 134 138
Interest on federal funds sold............................ 623 553 418
Interest and dividends on other investments............... 36 39 45
------ ------ ------
TOTAL INTEREST INCOME............................. 5,399 5,073 4,859
INTEREST EXPENSE ON DEPOSITS................................ 2,248 2,247 2,056
------ ------ ------
Net interest income.................................... 3,151 2,826 2,803
PROVISION FOR LOAN LOSSES................................... 330 135 120
------ ------ ------
Net interest income after provision for loan losses.... 2,821 2,691 2,683
NONINTEREST INCOME
Service charges and fees.................................. 441 419 538
Loss on sale of securities................................ (2) (16) (35)
Other income.............................................. 36 60 50
------ ------ ------
TOTAL NONINTEREST INCOME.......................... 475 463 553
NONINTEREST EXPENSES
Salaries and employee benefits............................ 1,149 1,041 987
Occupancy and equipment expense........................... 361 347 304
Minority interest in earnings of subsidiary............... 2 2 2
Other operating expenses.................................. 599 562 578
------ ------ ------
TOTAL NONINTEREST EXPENSES........................ 2,111 1,952 1,871
------ ------ ------
Income before income taxes........................... 1,185 1,202 1,365
Income tax expense.......................................... 387 412 467
------ ------ ------
NET INCOME........................................... 798 790 898
Other comprehensive income, net of tax:
Unrealized holding gains on securities available for sale
arising during period.................................. 4 9 63
------ ------ ------
COMPREHENSIVE INCOME...................................... $ 802 $ 799 $ 961
====== ====== ======
Earnings per share -- basic................................. $79.12 $87.25 $99.21
====== ====== ======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-36
<PAGE> 102
WARRIOR CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMMON RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS'
STOCK SURPLUS EARNINGS LOSS STOCK EQUITY
------ ------- -------- ------------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995......... $ 9 $ 436 $5,862 $(113) $ -- $ 6,194
Net income......................... -- -- 898 -- -- 898
Dividends declared................. -- -- (226) -- -- (226)
Other comprehensive income......... -- -- -- 63 -- 63
--- ------- ------ ----- ------ -------
Balance at December 31, 1995....... 9 436 6,534 (50) -- 6,929
Net income......................... -- -- 790 -- -- 790
Dividends declared................. -- -- (213) -- -- (213)
Other comprehensive income......... -- -- -- 9 -- 9
--- ------- ------ ----- ------ -------
Balance at December 31, 1996....... 9 436 7,111 (41) -- 7,515
NET INCOME......................... -- -- 798 -- -- 798
DIVIDENDS DECLARED................. -- -- (236) -- -- (236)
PURCHASE OF 6,587 SHARES OF COMMON
STOCK............................ -- -- -- -- (9,459) (9,459)
PROCEEDS FROM ISSUANCE OF 7,456
SHARES OF COMMON STOCK AND
REISSUANCE OF 6,587 SHARES OF
TREASURY STOCK................... 7 10,618 -- -- 9,459 20,084
OTHER COMPREHENSIVE INCOME......... -- -- -- 4 -- 4
--- ------- ------ ----- ------ -------
BALANCE AT DECEMBER 31, 1997....... $16 $11,054 $7,673 $ (37) -- $18,706
=== ======= ====== ===== ====== =======
</TABLE>
F-37
<PAGE> 103
WARRIOR CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 798 $ 790 $ 898
Adjustments to reconcile net income to net cash provided
by operations:
Depreciation and amortization.......................... 145 143 130
Net (discount accretion) premium amortization.......... (17) (47) 1
Loss on sale of securities available for sale.......... 2 16 35
Loss on sale of other real estate...................... 11 -- --
Provision for loan losses.............................. 330 135 120
Increase in accrued interest receivable................ (114) -- (50)
Increase in other assets............................... (122) (50) (190)
(Decrease) increase in accrued interest payable........ (3) (17) 72
(Decrease) increase in other liabilities............... (4) (137) 42
-------- ------- -------
NET CASH PROVIDED BY OPERATIONS................... 1,026 833 1,058
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in federal funds sold........................ (7,750) (650) (3,800)
Proceeds from sales of securities available for sale...... 13 36 38
Proceeds from maturities of investment securities held to
maturity............................................... 11,485 5,270 4,311
Purchases of investment securities held to maturity....... (14,552) (7,474) (4,079)
Net (increase) decrease in loans.......................... (1,679) 2,002 (2,424)
Purchases of premises and equipment....................... (203) (67) (149)
Proceeds from sale of other real estate................... 146 -- --
-------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES............. (12,540) (883) (6,103)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand and savings deposits.... 5,687 (58) 1,728
Net decrease (increase) in certificates of deposit and
other time deposits.................................... (694) 472 3,295
Payment on assumed debt................................... (1,513) -- --
Proceeds from issuance of common stock.................... 17,879 -- --
Repurchase of common stock................................ (9,459) -- --
Dividends paid............................................ (236) (213) (226)
-------- ------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES......... 11,664 201 4,797
-------- ------- -------
Net increase (decrease) in cash and due from banks.......... 150 151 (248)
Cash and due from banks at beginning of year................ 3,388 3,237 3,485
-------- ------- -------
CASH AND DUE FROM BANKS AT END OF YEAR...................... $ 3,538 $ 3,388 $ 3,237
======== ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION
Selected cash payments and noncash activities were as
follows:
Cash payments for income taxes............................ $ 461 $ 575 $ 423
Cash payments for interest................................ 2,251 2,264 1,984
Noncash investing and financing activities:
Real estate and equipment acquired by assuming related
liability and issuing common stock (Note 9)............ $ 4,534 $ -- $ --
======== ======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-38
<PAGE> 104
WARRIOR CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(IN THOUSAND, EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed by Warrior Capital Corporation ("Company")
and its subsidiary and the method of applying those policies which affect the
determination of financial condition, results of operations and cash flows are
summarized below.
CONSOLIDATION
The consolidated financial statements of the Company include the accounts
of its 99.75% owned subsidiary, Warrior Savings Bank ("Bank"). All significant
intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses. While management
uses available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in local economic conditions. In
addition, regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowances based on their
judgments about information available to them at the time of their examination.
INVESTMENT SECURITIES
The Bank's investments in securities are classified in two categories and
accounted for as follows:
-- Investment Securities Held to Maturity. Bonds, notes and debentures for
which the Bank has the positive intent and ability to hold to maturity
are reported at cost, adjusted for amortization of premiums and
accretion of discounts which are recognized in interest income using the
interest method over the period to maturity.
-- Investment Securities Available for Sale. Securities available for sale
consist of bonds, notes, debentures, and certain equity securities not
classified as trading securities nor as securities to be held to
maturity. Unrealized holding gains and losses, net of deferred income
tax, on securities available for sale are reported as a separate
component of stockholders' equity until realized.
Gains and losses on the sale of securities available for sale are
determined using the specific-identification method.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are stated at the amount of unpaid principal, reduced by unearned
discount and an allowance for loan losses. Interest income with respect to loans
is accrued on the principal amount outstanding, except for interest on certain
consumer loans, which is recognized over the term of the loan using a method
which approximates a level yield.
F-39
<PAGE> 105
WARRIOR CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
The allowance for loan losses is established through a provision for loan
losses charged to expenses. Loans are charged against the allowance for loan
losses when management believes the collectibility of principal is unlikely. The
allowance is the amount that management believes will be adequate to absorb
possible losses on existing loans which may become uncollectible, based on
evaluation of the collectibility of loans and prior loan loss experience. The
evaluations take into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, and current economic conditions that may affect the borrower's
ability to pay.
Accrual of interest is discontinued on a loan when management believes,
after considering economic and business conditions and collection efforts, that
the loan is impaired. Any unpaid interest previously accrued on those loans is
reversed from income. Interest income generally is not recognized on specific
impaired loans unless the likelihood of further loss is remote. Interest
payments received on such loans are applied as a reduction of the loan principal
balance. Interest income on other nonaccrual loans is recognized only to the
extent of interest payments received.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed over the estimated service lives of the
assets using certain straight-line and accelerated methods.
Expenditures for maintenance and repairs are charged to operations as
incurred; expenditures for renewals and betterments are capitalized and written
off by depreciation charges. Property retired or sold is removed from the asset
and related accumulated depreciation accounts and any profit or loss resulting
therefrom is reflected in the statement of income.
INTANGIBLE, NET
Intangible assets is the excess of the cost over net assets acquired, net
of amortization calculated on a straight-line basis over a forty-year period.
OTHER REAL ESTATE
Other real estate, acquired through partial or total satisfaction of loans,
is carried at the lower of cost or fair market value. At the date of
acquisition, losses are charged to the allowance for loan losses.
INCOME TAXES
Income tax expense is based on amounts reported in the statement of income,
after exclusion of nontaxable income such as interest on state and municipal
securities and certain nondeductible expenses (See Note 8).
EARNINGS PER SHARE
Basic earnings per share has been computed based on the weighted average
number of common shares outstanding of 10,086 and 9,054, respectively.
STOCKHOLDERS EQUITY
In 1997, the Company received $20,084, net of issuance cost, from the
proceeds of a private offering ("offering"). Under the offering a total of
14,043 shares were issued at $1,436 per share before December 31, 1997. Of the
14,043 shares issued, 6,587 consisted of treasury stock purchased on October 28,
1997 and recorded at cost.
F-40
<PAGE> 106
WARRIOR CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
OFF BALANCE SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business the Bank has entered into off balance
sheet financial instruments consisting of commitments to extend credit, and
standby letters of credit. Such financial instruments are recorded in the
financial statements when they become payable.
CASH AND CASH EQUIVALENTS
For the purpose of presentation in the statement of cash flows, cash and
cash equivalents are defined as those amounts included in the statement of
financial condition caption "Cash and Due from Banks."
EFFECT OF NEW FINANCIAL ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, Earnings per Share. This statement simplifies the standards for
computing earnings per share previously set forth in APB Opinion No. 15,
Earnings per Share, and makes them comparable to international Earnings per
Share ("EPS") standards. It replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. Basic EPS excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to APB Opinion No. 15. This statement is
effective for financial statements issued for periods ending after December 15,
1997. The adoption of this statement did not have a material impact on the
consolidated financial statements.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. This statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This statement does not
require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement. This statement requires that an enterprise
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance separately from retained earnings
and additional paid-in capital in the equity section of a statement of financial
position. This statement is effective for fiscal years beginning after December
15, 1997. The adoption of this statement did not have a material impact on the
consolidated financial statements.
2. RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
The subsidiary bank is required to maintain average reserve balances either
in vault cash or on deposit with the Federal Reserve Bank. The amount of those
reserves required at December 31, 1997 was approximately $420.
F-41
<PAGE> 107
WARRIOR CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVESTMENT SECURITIES
The amounts at which investment securities are carried and their
approximate fair values at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Investment securities available for sale
Equity securities............................ $ 260 $ -- $ 37 $ 223
======= ==== ==== =======
Investment securities held to maturity
U.S. Treasury securities and obligations of
U.S. government corporations and
agencies.................................. $20,050 $ 45 $ 91 $20,004
State, county and municipal securities....... 3,545 62 13 3,594
Corporate.................................... 200 10 -- 210
------- ---- ---- -------
Totals............................... $23,795 $117 $104 $23,808
======= ==== ==== =======
DECEMBER 31, 1996
Investment securities available for sale
Equity securities............................ $ 276 $ -- $ 41 $ 235
======= ==== ==== =======
Investment securities held to maturity
U.S. Treasury securities and obligations of
U.S. government corporations and
agencies.................................. $17,736 $ 44 $139 $17,641
State, county and municipal securities....... 2,776 85 22 2,839
Corporate.................................... 200 15 -- 215
------- ---- ---- -------
Totals............................... $20,712 $144 $161 $20,695
======= ==== ==== =======
</TABLE>
Securities with an amortized cost of $1,574 and $1,374 at December 31, 1997
and 1996, respectively were pledged to secure United States government deposits
and other public funds and for other purposes as required or permitted by law.
The amortized cost and estimated fair values of debt securities at December
31, 1997, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
SECURITIES HELD TO
MATURITY
---------------------
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
<S> <C> <C>
Due in one year or less..................................... $ 8,465 $ 8,434
Due after one year through five years....................... 8,988 9,036
Due after five years through ten years...................... 5,945 5,935
Due after ten years......................................... 397 403
------- -------
$23,795 $23,808
======= =======
</TABLE>
F-42
<PAGE> 108
WARRIOR CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. LOANS
The Bank grants loans to customers primarily in Jefferson County, Alabama.
At December 31, 1997 and 1996 the composition of the loan portfolio was as
follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Commercial and industrial................................... $ 5,285 $ 4,969
Real estate -- construction................................. 3,317 3,102
-- mortgage..................................... 12,360 12,005
Loans to individuals for personal expenditures.............. 10,979 10,840
All other loans (including overdrafts)...................... 773 440
------- -------
Total loans....................................... 32,714 31,356
Unearned interest and fees.................................. (320) (328)
Allowance for loan losses................................... (650) (634)
------- -------
Net loans......................................... $31,744 $30,394
======= =======
</TABLE>
At December 31, 1997 and 1996 the Company's recorded investment in loans
considered to be impaired under SFAS 114 were $433 and $719, respectfully, all
of which were on nonaccrual status with no related allowance. The average
recorded investment in impaired loans during 1997 and 1996 were approximately
$434 and $361, respectfully.
The Bank has no commitments to loan additional funds to the borrowers whose
loans are nonaccruing.
5. ALLOWANCE FOR LOAN LOSSES
A summary of the allowance for loan losses for the year ended December 31,
1997, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year................................ $634 $660 $627
Provision for loan losses................................... 330 135 120
Loan charge-offs............................................ (380) (202) (124)
Recoveries.................................................. 66 41 37
---- ---- ----
Balance at end of year...................................... $650 $634 $660
==== ==== ====
</TABLE>
6. PREMISES AND EQUIPMENT
Components of premises and equipment at December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Land........................................................ $ 200 $ 200
Bank premises............................................... 938 883
Furniture and equipment..................................... 1,438 1,438
------- -------
2,576 2,521
Less: Accumulated depreciation............................ (1,488) (1,367)
------- -------
Net book value of premises and equipment in service.... 1,088 1,154
Real estate and equipment under renovation (Note 9)......... 4,676 --
------- -------
Net premises and equipment............................. $ 5,764 $ 1,154
======= =======
</TABLE>
F-43
<PAGE> 109
WARRIOR CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. RETIREMENT PLANS
The Bank has a defined benefit plan that provides retirement, disability
and death benefits. All employees over age 21 are eligible to participate in the
plan after the completion of one year of service.
Benefits under the Plan depend upon a participant's years of credited
service with the Bank and his average monthly earnings for the five-year period
prior to the retirement or termination of employment. A participant is 20%
vested in his accrued benefits after completion of two years of service. Vesting
increases 20% per year for the next four years with the participant becoming
fully vested upon completion of six years of service. An employee who completes
ten years of service and attains age fifty-five is eligible for early retirement
benefits. Plan assets consist primarily of Bank certificates of deposit.
The Company contributes amounts to the pension funds sufficient to satisfy
funding requirements of the Employee Retirement Income Security Act.
Net pension cost for 1997 and 1996 are composed of the following:
<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
Service..................................................... $ 30 $ 31
Interest cost on projected benefit obligations.............. 55 47
Actual return on assets..................................... (53) (50)
Net amortization and deferral............................... (3) --
----- -----
Net periodic pension costs........................ $ 29 $ 28
===== =====
Actuarial present value of benefit obligation:
Vested.................................................... $ 700 $ 768
Nonvested................................................. 12 9
----- -----
Accumulated benefit obligation.............................. $ 712 $ 777
===== =====
Actuarial present value of projected benefit obligation..... $(725) $(783)
Plan assets at fair value................................... 789 774
----- -----
Funded status............................................... 64 (9)
Unrecognized transition amount.............................. (17) (18)
Unrecognized net (gain) loss................................ (12) 41
----- -----
Prepaid pension cost........................................ $ 35 $ 14
===== =====
</TABLE>
The weighted average discount rate used in determining actuarial present
value of the projected benefit obligation was seven percent for 1997. The
assumed long-term rate of return on plan assets in 1997 was seven percent.
The Bank has a profit-sharing plan which permits participants to make
contributions by salary reduction pursuant to Section 401(k) of the Internal
Revenue code. Employees may contribute a maximum of 15% of compensation for the
plan year. The Bank matches contributions at its discretion. In addition, the
plan allows the Bank to make discretionary contributions. In 1997, 1996 and 1995
the Bank's contributions to the plan were $20, $18 and $14, respectively.
F-44
<PAGE> 110
WARRIOR CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAX EXPENSE
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
DESCRIPTION 1997 1996 1995
- ----------- ---- ---- ----
<S> <C> <C> <C>
Currently payable:
Federal................................................... $357 $386 $418
State..................................................... 78 49 51
---- ---- ----
Total currently payable........................... 435 435 469
Tax effect of temporary differences......................... (48) (23) (2)
---- ---- ----
Income tax expense................................ $387 $412 $467
==== ==== ====
</TABLE>
As of December 31, 1997 and 1996 the net deferred tax liability consisted
of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax asset:
Provision for loan losses................................. $184 $206
---- ----
Deferred tax liability:
Difference in book and tax basis of assets acquired....... 816 --
Sec. 481 cash to accrual basis adjustment................. 127 207
Accretion on securities................................... 34 24
---- ----
977 231
---- ----
Net deferred tax liability........................ $793 $ 25
==== ====
</TABLE>
The effective tax rate differs significantly from the expected tax using
statutory rate of 34%. Reconciliation between the expected tax and the actual
provision for income taxes follows:
<TABLE>
<CAPTION>
DESCRIPTION 1997 1996 1995
- ----------- ---- ---- ----
<S> <C> <C> <C>
Expected tax at 34% of income tax before taxes.............. $403 $409 $464
Add (deduct):
State income taxes, net of federal tax benefit............ 52 32 34
Effect of interest income exempt from Federal income
taxes.................................................. (44) (45) (47)
Unallowable interest deduction............................ 5 5 4
Other items -- net........................................ (29) 11 12
---- ---- ----
Income tax expense................................ $387 $412 $467
==== ==== ====
</TABLE>
9. RELATED PARTY TRANSACTIONS
The Bank has entered into transactions with its directors, executive
officers, significant shareholders and their affiliates (related parties). Such
transactions were made in the ordinary course of business on substantially the
same terms and conditions, including interest rates and collateral, as those
prevailing at the same time for comparable transactions with other customers,
and did not, in the opinion of management, involve more than normal credit risk
or present other unfavorable features. Changes in related party loans for the
year ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
BALANCE BALANCE
DECEMBER 31, 1996 ADVANCES REPAYMENTS DECEMBER 31, 1997
- ----------------- -------- ---------- -----------------
<S> <C> <C> <C>
$1,327 $2,121 $1,304 $2,144
====== ====== ====== ======
</TABLE>
F-45
<PAGE> 111
WARRIOR CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. RELATED PARTY TRANSACTIONS -- CONTINUED
During 1997 the Company purchased a twenty-one story building in downtown
Birmingham from Taylor Acquisition Corporation, a corporation owned by James A.
Taylor, Sr., Chairman and CEO of the Company and certain family members. The
building was purchased through a transaction in which the Taylor's received
1,535 shares of Company common stock and, in addition, the Company assumed
$1,513 in outstanding debt on the property. The building and related equipment
have been capitalized at the appraised fair value of $3,718, plus $816 in
deferred taxes recognized on the difference between the book and tax basis.
On October 28, 1997, the Company purchased 6,587 shares of its common stock
at $1,436 per share, or $9,459,000, of which 5,436 shares were purchased from
individuals, or their immediate family members, who were officers or directors
of the Company at that time.
10. TIME DEPOSITS
The maturities of time certificates of deposit of $100,000 or more at
December 31, 1997 are as follows:
<TABLE>
<S> <C>
Three months or less........................................ $1,091
Over three through six months............................... 111
Over six through twelve months.............................. 568
Over twelve months.......................................... 712
------
$2,482
======
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
The consolidated financial statements do not reflect the Bank's various
commitments and contingent liabilities which arise in the normal course of
business and which involve elements of credit risk, interest rate risk and
liquidity risk. These commitments and contingent liabilities are commitments to
extend credit and standby letters of credit. The following is a summary of the
Bank's commitments and contingent liabilities at December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Commitments to extend credit................................ $5,294 $2,985
Standby letters of credit................................... 351 170
</TABLE>
Commitments to extend credit and standby letters of credit all include
exposure to some credit loss in the event of nonperformance of the customer. The
Bank's credit policies and procedures for credit commitments and financial
guarantees are the same as those for extension of credit that are recorded in
the consolidated statement of financial condition. Because these instruments
have fixed maturity dates, and because many of them expire without being drawn
upon, they do not generally present any significant liquidity risk to the Bank.
The Bank is party to litigation and claims arising in the normal course of
business. Management, after consultation with legal counsel, believes that the
liabilities, if any, arising from such litigation and claims will not be
material to the consolidated financial statements.
12. REGULATORY RESTRICTIONS
The primary source of funds available to the Company is the payment of
dividends by its subsidiary Bank. Banking regulations limit the amount of
dividends that may be paid without prior approval of the Bank's regulatory
agency. Approximately $2,182,000 are available to be paid as dividends by the
Bank subsidiary at December 31, 1997.
The Company and its subsidiary are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory -- and possible
additional discretionary -- actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory
F-46
<PAGE> 112
WARRIOR CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. REGULATORY RESTRICTIONS -- CONTINUED
framework for prompt corrective action, the Company and its subsidiary 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 Company and its subsidiary's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997 and 1996 that
the Company and its subsidiary meet all capital adequacy requirements to which
they are subject.
As of December 31, 1997 and 1996, the most recent notification from the
FDIC categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier I risk-based, Tier I leverage ratios as
set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
The Company and its subsidiary's actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
FOR CAPITAL UNDER PROMPT
ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
--------------- -------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------ ----- -------- -------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets):
Consolidated............................ $18,907 39.58% $3,821 8.00% $4,777 10.00%
Bank.................................... 8,191 19.05 3,439 8.00 4,299 10.00
Tier I Capital
(to Risk Weighted Assets):
Consolidated............................ 18,310 38.33 1,911 4.00 2,866 6.00
Bank.................................... 7,654 17.80 1,720 4.00 2,579 6.00
Tier I Capital
(to Average Assets):
Consolidated............................ 18,310 23.48 3,119 4.00 3,899 5.00
Bank.................................... 7,654 9.81 3,119 4.00 3,899 5.00
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets):
Consolidated............................ $ 7,604 18.88% $3,223 8.00% $4,029 10.00%
Bank.................................... 7,369 18.29 3,223 8.00 4,029 10.00
Tier I Capital
(to Risk Weighted Assets):
Consolidated............................ 7,100 17.62 1,611 4.00 2,417 6.00
Bank.................................... 6,865 17.04 1,611 4.00 2,417 6.00
Tier I Capital
(to Average Assets):
Consolidated............................ 7,100 10.56 2,689 4.00 3,361 5.00
Bank.................................... 6,865 10.21 2,689 4.00 3,361 5.00
</TABLE>
F-47
<PAGE> 113
WARRIOR CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. OTHER OPERATING EXPENSES
Other operating expenses consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Professional fees........................................... $ 67 $ 65 $ 71
Directors fees.............................................. 191 152 136
Insurance and assessments................................... 49 58 120
Postage, stationery and supplies............................ 124 111 117
Other operating expense..................................... 168 176 134
---- ---- ----
Total............................................. $599 $562 $578
==== ==== ====
</TABLE>
14. CONCENTRATIONS OF CREDIT
All of the Bank's loans, commitments and standby letters of credit have
been granted to customers in the Bank's market area. The concentrations of
credit by type of loan or commitment are set forth in Notes 4 and 11,
respectively.
The Bank maintains due from bank accounts at various commercial banks in
Alabama. The total cash balances are insured by the FDIC up to $100,000. Total
uninsured balances held at these commercial banks amounted to $1,053 at December
31, 1997.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and Short-Term Investments: For those short-term instruments,
the carrying amount is a reasonable estimate of fair value.
Investment Securities: For securities held for investment purposes,
fair values are based on quoted market prices or dealer quotes.
Loan Receivables: For variable-rate loans that reprice frequently and
have no significant change in credit risk, fair values are based on
carrying values. The fair value of other types of loans is estimated by
discounting the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the
same remaining maturities.
Deposit Liabilities: The fair value of demand deposits, savings
accounts, and certain money market deposits is the amount payable on demand
at the reporting date. The fair value of fixed-maturity certificates of
deposit is estimated using the rates currently offered for deposit of
similar remaining maturities.
Commitments to Extend Credit and Standby Letters of Credit. The fair
value of commitments and letters of credit is estimated to be approximately
the same as the notional amount of the related commitment.
F-48
<PAGE> 114
WARRIOR CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. FAIR VALUE OF FINANCIAL INSTRUMENTS -- CONTINUED
The estimated fair values of the Company's financial instruments as of
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and short-term investments................. $20,538 $20,538 $12,638 $12,638
Investment securities........................... 24,018 24,031 20,747 20,930
Loans........................................... 32,394 31,228
Less: Allowance for losses...................... (650) (634)
Net loans....................................... 31,744 31,800 30,594 30,600
------- ------- ------- -------
TOTAL FINANCIAL ASSETS.................. $76,300 $76,369 $63,979 $64,168
======= ======= ======= =======
FINANCIAL LIABILITIES:
Deposits........................................ $63,885 $63,973 $58,891 $58,941
======= ======= ======= =======
UNRECOGNIZED FINANCIAL INSTRUMENTS:
Commitments to extend credit.................... $ -- $ 5,294 $ -- $ 2,985
Standby letters of credit....................... -- 351 -- 170
------- ------- ------- -------
TOTAL UNRECOGNIZED FINANCIAL
INSTRUMENTS........................... $ -- $ 5,645 $ -- $ 3,155
======= ======= ======= =======
</TABLE>
16. PARENT COMPANY
The condensed financial information for Warrior Capital Corporation (Parent
Company only) is presented as follows:
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
ASSETS
Cash...................................................... $ 6,717 $ 257
Investment in subsidiary, at equity....................... 7,636 6,848
Intangibles, net.......................................... 415 432
Premises and equipment -- net............................. 4,676 --
Other assets.............................................. 148 1
------- ------
$19,592 $7,538
======= ======
LIABILITIES -- ACCOUNTS PAYABLE AND DEFERRED TAXES.......... $ 886 $ 23
STOCKHOLDERS' EQUITY........................................ 18,706 7,515
------- ------
$19,592 $7,538
======= ======
</TABLE>
F-49
<PAGE> 115
WARRIOR CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. PARENT COMPANY -- CONTINUED
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
INCOME
Dividends from subsidiary................................. $100 $235 $275
Interest.................................................. 65 -- --
---- ---- ----
165 235 275
EXPENSE
Directors' fees........................................... 136 98 89
Other..................................................... 58 34 36
---- ---- ----
194 132 125
---- ---- ----
Income (loss) before income tax benefit and equity
in undistributed earnings of subsidiary.......... (29) 103 150
INCOME TAX BENEFIT.......................................... 43 7 36
---- ---- ----
Income before equity in undistributed earnings of
subsidiary....................................... 14 110 186
Equity in undistributed earnings of subsidiary.............. 784 680 712
---- ---- ----
NET INCOME........................................ $798 $790 $898
==== ==== ====
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1997 1996 1995
------- ----- -----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 798 $ 790 $ 898
Adjustments to reconcile net income to net cash (used)
provided by operating activities:
Amortization expense................................... 18 18 18
Undistributed earnings of subsidiary................... (784) (680) (712)
Increase (decrease) in other liabilities............... 47 (141) 46
Increase in other assets............................... (149) -- --
------- ----- -----
NET CASH (USED) PROVIDED BY OPERATING
ACTIVITIES...................................... (70) (13) 250
------- ----- -----
NET CASH USED IN INVESTING ACTIVITIES
Purchase of equipment..................................... (141) -- --
------- ----- -----
CASH USED IN FINANCING ACTIVITIES
Dividends paid............................................ (235) (213) (226)
Proceeds from issuance of common stock.................... 17,878 -- --
Repurchase of common stock................................ (9,459) -- --
Payment on assumed debt................................... (1,513) -- --
------- ----- -----
Net cash provided (used) by financing
activities...................................... 6,671 (213) (226)
------- ----- -----
Net increase (decrease) in cash............................. 6,460 (226) 24
Cash at beginning of year................................... 257 483 459
------- ----- -----
CASH AT END OF YEAR......................................... $ 6,717 $ 257 $ 483
======= ===== =====
</TABLE>
F-50
<PAGE> 116
THE BANC CORPORATION
(FORMERLY WARRIOR CAPITAL CORPORATION)
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (UNAUDITED)
AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
--------------
(IN THOUSANDS)
<S> <C>
ASSETS
Cash and due from banks..................................... $ 4,844
Federal funds sold.......................................... 4,000
Investment securities available for sale.................... 25,966
Loans, net of unearned...................................... 64,002
Less: Allowance for loan losses............................. (805)
--------
Net loans......................................... 63,197
--------
Premises and equipment, net................................. 15,856
Other assets................................................ 4,423
--------
TOTAL ASSETS...................................... $118,286
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing....................................... $ 14,923
Interest-bearing.......................................... 78,099
--------
TOTAL DEPOSITS.................................... 93,022
Accrued expenses and other liabilities...................... 3,636
--------
TOTAL LIABILITIES................................. 96,658
Minority interest in equity of subsidiary................... 26
Stockholders' Equity
Common stock, par value $.001 per share; authorized
25,000,000 shares; 5,448,000 shares issued and
outstanding............................................ 6
Surplus................................................... 13,433
Retained earnings......................................... 8,069
Accumulated other comprehensive income.................... 94
--------
TOTAL STOCKHOLDERS' EQUITY........................ 21,602
--------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $118,286
========
</TABLE>
See Notes to Unaudited Condensed Financial Statements.
F-51
<PAGE> 117
THE BANC CORPORATION
(FORMERLY WARRIOR CAPITAL CORPORATION)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(IN THOUSANDS EXCEPT PER
SHARE DATA)
<S> <C> <C>
Interest income............................................. $ 5,019 $ 3,931
Interest expense............................................ 2,046 1,670
---------- ----------
Net interest income............................... 2,973 2,261
Provision for loan losses................................... 179 135
---------- ----------
Net interest income after provision for loan losses.... 2,794 2,126
Noninterest income.......................................... 457 382
Net loss on sale of securities.............................. (13) (3)
Noninterest expenses........................................ 3,527 1,520
---------- ----------
Income (loss) before income taxes................. (289) 985
Income tax expense (benefit)................................ (685) 363
---------- ----------
Net income........................................ 396 622
Other comprehensive income net of tax:
Unrealized gain on securities available for sale.......... 131 2
---------- ----------
Comprehensive income........................................ $ 527 $ 624
========== ==========
Basic earnings per share.................................... $ 0.07 $ 0.23
========== ==========
Average number of shares outstanding........................ 5,303,400 2,716,200
========== ==========
</TABLE>
See Notes to Unaudited Condensed Financial Statements.
F-52
<PAGE> 118
THE BANC CORPORATION
(FORMERLY WARRIOR CAPITAL CORPORATION)
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMMON RETAINED COMPREHENSIVE STOCKHOLDERS'
STOCK SURPLUS EARNINGS (LOSS) INCOME EQUITY
------ ------- -------- ------------- -------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997................ $ 5 $11,065 $7,673 $(37) $18,706
Net income.................................. -- -- 396 -- 396
Issuance of 495,000 shares of common
stock..................................... 1 2,368 -- -- 2,369
Other comprehensive income.................. -- -- -- 131 131
--- ------- ------ ---- -------
Balance at September 30, 1998............... $ 6 $13,433 $8,069 $ 94 $21,602
=== ======= ====== ==== =======
</TABLE>
See Notes to Unaudited Condensed Financial Statements.
F-53
<PAGE> 119
THE BANC CORPORATION
(FORMERLY WARRIOR CAPITAL CORPORATION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Net cash provided by operating activities................... $ 782 $ 930
-------- -------
Cash flows from investing activities:
Net decrease (increase) in federal funds sold............. 13,000 (720)
Proceeds from sales of securities available for sale...... 9,274 12
Proceeds from maturities of investment securities held to
maturity............................................... 12,526 5,757
Purchases of investment securities held to maturity....... (23,520) (5,486)
Net increase in loans..................................... (31,632) (2,325)
Purchases of premises and equipment....................... (8,228) (61)
Investment in officers' life insurance.................... (2,401) --
-------- -------
Net cash used in investing activities............. (30,981) (2,823)
-------- -------
Cash flows from financing activities:
Net increase in deposit accounts.......................... 29,136 2,486
Proceeds from issuance of common stock.................... 2,369 --
Cash dividends paid....................................... -- (235)
-------- -------
Net cash provided by financing activities......... 31,505 2,251
-------- -------
Net increase in cash and due from banks..................... 1,306 358
Cash and due from banks at beginning of period.............. 3,538 3,388
-------- -------
Cash and due from banks at end of period.................... $ 4,844 $ 3,746
======== =======
Supplemental Cash Flow Information:
Selected cash payments and noncash activities were as
follows:
Cash (refund) payments for income taxes................ $ (10) $ 388
Cash payments for interest............................. 1,770 1,427
</TABLE>
See Notes to Unaudited Condensed Financial Statements.
F-54
<PAGE> 120
THE BANC CORPORATION
(FORMERLY WARRIOR CAPITAL CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
1. ACCOUNTING AND REPORTING POLICIES
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and, accordingly, do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements contain all
adjustments (consisting of only normal recurring entries) necessary to present
fairly the financial position, results of operations and cash flows for the
interim periods. All interim amounts are subject to year-end audit, and the
results of operations for the interim periods reported herein are not
necessarily indicative of results of operations to be expected for the year.
2. INCOME TAXES
Investment tax credits are accounted for by the flow-through method whereby
they reduce income taxes currently payable and the provision for income taxes in
the period the assets giving rise to such credits are placed in service. To the
extent such credits are not currently utilized on the Company's tax return,
deferred tax assets are recognized for the carryforward amount.
For the year 1998, the Company is expected to have available approximately
$1,500,000 in general business tax credits related to the cost associated with
the renovation of the John Hand building. For the period ending September 30,
1998 the Company has recognized a benefit, net of the tax effect of the related
reduction in the tax basis of the asset, of approximately $700,000. Any credit
not utilized on the Company's 1998 tax return will not expire until the year
2008.
3. RELATED PARTY TRANSACTION
During 1998, the Company received $2,370,000 from the sale of common stock
to various directors and executive officers of the Company. The stock was issued
as part of a private offering initiated in 1997.
4. INVESTMENT SECURITIES
As of September 30, 1998, the Company transferred securities with a
carrying value of $25,623,000 and fair value of $25,821,000 from the held to
maturity category to available for sale. The unrealized gain of $198,000 has
been recognized in comprehensive income net of deferred income taxes of $79,000.
The securities were transferred in order to allow the Company to become more
liquid so as to meet the increasing loan demand being generated from its
Birmingham branch which opened on July 1, 1998.
F-55
<PAGE> 121
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Commerce Bank of Alabama
Albertville, Alabama
We have audited the accompanying balance sheet of Commerce Bank of Alabama
as of December 31, 1997, and the related statements of operations, stockholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audit. The financial
statements of Commerce Bank of Alabama for the year ended December 31, 1996 were
audited by other auditors whose report, dated June 10, 1997, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1997 financial statements referred to above present
fairly, in all material respects, the financial position of Commerce Bank of
Alabama as of December 31, 1997, and the results of its operations and its cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
MAULDIN & JENKINS, LLC
Albany, Georgia
February 13, 1998
F-56
<PAGE> 122
INDEPENDENT AUDITORS' REPORT
Board of Directors
Commerce Bank of Alabama
Albertville, Alabama
We have audited the accompanying balance sheet of Commerce Bank of Alabama
as of December 31, 1996, and the related statements of operations, cash flows
and stockholders' equity for the year then ended. These financial statements are
the responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examination on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Commerce Bank of Alabama as
of December 31, 1996, and the results of its operations and cash flows for the
year then ended, in conformity with generally accepted accounting principles.
Cochran, Wheeler and Kennedy, P.C.
June 10, 1997
F-57
<PAGE> 123
COMMERCE BANK OF ALABAMA
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 5,641,127 $ 7,609,484
Federal funds sold.......................................... 6,635,000 330,000
Securities available for sale, at fair value................ 9,356,603 3,001,026
Securities held to maturity, at cost (fair value $2,501,384
and $3,120,993)........................................... 2,503,218 3,155,107
Loans....................................................... 77,268,735 51,162,673
Less allowance for loan losses.............................. 698,283 411,011
------------ -----------
Loans, net.............................................. 76,570,452 50,751,662
------------ -----------
Premises and equipment, net................................. 2,821,649 2,655,593
Other assets................................................ 1,433,498 951,620
------------ -----------
$104,961,547 $68,454,492
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing demand................................ $ 8,633,733 $ 7,344,706
Interest-bearing demand................................... 15,599,423 8,474,921
Savings................................................... 2,168,929 1,861,834
Time, $100,000 and over................................... 18,692,820 10,846,515
Other time................................................ 52,349,727 32,939,310
------------ -----------
Total deposits..................................... 97,444,632 61,467,286
Securities sold under agreements to repurchase............ 216,258 --
Other borrowings.......................................... 242,631 248,606
Other liabilities......................................... 547,532 506,438
------------ -----------
Total liabilities.................................. 98,451,053 62,222,330
------------ -----------
Commitments and contingent liabilities
Stockholders' equity
Common stock, par value $.01; 20,000,000 shares
authorized, 656,280 and 655,460 shares issued,
respectively............................................ 6,563 6,555
Surplus................................................... 7,010,383 6,999,575
Accumulated deficit....................................... (534,709) (762,430)
Unrealized gains (losses) on securities available for
sale, net of taxes...................................... 28,257 (11,538)
------------ -----------
Total stockholders' equity......................... 6,510,494 6,232,162
------------ -----------
$104,961,547 $68,454,492
============ ===========
</TABLE>
See Notes to Financial Statements.
F-58
<PAGE> 124
COMMERCE BANK OF ALABAMA
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Interest income
Interest and fees on loans................................ $6,595,214 $3,497,732
Interest on taxable securities............................ 738,190 307,794
Interest on Federal funds sold............................ 179,700 250,871
---------- ----------
7,513,104 4,056,397
---------- ----------
Interest expense
Interest on deposits...................................... 4,002,996 2,150,206
Interest on other borrowings.............................. 24,994 19,995
---------- ----------
4,027,990 2,170,201
---------- ----------
Net interest income..................................... 3,485,114 1,886,196
Provision for loan losses................................... 584,000 372,000
---------- ----------
Net interest income after provision for loan losses..... 2,901,114 1,514,196
---------- ----------
Other income
Service charges on deposit accounts....................... 506,911 297,854
Other service charges, commissions and fees............... 41,543 17,042
Security transactions, net................................ (240) 8,600
Other..................................................... 29,961 56,533
---------- ----------
578,175 380,029
---------- ----------
Other expenses
Salaries and employee benefits............................ 1,745,659 1,209,639
Equipment and occupancy expense........................... 424,077 290,137
Supplies expense.......................................... 87,383 63,460
Advertising expense....................................... 57,748 44,467
Telephone expense......................................... 64,416 52,603
Other operating expense................................... 752,120 608,248
---------- ----------
3,131,403 2,268,554
---------- ----------
Income (loss) before income taxes (benefits)............ 347,886 (374,329)
Applicable income taxes (benefits).......................... 120,165 (81,500)
---------- ----------
Net income (loss)....................................... $ 227,721 $ (292,829)
========== ==========
Net income (loss) per common share
Basic..................................................... $ 0.35 $ (0.47)
========== ==========
Diluted................................................... $ 0.34 $ (0.47)
========== ==========
</TABLE>
See Notes to Financial Statements.
F-59
<PAGE> 125
COMMERCE BANK OF ALABAMA
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
UNREALIZED
GAINS
(LOSSES) ON
SECURITIES
COMMON STOCK AVAILABLE
------------------- CAPITAL ACCUMULATED FOR SALE,
SHARES PAR VALUE SURPLUS DEFICIT NET OF TAXES TOTAL
------- --------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995............... 550,100 $5,501 $5,495,799 $(469,601) $ -- $5,031,699
Net loss............................... -- -- -- (292,829) -- (292,829)
Proceeds from sale of stock.......... 100,000 1,000 1,449,000 -- -- 1,450,000
Shares issued under employee stock
purchase plan...................... 360 4 4,826 -- -- 4,830
Options exercised under incentive
stock option plan.................. 5,000 50 49,950 -- -- 50,000
Net change in unrealized (losses) on
securities available-for-sale, net of
taxes................................ -- -- -- -- (11,538) (11,538)
------- ------ ---------- --------- -------- ----------
BALANCE, DECEMBER 31, 1996............... 655,460 6,555 6,999,575 (762,430) (11,538) 6,232,162
Net income............................. -- -- -- 227,721 -- 227,721
Shares issued under employee stock
purchase plan........................ 820 8 10,808 -- -- 10,816
Net change in unrealized gains on
securities available-for-sale, net of
taxes................................ -- -- -- -- 39,795 39,795
------- ------ ---------- --------- -------- ----------
BALANCE, DECEMBER 31, 1997............... 656,280 $6,563 $7,010,383 $(534,709) $ 28,257 $6,510,494
======= ====== ========== ========= ======== ==========
</TABLE>
See Notes to Financial Statements.
F-60
<PAGE> 126
COMMERCE BANK OF ALABAMA
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)......................................... $ 227,721 $ (292,829)
------------ ------------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation............................................ 234,217 158,207
Provision for loan losses............................... 584,000 372,000
Provision for deferred taxes............................ 120,165 (81,500)
Loss on abandonment of assets........................... -- (12,920)
Net realized (gains) losses on securities available for
sale................................................... 240 (8,600)
Increase in interest receivable......................... (52,474) (271,580)
Increase in interest payable............................ 101,123 148,626
Other prepaids, deferrals and accruals, net............. (512,317) 142,863
------------ ------------
Total adjustments.................................. 474,954 447,096
------------ ------------
Net cash provided by operating activities.......... 702,675 154,267
------------ ------------
INVESTING ACTIVITIES
(Increase) decrease in Federal funds sold................. (6,305,000) 5,460,000
Purchases of securities available for sale................ (12,414,869) (5,988,126)
Proceeds from sales of securities available for sale...... 999,375 2,980,000
Proceeds from maturities of securities available for
sale.................................................... 5,118,191 --
Purchases of securities held to maturity.................. -- (3,855,839)
Proceeds from maturities of securities held to maturity... 651,889 4,251,438
Increase in loans, net.................................... (26,518,790) (28,983,419)
Purchase of premises and equipment........................ (400,273) (1,519,998)
------------ ------------
Net cash used in investing activities.............. (38,869,477) (27,655,944)
------------ ------------
FINANCING ACTIVITIES
Increase in deposits...................................... 35,977,346 32,967,019
Increase in securities sold under agreements to
repurchase.............................................. 216,258 --
Payments on other borrowings.............................. (5,975) (5,517)
Proceeds from sale of stock............................... 10,816 1,504,830
------------ ------------
Net cash provided by financing activities............. 36,198,445 34,466,332
------------ ------------
Net increase (decrease) in cash and due from banks.......... (1,968,357) 6,964,655
Cash and due from banks at beginning of year................ 7,609,484 644,829
------------ ------------
Cash and due from banks at end of year...................... $ 5,641,127 $ 7,609,484
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest.............................................. $ 3,926,867 $ 2,021,575
NONCASH TRANSACTIONS
Net changes in unrealized gains (losses) on securities
available for sale...................................... $ 58,514 $ (15,700)
Transfer from loans to other real estate.................. $ 116,000 $ --
</TABLE>
See Notes to Financial Statements.
F-61
<PAGE> 127
COMMERCE BANK OF ALABAMA
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Commerce Bank of Alabama (the Bank) is a commercial bank with operations in
the cities of Albertville, Gadsden, Guntersville and Rainbow City, Alabama. The
Bank provides a full range of banking services to individual and corporate
customers in the primary market areas described above and surrounding counties.
The Bank is subject to the regulations of certain Federal and state agencies and
is periodically examined by certain regulatory authorities.
BASIS OF PRESENTATION
The accounting and reporting policies of the Bank conform to generally
accepted accounting principles and general practices within the financial
services industry. In preparing the financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash on hand, cash items in process of collection, and amounts due from
banks are included in cash and cash equivalents.
The Bank maintains amounts due from banks which, at times, may exceed
Federally insured limits. The Bank has not experienced any losses in such
accounts.
SECURITIES
Securities are classified based on management's intention on the date of
purchase. Securities which management has the intent and ability to hold to
maturity are classified as held to maturity and reported at amortized cost. All
other debt securities are classified as available for sale and carried at fair
value with net unrealized gains and losses included in stockholders' equity net
of tax.
Interest and dividends on securities, including amortization of premiums
and accretion of discounts, are included in interest income. Realized gains and
losses from the sales of securities are determined using the specific
identification method.
LOANS
Loans are carried at their principal amounts outstanding less unearned
income and the allowance for loan losses. Interest income on loans is credited
to income based on the principal amount outstanding.
Loan origination fees and certain direct costs of most loans are recognized
at the time the loan is recorded. Because net origination loan fees and costs
are not material, the results of operations are not materially different than
the results which would be obtained by accounting for loan fees and costs in
accordance with generally accepted accounting principles.
The allowance for loan losses is maintained at a level that management
believes to be adequate to absorb potential losses in the loan portfolio.
Management's determination of the adequacy of the allowance is based on an
evaluation of the portfolio, past loan loss experience, current economic
conditions, volume, growth, composition of the loan portfolio, and other risks
inherent in the portfolio. In addition, regulatory agencies, as an integral part
of their examination process, periodically review the Bank's allowance for loan
losses, and may require the Bank to record additions to the allowance based on
their judgment about information available to them at the time of their
examinations.
F-62
<PAGE> 128
COMMERCE BANK OF ALABAMA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they become
due. Interest income is subsequently recognized only to the extent cash payments
are received.
A loan is impaired when it is probable the Bank will be unable to collect
all principal and interest payments due in accordance with the terms of the loan
agreement. Individually identified impaired loans are measured based on the
present value of payments expected to be received, using the contractual loan
rate as the discount rate. Alternatively, measurement may be based on observable
market prices or, for loans that are solely dependent on the collateral for
repayment, measurement may be based on the fair value of the collateral. If the
recorded investment in the impaired loan exceeds the measure of fair value, a
valuation allowance is established as a component of the allowance for loan
losses. Changes to the valuation allowance are recorded as a component of the
provision for loan losses.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed principally by the straight-line method over the
estimated useful lives of the assets.
OTHER REAL ESTATE OWNED
Other real estate owned represents properties acquired through foreclosure.
Other real estate owned is held for sale and is carried at the lower of the
recorded amount of the loan or fair value of the properties less estimated
selling costs. Any write-down to fair value at the time of transfer to other
real estate owned is charged to the allowance for loan losses. Subsequent gains
or losses on sale and any subsequent adjustment to the value are recorded as
other income or expense.
INCOME TAXES
Income tax expense consists of current and deferred taxes. Current income
tax provisions approximate taxes to be paid or refunded for the applicable year.
Deferred tax assets and liabilities are recognized on the temporary differences
between the bases of assets and liabilities as measured by tax laws and their
bases as reported in the financial statements. Deferred tax expense or benefit
is then recognized for the change in deferred tax assets or liabilities between
periods.
Recognition of deferred tax balance sheet amounts is based on management's
belief that it is more likely than not that the tax benefit associated with
certain temporary differences, tax operating loss carryforwards, and tax credits
will be realized.
EARNINGS PER COMMON SHARE
Basic earnings per share are calculated on the basis of the weighted
average number of common shares outstanding. Diluted earnings per share are
computed by dividing net income by the sum of the weighted average number of
common shares outstanding and potential common shares. Earnings per common share
for the prior periods have been restated to reflect the adoption of FASB 128.
CURRENT ACCOUNTING DEVELOPMENTS
In June 1996, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities". ("SFAS
No. 125"). This Statement provides standards for distinguishing transfers of
financial assets that are sales from those that are secured borrowings, and
provides guidance on the recognition
F-63
<PAGE> 129
COMMERCE BANK OF ALABAMA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
and measurement of asset servicing contracts and on debt extinguishments. As
issued, SFAS No. 125 is effective for transactions occurring after December 31,
1996. However, as a result of an amendment to SFAS No. 125 by the FASB in
December 1996, certain provisions of SFAS No. 125 are deferred for an additional
year. Adoption of the new accounting standard is not expected to have a material
impact on the Bank's financial statements.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share". This
statement simplifies the standards for computing earnings per share previously
set forth in APB Opinion No. 15, "Earnings per Share", and makes them comparable
to international Earnings per Share ("EPS") standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. Basic EPS excludes dilution and
is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to APB
Opinion No. 15. This statement is effective for financial statements issued for
periods ending after December 15, 1997. The adoption of this statement did not
have a material impact on the Bank's financial statements.
In June 1997, the FASB issued SFAS No 130, "Reporting Comprehensive
Income". This statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. This statement
does not require a specific format for that financial statement but requires
that an enterprise display an amount representing total comprehensive income for
the period in that financial statement. This statement requires that an
enterprise classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance or other comprehensive
income by their nature in a financial statement and display the accumulated
balance or other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position. This statement is effective for fiscal years beginning after December
15, 1997. The adoption of this statement is not expected to have a material
impact on the Bank's financial statements.
In June 1997, The FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". This statement requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Generally, financial
information is required to be reported on the basis that it is used internally
for evaluating segment performance and deciding how to allocate resources to
segments. The statement requires that a business enterprise report a measure of
segment profit or loss, certain specific revenue and expense items and segment
assets. It requires reconciliations of total segment revenues, total segment
profit or loss, total segment assets and other amounts disclosed for segments to
corresponding amounts in the enterprise's general-purpose financial statements.
It requires that the enterprise report information about the revenues derived
from the enterprise's products or services, about the countries in which the
enterprise earns revenues and hold assets and about major customers. This
Statement is effective for financial Statements for periods beginning after
F-64
<PAGE> 130
COMMERCE BANK OF ALABAMA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
December 15, 1997. The adoption of this statement is not expected to have a
material impact on the Bank's financial statements.
2. SECURITIES
The amortized cost and fair value of securities are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Securities Available for Sale
December 31, 1997:
U. S. Government and agency securities........... $1,501,007 $ 493 $ -- $1,501,500
State and municipal securities................... 672,590 570 -- 673,160
Mortgage-backed securities....................... 7,140,192 42,476 (725) 7,181,943
---------- ------- -------- ----------
$9,313,789 $43,539 $ (725) $9,356,603
========== ======= ======== ==========
December 31, 1996:
U. S. Government and agency securities........... $ 496,372 $ 2,288 $ (23) $ 498,637
Mortgage-backed securities....................... 2,520,354 282 (18,247) 2,502,389
---------- ------- -------- ----------
$3,016,726 $ 2,570 $(18,270) $3,001,026
========== ======= ======== ==========
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ------- -------- ----------
Securities Held to Maturity
December 31, 1997:
U. S. Government and agency securities........... $2,503,218 $ 1,001 $ (2,835) $2,501,384
---------- ------- -------- ----------
December 31, 1996:
U. S. Government and agency securities........... $3,155,107 $ 282 $(34,396) $3,120,993
========== ======= ======== ==========
</TABLE>
The amortized cost and fair value of securities as of December 31, 1997 by
contractual maturity are shown below. Maturities may differ from contractual
maturities in mortgage-backed securities because the mortgages underlying the
securities may be called or prepaid without penalty. Therefore, these securities
are not included in the maturity categories in the following maturity summary.
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE SECURITIES HELD TO MATURITY
----------------------------- ---------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Due from one year to five years........................... $1,001,007 $1,001,500 $2,503,218 $2,501,384
Due from five to ten years................................ 500,000 500,000 -- --
Due after ten years....................................... 672,590 673,160 -- --
Mortgage-backed securities................................ 7,140,192 7,181,943 -- --
---------- ---------- ---------- ----------
$9,313,789 $9,356,603 $2,503,218 $2,501,384
========== ========== ========== ==========
</TABLE>
Securities with a carrying value of $11,859,814 and $4,399,000 at December
31, 1997 and 1996, respectively, were pledged to secure public deposits and for
other purposes.
F-65
<PAGE> 131
COMMERCE BANK OF ALABAMA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SECURITIES -- (CONTINUED)
Gross realized gains and gross realized losses on sales of securities were:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------- ------
<S> <C> <C>
Gross realized gains on sales of securities................. $ 4,659 $8,679
Gross losses on sales of securities......................... (4,899) (79)
------- ------
Net realized gains (losses) on sales of securities available
for sale.................................................. $ (240) $8,600
======= ======
</TABLE>
3. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of loans is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Commercial, financial and agricultural...................... $36,955,003 $24,892,841
Real estate -- construction................................. 4,980,736 1,737,989
Real estate -- mortgage, other.............................. 22,448,723 13,950,911
Consumer.................................................... 11,222,366 9,547,939
Other....................................................... 1,661,907 1,032,993
----------- -----------
77,268,735 51,162,673
Allowance for loan losses................................... (698,283) (411,011)
----------- -----------
Loans, net.................................................. $76,570,452 $50,751,662
=========== ===========
</TABLE>
The total recorded investment in impaired loans was approximately $72,000
and $44,000 at December 31, 1997 and 1996, respectively. The average recorded
investment in impaired loans for 1997 and 1996 was approximately $58,000 and
$22,000, respectively. Interest income on impaired loans of $2,925 and $242 was
recognized for cash payments received for the years ended 1997 and 1996,
respectively.
Changes in the allowance for loan losses for the years ended December 31
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
BALANCE, BEGINNING OF YEAR.................................. $411,011 $174,467
Provision charged to operations........................... 584,000 372,000
Loans charged off......................................... (400,670) (143,456)
Recoveries of loans previously charged off................ 103,942 8,000
-------- --------
BALANCE, END OF YEAR........................................ $698,283 $411,011
======== ========
</TABLE>
The Bank has granted loans to certain directors, executive officers, and
related entities of the Bank. The interest rates on these loans were
substantially the same as rates prevailing at the time of the transaction and
repayment terms are customary for the type of loan involved. Changes in related
party loans for the year ended December 31, 1997 were as follows:
<TABLE>
<S> <C>
BALANCE, BEGINNING OF YEAR.................................. $1,617,163
Advances.................................................. 1,776,307
Repayments................................................ (1,025,266)
----------
BALANCE, END OF YEAR........................................ $2,368,204
==========
</TABLE>
F-66
<PAGE> 132
COMMERCE BANK OF ALABAMA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
Land........................................................ $1,096,050 $ 853,950
Buildings................................................... 1,154,374 1,140,705
Equipment................................................... 1,044,769 900,264
---------- ----------
3,295,193 2,894,919
Accumulated depreciation.................................... (473,544) (239,326)
---------- ----------
$2,821,649 $2,655,593
========== ==========
</TABLE>
Depreciation expense for the years ended December 31, 1997 and 1996 was
$234,217 and $158,207, respectively.
5. EMPLOYEE BENEFIT PLAN
The Bank adopted a 401(k) Asset Accumulation Plan for its employees. The
Plan covers substantially all employees who meet certain age and length of
service requirements. Annual contributions are determined by the Board of
Directors. Contributions to the plan charged to expense were $16,216 and $32,430
for the years ended December 31, 1997 and 1996, respectively.
6. INCENTIVE STOCK OPTION PLAN
Annually, the Bank enters into certain Incentive Stock Option Agreements
with certain key employees of the Bank. The agreements allow the employees to
acquire a specified amount of stock within a period beginning six months after
the date of grant and ending on the date which immediately precedes the tenth
anniversary. Options must be exercised in a minimum of 1,000 shares per purchase
unless less than 1,000 shares remain under the options. Options are exercised by
payment in full upon notification by the holder to the Compensation Committee of
his intent to exercise the options.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1997 1996
------------------- -------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Under option, beginning of year.......................... 36,000 $11.69 27,500 $10.00
Granted................................................ 2,500 14.50 13,500 14.50
Exercised.............................................. -- -- (5,000) 10.00
Forfeited.............................................. -- -- -- --
------- ------ ------- ------
Under option, end of year................................ 38,500 11.87 36,000 11.69
======= =======
Exercisable at end of year............................... 36,000 32,500
======= =======
Available for grant at end of year....................... 56,500 59,000
======= =======
Weighted-average fair value per option of options granted
during the year........................................ $ 6.57 $ 6.81
======= =======
</TABLE>
F-67
<PAGE> 133
COMMERCE BANK OF ALABAMA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. INCENTIVE STOCK OPTION PLAN -- (CONTINUED)
A further summary about options outstanding at December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE IN YEARS PRICE OUTSTANDING PRICE
- ------------------------ ----------- ------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$10.00....................................... 22,500 7.5 $10.00 22,500 $10.00
14.50....................................... 10,000 8.25 14.50 10,000 14.50
14.50....................................... 3,500 8.75 14.50 3,500 14.50
14.50....................................... 2,500 10.0 14.50 -- --
------ ------
38,500 7.97 11.87 36,000 11.69
====== ======
</TABLE>
As permitted by Statement of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123), the Company recognizes
compensation cost for stock-based employee compensation awards in accordance
with APB Opinion No. 25, "Accounting for Stock Issued to Employees". The Company
recognized no compensation cost for stock-based employee compensation awards for
the years ended December 31, 1997 and 1996. If the Company had recognized
compensation cost in accordance with SFAS No. 123, net income and net income per
share would have been reduced as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1997 1996
--------------------- ---------------------
BASIC BASIC NET
NET NET INCOME NET LOSS
INCOME PER SHARE LOSS PER SHARE
-------- ---------- --------- ---------
<S> <C> <C> <C> <C>
As reported............................................ $227,721 $ 0.35 $(292,829) $(0.47)
Stock based compensation, net of related tax effect.... (10,844) (0.02) (60,718) (0.10)
-------- ------ --------- ------
As adjusted............................................ $216,877 $ 0.33 $(353,547) $(0.57)
======== ====== ========= ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1997 1996
--------------------- -----------------------
DILUTED DILUTED NET
NET NET INCOME NET LOSS
INCOME PER SHARE LOSS PER SHARE
-------- ---------- --------- -----------
<S> <C> <C> <C> <C>
As reported........................................... $227,721 $ 0.34 $(292,829) $(0.47)
Stock based compensation, net of related tax effect... (10,844) (0.01) (60,718) (0.09)
-------- ------ --------- ------
As adjusted........................................... $216,877 $ 0.33 $(353,547) $(0.56)
======== ====== ========= ======
</TABLE>
The fair value of the options granted in 1997 was based upon the discounted
value of future cash flows of the options using the following assumptions:
<TABLE>
<S> <C>
Risk-free interest rate..................................... 6.13%
Expected life of the options................................ 10 years
Expected dividends (as a percent of the fair value of the
stock).................................................... 0.00%
Expected volatility......................................... 0.01%
</TABLE>
F-68
<PAGE> 134
COMMERCE BANK OF ALABAMA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. EMPLOYEE STOCK PURCHASE PLAN
Under the employee stock purchase plan, the Bank is authorized to issue up
to 5,000 shares of common stock to its full-time employees, nearly all of whom
are eligible to participate. Employees can subscribe at any one offering to a
minimum of 10 shares and a maximum of 50 shares of the Bank's stock at a price
that is 85% of the fair market value and is subject to the following:
No employee shall be permitted to subscribe for any shares under the
plan if such employee immediately after such a subscription, owns shares
possessing 5% or more of the total combined voting power or value of all
classes of stock of the Bank.
No employee shall be allowed to subscribe for any shares under the
plan which permits his rights to purchase shares under all stock purchase
plans of the Bank to accrue at a rate which exceeds $25,000 of the fair
market value of such shares for each calendar year.
Under the plan, the Bank sold 325 and 360 shares in 1997 and 1996,
respectively.
8. OTHER BORROWINGS
Other borrowings consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Note payable with interest at a fixed rate of 8%, payable in
equal monthly installments, due October 5, 2005,
collateralized by 3 lots in Guntersville.................. $ 67,631 $ 73,606
Advances under revolving credit agreement with the Federal
Reserve Bank with interest adjusting at the weekly Federal
funds rate minus 25 basis points, collateralized by
specific securities....................................... 175,000 175,000
-------- --------
$242,631 $248,606
======== ========
</TABLE>
Other borrowings at December 31, 1997 have maturities in future years as
follows:
<TABLE>
<S> <C>
1998........................................................ $ 6,471
1999........................................................ 7,008
2000........................................................ 7,590
2001........................................................ 8,220
2002........................................................ 8,902
Later years................................................. 29,440
-------
$67,631
=======
</TABLE>
9. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Current..................................................... $ -- $ --
Deferred.................................................... 120,165 (81,500)
-------- --------
Provision for income taxes................................ $120,165 $(81,500)
======== ========
</TABLE>
F-69
<PAGE> 135
COMMERCE BANK OF ALABAMA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES -- (CONTINUED)
The Bank's provision for income taxes differs from the amounts computed by
applying the Federal income tax statutory rates to income before income taxes. A
reconciliation of the differences is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1997 1996
------------------ -------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- ------- --------- -------
<S> <C> <C> <C> <C>
Tax provision at statutory rate.......................... $118,281 34% $(127,272) (34)%
Tax-exempt interest...................................... (1,050) -- -- --
Other items, net......................................... 2,934 -- 45,772 12
-------- -- --------- ----
Provision for income taxes............................. $120,165 34% $ (81,500) (22)%
======== == ========= ====
</TABLE>
The components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
DEFERRED TAX ASSETS:
Loan loss reserves........................................ $136,529 $ 38,856
Net operating loss carryover.............................. 104,317 266,986
Unrealized loss on securities available for sale.......... -- 4,054
Contribution carryover.................................... 20,726 10,842
-------- --------
261,572 320,738
-------- --------
DEFERRED TAX LIABILITIES:
Depreciation.............................................. 65,053 --
Unrealized gain on securities available for sale.......... 14,557 --
-------- --------
79,610 --
-------- --------
NET DEFERRED TAX ASSETS..................................... $181,962 $320,738
======== ========
</TABLE>
10. EARNINGS (LOSS) PER COMMON SHARE
The following is a reconciliation of net income (loss) (the numerator) and
the weighted average shares outstanding (the denominator) used in determining
basic and diluted earnings (loss) per share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
---------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net income................................................ $227,721 655,565 $0.35
=====
EFFECT OF DILUTIVE SECURITIES
Stock options............................................. -- 6,983
-------- -------
DILUTIVE EARNINGS PER SHARE
Net income................................................ $227,721 662,548 $0.34
======== ======= =====
</TABLE>
F-70
<PAGE> 136
COMMERCE BANK OF ALABAMA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. EARNINGS (LOSS) PER COMMON SHARE -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------------
LOSS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
BASIC LOSS PER SHARE
Net loss.................................................. $(292,829) 618,854 $(0.47)
=======
EFFECT OF DILUTIVE SECURITIES
Stock options............................................. -- 6,983
--------- -------
DILUTIVE LOSS PER SHARE
Net loss.................................................. $(292,829) 625,837 $(0.47)
========= ======= ======
</TABLE>
11. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Bank has entered into
off-balance-sheet financial instruments which are not reflected in the financial
statements. These financial instruments include commitments to extend credit and
standby letters of credit. Such financial instruments are included in the
financial statements when funds are disbursed or the instruments become payable.
These instruments involve, to varying degrees, elements of credit risk in excess
of the amount recognized in the balance sheet.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. A summary of the Bank's commitments is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
Commitments to extend credit................................ $9,168,285 $7,399,000
Standby letters of credit................................... 57,080 100,000
---------- ----------
$9,225,365 $7,499,000
========== ==========
</TABLE>
Commitments to extend credit generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
credit risk involved in issuing these financial instruments is essentially the
same as that involved in extending loans to customers. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the customer. Collateral held varies but may
include real estate and improvements, crops, marketable securities, accounts
receivable, inventory, equipment, and personal property.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
as specified above and is required in instances which the Bank deems necessary.
In the normal course of business, the Bank is involved in various legal
proceedings. In the opinion of management of the Bank, any liability resulting
from such proceedings would not have a material effect on the Bank's financial
statements.
F-71
<PAGE> 137
COMMERCE BANK OF ALABAMA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
12. CONCENTRATIONS OF CREDIT
The Bank makes agricultural, agribusiness, commercial, residential and
consumer loans to customers primarily in the market area described in Note 1. A
substantial portion of the Company's customers' abilities to honor their
contracts is dependent on the business economy in the above areas.
Thirty-six percent (36%) of the Bank's loan portfolio is concentrated in
real estate loans, of which 6% consists of construction loans. A substantial
portion of these loans are secured by real estate in the Bank's primary market
area. In addition, a substantial portion of the other real estate owned is
located in those same markets. Accordingly, the ultimate collectibility of the
loan portfolio and the recovery of the carrying amount of other real estate
owned are susceptible to changes in market conditions in the Bank's primary
market area. The other significant concentrations of credit by type of loan are
set forth in Note 3.
The Bank, as a matter of policy, does not generally extend credit to any
single borrower or group of related borrowers in excess of 20% of statutory
capital.
13. REGULATORY MATTERS
The Bank is subject to certain restrictions on the amount of dividends that
may be declared without prior regulatory approval. At December 31, 1997, there
were no retained earnings available for payment of dividends.
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary, actions
by regulators that, if undertaken, could have a direct material effect on the
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier I
capital to risk-weighted assets and of Tier I capital to average assets.
Management believes, as of December 31, 1997, the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the FDIC
categorized the Bank as adequately capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, the Bank
must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the following table. There are no conditions or events
since that notification that management believes have changed the Bank's
category.
The Bank's actual capital amounts and ratios are presented in the following
table.
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
------------------ ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total Capital (to Risk Weighted Assets)........ $7,180,521 9.66% $5,946,875 8.00% $7,433,594 10.00%
Tier I Capital (to Risk Weighted Assets)....... $6,482,237 8.72% $2,973,438 4.00% $4,460,156 6.00%
Tier I Capital (to Average Assets)............. $6,482,237 6.67% $3,884,840 4.00% $4,856,050 5.00%
</TABLE>
F-72
<PAGE> 138
COMMERCE BANK OF ALABAMA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
13. REGULATORY MATTERS -- (CONTINUED)
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
------------------ ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996
Total Capital (to Risk Weighted Assets).... $6,654,711 13.00% $4,093,000 8.00% $5,116,000 10.00%
Tier I Capital (to Risk Weighted Assets)... $6,243,700 12.20% $2,046,000 4.00% $3,070,000 6.00%
Tier I Capital (to Average Assets)......... $6,243,700 16.70% $1,495,000 4.00% $1,869,000 5.00%
</TABLE>
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Bank in estimating
its fair value disclosures for financial instruments. In cases where quoted
market prices are not available, fair values are based on estimates using
discounted cash flow methods. Those methods are significantly affected by the
assumptions used, including the discount rates and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. The use of different methodologies
may have a material effect on the estimated fair value amounts. Also, the fair
value estimates presented herein are based on pertinent information available to
management as of December 31, 1997 and 1996. Such amounts have not been revalued
for purposes of these financial statements since those dates and, therefore,
current estimates of fair value may differ significantly from the amounts
presented herein.
The following methods and assumptions were used by the Bank in estimating
fair values of financial instruments as disclosed herein:
CASH, DUE FROM BANKS, AND FEDERAL FUNDS SOLD
The carrying amounts of cash, due from banks, and Federal funds sold
approximate their fair value.
AVAILABLE FOR SALE AND HELD TO MATURITY SECURITIES
Fair values for securities are based on quoted market prices. The carrying
values of equity securities with no readily determinable fair value approximate
fair values.
LOANS
For variable-rate loans that reprice frequently and have no significant
change in credit risk, fair values are based on carrying values. For other
loans, the fair values are estimated using discounted cash flow methods, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality. Fair values for impaired loans are estimated using
discounted cash flow methods or underlying collateral values.
DEPOSITS
The carrying amounts of demand deposits, savings deposits, and
variable-rate certificates of deposit approximate their fair values. Fair values
for fixed-rate certificates of deposit are estimated using discounted cash flow
methods, using interest rates currently being offered on certificates.
OTHER BORROWINGS
The carrying amounts of securities sold under agreements to repurchase and
other borrowings approximate their fair value.
F-73
<PAGE> 139
COMMERCE BANK OF ALABAMA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
14. FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED)
OFF-BALANCE SHEET INSTRUMENTS
Fair values of the Bank's off-balance sheet financial instruments are based
on fees charged to enter into similar agreements. However, commitments to extend
credit and standby letters of credit do not represent a significant value to the
Bank until such commitments are funded. The Bank has determined that these
instruments do not have a distinguishable fair value and no fair value has been
assigned.
The estimated fair values of the Bank's financial instruments were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks, interest-bearing
deposits with banks and Federal funds
sold...................................... $12,276,127 $12,276,127 $ 7,939,484 $ 7,939,484
Securities available for sale............... 9,356,603 9,356,603 3,001,026 3,001,926
Securities held to maturity................. 2,503,218 2,501,384 3,155,107 3,120,993
Loans....................................... 76,570,452 78,050,966 50,751,662 51,162,673
Financial liabilities:
Deposits.................................... 97,450,735 94,465,065 61,467,286 61,051,995
Other borrowings............................ 242,631 242,631 248,606 248,606
Securities sold under agreements to
repurchase................................ 216,258 216,258 -- --
</TABLE>
F-74
<PAGE> 140
COMMERCE BANK OF ALABAMA
CONDENSED STATEMENT OF FINANCIAL CONDITION (UNAUDITED)
AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
--------------
(IN THOUSANDS)
<S> <C>
ASSETS
Cash and due from banks..................................... $ 5,193
Federal funds sold.......................................... 800
Investment securities available for sale.................... 20,830
Loans, net of unearned...................................... 98,511
Less: Allowance for loan losses............................. (1,245)
--------
Net loans......................................... 97,266
--------
Premises and equipment, net................................. 3,199
Other assets................................................ 2,229
--------
Total assets...................................... $129,517
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing....................................... $ 12,587
Interest-bearing.......................................... 105,747
--------
Total deposits.................................... 118,334
Accrued expenses and other liabilities...................... 4,909
--------
Total liabilities................................. 123,243
Stockholders' Equity
Common stock, par value $.01 per share; authorized
20,000,000 shares; 659,135 shares issued and
outstanding............................................ 7
Surplus................................................... 7,053
Accumulated deficit....................................... (890)
Accumulated other comprehensive income.................... 104
--------
Total stockholders' equity........................ 6,274
--------
Total liabilities and stockholders' equity........ $129,517
========
</TABLE>
See Note to Unaudited Condensed Financial Statements.
F-75
<PAGE> 141
COMMERCE BANK OF ALABAMA
CONDENSED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
-------- --------
(IN THOUSANDS EXCEPT
PER SHARE DATA)
<S> <C> <C>
Interest income............................................. $ 7,419 $ 5,305
Interest expense............................................ 4,148 2,885
-------- --------
Net interest income............................... 3,271 2,420
Provision for loan losses................................... 1,285 370
-------- --------
Net interest income after provision for loan
losses.......................................... 1,986 2,050
Noninterest income.......................................... 490 516
Gain on sale of securities.................................. 4 --
Noninterest expenses........................................ 2,931 2,222
-------- --------
Income (loss) before income taxes........................... (451) 344
Income tax expense (benefit)................................ (96) 107
-------- --------
Net income (loss)................................. (355) 237
Other comprehensive income, net of tax:
Unrealized gain on securities available for sale.......... 76 11
-------- --------
Comprehensive income (loss)................................. $ (279) $ 248
======== ========
Earnings (loss) per share
Basic..................................................... $ (0.54) $ 0.36
======== ========
Dilutive.................................................. $ (0.54) $ 0.36
======== ========
Average number of shares outstanding
Basic..................................................... 657,545 655,490
======== ========
Dilutive.................................................. 664,528 662,473
======== ========
</TABLE>
See Note to Unaudited Condensed Financial Statements.
F-76
<PAGE> 142
COMMERCE BANK OF ALABAMA
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMMON ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
STOCK SURPLUS DEFICIT INCOME EQUITY
------ ------- ----------- ------------- -------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997.............. $7 $7,011 $(535) $ 28 $6,511
Net loss.................................. -- -- (355) -- (355)
2,855 shares issued under employee stock
purchase plan........................... -- 42 -- -- 42
Other comprehensive loss.................. -- -- -- 76 (13)
-- ------ ----- ---- ------
Balance at June 30, 1998.................. $7 $7,053 $ 890 $104 $6,274
== ====== ===== ==== ======
</TABLE>
See Note to Unaudited Condensed Financial Statements.
F-77
<PAGE> 143
COMMERCE BANK OF ALABAMA
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net cash provided by operating activities................... $ 1,191 $ 750
-------- --------
Cash flows from investing activities:
Net decrease (increase) in federal funds sold............. 5,835 (720)
Proceeds from sales of securities available for sale...... 1,684 1,459
Proceeds from maturities of investment securities
available for sale..................................... 6,381 2,245
Purchases of investment securities available for sale..... (19,484) (10,661)
Proceeds from maturities of investment securities held to
maturity............................................... 2,502 400
Net increase in loans..................................... (22,412) (22,520)
Purchase of stock in FHLB................................. (31) (50)
Purchases of premises and equipment....................... (561) (125)
-------- --------
Net cash used by investing activities............. (26,086) (29,972)
-------- --------
Cash flows from financing activities:
Net increase in deposit accounts.......................... 20,889 24,842
Principal payments on long-term debt...................... (5) (5)
Advance form FHLB......................................... 3,000 --
Net increase in short-term borrowings..................... 521 1,154
Proceeds from issuance of common stock.................... 42 7
-------- --------
Net cash provided by financing activities......... 24,447 25,998
-------- --------
Net decrease in cash and due from banks..................... (448) (3,224)
Cash and due from banks at beginning of period.............. 5,641 7,610
-------- --------
Cash and due from banks at end of period.................... $ 5,193 $ 4,386
======== ========
Supplemental Cash Flow Information:
Selected cash payments and noncash activities were as
follows:
Cash payments for income taxes......................... $ -- $ --
Cash payments for interest............................. 4,076 2,832
</TABLE>
See Note to Unaudited Condensed Financial Statements.
F-78
<PAGE> 144
COMMERCE BANK OF ALABAMA
NOTE TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
1. ACCOUNTING AND REPORTING POLICIES
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and, accordingly, do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying unaudited
condensed financial statements contain all adjustments (consisting of only
normal recurring entries) necessary to present fairly the financial position,
results of operations and cash flows for the interim periods. All interim
amounts are subject to year-end audit, and the results of operations for the
interim periods reported herein are not necessarily indicative of results of
operations to be expected for the year.
F-79
<PAGE> 145
INDEPENDENT AUDITORS' REPORT
Board of Directors
Commerce Bank of Alabama
Albertville, Alabama
We have audited the accompanying balance sheet of Commerce Bank of Alabama
as of December 31, 1995, and the related statements of operations, cash flows
and stockholders' equity for the period from organization (April 6, 1995)
through December 31, 1995. These financial statements are the responsibility of
the Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examination on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Commerce Bank of Alabama as
of December 31, 1995, and the results of its operations and cash flows for the
period then ended, in conformity with generally accepted accounting principles.
Cochran, Wheeler and Kennedy, P.C.
January 12, 1996
F-80
<PAGE> 146
COMMERCE BANK OF ALABAMA
BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks................................... $ 644,829
Federal funds sold........................................ 5,790,000
-----------
Total cash and cash equivalents................... 6,434,829
Investment securities, held to maturity..................... 3,550,706
Loans, net.................................................. 22,150,039
Premises and equipment, net................................. 1,280,882
Other real estate owned..................................... 40,000
Accrued interest receivable................................. 164,958
Deferred tax benefit........................................ 241,825
Other assets................................................ 96,034
-----------
TOTAL ASSETS...................................... $33,959,273
===========
LIABILITIES
Deposits:
Demand.................................................... $ 8,149,930
Savings................................................... 1,528,622
Time.............................................. 18,996,715
-----------
Total deposits.................................... 28,675,267
-----------
Accrued interest payable.................................... 166,429
Long term debt.............................................. 79,123
Other liabilities........................................... 6,755
-----------
TOTAL LIABILITIES................................. 28,927,574
-----------
STOCKHOLDERS' EQUITY
Common stock -- par value $.01; 20,000,000 shares authorized
550,100 shares issued and outstanding..................... $ 5,501
Additional paid in capital.................................. 5,495,799
Accumulated deficit......................................... (469,601)
-----------
TOTAL STOCKHOLDERS' EQUITY........................ 5,031,699
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $33,959,273
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-81
<PAGE> 147
COMMERCE BANK OF ALABAMA
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM ORGANIZATION THROUGH DECEMBER 31, 1995
<TABLE>
<S> <C>
INTEREST INCOME
Interest and fees on loans................................ $1,063,794
Interest on investments................................... 92,640
Interest on federal funds sold............................ 321,629
----------
TOTAL INTEREST INCOME............................. 1,478,063
----------
INTEREST EXPENSE
Interest on deposits:
Demand................................................. 188,269
Savings................................................ 6,566
Time................................................... 569,442
Interest on borrowings................................. 1,063
----------
TOTAL INTEREST EXPENSE............................ 765,340
----------
PROVISION FOR LOAN LOSSES................................... 226,000
----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES......... 486,723
----------
OTHER INCOME
Service charges on deposit accounts....................... 66,141
Other fees and commissions................................ 3,174
Data processing services.................................. 16,000
Rental income............................................. 5,844
----------
TOTAL OTHER INCOME................................ 91,159
----------
OTHER EXPENSES
Salaries and employee benefits............................ 671,919
Occupancy expense......................................... 145,283
Equipment expense......................................... 13,576
Other real estate expense................................. 945
Loan and credit card expense.............................. 28,800
Marketing expense......................................... 33,609
Supply expense............................................ 89,970
Outside professional services............................. 75,732
Other expense............................................. 229,474
----------
TOTAL OTHER EXPENSES.............................. 1,289,308
----------
LOSS BEFORE INCOME TAX BENEFIT.............................. (711,426)
INCOME TAX BENEFIT.......................................... 241,825
----------
NET LOSS.................................................... $ (469,601)
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-82
<PAGE> 148
COMMERCE BANK OF ALABAMA
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM ORGANIZATION THROUGH DECEMBER 31, 1995
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. $ (469,601)
Adjustments to reconcile net loss to net cash used by
operating activities:
Provision for loan losses.............................. 226,000
Provision for tax benefit.............................. (241,825)
Provision for depreciation............................. 80,036
Net amortization (accretion) of investment securities
premiums (discounts).................................. (2,274)
Other real estate...................................... (36,509)
Accrued interest receivable............................ (164,958)
Other assets........................................... (99,525)
Accrued interest payable............................... 166,429
Other liabilities...................................... 6,755
------------
NET CASH USED BY OPERATING ACTIVITIES....................... (535,472)
------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities........................ (3,548,432)
Net increase in loans..................................... (22,376,039)
Purchase of premises and equipment........................ (1,360,918)
------------
NET CASH USED BY INVESTING ACTIVITIES....................... (27,285,389)
------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand, savings and interest bearing
checking account....................................... 9,680,468
Net increase in time deposits............................. 18,994,799
Payments of principal..................................... 80,000
New borrowing-long term................................... (877)
Capital contributions..................................... 5,501,300
------------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 34,255,690
------------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 6,434,829
CASH AND CASH EQUIVALENTS, Beginning of period.............. --
------------
CASH AND CASH EQUIVALENTS, End of period.................... $ 6,434,829
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Paid During Period For:
Interest............................................... $ 598,911
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-83
<PAGE> 149
COMMERCE BANK OF ALABAMA
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM ORGANIZATION THROUGH DECEMBER 31, 1995
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
BALANCE, Beginning of period...................... $ -- $ -- $ -- $ --
Initial sale of 550,000 shares, April 1995........ 5,500 5,494,500 -- 5,500,000
ESOP purchases of 100 shares, November 1995....... 1 1,299 -- 1,300
Net Loss.......................................... -- -- (469,601) (469,601)
------ ---------- --------- ----------
BALANCE, End of period............................ $5,501 $5,495,789 $(469,601) $5,031,699
====== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-84
<PAGE> 150
COMMERCE BANK OF ALABAMA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
NATURE OF OPERATIONS
Commerce Bank of Alabama was organized on April 6, 1995. Commerce Bank of
Alabama operates under a bank charter with the State of Alabama and provides
full banking services. The Bank is subject to regulation under the Federal
Deposit Insurance Corporation and State of Alabama, State Banking Department.
The area served by Commerce Bank of Alabama is the Marshall county area with two
branches located in Albertville and Guntersville, Alabama.
INVESTMENT SECURITIES
Investment securities are classified in three categories and accounted for
as follows.
Trading Securities. Government bonds held principally for resale in the
near term and mortgage-backed securities held for sale in conjunction
with the Bank's mortgage banking activities are classified as trading
securities and recorded at their fair values. Realized and unrealized
gains and losses on trading securities are included in other income.
Securities to be Held to Maturity. Bonds, notes and debentures for
which the Bank has the positive intent and ability to hold to maturity
are reported at cost, adjusted for amortization of premiums, and
accretion of discounts which are recognized in interest income suing the
interest method over the period to maturity.
Securities Available for Sale. Securities available for sale consist of
bonds, notes, debentures, and certain equity securities not classified
as trading securities or as securities to be hold to maturity.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than temporary
have resulted in write-downs of the individual securities to their fair value.
The related write-downs have been included in earnings as realized losses.
Unrealized holding gains and losses, net of tax, on securities available
for sale are reported as a net amount in a separate component of shareholders;
equity until realized.
Gains and losses on the sale of securities available for sale are
determined using the specific-identification method. Premiums and discounts are
amortized into interest income using a level yield method.
At December 31, 1995, all securities held by the Bank are securities held
to maturity. The Bank intends to hold these securities for an indefinite period
of time-out may sell prior to maturity. Securities are held with the Bankers
Bank and First Commercial Bank.
LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
Loans are stated at the amount of unpaid principal, reduced by unearned
discount and an allowance of possible loan losses. Unearned discount on
installment loans is recognized as income over the terms of the loans by the
sum-of-the-months-digits and simple interest methods.
Interest on other loans is calculated by using the simple interest method
on daily balances of the principal amount outstanding. The allowance for
possible loan losses is established through a provision for possible loan losses
charged to expense. Loans are charged against the allowance for possible loan
losses when management believes that the collectibility of the principal is
unlikely. The allowance is an amount that management believes will be adequate
to absorb possible losses on existing loans that may become uncollectible, based
on evaluations of the collectibility of loans and prior loan loss experience.
F-85
<PAGE> 151
COMMERCE BANK OF ALABAMA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The evaluations take into consideration such factors as changes in the
nature and volume of the loan portfolio, overall portfolio quality, review of
specific problem loans, and current economic conditions that may affect the
borrowers' ability to pay. Accrual of interest is discontinued on a loan when
management believes, after considering economic and business conditions and
collection efforts, that the borrower's financial condition is such that
collection of interest is doubtful.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is provided principally by the straight-line method,
to distribute the cost of premises and equipment over their estimated useful
lives of the assets. Maintenance and repairs of property and equipment are
charged to operations, and the expenditures for major improvements and
replacements are capitalized and added to the premises and equipment accounts.
Upon retirement, sale, or other disposition of property and equipment, the cost
and accumulated depreciation are eliminated from the accounts, and the gain or
loss is included in current operations.
OTHER REAL ESTATE
Other real estate, acquired through partial or total satisfaction of loans,
is carried at the lower of cost or fair market value. At the date of
acquisition, losses are charged to the allowance for loan losses and subsequent
write downs are charged to expense in the period they are incurred.
INCOME TAXES
Provisions for income taxes are based on amounts reported in the statement
of income (after exclusion of non-taxable income such as interest on state and
municipal securities) and include deferred taxes on temporary differences in the
recognition of income and expense for tax and financial statement purposes.
Deferred tax assets and liabilities are included in the financial statements at
currently enacted income tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be realized or settled as
prescribed in SFAS No. 109 Accounting for Income Taxes. As changes in tax laws
or rates are enacted, deferred tax assets and liabilities are adjusted through
the provision for income taxes.
CASH FLOWS
For purposes of presentation in the statement of cash flows, cash and cash
equivalents are defined as those amounts included in cash on hand, cash items,
amounts due from banks, and federal funds sold.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business, the Bank has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit, unfunded lines of credit and standby letters of credit. Such financial
instruments are recorded in the financial statements when they become payable or
related fees are incurred or received.
STOCK OPTIONS
Stock options are provided to all eligible employees through the Bank's
Employee Stock Option Plan and to certain key employees through the Incentive
Stock Compensation Plan. Options are granted at below market prices to employees
with the resulting difference between the option price and market value
recognized as a component of compensation expense in the period that full
payment is received.
F-86
<PAGE> 152
COMMERCE BANK OF ALABAMA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE B -- INVESTMENT SECURITIES
The carrying value and market value of investment securities follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Held to maturity:
U. S. government and agency securities.......... $3,550,706 $7,762 $580 $3,557,888
========== ====== ==== ==========
</TABLE>
The market value of investments are established with the assistance of an
independent pricing service and are based on available market data which often
reflects transactions of relatively small size and are not necessarily
indicative of the prices at which large amounts of particular issues could
readily be sold or purchased.
The amortized cost and estimated market values of debt securities at
December 31, 1995, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call of prepayment penalties.
<TABLE>
<CAPTION>
HELD TO MATURITY
-----------------------
AMORTIZED MARKET
COST VALUE
---------- ----------
<S> <C> <C>
Due in one year or less..................................... $1,900,000 $1,905,900
Due from one through five years............................. 1,500,706 1,501,988
Due from five through ten years............................. 150,000 150,000
Due after ten years......................................... -- --
---------- ----------
$3,550,706 $3,557,888
========== ==========
</TABLE>
Investment securities with a carrying value of approximately $1,900,000 at
December 31, 1995 were pledged for various purposes as required or permitted by
law.
F-87
<PAGE> 153
COMMERCE BANK OF ALABAMA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- LOANS
A summary of loans is as follows:
<TABLE>
<S> <C>
Loans secured by real estate: IN THOUSANDS
Construction.............................................. $ 1,142
Farm land and farm residential............................ 522
Residential properties 1-4 family......................... 3,846
Residential properties 5 or more family................... 102
Non-farm/non-residential properties....................... 254
Loans for agricultural production........................... 234
Commercial and industrial loans............................. 10,909
Loans to individuals for household, family and personal..... 4,862
Other loans................................................. 453
-------
22,324
Less: Allowance for possible loan losses.................. 174
-------
$22,150
=======
</TABLE>
Loans which are contractually past due 90 days or more as to interest or
principal payments and loans which have been restructured to provide a reduction
or deferral of interest or principal for reasons related to the debtors'
financial difficulties are considered to be non-performing loans. There were no
non-performing loans at December 31, 1995.
NOTE D -- ALLOWANCE FOR POSSIBLE LOAN LOSSES
An analysis of the allowance for possible loan losses is as follows:
<TABLE>
<S> <C>
Balance, beginning of period................................ $ --
Provision charged to operating expenses..................... 226,000
Recoveries on loans previously charged off.................. --
Loans charged off........................................... 51,533
--------
Balance, end of period...................................... $174,467
========
</TABLE>
NOTE E -- PREMISES AND EQUIPMENT
The major classes of premises and equipment are summarized as follows:
<TABLE>
<S> <C>
Land and improvements....................................... $ 342,151
Buildings................................................... 498,498
Furniture and equipment..................................... 520,269
----------
1,360,918
Less: Accumulated depreciation.............................. (80,036)
----------
$1,280,882
==========
</TABLE>
F-88
<PAGE> 154
COMMERCE BANK OF ALABAMA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F -- DEPOSITS
Deposits consisted of the following at December 31, 1995:
<TABLE>
<CAPTION>
IN THOUSANDS
<S> <C>
Deposits of individuals, partnerships, and corporations..... $24,225
Deposits of states and political subdivisions............... 2,961
Other depository institutions in the U.S. .................. 1,188
Certified and official checks............................... 301
-------
$28,675
=======
</TABLE>
NOTE G -- TIME DEPOSITS
Time deposits outstanding in the amounts of $100,000 or more as of December
31, 1995 were approximately $9,652,000. Interest expense on these deposits for
the period ended December 31, 1995 were approximately $357,000.
NOTE H -- LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1995:
<TABLE>
<S> <C>
Note payable, Edward R. Perkins, payable in equal monthly
installments of $971 through October, 2005. This loan is
collateralized by 3 lots in Guntersville. Interest accrues
at 8%..................................................... $79,123
=======
</TABLE>
Maturities of long-term debt for the next five years ending December 31,
are as follows:
<TABLE>
<S> <C>
1996........................................................ $ 5,517
1997........................................................ 5,975
1998........................................................ 6,471
1999........................................................ 7,008
2000........................................................ 7,590
Thereafter.................................................. 46,562
-------
$79,123
=======
</TABLE>
NOTE I -- TRANSACTIONS WITH DIRECTORS AND SHAREHOLDERS
In the ordinary course of business, the Bank has had, and may be expected
to have in the future, banking transactions with its directors, principal
officers, their immediate families, and affiliated companies in which they are
principal stockholders (commonly referred to as related parties), on the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with others. These persons and firms were indebted
to the Bank for loans totaling approximately $1,293,700 at December 31, 1995.
F-89
<PAGE> 155
COMMERCE BANK OF ALABAMA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- INCOME TAXES
Income tax expense and its components are as follows:
<TABLE>
<S> <C>
Components of income tax expense:
Currently paid or payable:
Federal................................................ $ --
State.................................................. --
--------
Deferred (Net Operating Loss):
Federal................................................ 199,145
State.................................................. 42,680
--------
241,825
--------
$241,825
========
</TABLE>
As of December 31, 1995 the Bank had a net operating loss (NOL)
carryforward for federal income tax purposes of approximately $241,000 that may
be used in future years to offset taxable income. To the extent not utilized,
the NOL carryforward will expire in the year 2010.
NOTE K -- EMPLOYEE BENEFIT PLAN
At organization, the Bank adopted a 401(k) Asset Accumulation Plan for its
employees. The Plan covers substantially all employees who meet certain age and
length of service requirements. Annual contributions are determined by the Board
of Directors. Contributions to the Plan were $8,753 for the period ended
December 31, 1995.
NOTE L -- INCENTIVE STOCK COMPENSATION PLAN
Effective May, 1995, the Bank entered into certain Incentive Stock Option
Agreements with certain key employees of the Bank. The agreements allow the
employees to acquire a specified amount of stock within a period beginning six
months after the date of grant and ending on the date which immediately precedes
the fifth anniversary. Options must be exercised in a minimum of 1,000 shares
per purchase unless less than 1.000 shares remain under the options. Options are
exercised by payment in full upon notification by the holder to the Compensation
Committee of his intent to exercise the options.
An analysis of options outstanding is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Options outstanding, beginning period....................... -- $--
Options granted............................................. 27,500 10
Options exercised........................................... -- --
------ ---
Options outstanding, end of period.......................... 27,500 $10
====== ===
</TABLE>
F-90
<PAGE> 156
COMMERCE BANK OF ALABAMA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- EMPLOYEE STOCK PURCHASE PLAN
Effective April, 1995, the Bank adopted an employee stock purchase plan
whereby the employees may conveniently acquire shares of Bank's stock. The Bank
provides offerings at six month intervals with offering periods lasting fifteen
days. The minimum number of shares for which an eligible employee will be
permitted to subscribe at any one offering is ten shares and the maximum is
fifty subject to the following:
No employee shall be permitted to subscribe for any shares under the Plan
if such employee immediately after such a subscription, owns shares possessing
5% or more of the total combined voting power or value of all classes of stock
of the Bank.
No employee shall be allowed to subscribe for any shares under the Plan
which permits his rights to purchase shares under all stock purchase plans of
the Bank to accrue at a rate which exceeds $25,000 of the fair market value of
such shares for each calendar year.
The established option price for stock at the predetermined offering dates
is at 85% of fair market value as established by the Board of Directors.
Employees are given the option to acquire the stock at the grant date or
withhold the amount due from the employee's compensation over the next twelve
months. The stock is transferred at the earlier of the date the last payment is
withheld or payment is received directly from the employee.
An analysis of options is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Options outstanding, beginning of period.................... -- $ --
Options granted............................................. 395 11.05
Options exercised........................................... 395 11.05
--- ------
Options outstanding, end of period.......................... -- $ --
=== ======
</TABLE>
Options exercised at December 31, 1995 on which employees have elected
payroll deduction are as follows:
<TABLE>
<S> <C> <C>
Options:.................................................... 295 shares
Total Option Price................................ $ 3,260
Amount withheld, through December 31, 1995.................. $ 277
</TABLE>
Compensation expense for the period ended December 31, 1995 recognized in
conjunction with purchased shares totaled $295.
NOTE N -- CONTINGENT LIABILITIES AND COMMITMENTS
The Bank's financial statements do not reflect various commitments and
contingent liabilities which arise in the normal course of business and which
involve elements of credit risk, interest rate risk, and liquidity risk. These
commitments and contingent liabilities are commitments to extend credit, standby
letters of credit and unfunded lines of credit. A summary of the Bank's
commitments and contingent liabilities at December 31, 1995 is as follows:
<TABLE>
<CAPTION>
NOTIONAL
AMOUNT
----------
<S> <C>
Commitments to extend credit................................ $ --
Standby letters of credit................................... $ 10,000
Unfunded lines of credit.................................... $4,156,000
</TABLE>
F-91
<PAGE> 157
COMMERCE BANK OF ALABAMA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Commitments to extend credit, unfunded lines of credit, and standby letters
of credit all include exposure to some credit loss in the event of
nonperformance of the customer. The Bank's credit policies and procedures for
credit commitments and financial guarantees are the same as those for extension
of credit that are recorded on the balance sheets. Because these instruments
have fixed maturity dates, and because many of them expire without being drawn
upon, they do not generally present any significant liquidity risk to the Bank.
The Bank has not incurred any losses on its commitments in 1995.
NOTE O -- CONCENTRATIONS OF CREDIT
Most of the Bank's loans, commitments, and standby letters of credit have
been granted to customers within Marshall County, Alabama. The concentrations of
credit by type of loan are set forth in Note C. The distribution of commitments
to extend credit and unfunded lines of credit approximates the distribution of
loans outstanding. Standby letters of credit were granted primarily to
commercial borrowers.
NOTE P -- REGULATORY MATTERS
The Bank is subject to the dividend restrictions set forth by the FDIC.
Under such restrictions, the Bank may not, without the prior approval of the
Bank's primary regulator, declare dividends in excess of the sum of the current
year's earnings (as defined) plus the retained earnings (as defined) from the
prior two years. As of December 31, 1995, the Bank could not declare dividends
without the approval of the State Banking Department and the F.D.I.C.
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory -- and possibly additional discretionary --
actions by regulators that, if undertaken, could have a direct material effect
on the Bank's financial statements. The regulations require the Bank to meet
specific capital adequacy guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital classification is also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. To be considered adequately capitalized (as
defined) under the regulatory framework for prompt corrective action, the Bank
is required to have minimum Tier 1 and Total capital ratios of 4.00% and 8.00%
respectively. The Bank's actual ratios at December 31, 1995 were approximately
16.9% and 17.4% respectively. Management believes, as of December 31, 1995, that
the Bank meets all capital requirements to which it is subject.
NOTE Q -- PROPOSED BRANCH
Prior to yearend, the Bank's Board of Directors established a committee to
evaluate the possibilities of establishing a branch of the Bank in Gadsden,
Alabama. In conjunction with the proposed branch, the Board of Directors
obtained an option to lease certain real estate in Gadsden. The lease option is
$5,000 and payable only if the Bank does not exercise the lease.
The Bank intends to authorize 100,000 shares of stock for issuance in
conjunction with establishing the proposed Branch. The Bank intends to offer
these shares during the first quarter of 1996.
NOTE R -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which is practicable to estimate that
value:
CASH AND FEDERAL FUNDS SOLD
For these short-term instruments, the carrying amount is a reasonable
estimate of fair value.
F-92
<PAGE> 158
COMMERCE BANK OF ALABAMA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INVESTMENT SECURITIES
For securities held for investment purposes, fair values are based on
quoted market prices or dealer quotes.
LOANS
The fair value of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
DEPOSITS
The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposit of similar remaining maturities.
LONG-TERM DEBT
Rates currently available to the Bank for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value of commitments and letters of credit is estimated to be
approximately the same as the notional amount of the related commitment.
The estimated fair values of the Bank's financial instruments as of
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
-------- -------
IN THOUSANDS
<S> <C> <C>
Financial Assets:
Cash and federal funds sold............................... $ 6,435 $ 6,435
Investment securities..................................... 3,551 3,558
Loans..................................................... 22,324
Less: allowance for losses................................ 174
------- -------
Net loans................................................. 22,150 22,443
------- -------
Total financial assets............................ $32,136 $32,436
======= =======
Financial Liabilities:
Deposits.................................................. $28,675 $28,589
Long-term debt............................................ 79 78
------- -------
Total financial liabilities....................... $28,754 $28,667
======= =======
Unrecognized Financial Instruments
Unused lines of credit.................................... $ 4,156 $ 4,156
Standby letter of credit.................................. 10 10
------- -------
Total unrecognized financial instruments.......... $ 4,166 $ 4,166
======= =======
</TABLE>
F-93
<PAGE> 159
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
and Stockholders
First Citizens Bancorp, Inc. and Subsidiary
Monroeville, Alabama
We have audited the accompanying consolidated statements of financial
condition of First Citizens Bancorp, Inc. and subsidiary as of December 31, 1997
and 1996, and the related consolidated statements of income and comprehensive
income, changes in stockholders' equity and cash flows for each of the years in
the three-year period ended December 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of First Citizens
Bancorp, Inc. and subsidiary at December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
DUDLEY, HOPTON-JONES, SIMS & FREEMAN PLLP
Birmingham, Alabama
May 6, 1998
F-94
<PAGE> 160
FIRST CITIZENS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 1,044 $ 2,249
Federal funds sold.......................................... -- 280
Investment securities available for sale.................... 2,176 3,133
Loans....................................................... 30,193 24,378
Less: Allowance for loan losses............................. (265) (195)
------- -------
Net loans............................................. 29,928 24,183
------- -------
Premises and equipment, net................................. 584 629
Accrued interest receivable................................. 469 393
Other assets................................................ 895 756
------- -------
TOTAL ASSETS....................................... $35,096 $31,623
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing demand................................ $ 4,678 $ 3,661
Interest-bearing demand................................... 5,813 6,614
Savings................................................... 1,692 1,502
Time deposits $100,000 and over........................... 6,326 5,033
Other time................................................ 13,054 11,833
------- -------
TOTAL DEPOSITS..................................... 31,563 28,643
Federal funds purchased..................................... 100 --
Accrued expenses and other liabilities...................... 422 404
------- -------
TOTAL LIABILITIES.................................. 32,085 29,047
Stockholders' equity
Common stock, par value $1 per share; authorized
10,000,000 shares; 75,000 shares issued and
outstanding............................................. 75 75
Surplus................................................... 1,914 1,914
Retained earnings......................................... 1,017 594
Accumulated other comprehensive income (loss)............. 5 (7)
------- -------
TOTAL STOCKHOLDERS' EQUITY......................... 3,011 2,576
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $35,096 $31,623
======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-95
<PAGE> 161
FIRST CITIZENS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans................................ $2,755 $2,124 $1,317
Interest on investment securities:
Taxable................................................. 143 247 376
Exempt from federal income tax.......................... 16 15 45
Interest on federal funds sold............................ 39 50 70
Interest and dividends on other investments............... 4 1 1
------ ------ ------
TOTAL INTEREST INCOME.............................. 2,957 2,437 1,809
INTEREST EXPENSE ON DEPOSITS................................ 1,215 1,008 786
------ ------ ------
Net interest income..................................... 1,742 1,429 1,023
PROVISION FOR LOAN LOSSES................................... 218 43 --
------ ------ ------
Net interest income after provision for loan losses..... 1,524 1,386 1,023
NONINTEREST INCOME
Service charges and fees.................................. 323 347 265
Other income.............................................. 92 79 64
Gain on sale of securities................................ -- 4 19
------ ------ ------
TOTAL NONINTEREST INCOME........................... 415 430 348
NONINTEREST EXPENSES
Salaries and employee benefits............................ 642 570 550
Occupancy and equipment expense........................... 206 217 216
Data processing expense................................... 97 135 114
Other operating expenses.................................. 358 310 236
------ ------ ------
TOTAL NONINTEREST EXPENSES......................... 1,303 1,232 1,116
------ ------ ------
Income before income taxes............................ 636 584 255
Income tax expense.......................................... 213 184 61
------ ------ ------
NET INCOME............................................ 423 400 194
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities available
for sale arising during period.......................... 12 (15) 117
------ ------ ------
COMPREHENSIVE INCOME.................................. $ 435 $ 385 $ 311
====== ====== ======
Earnings per common share
Basic..................................................... $ 5.64 $ 5.33 $ 2.59
Diluted................................................... 5.56 5.30 2.59
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-96
<PAGE> 162
FIRST CITIZENS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE TOTAL
COMMON RETAINED INCOME STOCKHOLDERS'
STOCK SURPLUS EARNINGS (LOSS) EQUITY
------ ------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance -- January 11, 1995 issuance of 75,000 shares
in exchange for 100% of the outstanding shares of
First Citizens Bank.................................. $75 $1,914 $ -- $(109) $1,880
Net income............................................. -- -- 194 -- 194
Other comprehensive income............................. -- -- -- 117 117
--- ------ ------ ----- ------
Balance at December 31, 1995........................... 75 1,914 194 8 2,191
Net income............................................. -- -- 400 -- 400
Other comprehensive loss............................... -- -- -- (15) (15)
--- ------ ------ ----- ------
Balance at December 31, 1996........................... 75 1,914 594 (7) 2,576
Net income............................................. -- -- 423 -- 423
Other comprehensive income............................. -- -- -- 12 12
--- ------ ------ ----- ------
Balance at December 31, 1997........................... $75 $1,914 $1,017 $ 5 $3,011
=== ====== ====== ===== ======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-97
<PAGE> 163
FIRST CITIZENS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 423 $ 400 $ 194
Adjustments to reconcile net income to net cash provided
by operations:
Depreciation and amortization........................... 72 77 83
Net premium amortization................................ 4 6 --
Gain on sale of securities.............................. -- (4) (19)
Provision for loan losses............................... 218 43 --
(Increase) decrease in accrued interest receivable...... (76) 1 (102)
Increase in other assets................................ (52) (35) (21)
Increase in accrued interest payable.................... 66 66 40
(Decrease) increase in other liabilities................ (48) 77 96
------- -------- -------
NET CASH PROVIDED BY OPERATIONS.................... 607 631 271
------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease (increase) in federal funds sold............. 280 2,690 (2,630)
Proceeds from sales of securities available for sale...... -- -- 219
Proceeds from maturities of securities available for
sale.................................................... 1,518 2,680 1,232
Purchases of investment securities available for sale..... (545) (102) (2,185)
Proceeds from sales of securities held to maturity........ -- -- 931
Proceeds from maturities of investments securities held to
maturity................................................ -- 656 1,457
Purchases of investment securities held to maturity....... -- -- (401)
Net increase in loans..................................... (5,963) (10,187) (3,951)
Purchases of premises and equipment....................... (27) (35) --
Purchase of FHLB stock.................................... (95) -- --
------- -------- -------
NET CASH USED IN INVESTING ACTIVITIES.............. (4,832) (4,298) (5,328)
------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand and savings deposits.... 406 (201) 2,558
Net increase in certificates of deposit and other time
deposits................................................ 2,514 4,631 2,529
Net increase in federal funds purchased................... 100 -- --
------- -------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES.......... 3,020 4,430 5,087
------- -------- -------
Net (decrease) increase in cash and due from banks.......... (1,205) 763 30
Cash and due from banks at beginning of year................ 2,249 1,486 1,456
------- -------- -------
CASH AND DUE FROM BANKS AT END OF YEAR...................... $ 1,044 $ 2,249 $ 1,486
======= ======== =======
SUPPLEMENTAL CASH FLOW INFORMATION
Selected cash payments and noncash activities were as
follows:
Cash payments (refund) for income taxes................. $ 322 $ 104 $ (24)
Cash payments for interest.............................. 1,149 942 746
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-98
<PAGE> 164
FIRST CITIZENS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed by First Citizens Bancorp, Inc.
("Company") and its subsidiary and the method of applying those policies which
affect the determination of financial condition, results of operations and cash
flows are summarized below.
CONSOLIDATION
The consolidated financial statements of the Company include the accounts
of its wholly-owned subsidiary, First Citizens Bank of Monroe County ("Bank").
All significant intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses. While management
uses available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in local economic conditions. In
addition, regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance based on their
judgments about information available to them at the time of their examination.
INVESTMENT SECURITIES
The Bank's investments in securities are classified as available for sale
and carried at fair value with net unrealized holding gains and losses
recognized as other comprehensive income and included in stockholders' equity
net of tax.
Interest, including amortization of premiums and accretion of discounts,
are included in interest income. Gains and losses on the sale of securities
available for sale are determined using the specific-identification method.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are stated at the amount of unpaid principal, reduced by unearned
discount and an allowance for loan losses. Interest income with respect to loans
is accrued on the principal amount outstanding.
The allowance for loan losses is established through a provision for loan
losses charged to expenses. Loans are charged against the allowance for loan
losses when management believes the collectibility of principal is unlikely. The
allowance is the amount that management believes will be adequate to absorb
possible losses on existing loans which may become uncollectible, based on
evaluation of the collectibility of loans and prior loan loss experience. The
evaluations take into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, and current economic conditions that may affect the borrower's
ability to pay.
Accrual of interest is discontinued on a loan when management believes,
after considering economic and business conditions and collection efforts, that
the loan is impaired. Any unpaid interest previously accrued on
F-99
<PAGE> 165
FIRST CITIZENS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
those loans is reversed from income. Interest income generally is not recognized
on specific impaired loans unless the likelihood of further loss is remote.
Interest payments received on such loans are applied as a reduction of the loan
principal balance. Interest income on other nonaccrual loans is recognized only
to the extent of interest payments received.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed over the estimated service lives of the
assets using certain straight-line and accelerated methods.
Expenditures for maintenance and repairs are charged to operations as
incurred; expenditures for renewals and betterments are capitalized and written
off by depreciation charges. Property retired or sold is removed from the asset
and related accumulated depreciation accounts and any profit or loss resulting
therefrom is reflected in the statement of income.
INCOME TAXES
Income tax expense is based on amounts reported in the statements of income
and comprehensive income after exclusion of nontaxable income such as interest
on state and municipal securities and certain nondeductible expenses (See Note
9).
EARNINGS PER COMMON SHARE
Basic earnings per common share are computed by dividing earnings available
to stockholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share reflect per share amounts that
would have resulted if dilutive potential common stock had been converted to
common stock, as prescribed by SFAS No. 128, Earnings per Share. The following
reconciles the weighted average number of shares outstanding:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Weighted average of common shares outstanding............... 75,000 75,000 75,000
Effect of dilutive options.................................. 1,113 444 --
------ ------ ------
Weighted average of common shares outstanding effected for
dilution.................................................. 76,113 75,444 75,000
====== ====== ======
</TABLE>
OFF BALANCE SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business the Bank has entered into off balance
sheet financial instruments consisting of commitments to extend credit and
standby letters of credit. Such financial instruments are recorded in the
financial statements when they become payable.
CASH AND CASH EQUIVALENTS
For the purpose of presentation in the statement of cash flows, cash and
cash equivalents are defined as those amounts included in the statement of
financial condition caption "Cash and Due from Banks."
EFFECT OF NEW FINANCIAL ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation.
SFAS No. 123, became effective for years beginning after December 15, 1995, and
allows for the option of continuing to follow Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and the related
Interpretations or selecting
F-100
<PAGE> 166
FIRST CITIZENS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
the fair value method of expense recognition as described in SFAS No. 123. The
Company has elected to follow APB No. 25 in accounting for its employee stock
options.
In February 1997, the FASB issued SFAS No. 128, Earnings per Share. This
statement simplifies the standards for computing earnings per share previously
set forth in APB Opinion No. 15, Earnings per Share, and makes them comparable
to international Earnings per Share ("EPS") standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. Basic EPS excludes dilution and
is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to APB
Opinion No. 15. This statement is effective for financial statements issued for
periods ending after December 15, 1997. The adoption of this statement did not
have a material impact on the consolidated financial statements.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. This statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This statement does not
require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement. This statement requires that an enterprise
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance separately from retained earnings
and additional paid-in capital in the equity section of a statement of financial
position. This statement is effective for fiscal years beginning after December
15, 1997. The adoption of this statement did not have a material impact on the
consolidated financial statements.
2. RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
The subsidiary bank is required to maintain average reserve balances either
in vault cash or on deposit with the Federal Reserve Bank. The amount of those
reserves required at December 31, 1997 was approximately $175.
F-101
<PAGE> 167
FIRST CITIZENS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVESTMENT SECURITIES
The amounts at which investment securities are carried and their
approximate fair values at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Obligations of U.S. government corporations and
agencies........................................... $1,916 $ 4 $ 4 $1,916
State, county and municipal securities............... 252 8 -- 260
------ --- --- ------
Totals........................................ $2,168 $12 $ 4 $2,176
====== === === ======
DECEMBER 31, 1996
U.S. Treasury securities and obligations of U.S.
government corporations and agencies............... $2,891 $ 6 $20 $2,877
State, county and municipal securities............... 253 4 1 256
------ --- --- ------
Totals........................................ $3,144 $10 $21 $3,133
====== === === ======
</TABLE>
Securities with an amortized cost of $1,722 at December 31, 1997 were
pledged to secure United States government deposits and other public funds and
for other purposes as required or permitted by law.
Gross realized gains and losses on investments in debt securities available
for sale for each of the three years in the period ended December 31, 1997 were
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Gross realized gains........................................ $-- $ 5 $29
Gross realized losses....................................... -- 1 10
</TABLE>
The amortized cost and estimated fair values of debt securities at December
31, 1997, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
<S> <C> <C>
Due in one year or less..................................... $ 561 $ 560
Due after one year through five years....................... 1,260 1,262
Due after five years through ten years...................... 323 329
Due after ten years......................................... 24 25
------ ------
$2,168 $2,176
====== ======
</TABLE>
4. LOANS
The Bank grants loans to customers primarily in Monroe County, Alabama.
At December 31 the composition of the loan portfolio was as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Commercial, industrial and agricultural..................... $ 9,933 $ 8,051
Real estate -- construction................................. 1,362 764
-- mortgage..................................... 10,680 8,866
Loans to individuals for personal expenditures.............. 8,218 6,697
------- -------
Total loans........................................ 30,193 24,378
Allowance for loan losses................................... (265) (195)
------- -------
Net loans................................................. $29,928 $24,183
======= =======
</TABLE>
F-102
<PAGE> 168
FIRST CITIZENS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. LOANS -- (CONTINUED)
At December 31, 1997 and 1996 the Company's recorded investment in loans
considered to be impaired under SFAS 114 were $67 and $273, respectively, all of
which were on nonaccrual status with no related allowance. The average recorded
investment in impaired loans during 1997 was approximately $170.
The Bank has no commitments to loan additional funds to the borrowers whose
loans are nonaccruing.
5. ALLOWANCE FOR LOAN LOSSES
A summary of the allowance for loan losses for the year ended December 31,
1997, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year................................ $195 $209 $188
Provision for loan losses................................... 218 43 --
Loan charge-offs............................................ (195) (109) (41)
Recoveries.................................................. 47 52 62
---- ---- ----
Balance at end of year...................................... $265 $195 $209
==== ==== ====
</TABLE>
6. PREMISES AND EQUIPMENT
Components of premises and equipment at December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Land........................................................ $ 85 $ 85
Bank premises and leasehold improvements.................... 680 680
Furniture and equipment..................................... 410 383
------ ------
1,175 1,148
Less: Accumulated depreciation............................ (591) (519)
------ ------
Net premises and equipment.............................. $ 584 $ 629
====== ======
</TABLE>
7. RETIREMENT PLAN
The Bank has a profit-sharing plan which permits participants to make
contributions by salary reduction pursuant to Section 401(k) of the Internal
Revenue Code. Employees may contribute a maximum of 15% of compensation for the
plan year. In addition, the plan allows the Bank to make discretionary
contributions. In 1997 and 1996 the Bank's contributions to the plan were $10
and $5, respectively.
8. STOCK OPTION PLAN
On January 9, 1996, the Company granted its CEO an option to purchase 5,000
shares of its common stock at the option price of $28.96 per share. The options
are fully vested and expire January 9, 2001.
As permitted by Statement of Financial Accounting Standard No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123), the Company recognizes
compensation cost for stock-based employee compensation awards in accordance
with APB Opinion No. 25, Accounting for Stock Issued to Employees. The Company
recognized no compensation cost for stock-based employee compensation awards for
the year
F-103
<PAGE> 169
FIRST CITIZENS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCK OPTION PLAN -- (CONTINUED)
ended December 31, 1996. If the Company had recognized compensation cost in
accordance with SFAS No. 123, net income and net income per share would have
been reduced as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------
BASIC NET
NET INCOME
INCOME PER SHARE
------ ---------
<S> <C> <C>
As reported................................................. $400 $5.33
Stock based compensation, net of related tax effect......... (25) (.33)
---- -----
As adjusted................................................. $375 $5.00
==== =====
</TABLE>
The fair value of the options granted in 1996 was based upon the discounted
value of future cash flows of the options using the following assumptions:
<TABLE>
<S> <C>
Risk-free interest rate..................................... 6.13%
Expected life of the options................................ 10 years
Expected dividends (as a percent of the fair value of the
stock).................................................... 0.00%
</TABLE>
9. INCOME TAX EXPENSE
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Currently payable:
Federal................................................... $218 $169 $61
State..................................................... 17 22 14
---- ---- ---
Total currently payable............................ 235 191 75
Tax effect of temporary differences......................... (22) (7) (14)
---- ---- ---
Income tax expense...................................... $213 $184 $61
==== ==== ===
</TABLE>
As of December 31, 1997 and 1996 the deferred tax asset consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax asset:
Provision for loan losses................................. $33 $10
Deferred compensation..................................... 21 21
Net unrealized gain (loss) on securities available for
sale.................................................... (3) 5
--- ---
Deferred tax asset...................................... $51 $36
=== ===
</TABLE>
The effective tax rate differs significantly from the expected tax using
the statutory rate of 34%. Reconciliation between the expected tax and the
actual provision for income taxes follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Expected tax at 34% of income tax before taxes.............. $216 $199 $87
Add (deduct):
State income taxes, net of federal tax benefit............ 11 15 9
Effect of interest income exempt from Federal income
taxes................................................... (12) (11) (19)
Unallowable interest deduction............................ 1 1 2
Other items -- net........................................ (3) (20) (18)
---- ---- ---
Income tax expense...................................... $213 $184 $61
==== ==== ===
</TABLE>
F-104
<PAGE> 170
FIRST CITIZENS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. RELATED PARTY TRANSACTIONS
The Bank has entered into transactions with its directors, executive
officers, significant shareholders and their affiliates (related parties). Such
transactions were made in the ordinary course of business on substantially the
same terms and conditions, including interest rates and collateral, as those
prevailing at the same time for comparable transactions with other customers,
and did not, in the opinion of management, involve more than normal credit risk
or present other unfavorable features. Changes in related party loans for the
year ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
BALANCE BALANCE
DECEMBER 31, 1996 ADVANCES REPAYMENTS DECEMBER 31, 1997
- ----------------- -------- ---------- -----------------
<S> <C> <C> <C>
$908 $652 $148 $1,412
==== ==== ==== ======
</TABLE>
11. TIME DEPOSITS
The maturities of time certificates of deposit and other time deposits of
$100,000 or more at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
TIME OTHER
CERTIFICATES TIME
OF DEPOSIT DEPOSITS TOTAL
------------ -------- ------
<S> <C> <C> <C>
Three months or less........................................ $2,799 $275 $3,074
Over three through six months............................... 1,117 -- 1,117
Over six through twelve months.............................. 2,135 -- 2,135
------ ---- ------
$6,051 $275 $6,326
====== ==== ======
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
The consolidated financial statements do not reflect the Bank's various
commitments and contingent liabilities which arise in the normal course of
business and which involve elements of credit risk, interest rate risk and
liquidity risk. These commitments and contingent liabilities are commitments to
extend credit and standby letters of credit. The following is a summary of the
Bank's commitments and contingent liabilities at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ------
<S> <C> <C>
Commitments to extend credit................................ $772 $1,023
Standby letters of credit................................... 130 130
</TABLE>
Commitments to extend credit and standby letters of credit all include
exposure to some credit loss in the event of nonperformance of the customer. The
Bank's credit policies and procedures for credit commitments and financial
guarantees are the same as those for extension of credit that are recorded in
the consolidated statement of financial condition. Because these instruments
have fixed maturity dates, and because many of them expire without being drawn
upon, they do not generally present any significant liquidity risk to the Bank.
The Bank is party to litigation and claims arising in the normal course of
business. Management, after consultation with legal counsel, believes that the
liabilities, if any, arising from such litigation and claims will not be
material to the consolidated financial statements.
13. REGULATORY RESTRICTIONS
The primary source of funds available to the Company is the payment of
dividends by its subsidiary Bank. Banking regulations limit the amount of
dividends that may be paid without prior approval of the Bank's regulatory
agency. Approximately $1,004 are available to be paid as dividends by the Bank
subsidiary at December 31, 1997.
F-105
<PAGE> 171
FIRST CITIZENS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. REGULATORY RESTRICTIONS -- (CONTINUED)
The Company and its subsidiary are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory -- and possible
additional discretionary -- actions by regulators that, if undertaken, could
have a direct material effect on the financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and its subsidiary 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
Company and its subsidiary capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and its subsidiary to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1997 and 1996 that the Company meet all capital adequacy requirements to which
they are subject.
As of December 31, 1997 and 1996, the most recent notification from the
FDIC categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier I risk-based, Tier I leverage ratios as
set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
The Company and its subsidiary's actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
FOR CAPITAL UNDER PROMPT
ADEQUACY CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
-------------- -------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- -------- -------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk Weighted Assets):
Consolidated....................................... $3,271 13.49% $1,940 8.00% $2,425 10.00%
Bank............................................... 3,257 13.43 1,940 8.00 2,425 10.00
Tier I Capital (to Risk Weighted Assets):
Consolidated....................................... 3,006 12.40 970 4.00 1,455 6.00
Bank............................................... 2,992 12.34 970 4.00 1,455 6.00
Tier I Capital (to Average Assets):
Consolidated....................................... 3,006 10.22 1,177 4.00 1,471 5.00
Bank............................................... 2,992 10.17 1,177 4.00 1,471 5.00
As of December 31, 1996:
Total Capital (to Risk Weighted Assets):
Consolidated....................................... $2,778 11.46% $1,940 8.00% $2,425 10.00%
Bank............................................... 2,764 11.40 1,940 8.00 2,425 10.00
Tier I Capital (to Risk Weighted Assets):
Consolidated....................................... 2,583 10.65 970 4.00 1,455 6.00
Bank............................................... 2,569 10.60 970 4.00 1,455 6.00
Tier I Capital (to Average Assets) Consolidated........ 2,583 8.78 1,177 4.00 1,471 5.00
Bank............................................... 2,569 8.73 1,177 4.00 1,471 5.00
</TABLE>
F-106
<PAGE> 172
FIRST CITIZENS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. OTHER OPERATING EXPENSES
Other operating expenses consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Professional fees........................................... $ 62 $ 44 $ 23
Directors fees.............................................. 16 15 12
Insurance and assessments................................... 27 22 38
Postage..................................................... 32 25 25
Bank service charges........................................ 29 27 28
Other operating expense..................................... 192 177 110
---- ---- ----
Total.............................................. $358 $310 $236
==== ==== ====
</TABLE>
15. CONCENTRATIONS OF CREDIT
All of the Bank's loans, commitments and standby letters of credit have
been granted to customers in the Bank's market area. The concentrations of
credit by type of loan or commitment are set forth in Notes 4 and 12,
respectively.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and Short-Term Investments: For those short-term instruments, the
carrying amount is a reasonable estimate of fair value.
Investment Securities: For securities held for investment purposes, fair
values are based on quoted market prices or dealer quotes.
Loan Receivables: For variable-rate loans that reprice frequently and have
no significant change in credit risk, fair values are based on carrying values.
The fair value of other types of loans is estimated by discounting the future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities.
Deposit Liabilities: The fair value of demand deposits, savings accounts,
and certain money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of deposit is
estimated using the rates currently offered for deposit of similar remaining
maturities.
Commitments to Extend Credit and Standby Letters of Credit. The fair value
of commitments and letters of credit is estimated to be approximately the same
as the notional amount of the related commitment.
F-107
<PAGE> 173
FIRST CITIZENS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED)
The estimated fair values of the Company's financial instruments as of
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and short-term investments........................... $ 1,044 $ 1,044 $ 2,529 $ 2,529
Investment securities..................................... 2,176 2,176 3,133 3,133
Loans..................................................... 30,193 -- 24,378 --
Less: Allowance for losses................................ (265) -- (195) --
------- -------
Net loans................................................. 29,928 30,160 24,183 24,374
------- ------- ------- -------
TOTAL FINANCIAL ASSETS............................. $33,148 $33,380 $29,845 $30,036
======= ======= ======= =======
FINANCIAL LIABILITIES:
Deposits.................................................. $31,563 $31,722 $28,643 $28,737
Short-term borrowings..................................... 100 100 -- --
------- ------- ------- -------
TOTAL FINANCIAL LIABILITIES........................ $31,663 $31,822 $28,643 $28,737
======= ======= ======= =======
UNRECOGNIZED FINANCIAL INSTRUMENTS:
Commitments to extend credit.............................. $ -- $ 772 $ -- $ 1,023
Standby letters of credit................................. -- 130 -- 130
------- ------- ------- -------
TOTAL UNRECOGNIZED FINANCIAL INSTRUMENTS........... $ -- $ 902 $ -- $ 1,153
======= ======= ======= =======
</TABLE>
17. PARENT COMPANY
The condensed financial information for First Citizens Bancorp, Inc.
(Parent Company only) is presented as follows:
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
ASSETS
Cash...................................................... $ 10 $ 11
Investment in subsidiary, at equity....................... 2,999 2,563
Other assets.............................................. 2 2
------ ------
$3,011 $2,576
====== ======
STOCKHOLDERS' EQUITY........................................ $3,011 $2,576
====== ======
</TABLE>
F-108
<PAGE> 174
FIRST CITIZENS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. PARENT COMPANY -- (CONTINUED)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
INCOME
Dividends from subsidiary................................. $ -- $ -- $ 15
EXPENSE -- OTHER............................................ 1 1 --
---- ---- ----
Income (loss) before income tax expense (benefit) and
equity in undistributed earnings of subsidiary.......... (1) (1) 15
INCOME TAX EXPENSE (BENEFIT)................................ -- (5) 5
---- ---- ----
Income (loss) before equity in undistributed earnings of
subsidiary.............................................. (1) 4 10
Equity in undistributed earnings of subsidiary.............. 424 396 184
---- ---- ----
NET INCOME......................................... $423 $400 $194
==== ==== ====
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 423 $ 400 $ 194
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Undistributed earnings of subsidiary.................... (424) (396) (184)
Increase (decrease) in other liabilities................ -- (5) 5
Increase in other assets................................ -- -- (3)
----- ----- -----
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES....................................... (1) (1) 12
----- ----- -----
Net (decrease) increase in cash............................. (1) (1) 12
Cash at beginning of year................................... 11 12 --
----- ----- -----
CASH AT END OF YEAR......................................... $ 10 $ 11 $ 12
===== ===== =====
</TABLE>
F-109
<PAGE> 175
FIRST CITIZENS BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (UNAUDITED)
AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
--------------
(IN THOUSANDS)
<S> <C>
ASSETS
Cash and due from banks..................................... $ 1,298
Interest bearing deposits in other banks.................... 8
Investment securities available for sale.................... 1,225
Loans, net of unearned...................................... 34,713
Less: Allowance for loan losses............................. (467)
-------
Net loans......................................... 34,246
-------
Premises and equipment, net................................. 587
Other assets................................................ 1,407
-------
Total assets...................................... $38,771
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing......................................... $ 4,566
Interest-bearing............................................ 30,332
-------
Total deposits.................................... 34,898
Federal funds purchased..................................... 140
Accrued expenses and other liabilities...................... 561
-------
Total liabilities................................. 35,599
Stockholders' Equity
Common stock, par value $1 per share; authorized
10,000,000 shares; 75,000 shares issued................ 75
Surplus................................................... 1,914
Retained earnings......................................... 1,175
Accumulated other comprehensive income.................... 8
-------
Total stockholders' equity........................ 3,172
-------
Total liabilities and stockholders' equity........ $38,771
=======
</TABLE>
See Note to Unaudited Condensed Financial Statements.
F-110
<PAGE> 176
FIRST CITIZENS BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
-------- --------
(IN THOUSANDS EXCEPT
PER SHARE DATA)
<S> <C> <C>
Interest income............................................. $ 2,593 $ 2,149
Interest expense............................................ 1,056 892
------- -------
Net interest income............................... 1,537 1,257
Provision for loan losses................................... 350 45
------- -------
Net interest income after provision for loan
losses........................................... 1,187 1,212
Noninterest income.......................................... 369 301
Noninterest expenses........................................ 1,242 951
------- -------
Income before income taxes.................................. 314 562
Income tax expense.......................................... 156 205
------- -------
Net income........................................ 158 357
Other comprehensive income, net of tax:
Unrealized gain on securities available for sale.......... 3 11
------- -------
Comprehensive income........................................ $ 161 $ 368
======= =======
Earnings per share
Basic..................................................... $ 2.11 $ 4.76
======= =======
Diluted................................................... $ 2.06 $ 4.69
======= =======
Average number of shares outstanding
Basic..................................................... 75,000 75,000
======= =======
Diluted................................................... 76,528 76,113
======= =======
</TABLE>
See Note to Unaudited Condensed Financial Statements.
F-111
<PAGE> 177
FIRST CITIZENS BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMMON RETAINED COMPREHENSIVE STOCKHOLDERS'
STOCK SURPLUS EARNINGS INCOME EQUITY
------ ------- -------- ------------- -------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997................ $75 $1,914 $1,017 $ 5 $3,011
Net income.................................. -- -- 158 -- 158
Other comprehensive income.................. -- -- -- 3 3
--- ------ ------ ------- ------
Balance at September 30, 1998............... $75 $1,914 $1,175 $ 8 $3,172
=== ====== ====== ======= ======
</TABLE>
See Note to Unaudited Condensed Financial Statements.
F-112
<PAGE> 178
FIRST CITIZENS BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Net cash provided by operating activities................... $ 551 $ 488
------- -------
Cash flows from investing activities:
Increase in interest bearing deposits in other banks...... (8) --
Net increase in federal funds sold........................ -- (210)
Proceeds from maturities of investment securities
available for sale..................................... 1,351 800
Purchases of investment securities available for sale..... (400) (200)
Purchase of other investments............................. -- (218)
Proceeds from sale of other investments................... 113 --
Net increase in loans..................................... (4,668) (3,656)
Purchases of premises and equipment....................... (59) (24)
------- -------
Net cash used in investing activities................ (3,671) (3,508)
------- -------
Cash flows from financing activities:
Net increase in deposit accounts.......................... 3,335 2,158
Net decrease in federal funds purchased................... 40 --
------- -------
Net cash provided by financing activities............ 3,375 2,158
------- -------
Net increase (decrease) in cash and due from banks.......... 255 (862)
Cash and due from banks at beginning of period.............. 1,044 2,249
------- -------
Cash and due from banks at end of period.................... $ 1,299 $ 1,387
======= =======
Supplemental Cash Flow Information:
Selected cash payments and noncash activities were as
follows:
Cash payments for income taxes......................... $ 175 $ 277
Cash payments for interest............................. 1,025 849
</TABLE>
See Note to Unaudited Condensed Financial Statements.
F-113
<PAGE> 179
FIRST CITIZENS BANCORP, INC.
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
1. ACCOUNTING AND REPORTING POLICIES
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and, accordingly, do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements contain all
adjustments (consisting of only normal recurring entries) necessary to present
fairly the financial position, results of operations and cash flows for the
interim periods. All interim amounts are subject to year-end audit, and the
results of operations for the interim periods reported herein are not
necessarily indicative of results of operations to be expected for the year.
F-114
<PAGE> 180
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
and Stockholders
City National Corporation
Sylacauga, Alabama
We have audited the accompanying consolidated statements of financial
condition of City National Corporation and subsidiary as of December 31, 1997
and 1996, and the related consolidated statements of income and comprehensive
income, changes in stockholders' equity and cash flows for each of the years in
the three-year period ended December 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly,
in all material respects, the financial position of City National Corporation
and subsidiary at December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1997, in conformity with generally accepted accounting principles.
DUDLEY, HOPTON-JONES, SIMS & FREEMAN PLLP
Birmingham, Alabama
January 8, 1998
F-115
<PAGE> 181
CITY NATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
ASSETS
Cash and due from banks................................... $ 2,031 $ 2,696
Interest-bearing deposits in other banks.................. 200 200
Federal funds sold........................................ 3,240 520
Investment securities available for sale.................. 35,857 43,066
Loans, net of unearned income............................. 39,149 34,659
Less: Allowance for loan losses........................... (515) (449)
------- -------
Net loans............................................. 38,634 34,210
------- -------
Premises and equipment, net............................... 2,535 2,075
Accrued interest receivable............................... 1,026 973
Stock in FHLB and Federal Reserve Bank.................... 270 244
Other assets.............................................. 203 254
------- -------
TOTAL ASSETS....................................... $83,996 $84,238
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing demand................................ $10,569 $ 9,538
Interest-bearing demand................................... 14,209 14,113
Savings................................................... 7,782 7,934
Time deposits $100,000 and over........................... 23,094 21,818
Other time deposits....................................... 15,616 17,239
------- -------
TOTAL DEPOSITS..................................... 71,270 70,642
Advance from FHLB........................................... -- 1,600
Accrued expenses and other liabilities...................... 831 743
------- -------
TOTAL LIABILITIES.................................. 72,101 72,985
Minority interest in equity of subsidiary................... 141 133
Stockholders' equity
Common stock, par value $1.00 per share; 100,000 shares
authorized, 27,149 issued............................... 27 27
Surplus................................................... 4,127 4,127
Retained earnings......................................... 7,418 6,946
Treasury stock, at cost -- 300 and 100 shares,
respectively............................................ (53) (16)
Accumulated other comprehensive income.................... 235 36
------- -------
TOTAL STOCKHOLDERS' EQUITY......................... 11,754 11,120
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $83,996 $84,238
======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-116
<PAGE> 182
CITY NATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans................................ $3,802 $3,468 $3,211
Interest on investment securities
Taxable................................................. 2,440 2,008 1,855
Exempt from federal income tax.......................... 353 447 454
Interest on federal funds sold............................ 82 78 131
Interest on other investments............................. 43 25 22
------ ------ ------
TOTAL INTEREST INCOME.............................. 6,720 6,026 5,673
INTEREST EXPENSE
Interest on deposits...................................... 2,903 2,452 2,324
Interest on short-term borrowings......................... 7 8 --
------ ------ ------
TOTAL INTEREST EXPENSE............................. 2,910 2,460 2,324
------ ------ ------
Net interest income..................................... 3,810 3,566 3,349
PROVISION FOR LOAN LOSSES................................... 384 346 203
------ ------ ------
Net interest income after provision for loan losses..... 3,426 3,220 3,146
NONINTEREST INCOME
Service charges, commissions and fees..................... 481 538 506
Net investment securities gains........................... 214 55 88
Other income.............................................. 42 90 35
------ ------ ------
TOTAL NONINTEREST INCOME........................... 737 683 629
NONINTEREST EXPENSES
Salaries and employee benefits............................ 1,940 1,816 1,649
Occupancy expense......................................... 188 128 127
Furniture and equipment expense........................... 386 389 303
Insurance and assessments................................. 48 47 97
Loss on disposal of assets................................ 23 -- 82
Minority interest in earnings of subsidiary............... 8 7 9
Other operating expenses.................................. 775 823 743
------ ------ ------
TOTAL NONINTEREST EXPENSES......................... 3,368 3,210 3,010
------ ------ ------
Income before income taxes......................... 795 693 765
Income tax expense.......................................... 170 133 40
------ ------ ------
NET INCOME......................................... 625 560 725
Other comprehensive income (loss) net of tax:
Unrealized holding gains (losses) on securities available
for sale arising during period.......................... 199 (267) 1,486
------ ------ ------
COMPREHENSIVE INCOME...................................... $ 824 $ 293 $2,211
====== ====== ======
Earnings per share -- basic................................. $23.25 $20.68 $26.73
====== ====== ======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-117
<PAGE> 183
CITY NATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON RETAINED OTHER COMPREHENSIVE TREASURY TOTAL
STOCK SURPLUS EARNINGS INCOME (LOSS) STOCK AT COST EQUITY
------ ------- -------- ------------------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994................ $27 $4,127 $5,956 $(1,183) $ -- $ 8,927
Net income................................ -- -- 725 -- -- 725
Cash dividends declared................... -- -- (144) -- -- (144)
Other comprehensive income................ -- -- -- 1,486 -- 1,486
--- ------ ------ ------- ---- -------
Balance at December 31, 1995.............. 27 4,127 6,537 303 -- 10,994
Net income................................ -- -- 560 -- -- 560
Cash dividends declared................... -- -- (151) -- -- (151)
Purchase of treasury stock................ -- -- -- -- (16) (16)
Other comprehensive loss.................. -- -- -- (267) -- (267)
--- ------ ------ ------- ---- -------
Balance at December 31, 1996.............. 27 4,127 6,946 36 (16) 11,120
Net income................................ -- -- 625 -- -- 625
Cash dividends............................ -- -- (153) -- -- (153)
Purchase of treasury stock................ -- -- -- -- (37) (37)
Other comprehensive income................ -- -- -- 199 -- 199
--- ------ ------ ------- ---- -------
Balance at December 31, 1997.............. $27 $4,127 $7,418 $ 235 $(53) $11,754
=== ====== ====== ======= ==== =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-118
<PAGE> 184
CITY NATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 625 $ 560 $ 725
Adjustments to reconcile net income to net cash provided
by operations:
Depreciation............................................ 269 276 205
Net discount accretion.................................. (246) (35) (42)
Provision for loan losses............................... 384 346 203
Net investment securities gains......................... (214) (55) (88)
Increase in accrued interest receivable................. (53) (60) (96)
(Increase) decrease in other assets..................... (83) 110 (186)
(Decrease) increase in accrued interest payable......... (32) 54 104
Increase (decrease) in other liabilities................ 119 (110) 55
Minority interest in earnings of subsidiary............. 8 5 9
-------- -------- --------
NET CASH PROVIDED BY OPERATIONS.................... 777 1,091 889
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of interest-bearing deposits with
banks................................................... -- 202 --
Net (increase) decrease in federal funds sold............. (2,720) (520) 5,950
Proceeds from sales of investment securities available for
sale.................................................... 22,207 6,091 8,208
Proceeds from maturities of investment securities
available for sale...................................... 2,314 7,391 4,512
Purchases of investment securities available for sale..... (16,516) (20,213) (19,381)
Purchase of FHLB stock.................................... (25) (226) --
Net increase in loans..................................... (4,809) (3,517) (2,488)
Purchases of premises and equipment....................... (729) (561) (706)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES.............. (278) (11,353) (3,905)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand and savings deposits.... 974 (1,919) (2,327)
Net (decrease) increase in certificates of deposit and
other time deposits..................................... (346) 11,193 4,744
Dividends paid............................................ (153) (151) (144)
Dividends paid to minority shareholders................... (2) (1) (2)
Net (decrease) increase in notes payable.................. -- (30) 30
Net (decrease) increase in FHLB advance................... (1,600) 1,600 --
Net (decrease) increase in federal funds purchased........ -- (1,000) 1,000
Purchase of treasury stock................................ (37) (16) --
-------- -------- --------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES....................................... (1,164) 9,676 3,301
-------- -------- --------
Net (decrease) increase in cash and due from banks.......... (665) (586) 285
Cash and due from banks at beginning of year................ 2,696 3,282 2,997
-------- -------- --------
CASH AND DUE FROM BANKS AT END OF YEAR...................... $ 2,031 $ 2,696 $ 3,282
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest................................................ $ 2,942 $ 2,406 $ 2,219
Income taxes............................................ 106 117 181
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-119
<PAGE> 185
CITY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed by the Company and its subsidiary and the
method of applying those policies which affect the determination of financial
position, results of operations and cash flows are summarized below.
CONSOLIDATION
The consolidated financial statements of the Company include the accounts
of the Company and its subsidiary, The City National Bank ("Bank"), Sylacauga,
Alabama and its wholly-owned subsidiary, Freedom Financial Corporation. As of
December 31, 1997 and 1996, the Company owns 98.81% of the Bank and all
significant intercompany transactions and amounts have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in local economic
conditions. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for losses on
loans. Such agencies may require the Company to recognize additions to the
allowances based on their judgments about information available to them at the
time of their examination.
INVESTMENT SECURITIES
The Bank's investments in securities are classified available for sale and
accounted for as follows:
Securities available for sale consist of bonds, notes, debentures, and
certain equity securities not classified as trading securities nor as
securities to be held to maturity.
Unrealized holding gains and losses, net of deferred income tax, are
reported as a separate component of stockholders' equity until realized.
Gains and losses on the sale of securities available for sale are
determined using the specific-identification method.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are stated at the amount of unpaid principal, reduced by unearned
discount and an allowance for loan losses. Interest income with respect to loans
is accrued on the principal amount outstanding, except for interest on certain
consumer loans, which is recognized over the term of the loan using a method
which approximates a level yield.
The allowance for loan losses is established through a provision for loan
losses charged to expenses. Loans are charged against the allowance for loan
losses when management believes the collectibility of principal is unlikely. The
allowance is the amount that management believes will be adequate to absorb
possible losses on existing loans which may become uncollectible, based on
evaluation of the collectibility of loans and prior loan
F-120
<PAGE> 186
CITY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
loss experience. The evaluations take into consideration such factors as changes
in the nature and volume of the loan portfolio, overall portfolio quality,
review of specific problem loans, and current economic conditions that may
affect the borrower's ability to pay.
Accrual of interest is discontinued on a loan when management believes,
after considering economic and business conditions and collection efforts, that
the loan is impaired. Any unpaid interest previously accrued on those loans is
reversed from income. Interest income generally is not recognized on specific
impaired loans unless the likelihood of further loss is remote. Interest
payments received on such loans are applied as a reduction of the loan principal
balance. Interest income on other nonaccrual loans is recognized only to the
extent of interest payments received.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed over the estimated
service lives of the assets using straight-line and accelerated methods. The
estimated service lives are as follows:
<TABLE>
<CAPTION>
DESCRIPTION ESTIMATED SERVICE LIFE
----------- ----------------------
<S> <C>
Bank premises............................................... 18 to 50 years
Furniture and equipment..................................... 5 to 12 years
</TABLE>
Expenditures for maintenance and repairs are charged to operations as
incurred; expenditures for renewals and betterments are capitalized and written
off by depreciation charges. Property retired or sold is removed from the asset
and related accumulated depreciation accounts and any profit or loss resulting
therefrom is reflected in the statement of income.
LOAN ORIGINATION FEES
Loan origination fees are capitalized and recognized as an adjustment of
the yield on the related loan.
INCOME TAXES
Income taxes are based on amounts reported in the statements of income and
comprehensive income, after exclusion of nontaxable income such as interest on
state and municipal securities and certain nondeductible expenses (See Note 9).
EARNINGS PER SHARE
Earnings per share has been computed based on the weighted average number
of common shares outstanding of 26,910, 27,063 and 27,149, respectively.
OFF BALANCE SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business the Bank has entered into off balance
sheet financial instruments consisting of commitments to extend credit and
standby letters of credit. Such financial instruments are recorded in the
financial statements when they become payable.
CASH AND CASH EQUIVALENTS
For the purpose of presentation in the Statements of Cash Flows, cash and
cash equivalents are defined as those amounts included in the balance sheet
caption "Cash and Due from Banks."
F-121
<PAGE> 187
CITY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
EFFECT OF NEW FINANCIAL ACCOUNTING STANDARDS
In February 1997, the FASB issued SFAS No. 128, Earnings per Share. This
statement simplifies the standards for computing earnings per share previously
set forth in APB Opinion No. 15, Earnings per Share, and makes them comparable
to international Earnings per Share ("EPS") standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. Basic EPS excludes dilution and
is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to APB
Opinion No. 15. This statement is effective for financial statements issued for
periods ending after December 15, 1997. The adoption of this statement did not
have a material impact on the consolidated financial statements.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. This statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. This statement
does not require a specific format for that financial statement but requires
that an enterprise display an amount representing total comprehensive income for
the period in that financial statement. This statement requires that an
enterprise classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. This statement is effective for fiscal years beginning after
December 15, 1997. The adoption of this statement did not have a material impact
on the consolidated financial statements.
2. RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
The subsidiary bank is required to maintain average reserve balances either
in vault cash or on deposit with the Federal Reserve Bank. The amount of those
reserves required at December 31, 1997 was approximately $418.
F-122
<PAGE> 188
CITY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVESTMENT SECURITIES
The amounts at which investment securities are carried and their
approximate fair values at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
December 31, 1997
U.S. Treasury securities and obligations of U.S.
government corporations and agencies.............. $19,894 $ 51 $ 47 $19,898
Obligations of states and political subdivisions.... 6,774 344 -- 7,118
Mortgage-backed securities.......................... 5,726 59 28 5,757
Corporate........................................... 3,067 17 -- 3,084
------- ---- ---- -------
Total........................................ $35,461 $471 $ 75 $35,857
======= ==== ==== =======
December 31, 1996
U.S. Treasury securities and obligations of U.S.
government corporations and agencies.............. $22,881 $ 27 $366 $22,542
Obligations of states and political subdivisions.... 9,984 486 42 10,428
Mortgage-backed securities.......................... 10,140 73 117 10,096
------- ---- ---- -------
Total........................................ $43,005 $586 $525 $43,066
======= ==== ==== =======
</TABLE>
Securities with an amortized cost of $14,291 and $14,681 at December 31,
1997 and 1996, respectively, were pledged to secure United States Government
deposits and other public funds and for other purposes as required or permitted
by law.
The amortized cost and estimated fair value of debt securities at December
31, 1997, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
<S> <C> <C>
Due in one year or less..................................... $ 99 $ 102
Due after one year through five years....................... 6,920 6,978
Due after five years through ten years...................... 18,559 18,695
Due after ten years......................................... 9,883 10,082
------- -------
$35,461 $35,857
======= =======
</TABLE>
Gross realized gains and losses on securities available for sale were:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Realized gains.............................................. $235 $68 $97
Realized losses............................................. 21 13 9
</TABLE>
4. LOANS
The Bank grants loans to customers primarily in Talladega County, Alabama.
F-123
<PAGE> 189
CITY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. LOANS -- (CONTINUED)
A summary of the composition of the loan portfolio at December 31, 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Commercial, industrial and agricultural..................... $ 5,699 $ 2,855
Real estate -- construction................................. 467 215
-- mortgage..................................... 21,197 19,212
Loans to individuals for personal expenditures.............. 12,122 12,793
All other loans (including overdrafts)...................... 560 659
------- -------
Total loans........................................ 40,045 35,734
Unearned interest and fees.................................. (896) (1,075)
Allowance for loan losses................................... (515) (449)
------- -------
Net loans.......................................... $38,634 $34,210
======= =======
</TABLE>
Information with respect to impaired loans as of and for the year ended
December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Nonaccruing with related loan loss reserve.................. $ -- $ --
Nonaccruing with no related loan loss reserve............... 404 453
---- ----
Total impaired loans............................... $404 $453
==== ====
Average balance of impaired loans........................... $428 $280
==== ====
</TABLE>
The Bank has no commitments to loan additional funds to borrowers whose
loans are nonaccruing.
5. ALLOWANCE FOR LOAN LOSSES
A summary of the allowance for loan losses for the years ended December 31,
1997 and 1996 follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year................................ $449 $434 $431
Provision charged to operations............................. 384 346 203
---- ---- ----
833 780 634
Net charge-offs............................................. 318 331 200
---- ---- ----
Balance at end of year...................................... $515 $449 $434
==== ==== ====
</TABLE>
6. PREMISES AND EQUIPMENT
A summary of the components of premises and equipment at December 31, 1997
and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Land........................................................ $ 261 $ 261
Bank premises............................................... 1,816 1,146
Furniture and equipment..................................... 2,068 1,977
------- -------
4,145 3,384
Less: Accumulated depreciation............................ (1,610) (1,309)
------- -------
Net book value..................................... $ 2,535 $ 2,075
======= =======
</TABLE>
The provision for depreciation charged to occupancy and equipment expense
for the years ended December 31, 1997, 1996 and 1995 was $269, $276 and $205,
respectively.
F-124
<PAGE> 190
CITY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. ADVANCE FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank ("FHLB") as of December 31, 1996
totaled $1,600,000. The interest rate is fixed at 5.64% and due monthly;
maturity date is March 12, 1997. The advances are secured by Federal Home Loan
Bank stock.
8. PROFIT-SHARING PLAN
The Bank has a profit-sharing plan which permits participants to make
contributions by salary reduction pursuant to section 401(k) of the Internal
Revenue Code. The Bank matches contributions at its discretion up to a maximum
of 8% of compensation. In addition, the plan allows the Bank to make
discretionary contributions of up to 6% of employee compensation. In 1997, 1996
and 1995, the Bank's contributions to the plan were $124, $100, and $95,
respectively.
9. INCOME TAX EXPENSE
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Currently payable:
Federal................................................... $154 $116 $120
State..................................................... 37 26 9
---- ---- ----
Total currently payable............................ 191 142 129
Tax effect of temporary differences....................... (21) (9) (89)
---- ---- ----
Total income tax expense........................... $170 $133 $ 40
==== ==== ====
</TABLE>
As of December 31, 1997 and 1996, the net deferred tax asset (liability)
consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax asset:
Allowance for loan losses................................. $194 $161
Alternative minimum tax credit............................ 97 91
---- ----
291 252
Deferred tax liability:
Depreciation.............................................. 163 145
Unrealized gain on securities available for sale.......... 159 24
---- ----
322 169
---- ----
Net deferred tax asset (liability)................. $(31) $ 83
==== ====
</TABLE>
The effective tax differs significantly from the Federal tax rate of 34%. A
reconciliation between the expected tax and the actual income tax follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Expected tax at the Federal statutory rate.................. $ 271 $ 235 $ 260
Increases (decreases) resulting from:
Effect of tax-exempt income............................... (120) (161) (154)
Change in valuation allowance............................. -- -- (86)
State excise taxes........................................ 24 17 3
Nondeductible interest.................................... 14 18 13
Other -- net.............................................. (19) 24 4
----- ----- -----
$ 170 $ 133 $ 40
===== ===== =====
</TABLE>
F-125
<PAGE> 191
CITY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. RELATED PARTY TRANSACTIONS
The Bank has entered into transactions with its directors, significant
shareholders and their affiliates (related parties). Such transactions were made
in the ordinary course of business on substantially the same terms and
conditions, including interest rates and collateral, as those prevailing at the
same time for comparable transactions with other customers, and did not, in the
opinion of management, involve more than normal credit risk or present other
unfavorable features. Changes in related party loans for the year ended December
31, 1997 were as follows:
<TABLE>
<CAPTION>
BALANCE BALANCE
DECEMBER 31, 1996 ADVANCES REPAYMENTS DECEMBER 31, 1997
- ----------------- -------- ---------- -----------------
<S> <C> <C> <C>
$533 $49 $70 $512
==== === === ====
</TABLE>
11. TIME DEPOSITS
The maturities of time certificates of deposit and other time deposits of
$100,000 or more at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
TIME OTHER
CERTIFICATES TIME
OF DEPOSIT DEPOSITS TOTAL
------------ -------- -------
<S> <C> <C> <C>
Three months or less........................................ $ 3,076 $ 4,500 $ 7,576
Over three through six months............................... 1,188 -- 1,188
Over six through twelve months.............................. 5,796 6,980 12,776
Over twelve months.......................................... 1,554 -- 1,554
------- ------- -------
$11,614 $11,480 $23,094
======= ======= =======
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
The consolidated financial statements do not reflect various commitments
and contingent liabilities which arise in the normal course of business and
which involve elements of credit risk, interest rate risk and liquidity risk.
These commitments and contingent liabilities are commitments to extend credit
and standby letters of credit. A summary of the Bank's commitments and
contingent liabilities at December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Commitments to extend credit................................ $1,246 $1,598
Standby letters of credit................................... 68 201
</TABLE>
Commitments to extend credit and standby letters of credit all include
exposure to some credit loss in the event of nonperformance of the customer. The
Bank's credit policies and procedures for credit commitments and financial
guarantees are the same as those for extension of credit that are recorded on
the balance sheet. Because these instruments have fixed maturity dates, and
because many of them expire without being drawn upon, they do not generally
present any significant liquidity risk to the Bank.
Freedom Financial Services, Inc. leases its branch office facilities under
various operating leases. The future minimum lease payments (including renewal
options) for each of the succeeding five years follows:
<TABLE>
<S> <C>
1998........................................................ $33
1999........................................................ 22
2000........................................................ 18
2001........................................................ 8
2002........................................................ 8
---
$89
===
</TABLE>
F-126
<PAGE> 192
CITY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
Rent expense was approximately $33 and $29 for the years ended December 31,
1997 and 1996, respectively.
The Bank is party to litigation and claims arising in the normal course of
business. Management, after consultation with legal counsel, believes that the
liabilities, if any, arising from such litigation and claims will not be
material to the financial statements.
13. CONCENTRATIONS OF CREDIT
Substantially all of the Bank's loans, commitments and standby letters of
credit have been granted to customers in the Bank's market area. The
concentrations of credit by type of loan or commitment are set forth in Notes 4
and 12, respectively.
14. REGULATORY RESTRICTIONS
The primary source of funds available to the Company is the payment of
dividends by its subsidiary bank. Banking regulations limit the amount of
dividends that may be paid without prior approval of the Banks' regulatory
agency. Approximately $1,420 are available to be paid as dividends by the
subsidiary bank at December 31, 1997.
The Company and its subsidiary are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory -- and possible
additional discretionary -- actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and its subsidiary 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
Company and its subsidiary's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and its subsidiary to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1997 and 1996, that the Company and its subsidiary meet all capital adequacy
requirements to which it is subject.
As of December 31, 1997 and 1996, the most recent notification from the
Office of the Comptroller of the Currency categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Bank must maintain minimum total risk-based,
Tier I risk-based, Tier I leverage ratios as set forth in the table. There are
no conditions or events since that notification that management believes have
changed the institution's category.
F-127
<PAGE> 193
CITY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. REGULATORY RESTRICTIONS -- (CONTINUED)
The Company's and its subsidiary's actual capital amounts and ratios are
also presented in the table.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
FOR CAPITAL UNDER PROMPT
ADEQUACY CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
--------------- -------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------ ----- -------- -------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk Weighted Assets):
Consolidated......................................... $12,175 25.3% $3,858 8.0% $4,822 10.0%
Bank................................................. 12,098 25.2 3,837 8.0 4,796 10.0
Tier I Capital (to Risk Weighted Assets):
Consolidated......................................... 11,660 24.2 1,929 4.0 2,893 6.0
Bank................................................. 11,583 24.2 1,918 4.0 2,878 6.0
Tier I Capital (to Average Assets):
Consolidated......................................... 11,660 13.6 3,423 4.0 4,279 5.0
Bank................................................. 11,583 13.6 3,412 4.0 4,265 5.0
As of December 31, 1996:
Total Capital (to Risk Weighted Assets):
Consolidated......................................... $11,667 27.6% $3,385 8.0% $4,231 10.0%
Bank................................................. 11,567 27.5 3,366 8.0 4,208 10.0
Tier I Capital (to Risk Weighted Assets):
Consolidated......................................... 11,217 26.5 1,692 4.0 2,539 6.0
Bank................................................. 11,117 26.4 1,683 4.0 2,525 6.0
Tier I Capital (to Average Assets):
Consolidated......................................... 11,217 14.0 3,196 4.0 3,995 5.0
Bank................................................. 11,117 14.0 3,186 4.0 3,983 5.0
</TABLE>
15. OTHER OPERATING EXPENSES
Other operating expenses consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Directors fees.............................................. $ 87 $ 91 $ 94
Advertising................................................. 80 77 87
Other operating expense..................................... 608 655 562
---- ---- ----
Total.............................................. $775 $823 $743
==== ==== ====
</TABLE>
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and Short-Term Investments: For those short-term instruments, the
carrying amount is a reasonable estimate of fair value.
Investment Securities: For securities held for investment purposes, fair
values are based on quoted market prices or dealer quotes.
Loan Receivables: For variable-rate loans that reprice frequently and have
no significant change in credit risk, fair values are based on carrying values.
The fair value of other types of loans is estimated by discounting the future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities.
F-128
<PAGE> 194
CITY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED)
Deposit Liabilities: The fair value of demand deposits, savings accounts,
and certain money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of deposit is
estimated using the rates currently offered for deposit of similar remaining
maturities.
Commitments to Extend Credit and Standby Letters of Credit. The fair value
of commitments and letters of credit is estimated to be approximately the same
as the notional amount of the related commitment.
The estimated fair values of the Company's financial instruments as of
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and short-term investments........................ $ 5,471 $ 5,471 $ 3,416 $ 3,416
Investment securities.................................. 35,857 35,857 43,066 43,066
Loans.................................................. 39,149 34,659
Less: Allowance for losses............................. (515) (449)
------- -------
Net loans.............................................. 38,634 39,197 34,210 34,853
------- ------- ------- -------
TOTAL FINANCIAL ASSETS.......................... $79,962 $80,525 $80,692 $81,335
======= ======= ======= =======
FINANCIAL LIABILITIES:
Deposits............................................... $71,270 $71,408 $70,642 $70,860
Short-term borrowings.................................. -- -- 1,600 1,600
------- ------- ------- -------
TOTAL FINANCIAL LIABILITIES..................... $71,270 $71,408 $72,242 $72,460
======= ======= ======= =======
UNRECOGNIZED FINANCIAL INSTRUMENTS:
Commitments to extend credit........................... $ -- $ 1,246 $ -- $ 1,598
Standby letters of credit.............................. -- 68 -- 201
------- ------- ------- -------
TOTAL UNRECOGNIZED FINANCIAL INSTRUMENTS........ $ -- $ 1,314 $ -- $ 1,799
======= ======= ======= =======
</TABLE>
F-129
<PAGE> 195
CITY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. PARENT COMPANY
The condensed financial information for City National Corporation (Parent
Company only) is presented as follows:
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
ASSETS
Cash...................................................... $ 40 $ 74
Investment in subsidiary, at equity....................... 11,679 11,023
Property and equipment, net............................... 146 153
Other assets.............................................. 117 82
------- -------
TOTAL ASSETS....................................... $11,982 $11,332
======= =======
LIABILITIES
Dividends payable......................................... $ 40 $ 38
Other liabilities......................................... 188 174
------- -------
228 212
STOCKHOLDERS' EQUITY........................................ 11,754 11,120
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $11,982 $11,332
======= =======
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
INCOME
Dividends from subsidiary................................. $169 $166 $157
Interest.................................................. 2 2 5
Commissions............................................... 2 -- 10
Lease income.............................................. 10 53 52
Management fees........................................... 72 60 --
Amortization of negative goodwill......................... 11 11 11
---- ---- ----
266 292 235
EXPENSES
Interest.................................................. -- -- 2
Depreciation.............................................. 7 3 18
Salaries and benefits..................................... 89 77 59
Miscellaneous............................................. 7 8 3
---- ---- ----
103 88 82
---- ---- ----
OPERATING INCOME BEFORE INCOME TAX EXPENSE (BENEFIT).... 163 204 153
Income tax expense (benefit).............................. (5) 39 (22)
---- ---- ----
INCOME BEFORE UNDISTRIBUTED INCOME OF SUBSIDIARY........ 168 165 175
UNDISTRIBUTED INCOME OF SUBSIDIARY
Net income of subsidiary.................................. 626 561 707
Less: Dividends received.................................. 169 166 157
---- ---- ----
UNDISTRIBUTED INCOME OF SUBSIDIARY................. 457 395 550
---- ---- ----
NET INCOME......................................... $625 $560 $725
==== ==== ====
</TABLE>
F-130
<PAGE> 196
CITY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. PARENT COMPANY -- (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $625 $560 $725
Adjustment to reconcile net income to net cash provided by
operations
Depreciation............................................ 7 3 18
Amortization of negative goodwill....................... (11) (11) (11)
Undistributed income of subsidiary...................... (457) (395) (550)
(Increase) decrease in other assets..................... (35) 70 (113)
Increase in other liabilities........................... 27 18 --
---- ---- ----
NET CASH PROVIDED BY OPERATIONS.................... 156 245 69
---- ---- ----
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchases of premises and equipment....................... -- -- (153)
---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in notes payable...................... -- (30) 30
Dividends paid............................................ (153) (151) (141)
Purchase of treasury stock................................ (37) (16) --
---- ---- ----
NET CASH USED IN FINANCING ACTIVITIES.............. (190) (197) (111)
---- ---- ----
Net (decrease) increase in cash............................. (34) 48 (195)
Cash at beginning of year................................... 74 26 221
---- ---- ----
CASH AT END OF YEAR......................................... $ 40 $ 74 $ 26
==== ==== ====
</TABLE>
F-131
<PAGE> 197
CITY NATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (UNAUDITED)
AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
--------------
(IN THOUSANDS)
<S> <C>
ASSETS
Cash and due from banks..................................... $ 2,435
Interest bearing deposits in other banks.................... 200
Federal funds sold.......................................... 1,320
Investment securities available for sale.................... 33,384
Loans, net of unearned...................................... 39,531
Less: Allowance for loan losses............................. (905)
-------
Net loans......................................... 38,626
-------
Premises and equipment, net................................. 2,777
Other assets................................................ 1,330
-------
Total assets...................................... $80,072
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing....................................... $11,159
Interest-bearing.......................................... 55,694
-------
Total deposits.................................... 66,853
Note payable................................................ 446
Accrued expenses and other liabilities...................... 1,085
-------
Total liabilities................................. 68,384
Minority interest in equity of subsidiary................... 135
Stockholders' Equity
Common stock, par value $1 per share; authorized 100,000
shares; 27,149 shares issued........................... 27
Surplus................................................... 4,135
Retained earnings......................................... 7,108
Accumulated other comprehensive income.................... 349
Treasury stock, at cost -- 317 shares..................... (66)
-------
Total stockholders' equity........................ 11,553
-------
Total liabilities and stockholders' equity........ $80,072
=======
</TABLE>
See Note to Unaudited Condensed Financial Statements.
F-132
<PAGE> 198
CITY NATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(IN THOUSANDS EXCEPT
PER SHARE DATA)
<S> <C> <C>
Interest income............................................. $ 4,924 $ 5,072
Interest expense............................................ 2,013 2,190
------- -------
Net interest income.................................. 2,911 2,882
Provision for loan losses................................... 1,070 298
------- -------
Net interest income after provision for loan losses....... 1,841 2,584
Noninterest income.......................................... 423 374
Gain on sale of securities.................................. 194 100
Noninterest expenses........................................ 2,783 2,495
------- -------
(Loss) income before income taxes...................... (325) 563
Income tax (benefit) expense................................ (137) 193
------- -------
Net (loss) income.................................... (188) 370
Other comprehensive income, net of tax:
Unrealized gain on securities available for sale.......... 114 171
------- -------
Comprehensive (loss) income................................. $ (74) $ 541
======= =======
Basic (loss) earnings per share............................. $ (6.99) $ 13.74
======= =======
Average number of shares outstanding........................ 26,882 26,927
======= =======
</TABLE>
See Note to Unaudited Condensed Financial Statements.
F-133
<PAGE> 199
CITY NATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TREASURY TOTAL
COMMON RETAINED COMPREHENSIVE STOCK STOCKHOLDERS'
STOCK SURPLUS EARNINGS INCOME AT COST EQUITY
------ ------- -------- ------------- -------- -------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997........ $27 $4,126 $7,417 $235 $(53) $11,752
Net loss............................ -- -- (188) -- -- (188)
Dividends declared.................. -- -- (121) -- -- (121)
Sale of 100 shares of treasury
stock............................. -- 9 -- -- 16 25
Purchase of 117 shares of treasury
stock............................. -- -- -- -- (29) (29)
Other comprehensive income.......... -- -- -- 114 -- 114
--- ------ ------ ---- ---- -------
Balance at September 30, 1998....... $27 $4,135 $7,108 $349 $(66) $11,553
=== ====== ====== ==== ==== =======
</TABLE>
See Note to Unaudited Condensed Financial Statements.
F-134
<PAGE> 200
CITY NATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net cash provided by operating activities................... $ 1,280 $ 1,031
-------- --------
Cash flows from investing activities:
Net decrease (increase) in federal funds sold............. 1,920 (240)
Proceeds from sales of securities available for sale...... 13,142 14,650
Proceeds from maturities of investment securities
available for sale..................................... 9,375 1,890
Purchases of investment securities available for sale..... (19,684) (14,777)
Purchase of stock in FHLB................................. -- (25)
Net increase in loans..................................... (1,062) (3,768)
Purchases of premises and equipment....................... (471) (480)
-------- --------
Net cash provided (used) by investing
activities....................................... 3,220 (2,750)
-------- --------
Cash flows from financing activities:
Net (decrease) increase in deposit accounts............... (4,417) 2,943
Net increase in federal funds purchased................... 446 --
Net decrease in advance from FHLB......................... -- (1,600)
Proceeds from sale of treasury stock...................... 25 --
Purchase of treasury stock................................ (29) (28)
Cash dividends paid....................................... (121) (113)
-------- --------
Net cash (used) provided by financing
activities....................................... (4,096) 1,202
-------- --------
Net increase (decrease) in cash and due from banks.......... 404 (517)
Cash and due from banks at beginning of period.............. 2,031 2,696
-------- --------
Cash and due from banks at end of period.................... $ 2,435 $ 2,179
======== ========
Supplemental Cash Flow Information:
Selected cash payments and noncash activities were as
follows:
Cash payments for income taxes......................... $ 180 $ 80
Cash payments for interest............................. 1,749 1,914
</TABLE>
See Note to Unaudited Condensed Financial Statements.
F-135
<PAGE> 201
CITY NATIONAL CORPORATION
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
1. ACCOUNTING AND REPORTING POLICIES
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and, accordingly, do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements contain all
adjustments (consisting of only normal recurring entries) necessary to present
fairly the financial position, results of operations and cash flows for the
interim periods. All interim amounts are subject to year-end audit, and the
results of operations for the interim periods reported herein are not
necessarily indicative of results of operations to be expected for the year.
F-136
<PAGE> 202
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Emerald Coast Bancshares, Inc. and Subsidiary
Panama City Beach, Florida
We have audited the accompanying consolidated statements of financial
condition of Emerald Coast Bancshares, Inc. and Subsidiary as of December 31,
1997 and 1996, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for the year ended December 31, 1997 and
the four months ended December 31, 1996. These consolidated financial statements
are the responsibility of the Bank's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Emerald Coast
Bancshares, Inc. and Subsidiary as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for the year ended
December 31, 1997 and the four months ended December 31, 1996 in conformity with
generally accepted accounting principles.
/s/ SALTMARSH, CLEAVELAND & GUND
--------------------------------------
Pensacola, Florida
March 9, 1998, except of Note 15,
as to which date is May 4, 1998
F-137
<PAGE> 203
EMERALD COAST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 3,496,277 $ 1,689,615
Federal funds sold.......................................... -- 410,000
Securities available for sale............................... 8,529,253 4,436,071
Loans receivable, net of allowance for loan losses of
$387,826 in 1997 and $70,000 in 1996...................... 37,437,148 11,776,372
Accrued interest receivable................................. 358,349 112,149
Premises and equipment...................................... 5,587,492 2,364,075
Deferred income taxes....................................... 448,535 257,990
Other assets................................................ 139,995 170,438
----------- -----------
TOTAL ASSETS...................................... $55,997,049 $21,216,710
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Noninterest-bearing demand deposits....................... $11,296,263 $ 5,092,673
Interest-bearing deposits
NOW and money market deposits.......................... 9,267,938 2,128,003
Savings deposits....................................... 526,242 182,355
Other time deposits.................................... 21,532,177 7,836,961
----------- -----------
Total deposits.................................... 42,622,620 15,239,992
Federal funds purchased................................... 7,670,000 --
Accrued interest payable.................................. 177,812 68,873
Other liabilities......................................... 10,994 4,000
----------- -----------
Total liabilities................................. 50,481,426 15,312,865
----------- -----------
COMMITMENTS AND CONTINGENCIES............................... -- --
STOCKHOLDERS' EQUITY:
Common stock, $5 par value; 10,000,000 shares authorized,
626,000 shares issued and outstanding.................. 3,130,000 3,130,000
Additional paid-in capital................................ 3,130,000 3,130,000
Accumulated deficit....................................... (750,104) (354,294)
Net unrealized appreciation (depreciation) on
available-for-sale securities, net of taxes of $3,465
in 1997 and $1,240 in 1996............................. 5,727 (1,861)
----------- -----------
Total stockholders' equity........................ 5,515,623 5,903,845
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $55,997,049 $21,216,710
=========== ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements
F-138
<PAGE> 204
EMERALD COAST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
AND THE FOUR MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
INTEREST INCOME:
Loans receivable and fees on loans........................ $2,694,995 $ 249,957
Investment securities..................................... 388,516 60,880
Federal funds sold........................................ 30,935 70,098
---------- ---------
Total interest income............................. 3,114,446 380,935
---------- ---------
INTEREST EXPENSE:
Deposits.................................................. 1,474,472 139,112
Federal funds purchased................................... 76,869 --
---------- ---------
Total interest expense............................ 1,551,341 139,112
---------- ---------
Net interest income............................... 1,563,105 241,823
PROVISION FOR LOAN LOSSES................................... 332,500 70,000
---------- ---------
Net interest income after provision for loan
losses.......................................... 1,230,605 171,823
---------- ---------
NONINTEREST INCOME:
Service charges on deposit accounts....................... 67,667 3,123
Net gain on sale of securities............................ 4,747 --
Other income.............................................. 42,360 6,547
---------- ---------
Total noninterest income.......................... 114,774 9,670
---------- ---------
NONINTEREST EXPENSES:
Salaries and employee benefits............................ 1,016,915 432,791
Occupancy expense......................................... 152,177 76,065
Other expense............................................. 767,347 283,681
---------- ---------
Total noninterest expenses........................ 1,936,439 792,537
---------- ---------
LOSS BEFORE INCOME TAX BENEFIT.............................. (591,060) (611,044)
INCOME TAX BENEFIT.......................................... 195,250 256,750
---------- ---------
NET LOSS.................................................... $ (395,810) $(354,294)
========== =========
NET LOSS PER SHARE OF COMMON STOCK.......................... $ (.63) $ (.57)
========== =========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements
F-139
<PAGE> 205
EMERALD COAST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997 AND THE FOUR MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
NET
UNREALIZED
APPRECIATION
(DEPRECIATION)
ADDITIONAL ON AVAILABLE-
COMMON PAID-IN ACCUMULATED FOR-SALE
STOCK CAPITAL DEFICIT SECURITIES TOTAL
---------- ---------- ----------- -------------- ----------
<S> <C> <C> <C> <C> <C>
ISSUANCE OF COMMON
STOCK -- INCEPTION, AUGUST 30,
1996............................ $3,120,000 $3,120,000 -- -- $6,240,000
Net loss........................ $(354,294) (354,294)
Issuance of common stock........ 10,000 10,000 20,000
Net unrealized depreciation on
available-for-sale
securities, net of tax of
$1,240....................... $ (1,861) (1,861)
---------- ---------- --------- -------- ----------
BALANCE, DECEMBER 31, 1996........ $3,130,000 $3,130,000 $(354,294) $ (1,861) $5,903,845
Net loss........................ (395,810) (395,810)
Net change in unrealized
appreciation (depreciation)
on available-for-sale
securities, net of tax of
$4,705....................... 7,588 7,588
---------- ---------- --------- -------- ----------
BALANCE, DECEMBER 31, 1997........ $3,130,000 $3,130,000 $(750,104) $ 5,727 $5,515,623
========== ========== ========= ======== ==========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-140
<PAGE> 206
EMERALD COAST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997 AND THE FOUR MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (323,420) $ (354,294)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation and amortization.......................... 234,361 62,678
Provision for loan losses.............................. 260,000 70,000
Net accretion/amortization on securities............... (6,045) 737
Net gain on sale of securities......................... (4,747) --
Deferred income taxes.................................. (110,209) (256,750)
Change in operating assets and liabilities --
Increase in accrued interest receivable................ (148,697) (112,149)
Increase (decrease) in other assets.................... 30,411 (170,438)
Increase in accrued interest payable and other
liabilities.......................................... 64,786 72,873
------------ ------------
Net cash used in operating activities............. (3,560) (687,343)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities................ (7,987,778) (4,439,909)
Proceeds from sales and maturities of available-for-sale
securities............................................. 4,316,495 --
Net increase in loans..................................... (14,828,435) (11,846,372)
Net purchases of premises and equipment................... (2,470,987) (2,426,753)
------------ ------------
Net cash used in investing activities............. (20,970,705) (18,713,034)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in non-interest bearing demand, NOW, money
market and savings deposits............................ 6,724,322 7,403,031
Net increase in time deposits............................. 7,903,759 7,836,961
Issuance of common stock.................................. -- 6,260,000
Net increase in federal funds purchased................... 7,670,000 --
------------ ------------
Net cash provided by financing activities......... 22,298,081 21,499,992
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 1,323,816 2,099,615
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 2,172,461 --
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 3,496,277 $ 2,099,615
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid............................................. $ 1,202,295 $ 70,239
============ ============
Income taxes paid......................................... $ -- $ --
============ ============
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-141
<PAGE> 207
EMERALD COAST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION:
Emerald Coast Bancshares, Inc. (the "Company") was incorporated on April
16, 1997, as a bank holding company organized under the laws of the State of
Florida. On the date of incorporation, the shareholders of Emerald Coast Bank
received one share of common stock of the Company for each share of common stock
of the Bank. The transaction represented an exchange of shares between
enterprises under common control. The financial statements reflect the
consolidated results of operations as if the combination had occurred at the
date of Bank inception on August 30, 1996.
In 1996, the organizers of Emerald Coast Bank (the "Bank") contributed
$6,260,000 for capital of the Bank. On August 30, 1996, the organizers received
final approval from the Federal Deposit Insurance Corporation and the State of
Florida Department of Banking and Finance to conduct banking transactions.
During the period prior to receiving this regulatory approval the organizers
incurred expenses amounting to $222,782. These expenses have been included in
the consolidated statements of operations for the four months ended December 31,
1996.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Emerald Coast Bank, (the "Bank"), which
includes its wholly-owned subsidiary Emerald Coast Financial Management, Inc.
All material intercompany balances and transactions have been eliminated in
consolidation.
BUSINESS ACTIVITY:
The Bank is a state chartered bank organized in 1996 under the laws of the
State of Florida. The Bank provides a full range of banking services to
individuals and businesses through three branches located in Northwest Florida.
The Bank is regulated by various federal and state agencies and is subject to
periodic examination by those regulatory authorities.
ACCOUNTING ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS:
For the purpose of presentation in the consolidated statement of cash
flows, cash and cash equivalents are defined as those amounts included in the
balance-sheet caption "cash and due from banks" and "federal funds sold."
Generally, federal funds are sold for one day periods.
SECURITIES AVAILABLE FOR SALE:
Available-for-sale securities consist of bonds and other securities not
classified as trading securities or as held-to-maturity securities.
Unrealized holding gains and losses, net of tax, on available-for-sale
securities are reported as a net amount in a separate component of stockholders'
equity until realized.
F-142
<PAGE> 208
EMERALD COAST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Gains and losses on the sale of available-for-sale securities are
determined using the specific-identification method.
Declines in the fair value of available-for-sale securities below their
cost, that are other than temporary, result in write-downs of the individual
securities to their fair value. The related write-downs are included in earnings
as realized losses.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity.
LOANS RECEIVABLE:
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal adjusted for any charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans.
Loan origination fees and certain direct origination costs are capitalized
and recognized as an adjustment of the yield of the related loan.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they become
due. When interest accrual is discontinued, all unpaid accrued interest is
reversed. Interest income is subsequently recognized only to the extent cash
payments are received.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic evaluation
of the adequacy of the allowance is based on the Bank's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, the estimated value of any
underlying collateral, and current economic conditions.
PREMISES AND EQUIPMENT:
Land is carried at cost. Furniture and equipment and leasehold improvements
are carried at cost, less accumulated depreciation and amortization computed
principally by the straight-line method.
INCOME TAXES:
Deferred tax assets and liabilities are reflected at current 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 Company and its subsidiary file consolidated income tax returns, with
income tax expense or benefit computed and allocated on a separate return basis.
FINANCIAL INSTRUMENTS:
In the ordinary course of business the Bank has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit and standby letters of credit. Such financial instruments are recorded in
the consolidated financial statements when they are funded or related fees are
incurred or received.
NET LOSS PER SHARE OF COMMON STOCK:
Net loss per share of common stock is computed on the weighted average
number of shares outstanding.
F-143
<PAGE> 209
EMERALD COAST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
2. INVESTMENT SECURITIES
Securities have been classified in the consolidated statement of financial
condition according to management's intent. The carrying amount of securities
available-for-sale and their approximate fair values at December 31, 1997 and
1996, are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
December 31, 1997
U.S. government and agency securities.... $8,520,061 $13,347 $(4,155) $8,529,253
========== ======= ======= ==========
December 31, 1996
U.S. government and agency securities.... $4,439,172 $ 3,966 $(7,067) $4,436,071
========== ======= ======= ==========
</TABLE>
The amortized cost and fair value of investment maturities at December 31,
1997, by contractual maturity, are summarized below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties. The
scheduled maturities of securities available-for-sale as of December 31, 1997,
are as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
---------- ----------
<S> <C> <C>
Due in one year or less..................................... $ 500,121 $ 500,690
Due from one to five years.................................. 3,136,846 3,140,969
Due from five to ten years.................................. 4,883,094 4,887,594
---------- ----------
$8,520,061 $8,529,253
========== ==========
</TABLE>
Investment securities with a fair value of approximately $5,612,000 at
December 31, 1997 and $250,000 at December 31, 1996, were pledged to secure
public deposits and for other purposes required or permitted by law.
3. LOANS RECEIVABLE
The components of loans in the consolidated statement of financial
condition are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Commercial.................................................. $14,214,394 $ 4,724,795
Real estate................................................. 18,988,419 5,559,481
Consumer.................................................... 2,035,360 852,162
Lines of credit............................................. 2,610,200 731,200
----------- -----------
37,848,373 11,867,638
Net deferred loan fees...................................... (23,399) (21,266)
Allowance for loan losses................................... (387,826) (70,000)
----------- -----------
Loans receivable, net....................................... $37,437,148 $11,776,372
=========== ===========
</TABLE>
The Bank grants commercial, real estate and consumer loans in the State of
Florida with primary concentration being in Walton and Bay Counties, Florida.
Although the Bank's loan portfolio is diversified, a significant portion of its
loans are secured by real estate.
F-144
<PAGE> 210
EMERALD COAST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
3. LOANS RECEIVABLE -- (CONTINUED)
An analysis of the change in the allowance for loan losses follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Balance, beginning of period................................ $ 70,000 $ --
Loans charged off......................................... (14,674) --
Provision for loan losses................................. 332,500 70,000
-------- --------
Balance, end of period...................................... $387,826 $ 70,000
======== ========
</TABLE>
Loans on which the accrual of interest has been discontinued or reduced,
for which impairment had not been recognized, amounted to approximately $51,280
at December 31, 1997. If interest on those loans had been accrued, such income
would have approximated $2,100 for the year ended December 31, 1997. Interest
income on those loans is recorded only when received. The Bank did not have any
nonaccrual loans as of December 31, 1996.
4. PREMISES AND EQUIPMENT
Components of premises and equipment included in the consolidated statement of
financial condition were as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land...................................................... $1,164,072 $1,164,072
Land improvements......................................... 330,447 --
Buildings and improvements................................ 2,457,491 --
Furniture and equipment................................... 1,519,935 613,790
Software.................................................. 272,084 225,338
Vehicles.................................................. 132,123 131,791
Leasehold improvements.................................... 17,491 35,986
---------- ----------
5,893,643 2,170,977
Less: Accumulated depreciation and amortization........... (309,036) (62,678)
---------- ----------
5,584,607 2,108,299
Construction in progress.................................. 2,885 255,776
---------- ----------
$5,587,492 $2,364,075
========== ==========
</TABLE>
Depreciation and amortization expense charged to operations amounted to
$241,508 for the year ended December 31, 1997 and $62,678 for the four months
ended December 31, 1996.
LEASES:
The Bank leases a branch building under an operating lease expiring in
2000. The lease requires payment of taxes, insurance and maintenance costs in
addition to rental payments.
Future minimum lease payments under the operating lease are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1998................................................. $22,836
1999................................................. 22,836
2000................................................. 11,418
-------
Total minimum lease payments................. $57,090
=======
</TABLE>
F-145
<PAGE> 211
EMERALD COAST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
4. PREMISES AND EQUIPMENT -- (CONTINUED)
Rental expense relating to operating leases, including leases that expired
during 1997, amounted to approximately $52,180 for the year ended December 31,
1997, and $44,560 for the four months ended December 31, 1996.
5. TIME DEPOSITS
The aggregate amount of time deposits, each with a minimum denomination of
$100,000, was approximately $8,994,500 at December 31, 1997.
At December 31, 1997, the scheduled maturities of time deposits are as
follows:
<TABLE>
<S> <C>
1998........................................................ $10,482,725
1999........................................................ 10,719,794
2000........................................................ 320,829
2001........................................................ 8,829
-----------
$21,532,177
===========
</TABLE>
6. STOCKHOLDERS' EQUITY
The Bank is subject to certain restrictions on the amount of dividends that
it may declare without prior regulatory approval. However, it is management's
intent not to pay dividends until such time as the accumulated deficit has been
recovered.
7. RESTRICTED STOCK AWARD AGREEMENT
The Bank has entered into a Restricted Stock Award Agreement (the
"Agreement") with the Chairman/Chief Executive Officer of the Bank (the
"Employee") in consideration of future services to be rendered on behalf of the
Bank. The Agreement awards the Employee 12,000 shares of common stock which will
vest in equal one-third increments on January 1, 1998, 1999, and 2000. All or a
portion of the restricted stock would be subject to forfeiture in the event the
Employee resigns or is involuntarily terminated prior to the applicable vesting
date unless the Employee resigns for a "good reason" or is involuntary
terminated without "good cause." The shares of restricted stock are not
transferable until they become vested. The amount of related compensation cost
is not significant in 1997 or 1996.
8. INCOME TAXES
The financial statements of the Company reflect a zero income tax provision
for current federal and state income taxes for the year ended December 31, 1997,
and the four months ended December 31, 1996 as a result of the net operating
loss incurred. The deferred tax benefit for 1997 and 1996 primarily relates to
the expected future benefit from the net operating losses. The net operating
loss carryforward available to the Company will expire in 2011 and 2012 and
amounted to approximately $811,000 at December 31, 1997.
F-146
<PAGE> 212
EMERALD COAST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
8. INCOME TAXES -- (CONTINUED)
The tax effects of each type of significant item that gave rise to deferred
income taxes are:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Expected benefit of net operating loss carryforwards...... $305,790 $230,360
Allowance for loan losses................................. 146,210 26,390
Net unrealized depreciation on available-for-sale
securities............................................. -- 1,240
-------- --------
452,000 257,990
Deferred tax liabilities:
Net unrealized appreciation on available-for-sale
securities............................................. (3,465) --
-------- --------
$448,535 $257,990
======== ========
</TABLE>
9. EMPLOYEE BENEFIT PLAN
The Bank has a non-contributory profit sharing retirement plan (the
"Plan"). The Plan covers all employees over 21 years of age who have completed
one year of service. A participant will become vested after completing five
years of service. At its discretion, the Bank can make an annual profit-sharing
contribution to the Plan which will be allocated based on the provisions of the
Plan document. The Bank did not make a contribution to the Plan in 1997 or 1996.
10. COMMITMENTS AND CONTINGENCIES
FINANCIAL INSTRUMENTS:
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, standby
letters of credit and financial guarantees. Those instruments involve, to
varying degrees, elements of credit and interest-rate risk in excess of the
amount recognized in the consolidated statement of financial condition. The
contract or notional amounts of those instruments reflect the extent of the
Bank's involvement in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit,
standby letters of credit, and financial guarantees written is represented by
the contractual notional amount of those instruments. The Bank uses the same
credit policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
Commitments to Extend Credit and Financial Guarantees. Commitments to
extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on management's credit evaluation of
the counterparty. Collateral held varies but may include accounts receivable;
inventory; property, plant, and equipment; and income-producing commercial
properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements, including
commercial paper, bond financing, and similar transactions. The credit risk
involved
F-147
<PAGE> 213
EMERALD COAST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
10. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
in issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. The Bank holds collateral for those
commitments for which collateral is deemed necessary.
The Bank has not incurred any losses on its commitments in 1997.
A summary of the notional amounts of the Bank's financial instruments with
off-balance-sheet risk at December 31, 1997, follows:
<TABLE>
<S> <C>
Commitments to extend credit................................ $4,284,000
==========
Standby letters of credit................................... $ 525,385
==========
</TABLE>
OTHER:
In the ordinary course of business, the Company has various outstanding
contingent liabilities that are not reflected in the accompanying financial
statements. In addition, the Company is a defendant in certain claims and legal
actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate disposition of
these matters is not expected to have a material adverse effect on the financial
condition of the Company.
11. CONCENTRATIONS OF CREDIT RISK
The Bank maintains cash balances and federal funds sold at several
financial institutions in Alabama and Florida. Accounts at each institution are
insured by the Federal Deposit Insurance Corporation (the "FDIC") up to
$100,000. At various times throughout the year cash balance held at these
institutions will exceed federally insured limits. The Bank's management
monitors these institutions on a quarterly basis in order to determine that the
institutions meet "well-capitalized" guidelines as established by the FDIC.
12. RELATED PARTY TRANSACTIONS
The Bank has entered into transactions with its directors, significant
stockholders, and their affiliates (related parties). The aggregate amount of
loans to such related parties at December 31, 1997 and 1996, was approximately
$2,335,000 and $1,164,000, respectively. During 1997, new loans to such related
parties amounted to approximately $2,071,000 and repayments amounted to
approximately $730,000. Also, certain related parties maintain deposit balances
with the Bank in the aggregate amount of approximately $6,325,000 and $2,718,000
at December 31, 1997 and 1996, respectively.
13. REGULATORY MATTERS
The Company and the Bank 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 the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the Company's and the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's and the Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as
F-148
<PAGE> 214
EMERALD COAST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
13. REGULATORY MATTERS -- (CONTINUED)
defined in the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management believes, as of
December 31, 1997 and 1996, that the Company and the Bank meets all capital
adequacy requirements to which they are subject.
As of December 31, 1997, the most recent notification that the Company and
the Bank had received from the FDIC categorized the Company and the Bank as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Company and the Bank must maintain minimum
total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
the table. There are no conditions or events since that notification that
management believes have changed the Company's or the Bank's category.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------ ------------------------ ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk
Weighted Assets)
Consolidated.............. $5,897,722 13.55% >= $3,480,343 >= 8.0% >= $4,350,429 >= 10.0%
Bank...................... 5,869,744 13.50 >= 3,479,387 >= 8.0 >= 4,349,234 >= 10.0
Tier I Capital (to Risk
Weighted Assets)
Consolidated.............. $5,509,896 12.67% >= $1,740,172 >= 4.0% >= $2,610,257 >= 6.0%
Bank...................... 5,481,918 12.60 >= 1,739,694 >= 4.0 >= 2,609,540 >= 6.0
Tier I Capital (to Average
Assets)
Consolidated.............. $5,509,896 10.53% >= $2,093,838 >= 4.0% >= $2,617,297 >= 5.0%
Bank...................... 5,481,918 10.47 >= 2,093,360 >= 4.0 >= 2,616,700 >= 5.0
As of December 31, 1996:
Total Capital (to Risk
Weighted Assets)
Consolidated.............. $5,975,706 41.47% >= $1,152,781 >= 8.0% >= $1,440,976 >= 10.0%
Bank...................... 5,975,706 41.47 >= 1,152,781 >= 8.0 >= 1,440,976 >= 10.0
Tier I Capital (to Risk
Weighted Assets)
Consolidated.............. $5,905,706 40.98% >= $ 576,390 >= 4.0% >= $ 864,586 >= 6.0%
Bank...................... 5,905,706 40.98 >= 576,390 >= 4.0 >= 864,586 >= 6.0
Tier I Capital (to Average
Assets)
Consolidated.............. $5,905,706 34.48% >= $ 685,120 >= 4.0% >= $ 856,400 >= 5.0%
Bank...................... 5,905,706 34.48 >= 685,120 >= 4.0 >= 856,400 >= 5.0
</TABLE>
14. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company 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.
Available-for-sale securities. Fair values for securities are based
on quoted market prices. The carrying values of restricted equity
securities approximate fair values.
F-149
<PAGE> 215
EMERALD COAST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
14. FAIR VALUES OF FINANCIAL INSTRUMENTS -- (CONTINUED)
Loans receivable. For variable-rate loans that reprice frequently and
have no significant change in credit risk, fair values are based on
carrying values. Fair values for certain mortgage loans (for example,
one-to-four family residential), and other consumer loans are based on
quoted market prices of similar loans sold in conjunction with
securitization transactions, adjusted for differences in loan
characteristics. Fair values for commercial real estate and commercial
loans are estimated using discounted cash flow analyses using interest
rates currently being offered for loans with similar terms to borrowers of
similar credit quality. Fair values for impaired loans are estimated using
discounted cash flow analyses or underlying collateral values, where
applicable.
Deposit liabilities. The fair values disclosed for demand deposits
are, by definition, equal to the amount payable on demand at the reporting
date (that is, their carrying amounts). The carrying amounts of
variable-rate, fixed-term money market accounts and certificates of deposit
("CDs") approximate their fair values at the reporting date. Fair values
for fixed-rate CDs are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits.
Short-term borrowings. The carrying amount of federal funds purchased
and other short-term borrowings maturing within 90 days approximate their
fair values.
Accrued interest. The carrying amounts of accrued interest
approximate their fair values.
Off balance-sheet instruments. Fair values for off-balance-sheet
lending commitments are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standings. The estimated fair
value for these financial instruments was insignificant at December 31,
1997 and 1996.
Limitations. Fair value estimates are made at a specific point in
time and are based on relevant market information which is continuously
changing. Because no quoted market prices exist for a significant portion
of the Company's financial instruments, fair values for such instruments
are based on management's assumptions with respect to future economic
conditions, estimated discount rates, estimates of the amount and timing of
future cash flows, expected loss experience, and other factors. These
estimates are subjective in nature involving uncertainties and matters of
significant judgment; therefore, they cannot be determined with precision.
Changes in the assumptions could significantly affect the estimates.
The estimated fair values of the Company's financial instruments at
December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents......... $ 3,496,277 $ 3,496,277 $ 2,099,615 $ 2,099,615
Securities available-for-sale..... 8,529,253 8,529,253 4,436,071 4,436,071
Loans receivable.................. 37,437,148 37,495,223 11,776,372 11,645,805
Accrued interest receivable....... 358,349 358,349 112,149 112,149
Financial liabilities:
Deposits.......................... 42,622,620 42,607,998 15,239,992 15,217,529
Federal funds purchased........... 7,670,000 7,670,000 -- --
Accrued interest payable.......... 177,812 177,812 68,873 68,873
</TABLE>
F-150
<PAGE> 216
EMERALD COAST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
15. SUBSEQUENT EVENT
Subsequent to year-end the Company entered into discussions with another
bank holding company regarding merger options between the companies. At this
time the companies are performing various due diligence and negotiations as
covered under a confidentiality agreement signed May 4, 1998.
16. PARENT COMPANY FINANCIAL STATEMENTS
The following is the parent company only statement of financial condition
as of December 31, 1997 and statements of income and cash flows for the year
ended December 31, 1997. Parent company information is not presented for 1996
since the Company was not formed until April 1997.
STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
1997
----------
<S> <C>
ASSETS
Cash........................................................ $ 16,423
Investment in subsidiary bank............................... 5,487,645
Other assets................................................ 11,555
----------
Total Assets...................................... $5,515,623
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Total Liabilities........................................... $ --
Stockholder's equity........................................ 5,515,623
----------
Total liabilities and stockholder's equity........ $5,515,623
==========
</TABLE>
STATEMENT OF INCOME
<TABLE>
<CAPTION>
1997
----------
<S> <C>
Operating Income:
Dividends from subsidiary bank............................ $ --
----------
Operating Expenses:
Other operating expenses.................................. 2,022
----------
Loss before equity in loss of subsidiary.................... (2,022)
Equity in loss of subsidiary................................ (393,788)
----------
Net Loss.................................................... $ (395,810)
==========
</TABLE>
F-151
<PAGE> 217
EMERALD COAST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
16. PARENT COMPANY FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
1997
---------
<S> <C>
Cash Flows From Operating Activities:
Net loss.................................................. $(395,810)
Adjustments to reconcile net loss to net cash used in
operating activities:
Equity in loss of subsidiary........................... 393,788
Increase in other assets............................... (11,555)
---------
Net cash used in operating activities:...................... (13,577)
---------
Cash Flows From Investing Activities:
Return of capital from subsidiary bank.................... 30,000
---------
NET INCREASE IN CASH........................................ 16,423
CASH, BEGINNING OF YEAR..................................... --
---------
CASH, END OF YEAR........................................... $ 16,423
=========
</TABLE>
F-152
<PAGE> 218
EMERALD COAST BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (UNAUDITED)
AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
--------------
(IN THOUSANDS)
<S> <C>
ASSETS
Cash and due from banks..................................... $ 3,355
Federal funds sold.......................................... 2,382
Investment securities available for sale.................... 9,322
Loans, net of unearned...................................... 59,241
Less: Allowance for loan losses............................. (686)
-------
Net loans......................................... 58,555
-------
Premises and equipment, net................................. 2,160
Other assets................................................ 1,442
-------
TOTAL ASSETS...................................... $77,216
=======
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits
Noninterest-bearing....................................... $ 7,896
Interest-bearing.......................................... 58,493
-------
TOTAL DEPOSITS.................................... 66,389
Federal funds purchased and other borrowed funds............ 4,500
Accrued expenses and other liabilities...................... 757
-------
TOTAL LIABILITIES................................. 71,646
-------
Stockholders' Equity
Common stock, par value $5 per share; authorized
10,000,000 shares; 626,000 shares issued and
outstanding............................................ 3,130
Surplus................................................... 3,130
Accumulated deficit....................................... (738)
Accumulated other comprehensive income.................... 48
-------
TOTAL STOCKHOLDERS' EQUITY........................ 5,570
-------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $77,216
=======
</TABLE>
See Note to Unaudited Condensed Financial Statements.
F-153
<PAGE> 219
EMERALD COAST BANCSHARES, INC.
CONDENSED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- ---------
(IN THOUSANDS EXCEPT
PER SHARE DATA)
<S> <C> <C>
Interest income............................................. $ 4,123 $ 2,088
Interest expense............................................ 1,932 1,008
-------- --------
Net interest income............................... 2,191 1,080
Provision for loan losses................................... 339 243
-------- --------
Net interest income after provision for loan
losses........................................... 1,852 837
Noninterest income.......................................... 397 60
Gain on sale of securities.................................. 25 --
Noninterest expenses........................................ 2,254 1,332
-------- --------
Income (loss) before income tax expense
(benefit)........................................ 20 (435)
Income tax expense (benefit)................................ 8 (137)
-------- --------
Net income (loss)................................. 12 (298)
Other comprehensive income (loss), net of tax:
Unrealized gain(loss) on securities available for sale.... 43 (7)
-------- --------
Comprehensive income (loss)................................. $ 55 $ (305)
======== ========
Basic income (loss) per share............................... $ 0.02 $ (0.48)
======== ========
Average number of shares outstanding........................ 626,000 626,000
======== ========
</TABLE>
See Note to Unaudited Condensed Financial Statements.
F-154
<PAGE> 220
EMERALD COAST BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMMON ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
STOCK SURPLUS DEFICIT INCOME EQUITY
------ ------- ----------- ------------- -------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997............. $3,130 $ 3,130 $(750) $ 5 $5,515
Net income............................... -- -- 12 -- 12
Other comprehensive income............... -- -- -- 43 43
------ ------- ----- --- ------
Balance at September 30, 1998............ $3,130 $ 3,130 $(738) $48 $5,570
====== ======= ===== === ======
</TABLE>
See Note to Unaudited Condensed Financial Statements.
F-155
<PAGE> 221
EMERALD COAST BANCSHARES, INC.
CONDENSED STATEMENTS OF CASH FLOW (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net cash provided (used) by operating activities............ $ 678 $ (158)
-------- --------
Cash flows from investing activities:
Proceeds from sales of securities available for sale...... 1,763 2,919
Proceeds from maturities of investment securities
available for sale..................................... 2,243 2,100
Purchases of investment securities available for sale..... (4,580) (9,115)
Purchase of stock in FHLB................................. (225) --
Net increase in federal funds sold........................ (2,382) (270)
Net increase in loans..................................... (21,384) (20,263)
Proceeds from sales of premises and equipment............. 3,795 --
Purchases of premises and equipment....................... (645) (3,303)
-------- --------
Net cash used in investing activities............. (21,415) (27,932)
-------- --------
Cash flows from financing activities:
Net increase in deposit accounts.......................... 23,766 27,956
Net decrease in short-term borrowings..................... (3,170) --
-------- --------
Net cash provided by financing activities......... 20,596 27,956
-------- --------
Net decrease in cash and cash equivalents................... (141) (134)
Cash and cash equivalents at beginning of period............ 3,496 2,099
-------- --------
Cash and cash equivalents at end of period.................. $ 3,355 $ 1,965
======== ========
Supplemental Cash Flow Information:
Selected cash payments and noncash activities were as
follows:
Cash payments for income taxes......................... $ -- $ --
Cash payments for interest............................. 1,700 772
</TABLE>
See Note to Unaudited Condensed Financial Statements.
F-156
<PAGE> 222
EMERALD COAST BANCSHARES, INC.
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
1. ACCOUNTING AND REPORTING POLICIES
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and, accordingly, do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements contain all
adjustments (consisting of only normal recurring entries) necessary to present
fairly the financial position, results of operations and cash flows for the
interim periods. All interim amounts are subject to year-end audit, and the
results of operations for the interim periods reported herein are not
necessarily indicative of results of operations to be expected for the year.
F-157
<PAGE> 223
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
and Stockholders'
Commercial Bancshares of Roanoke, Inc. and Subsidiaries
Roanoke, Alabama
We have audited the accompanying consolidated statement of financial
condition of Commercial Bancshares of Roanoke, Inc. and Subsidiaries as of
December 31, 1997 and the related consolidated statements of income and
comprehensive income, changes in stockholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Commercial
Bancshares of Roanoke, Inc. and Subsidiaries at December 31, 1997 and the
consolidated results of their operations and their cash flows for the year then
ended, in conformity with generally accepted accounting principles.
DUDLEY, HOPTON-JONES, SIMS & FREEMAN PLLP
Birmingham, Alabama
June 11, 1998
F-158
<PAGE> 224
COMMERCIAL BANCSHARES OF ROANOKE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 1,467 $ 1,486
Interest bearing deposits in other banks.................... 200 300
Federal funds sold.......................................... 4,125 150
Preferred stocks............................................ -- 1,200
Investment securities available for sale.................... 1,170 1,363
Investment securities held to maturity (fair value $17,646
and 20,549, respectively)................................. 17,559 20,567
Loans, net of unearned income............................... 16,453 16,818
Less: Allowance for loan losses............................. 382 92
------- -------
Net loans.............................................. 16,071 16,726
------- -------
Premises and equipment, net................................. 307 237
Accrued interest receivable................................. 433 480
Other real estate........................................... 244 --
Other assets................................................ 116 203
------- -------
TOTAL ASSETS....................................... $41,692 $42,712
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing demand................................ $ 6,156 $ 5,945
Interest-bearing demand................................... 10,377 11,171
Savings................................................... 1,895 1,928
Time deposit $100,000 and over............................ 2,497 2,846
Other time................................................ 14,290 14,430
------- -------
TOTAL DEPOSITS..................................... 35,215 36,320
Accrued expenses and other liabilities...................... 338 438
------- -------
TOTAL LIABILITIES.................................. 35,553 36,758
Stockholders' equity
Common stock, par value $.10 per share; authorized 600,000
shares; 200,000 shares issued and outstanding........... 20 20
Surplus................................................... 3,527 3,527
Retained earnings......................................... 2,576 2,398
Accumulated other comprehensive gains..................... 16 9
------- -------
TOTAL STOCKHOLDERS' EQUITY......................... 6,139 5,954
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $41,692 $42,712
======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-159
<PAGE> 225
COMMERCIAL BANCSHARES OF ROANOKE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED)
---------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans................................ $1,753 $1,535 $1,347
Interest on investment securities:
Taxable................................................. 1,070 1,276 1,436
Exempt from federal income tax.......................... 157 149 107
Interest on federal funds sold............................ 99 57 91
Interest and dividends on other investments............... 35 78 76
------ ------ ------
TOTAL INTEREST INCOME.............................. 3,114 3,095 3,057
INTEREST EXPENSE ON DEPOSITS................................ 1,307 1,339 1,413
------ ------ ------
Net interest income..................................... 1,807 1,756 1,644
PROVISION FOR LOAN LOSSES................................... 401 201 33
------ ------ ------
Net interest income after provision for loan losses..... 1,406 1,555 1,611
NONINTEREST INCOME
Service charges and fees.................................. 189 196 174
Gain (loss) on sale of securities......................... 1 1 (41)
Data processing fees...................................... 698 694 940
Other income.............................................. 92 164 76
------ ------ ------
TOTAL NONINTEREST INCOME........................... 980 1,055 1,149
------ ------ ------
NONINTEREST EXPENSES
Salaries and employee benefits............................ 1,038 1,009 1,022
Occupancy and equipment expense........................... 310 333 411
Other operating expenses.................................. 661 731 773
------ ------ ------
TOTAL NONINTEREST EXPENSES......................... 2,009 2,073 2,206
------ ------ ------
Income before income taxes............................ 377 537 554
Income tax expense.......................................... 69 137 156
------ ------ ------
NET INCOME............................................ 308 400 398
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities available
for sale arising during period.......................... 7 (12) 22
------ ------ ------
COMPREHENSIVE INCOME...................................... $ 315 $ 388 $ 420
====== ====== ======
Earnings per share -- basic................................. $ 1.54 $ 2.00 $ 1.99
====== ====== ======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-160
<PAGE> 226
COMMERCIAL BANCSHARES OF ROANOKE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON RETAINED COMPREHENSIVE TOTAL
STOCK SURPLUS EARNINGS INCOME (LOSS) EQUITY
------ ------- -------- ------------- ------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 (Unaudited)......... $20 $3,527 $1,860 $(1) $5,406
Net income..................................... -- -- 398 -- 398
Dividends declared............................. -- -- (130) -- (130)
Other comprehensive income..................... -- -- -- 22 22
--- ------ ------ --- ------
Balance at December 31, 1995 (Unaudited)....... 20 3,527 2,128 21 5,696
Net income..................................... -- -- 400 -- 400
Dividends declared............................. -- -- (130) -- (130)
Other comprehensive loss....................... -- -- -- (12) (12)
--- ------ ------ --- ------
Balance at December 31, 1996 (Unaudited)....... 20 3,527 2,398 9 5,954
Net income..................................... -- -- 308 -- 308
Dividends declared............................. -- -- (130) -- (130)
Other comprehensive income..................... -- -- -- 7 7
--- ------ ------ --- ------
Balance at December 31, 1997................... $20 $3,527 $2,576 $16 $6,139
=== ====== ====== === ======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-161
<PAGE> 227
COMMERCIAL BANCSHARES OF ROANOKE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 308 $ 400 $ 398
Adjustments to reconcile net income to net cash provided
by operations:
Depreciation and amortization......................... 66 82 108
Loss (gain) on disposal of fixed assets............... -- 8 (17)
Loss on sale of investment securities................. -- -- 41
Provision for loan losses............................. 401 201 33
Decrease in accrued interest receivable............... 47 5 26
Decrease (increase) in other assets................... 87 (32) 57
(Decrease) increase in accrued interest payable....... 7 (3) (25)
Decrease in other liabilities......................... (107) (115) (6)
------- ------- --------
NET CASH PROVIDED BY OPERATIONS.................... 809 546 615
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of interest bearing deposits....... 100 300 100
Net (increase) decrease in federal funds sold............. (3,975) 1,475 450
Proceeds from sales of securities available for sale...... -- -- 3,618
Proceeds from maturities of securities available for
sale.................................................... 950 901 182
Purchase of securities available for sale................. (745) (354) (1,237)
Proceeds from maturities of investment securities held to
maturity................................................ 4,276 4,538 10,743
Purchases of investment securities held to maturity....... (1,272) (3,205) (10,719)
Proceeds from maturities of preferred stocks.............. 1,200 -- --
Purchase of preferred stocks.............................. -- (200) (300)
Net (increase) decrease in loans.......................... 10 (3,663) (1,544)
Purchases of premises and equipment....................... (136) (72) (35)
Proceeds from sale of fixed assets........................ -- 14 34
------- ------- --------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES....................................... 408 (266) 1,292
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in demand and savings deposits............... (616) (1,503) (1,344)
Net decrease (increase) in certificates of deposit and
other time deposits..................................... (490) 1,334 (513)
Dividends paid............................................ (130) (130) (130)
------- ------- --------
NET CASH USED IN FINANCING ACTIVITIES.............. (1,236) (299) (1,987)
------- ------- --------
Net decrease in cash and due from banks..................... (19) (19) (80)
Cash and due from banks at beginning of year................ 1,486 1,505 1,585
------- ------- --------
CASH AND DUE FROM BANKS AT END OF YEAR...................... $ 1,467 $ 1,486 $ 1,505
======= ======= ========
SUPPLEMENTAL CASH FLOW INFORMATION
Selected cash payments and noncash activities were as
follows:
Cash payments for income taxes.......................... $ 202 $ 182 $ 166
Cash payments for interest.............................. 1,300 1,342 1,397
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-162
<PAGE> 228
COMMERCIAL BANCSHARES OF ROANOKE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(IN THOUSAND, EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed by Commercial Bancshares of Roanoke, Inc.
and Subsidiaries, and the method of applying those policies which affect the
determination of financial condition, results of operations and cash flows are
summarized below.
CONSOLIDATION
The consolidated financial statements of the Company include the accounts
of subsidiaries. All significant intercompany accounts and transactions have
been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses. While management
uses available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in local economic conditions. In
addition, regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowances based on their
judgments about information available to them at the time of their examination.
INVESTMENT SECURITIES
The Bank's investments in securities are classified in two categories and
accounted for as follows:
- Investment Securities Held to Maturity. Bonds, notes and debentures for
which the Bank has the positive intent and ability to hold to maturity
are reported at cost, adjusted for amortization of premiums and accretion
of discounts which are recognized in interest income using the interest
method over the period to maturity.
- Investment Securities Available for Sale. Securities available for sale
consist of bonds, notes, debentures, and certain equity securities not
classified as trading securities nor as securities to be held to
maturity. Unrealized holding gains and losses, net of deferred income
tax, on securities available for sale are reported as a separate
component of stockholders' equity until realized.
Gains and losses on the sale of securities available for sale are
determined using the specific-identification method.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are stated at the amount of unpaid principal, reduced by unearned
discount and an allowance for loan losses. Interest income on substantially all
loans is accrued on the principal amount outstanding.
The allowance for loan losses is established through a provision for loan
losses charged to expenses. Loans are charged against the allowance for loan
losses when management believes the collectibility of principal is unlikely. The
allowance is the amount that management believes will be adequate to absorb
possible losses on existing loans which may become uncollectible, based on
evaluation of the collectibility of loans and prior loan
F-163
<PAGE> 229
COMMERCIAL BANCSHARES OF ROANOKE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
loss experience. The evaluations take into consideration such factors as changes
in the nature and volume of the loan portfolio, overall portfolio quality,
review of specific problem loans, and current economic conditions that may
affect the borrower's ability to pay.
Accrual of interest is discontinued on a loan when management believes,
after considering economic and business conditions and collection efforts, that
the loan is impaired. Any unpaid interest previously accrued on those loans is
reversed from income. Interest income generally is not recognized on specific
impaired loans unless the likelihood of further loss is remote. Interest
payments received on such loans are applied as a reduction of the loan principal
balance. Interest income on other nonaccrual loans is recognized only to the
extent of interest payments received.
PREMISES AND EQUIPMENT
Premises, equipment and equipment under capital lease are stated at cost
less accumulated depreciation and amortization. Depreciation is computed over
the estimated service lives of the assets using certain straight-line and
accelerated methods.
Expenditures for maintenance and repairs are charged to operations as
incurred; expenditures for renewals and betterments are capitalized and written
off by depreciation charges. Property retired or sold is removed from the asset
and related accumulated depreciation accounts and any profit or loss resulting
therefrom is reflected in the statement of income.
OTHER REAL ESTATE
Other real estate, acquired through partial or total satisfaction of loans,
is carried at the lower of cost or fair market value. At the date of
acquisition, losses are charged to the allowance for loan losses.
INCOME TAXES
Income tax expense is based on amounts reported in the statement of income,
after exclusion of nontaxable income such as interest on state and municipal
securities and certain nondeductible expenses (See Note 8).
OFF BALANCE SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business the Bank has entered into off balance
sheet financial instruments consisting of commitments to extend credit, and
standby letters of credit. Such financial instruments are recorded in the
financial statements when they become payable.
CASH AND CASH EQUIVALENTS
For the purpose of presentation in the statement of cash flows, cash and
cash equivalents are defined as those amounts included in the statement of
financial condition caption "Cash and Due from Banks."
EFFECT OF NEW FINANCIAL ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, Earnings per Share. This statement simplifies the standards for
computing earnings per share previously set forth in APB Opinion No. 15,
Earnings per Share, and makes them comparable to international Earnings per
Share ("EPS") standards. It replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic
F-164
<PAGE> 230
COMMERCIAL BANCSHARES OF ROANOKE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
EPS computation to the numerator and denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted EPS is computed similarly to fully
diluted EPS pursuant to APB Opinion No. 15. This statement is effective for
financial statements issued for periods ending after December 15, 1997. The
adoption of this statement did not have a material impact on the consolidated
financial statements.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. This statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. This statement
does not require a specific format for that financial statement but requires
that an enterprise display an amount representing total comprehensive income for
the period in that financial statement. This statement requires that an
enterprise classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. This statement is effective for fiscal years beginning after
December 15, 1997. The adoption of this statement did not have a material impact
on the consolidated financial statements.
2. RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
The subsidiary bank is required to maintain average reserve balances either
in vault cash or on deposit with the Federal Reserve Bank. The amount of those
reserves required at December 31, 1997 was approximately $1,809.
3. INVESTMENT SECURITIES
The amounts at which investment securities are carried and their
approximate fair values at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
INVESTMENT SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies............... $ 947 $ 14 $ 3 $ 958
Obligations of states and political subdivisions..... 195 17 -- 212
------- ---- --- -------
Totals........................................ $ 1,142 $ 31 $ 3 $ 1,170
======= ==== === =======
INVESTMENT SECURITIES HELD TO MATURITY:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies............... $10,129 $ 35 $16 $10,148
Obligations of states and political subdivisions..... 2,830 61 2 2,889
Corporate securities................................. 752 26 -- 778
Mortgage-backed securities........................... 3,848 26 43 3,831
------- ---- --- -------
Totals........................................ $17,559 $148 $61 $17,646
======= ==== === =======
</TABLE>
F-165
<PAGE> 231
COMMERCIAL BANCSHARES OF ROANOKE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVESTMENT SECURITIES -- (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996 (UNAUDITED)
INVESTMENT SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies.................... $ 1,152 $ 6 $ 7 $ 1,151
Obligations of states and political subdivisions.......... 195 17 -- 212
------- ---- ---- -------
Totals............................................. $ 1,347 $ 23 $ 7 $ 1,363
======= ==== ==== =======
HELD TO MATURITY SECURITIES:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies.................... $11,825 $ 27 $ 83 $11,769
Obligations of states and political subdivisions.......... 3,210 83 2 3,291
Corporate securities...................................... 851 27 1 877
Mortgage-backed securities................................ 4,681 25 94 4,612
------- ---- ---- -------
Totals............................................. $20,567 $162 $180 $20,549
======= ==== ==== =======
</TABLE>
The amortized cost and estimated fair values of debt securities at December
31, 1997, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SECURITIES HELD TO
SALE MATURITY
------------------------ ---------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Due in one year or less..................................... $ 200 $ 200 $ 4,351 $ 4,349
Due after one year through five years....................... 747 758 8,771 8,831
Due after five years through ten years...................... 100 104 1,929 1,957
Due after ten years......................................... 95 108 2,508 2,509
------ ------ ------- -------
$1,142 $1,170 $17,559 $17,646
====== ====== ======= =======
</TABLE>
Securities carried at approximately $3,093 and $4,525 at December 31, 1997
and 1996, respectively, were pledged to secure public and trust deposits as
required by law and for other purposes.
4. LOANS
The Bank grants loans to customers primarily in Randolph and Northern
Chambers County, Alabama.
At December 31, 1997 and 1996 the composition of the loan portfolio was as
follows:
<TABLE>
<CAPTION>
1997 1996
------- -----------
(UNAUDITED)
<S> <C> <C>
Commercial and industrial................................... $ 3,151 $ 4,989
Real estate -- construction................................. 167 221
-- mortgage...................................... 8,971 7,067
Loans to individuals for personal expenditures.............. 4,017 4,338
All other loans (including overdrafts)...................... 147 223
------- -------
Total loans........................................ 16,453 16,838
Unearned interest and fees.................................. -- (20)
Allowance for loan losses................................... (382) (92)
------- -------
Net loans.......................................... $16,071 $16,726
======= =======
</TABLE>
F-166
<PAGE> 232
COMMERCIAL BANCSHARES OF ROANOKE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. ALLOWANCE FOR LOAN LOSSES
A summary of the allowance for loan losses for the year ended December 31,
1997, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- ----
(UNAUDITED)
<S> <C> <C> <C>
Balance at beginning of year................................ $ 92 $ 81 $ 70
Provision for loan losses................................... 401 201 33
Loan charge-offs............................................ (142) (225) (51)
Recoveries.................................................. 31 35 29
----- ----- ----
Balance at end of year...................................... $ 382 $ 92 $ 81
===== ===== ====
</TABLE>
6. PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, follows:
<TABLE>
<CAPTION>
1997 1996
------ -----------
(UNAUDITED)
<S> <C> <C>
Land........................................................ $ 25 $ 22
Premises.................................................... 470 361
Furniture and equipment..................................... 585 561
Leasehold improvements...................................... 96 96
Capital lease............................................... 73 73
------ ------
1,249 1,113
Allowance for depreciation and amortization................. (942) (876)
------ ------
$ 307 $ 237
====== ======
</TABLE>
Depreciation expense for the years ended December 31, 1997 and 1996 was $66
and $82, respectively.
7. PENSION PLANS
Net pension cost for 1997 and 1996 are composed of the following:
<TABLE>
<CAPTION>
1997 1996
------ -----------
(UNAUDITED)
<S> <C> <C>
Service..................................................... $ 51 $ 49
Interest cost on projected benefit obligations.............. 81 76
Actual return on assets..................................... (276) (147)
Net amortization and deferral............................... 172 49
------ ------
Net periodic pension costs......................... $ 28 $ 27
====== ======
Actuarial present value of benefit obligation:
Vested.................................................... $ 910 $ 846
Nonvested................................................. -- 21
------ ------
Accumulated benefit obligation.............................. $ 910 $ 867
------ ------
Actuarial present value of projected benefit obligation..... $1,213 $1,129
Plan assets at fair value................................... 1,548 1,306
------ ------
Excess of plan assets over projected benefit obligation..... 335 177
Unamortized net assets at transition........................ (383) (192)
Unrecognized net gain....................................... (24) (29)
------ ------
Accrued pension cost included in other liabilities.......... $ 72 $ 44
====== ======
</TABLE>
F-167
<PAGE> 233
COMMERCIAL BANCSHARES OF ROANOKE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. PENSION PLANS -- (CONTINUED)
The weighted average discount rate and rate of increase in future
compensation levels in determining the actuarial present value of the projected
benefit obligation were 7.5% and 5.0%, respectively, in both years presented.
The expected long-term rate of return on assets was 7.5% for both years
presented. The Plan was terminated on April 29, 1998.
8. INCOME TAX EXPENSE
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Currently payable:
Federal................................................... $198 $129 $145
State..................................................... 26 11 16
---- ---- ----
Total currently payable............................ 224 140 161
Tax effect of temporary differences......................... (155) (3) (5)
---- ---- ----
Income tax expense...................................... $ 69 $137 $156
==== ==== ====
</TABLE>
As of December 31, 1997 and 1996 the net deferred tax (asset) liability
consisted of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
Deferred tax asset:
Accrued pension expense................................... $ 7 $ 13
Allowance for loan losses................................. 167 28
Miscellaneous............................................. 14 3
---- ----
Total deferred tax asset........................... 188 44
---- ----
Deferred tax liabilities:
Cash method of accounting for tax purposes................ 137 151
Property, plant and equipment............................. 16 13
Unrealized gain on available-for-sale securities.......... 11 6
Miscellaneous............................................. 1 1
---- ----
Total deferred tax liability....................... 165 171
---- ----
Net deferred tax(asset) liability.................. $(23) $127
==== ====
</TABLE>
The effective tax rate differs significantly from the expected tax using
statutory rate of 34%. Reconciliation between the expected tax and the actual
provision for income taxes follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Expected tax at 34% of income tax before taxes.............. $128 $182 $188
Add (deduct):
State income taxes, net of federal tax benefit............ 8 7 17
Effect of interest income exempt from Federal income
taxes................................................... (59) (57) (46)
Other items -- net........................................ (8) 5 (3)
---- ---- ----
Income tax expense................................. $ 69 $137 $156
==== ==== ====
</TABLE>
9. RELATED PARTY TRANSACTIONS
The Bank has entered into transactions with its directors, executive
officers, significant shareholders and their affiliates (related parties). Such
transactions were made in the ordinary course of business on
F-168
<PAGE> 234
COMMERCIAL BANCSHARES OF ROANOKE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. RELATED PARTY TRANSACTIONS -- (CONTINUED)
substantially the same terms and conditions, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with other customers, and did not, in the opinion of management, involve more
than normal credit risk or present other unfavorable features. Changes in
related party loans for the year ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
BALANCE BALANCE
DECEMBER 31, 1996 ADVANCES REPAYMENTS DECEMBER 31, 1997
- ----------------- -------- ---------- -----------------
<S> <C> <C> <C>
$325 $21 $126 $220
==== === ==== ====
</TABLE>
One of the Company's subsidiaries leases a facility from the Schuessler
Partnership, a related party. (See Note 11).
10. TIME DEPOSITS
The maturities of time certificates of deposit and other time deposits of
$100 or more at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
TIME OTHER
CERTIFICATES TIME
OF DEPOSIT DEPOSITS TOTAL
------------ -------- ------
<S> <C> <C> <C>
Three months or less........................................ $ 820 $725 $1,545
Over three through six months............................... 306 -- 306
Over six through twelve months.............................. 1,050 113 1,163
Over twelve through twenty four months...................... 100 108 208
------ ---- ------
$2,276 $946 $3,222
====== ==== ======
</TABLE>
11. OPERATING LEASES
The Company through its subsidiaries, The Commercial Bank of Roanoke,
Alabama and Commercial Bancshares Services, Inc., conducts portions of its
operations in leased facilities. One of the leased facilities was leased from a
related party, Schuessler Partnership, an Alabama general partnership. This
facility was purchased by the Company on December 19, 1997.
In addition to the above mentioned lease, the Company also leases equipment
which expire on various dates through 2000.
At December 31, 1997, minimum rental payments under operating leases shown
by subsidiary, are as follows:
<TABLE>
<CAPTION>
THE COMMERCIAL COMMERCIAL
BANK OF ROANOKE BANCSHARES
ALABAMA SERVICES, INC. TOTAL
--------------- -------------- -----
<S> <C> <C> <C>
1998........................................................ $3 $191 $194
1999........................................................ 3 151 154
2000........................................................ 1 28 29
2001........................................................ -- -- --
2002........................................................ -- -- --
2003 and thereafter......................................... -- -- --
-- ---- ----
Total.............................................. $7 $370 $377
== ==== ====
</TABLE>
F-169
<PAGE> 235
COMMERCIAL BANCSHARES OF ROANOKE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. OPERATING LEASES -- (CONTINUED)
Rental expense for all operating leases for the years ending December 31,
were as follows:
<TABLE>
<CAPTION>
1997 1996
---- -----------
(UNAUDITED)
<S> <C> <C>
Rental payments............................................. $212 $162
==== ====
</TABLE>
12. CAPITAL LEASES
Computer hardware was purchased by the Company's subsidiary, Commercial
Bancshares Services, Inc., under a 5-year capital lease negotiated during 1994.
The lease requires a monthly fee of $1 through November 1999. The capitalized
lease obligation was calculated using the interest rate appropriate at the
inception of the lease. The gross amount of these leased assets included in
premises and equipment is $73. Accumulated amortization for these leased assets
for 1997 and 1996 is $61 and $52, respectively. At December 31, 1997 and 1996,
the recorded obligation was $32 and $46, respectively.
Future minimum lease payments for capitalized lease obligations at December
31, 1997 are as follows:
<TABLE>
<S> <C>
1998........................................................ $16
1999........................................................ 16
2000........................................................ --
2001........................................................ --
2002........................................................ --
</TABLE>
13. COMMITMENTS AND CONTINGENCIES
The consolidated financial statements do not reflect the Bank's various
commitments and contingent liabilities which arise in the normal course of
business and which involve elements of credit risk, interest rate risk and
liquidity risk. These commitments to extend credit totaled $172 and $715 at
December 31, 1997 and 1996, respectively.
Commitments to extend credit include exposure to some credit loss in the
event of nonperformance of the customer. The Bank's credit policies and
procedures for credit commitments and financial guarantees are the same as those
for extension of credit that are recorded in the consolidated statement of
financial condition. Because these instruments have fixed maturity dates, and
because many of them expire without being drawn upon, they do not generally
present any significant liquidity risk to the Bank.
The Bank is party to litigation and claims arising in the normal course of
business. Management, after consultation with legal counsel, believes that the
liabilities, if any, arising from such litigation and claims will not be
material to the consolidated financial statements.
14. REGULATORY RESTRICTIONS
The primary source of funds available to the Company is the payment of
dividends by its subsidiary Bank. Banking regulations limit the amount of
dividends that may be paid without prior approval of the Bank's regulatory
agency. Approximately $103 are available to be paid as dividends by the Bank
subsidiary at December 31, 1997.
The Company and its subsidiary are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory -- and possible
additional discretionary -- actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and its subsidiary must meet specific capital guidelines
F-170
<PAGE> 236
COMMERCIAL BANCSHARES OF ROANOKE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. REGULATORY RESTRICTIONS -- (CONTINUED)
that involve quantitative measures of their assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Company and its subsidiary's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997 that the
Company and its subsidiary meet all capital adequacy requirements to which they
are subject.
As of December 31, 1997, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier I risk-based, Tier I leverage ratios as
set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
The Company and its subsidiary's actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
-------------- -------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------- ------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk Weighted Assets):
Consolidated........................................ $6,037 24.9% $2,364 >8% $2,955 >10%
- -
Bank................................................ 4,647 22.6 1,793 >8 2,241 >10
- -
Tier I Capital (to Risk Weighted Assets):
Consolidated........................................ 5,945 24.5 1,182 >4 1,773 >6
- -
Bank................................................ 4,366 21.3 896 >4 1,345 >6
- -
Tier I Capital (to Average Assets):
Consolidated........................................ 5,945 13.8 1,762 >4 2,202 >5
- -
Bank................................................ 4,366 10.5 1,692 >4 2,115 >5
- -
As of December 31, 1996 (Unaudited):
Total Capital (to Risk Weighted Assets):
Consolidated........................................ $6,504 26.8% $1,940 >8% $2,425 >10%
- -
Bank................................................ 4,383 21.3 1,643 >8 2,054 >10
- -
Tier I Capital (to Risk Weighted Assets):
Consolidated........................................ 6,122 25.3 970 >4 1,455 >6
- -
Bank................................................ 4,293 20.9 821 >4 1,232 >6
- -
Tier I Capital (to Average Assets):
Consolidated........................................ 6,122 14.2 1,728 >4 2,161 >5
- -
Bank................................................ 4,293 10.3 1,665 >4 2,081 >5
- -
</TABLE>
F-171
<PAGE> 237
COMMERCIAL BANCSHARES OF ROANOKE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. OTHER OPERATING EXPENSES
Other operating expenses consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Professional fees........................................... $101 $ 85 $ 53
Advertising................................................. 45 49 56
Service maintenance contracts............................... 23 50 63
Postage, stationery and supplies............................ 58 67 65
Telephone................................................... 163 184 194
FDIC insurance.............................................. -- -- 44
---- ---- ----
Total.............................................. $390 $435 $475
==== ==== ====
</TABLE>
16. CONCENTRATIONS OF CREDIT
All of the Bank's loans, commitments and standby letters of credit have
been granted to customers in the Bank's market area. The concentrations of
credit by type of loan or commitment are set forth in Notes 4 and 13,
respectively.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and Short-Term Investments: For those short-term instruments,
the carrying amount is a reasonable estimate of fair value.
Investment Securities: For securities held for investment purposes,
fair values are based on quoted market prices or dealer quotes.
Loan Receivables: For variable-rate loans that reprice frequently and
have no significant change in credit risk, fair values are based on
carrying values. The fair value of other types of loans is estimated by
discounting the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the
same remaining maturities.
Deposit Liabilities: The fair value of demand deposits, savings
accounts, and certain money market deposits is the amount payable on demand
at the reporting date. The fair value of fixed-maturity certificates of
deposit is estimated using the rates currently offered for deposit of
similar remaining maturities.
Commitments to Extend Credit. The fair value of commitments are
estimated to be approximately the same as the notional amount of the
related commitment.
F-172
<PAGE> 238
COMMERCIAL BANCSHARES OF ROANOKE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED)
The estimated fair values of the Company's financial instruments as of
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
1997
------------------
CARRYING FAIR
AMOUNT VALUE
-------- -------
<S> <C> <C>
FINANCIAL ASSETS:
Cash and short-term investments........................... $ 5,792 $ 5,792
Investment securities..................................... 18,788 18,816
Loans..................................................... 16,453
Less: Allowance for losses................................ 382
-------
Net loans................................................. 16,071 16,140
------- -------
TOTAL FINANCIAL ASSETS............................. $40,651 $40,748
======= =======
FINANCIAL LIABILITIES:
Deposits.................................................. $35,215 $35,229
======= =======
TOTAL FINANCIAL LIABILITIES
UNRECOGNIZED FINANCIAL INSTRUMENTS:
Commitments to extend credit.............................. $ -- $ 172
======= =======
</TABLE>
18. PARENT COMPANY
The condensed financial information for Commercial Bancshares of Roanoke,
Inc. (Parent only) is presented as follows:
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
1997 1996
------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash on demand deposit...................................... $1,351 $ 131
Preferred stock............................................. -- 1,200
Due from subsidiaries:
Commercial Bank of Roanoke................................ 35 44
Commercial Bancshares Services............................ 51 12
Loans to subsidiary......................................... 61 124
Investment in subsidiaries:
Commercial Bank of Roanoke................................ 4,383 4,301
Commercial Bancshares Services............................ 159 62
Premises and equipment, net................................. 165 60
Other assets................................................ 3 22
------ ------
Total Assets....................................... $6,208 $5,956
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities........................................... $ 69 $ 2
STOCKHOLDERS' EQUITY........................................ 6,139 5,954
------ ------
Total Liabilities and Stockholders' Equity......... $6,208 $5,956
====== ======
</TABLE>
F-173
<PAGE> 239
COMMERCIAL BANCSHARES OF ROANOKE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. PARENT COMPANY -- (CONTINUED)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
INCOME
Cash dividends from bank subsidiary....................... $120 $220 $360
Cash dividends from preferred stock....................... 23 47 39
Management fees........................................... 12 12 12
Interest.................................................. 8 11 13
Rent income............................................... 3 4 8
---- ---- ----
Total income....................................... 166 294 432
---- ---- ----
EXPENSES
Taxes..................................................... 9 8 5
Repairs................................................... 2 8 --
Professional services..................................... 10 6 4
Depreciation.............................................. 3 3 4
Other expenses............................................ 6 4 9
---- ---- ----
Total expenses..................................... 30 29 22
---- ---- ----
Income before income taxes and equity in undistributed net
income of subsidiaries.................................... 136 265 410
Income taxes................................................ -- 7 8
---- ---- ----
Income before equity in undistributed net income of
subsidiaries.............................................. 136 258 402
Equity in undistributed net income of subsidiaries.......... 172 142 (4)
---- ---- ----
NET INCOME......................................... $308 $400 $398
==== ==== ====
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1997 1996 1995
------ ----- -----
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................ $ 308 $ 400 $ 398
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation............................................ 3 3 4
(Increase) decrease in equity in undistributed net
income of subsidiaries................................ (171) (142) 4
Decrease (increase) in other assets..................... 18 (18) (1)
Increase (decrease) in other liabilities................ 67 (44) (9)
------ ----- -----
Net cash provided by operating activities.......... 225 199 396
------ ----- -----
INVESTING ACTIVITIES
Net principal received on loans to subsidiary............. 33 234 (14)
Purchases of premises and equipment....................... (108)
Redemption (purchase) of preferred stock.................. 1,200 (200) (300)
------ ----- -----
Net cash provided (used) by investing activities... 1,125 34 (314)
------ ----- -----
FINANCING ACTIVITIES
Cash dividends............................................ (130) (130) (130)
------ ----- -----
Net increase (decrease) in cash............................. 1,220 103 (48)
Cash -- beginning of year................................... 131 28 76
------ ----- -----
Cash -- end of year......................................... $1,351 $ 131 $ 28
====== ===== =====
</TABLE>
F-174
<PAGE> 240
COMMERCIAL BANCSHARES OF ROANOKE, INC.
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (UNAUDITED)
AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
--------------
(IN THOUSANDS)
<S> <C>
ASSETS
Cash and due from banks..................................... $ 1,146
Interest bearing deposits in other banks.................... 200
Federal funds sold.......................................... 7,475
Investment securities available for sale.................... 2,356
Investment securities held to maturity...................... 15,918
Loans, net of unearned...................................... 13,717
Less: Allowance for loan losses............................. (311)
-------
Net loans......................................... 13,406
-------
Premises and equipment, net................................. 276
Other assets................................................ 803
-------
Total assets...................................... $41,580
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing....................................... $ 6,115
Interest-bearing.......................................... 28,918
-------
Total deposits.................................... 35,033
Accrued expenses and other liabilities...................... 297
-------
Total liabilities................................. 35,330
Stockholders' Equity
Common stock, par value $.10 per share; authorized 600,000
shares; 200,000 shares issued.......................... 20
Surplus................................................... 3,527
Retained earnings......................................... 2,669
Accumulated other comprehensive income.................... 34
-------
Total stockholders' equity........................ 6,250
-------
Total liabilities and stockholders' equity........ $41,580
=======
</TABLE>
See Note to Unaudited Condensed Financial Statements.
F-175
<PAGE> 241
COMMERCIAL BANCSHARES OF ROANOKE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE
INCOME (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(IN THOUSANDS EXCEPT
PER SHARE DATA)
<S> <C> <C>
Interest income............................................. $ 2,215 $ 2,351
Interest expense............................................ 1,013 971
-------- --------
Net interest income............................... 1,202 1,380
Provision for loan losses................................... 344 98
-------- --------
Net interest income after provision for loan
losses........................................... 858 1,282
Noninterest income.......................................... 714 746
Noninterest expenses........................................ 1,450 1,357
-------- --------
Income before income taxes................................ 122 671
Income tax expense.......................................... 29 206
-------- --------
Net income........................................ 93 465
Other comprehensive income, net of tax:
Unrealized gain on securities available for sale.......... 17 5
-------- --------
Comprehensive income........................................ $ 110 $ 470
======== ========
Basic earnings per share.................................... $ 0.47 $ 2.33
======== ========
Average number of shares outstanding........................ 200,000 200,000
======== ========
</TABLE>
See Note to Unaudited Condensed Financial Statements.
F-176
<PAGE> 242
COMMERCIAL BANCSHARES OF ROANOKE, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMMON RETAINED COMPREHENSIVE STOCKHOLDERS'
STOCK SURPLUS EARNINGS INCOME EQUITY
------ ------- -------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997................ $20 $3,526 $2,576 $17 $6,139
Net income.................................. -- -- 93 -- 93
Other comprehensive income.................. -- -- -- 17 17
--- ------ ------ --- ------
Balance at September 30, 1998............... $20 $3,526 $2,669 $34 $6,249
=== ====== ====== === ======
</TABLE>
See Note to Unaudited Condensed Financial Statements.
F-177
<PAGE> 243
COMMERCIAL BANCSHARES OF ROANOKE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Net cash provided by operating activities................... $ 464 $ 623
------- -------
Cash flows from investing activities:
Net decrease in interest bearing deposits................. -- 100
Net increase in federal funds sold........................ (3,350) (2,125)
Proceeds from maturities of investment securities
available for sale..................................... 591 750
Purchases of investment securities available for sale..... (1,751) (743)
Proceeds from maturities of investment securities held to
maturity............................................... 6,233 3,446
Purchase of investment securities held to maturity........ (4,590) (965)
Proceeds from maturity of other investments............... -- 1,200
Net decrease (increase) in loans.......................... 2,272 (895)
Purchases of premises and equipment....................... (8) (37)
------- -------
Net cash (used) provided by investing
activities....................................... (603) 731
------- -------
Cash flows used by financing activities:
Net decrease in deposit accounts.......................... (182) (1,593)
------- -------
Net decrease in cash and due from banks..................... (321) (239)
Cash and due from banks at beginning of period.............. 1,467 1,486
------- -------
Cash and due from banks at end of period.................... $ 1,146 $ 1,247
======= =======
Supplemental Cash Flow Information:
Selected cash payments and noncash activities were as
follows:
Cash payments for income taxes......................... $ 242 $ 101
Cash payments for interest............................. 1,034 991
</TABLE>
See Note to Unaudited Condensed Financial Statements.
F-178
<PAGE> 244
COMMERCIAL BANCSHARES OF ROANOKE, INC.
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
1. ACCOUNTING AND REPORTING POLICIES
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and, accordingly, do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements contain all
adjustments (consisting of only normal recurring entries) necessary to present
fairly the financial position, results of operations and cash flows for the
interim periods. All interim amounts are subject to year-end audit, and the
results of operations for the interim periods reported herein are not
necessarily indicative of results of operations to be expected for the year.
F-179
<PAGE> 245
- ------------------------------------------------------
- ------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION PROVIDED IN THIS PROSPECTUS OR ANY
SUPPLEMENT. THE CORPORATION HAS NOT AUTHORIZED ANYONE ELSE TO PROVIDE YOU WITH
DIFFERENT INFORMATION. THE CORPORATION IS NOT MAKING AN OFFER OF THESE
SECURITIES IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME
THAT THE INFORMATION IN THIS PROSPECTUS OR ANY SUPPLEMENT IS ACCURATE AS OF ANY
DATE OTHER THAN THE DATE ON THE FRONT OF THOSE DOCUMENTS.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 4
Forward Looking Statements............ 11
Use of Proceeds....................... 12
Dividend Policy....................... 12
Capitalization........................ 13
Dilution.............................. 14
Selected Consolidated Financial
Data................................ 15
Condensed Pro Forma Combined Statement
of Financial Condition.............. 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 33
Management............................ 39
Principal Stockholders................ 47
Supervision and Regulation............ 49
Description of Capital Stock.......... 56
Shares Eligible For Future Sale....... 58
Underwriting.......................... 60
Legal Matters......................... 62
Experts............................... 62
Index to Financial Statements......... F-1
</TABLE>
UNTIL JANUARY 4, 1999, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
1,000,000 SHARES
COMMON STOCK
(THE BANC CORPORATION LOGO)
-------------------------
PROSPECTUS
-------------------------
STERNE, AGEE & LEACH, INC.
DECEMBER 10, 1998
- ------------------------------------------------------
- ------------------------------------------------------
