<PAGE>
PROSPECTUS
SAL TRUST PREFERRED FUND I
725,000 Shares of Beneficial Interest
Investment Objective. The Fund is a newly organized, closed-end,
nondiversified management investment company. The Fund's investment objective
is to seek a high level of current income. The Fund cannot assure you that it
will achieve its investment objective.
YOU SHOULD CAREFULLY READ "RISK FACTORS" BEGINNING ON PAGE 6 OF THE
PROSPECTUS AND "ADDITIONAL RISK FACTORS" BEGINNING ON PAGE S-2 OF THE STATEMENT
OF ADDITIONAL INFORMATION BEFORE YOU MAKE YOUR INVESTMENT DECISION.
Shares. The Fund intends to offer shares of beneficial interest that
represent an undivided interest in the assets of the Fund. No public market for
the shares currently exists. The Fund intends to list the shares on the
American Stock Exchange ("AMEX"). The trading or "ticker" symbol of the shares
is expected to be "PBA." See "Fund Shares."
Portfolio Contents. The Fund intends to invest substantially all of its
assets in 9.75% Cumulative Trust Preferred Securities issued in approximately
equal amounts by three statutory trusts, controlled respectively, by three bank
holding companies. The assets of each statutory trust consist solely of 9.75%
subordinated debentures and payments thereunder. The Fund seeks to pay a
dividend yield on the shares of 9.75% of the price to the public ($25.00). See
"The Fund's Investments."
No Prior History. Because the Fund is newly organized, its shares have no
history of public trading.
THE SECURITIES aND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<CAPTION>
Price to Sales Proceeds to
Public Load(1) the Fund(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................ $25.00 None $25.00
- --------------------------------------------------------------------------------
Total(3)................................. $18,125,000.00 None $18,125,000.00
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) The bank holding companies will pay the underwriters 5% of the Per Share
Price to Public in connection with the sale of shares offered hereby
($906,250). The Fund has granted the underwriters an option, exercisable
for 30 days from the date of this Prospectus, to purchase up to 108,750
additional shares to cover over-allotments, if any. To the extent that such
option is exercised in full, the bank holding companies will pay the
underwriters $1,042,187.50. See "Underwriting."
(2) Provided Fund expenses do not exceed specified limits. If expenses do
exceed such limits, proceeds to the Fund will decrease accordingly. See
"Use of Proceeds" and "Underwriting."
(3) To the extent the over-allotment option is exercised in full, the Total
Price to Public will be $20,843,750 and, assuming Fund expenses do not
exceed the limitations set forth in footnote (2) above, the Total Proceeds
to the Fund will be $20,843,750. See "Underwriting."
The underwriters are offering the shares as they receive them and retain the
right to reject any order in whole or in part. The Fund expects to deliver
shares to the underwriters on or about September 30, 1999.
-----------
STERNE AGEE & LEACH, INC.
The date of this Prospectus is September 27, 1999
<PAGE>
(CONTINUED FROM THE COVER PAGE)
This Prospectus contains important information about the Fund. You should
read the Prospectus before deciding whether to invest and retain it for future
reference. A Statement of Additional Information, dated September 27, 1999,
containing additional information about the Fund, has been filed with the
Securities and Exchange Commission (the "SEC") and is hereby incorporated by
reference in its entirety into this Prospectus and is attached to this
Prospectus.
THE SHARES OF CLOSED-END INVESTMENT COMPANIES, SUCH AS THE FUND, FREQUENTLY
TRADE AT A DISCOUNT TO THEIR NET ASSET VALUES. INVESTORS IN THIS OFFERING
SHOULD NOTE THAT THE SHARES MAY LIKEWISE TRADE AT A DISCOUNT TO NET ASSET
VALUE. THIS RISK MAY BE GREATER FOR INVESTORS WHO SELL THEIR SHARES IN A
RELATIVELY SHORT PERIOD AFTER COMPLETION OF THE PUBLIC OFFERING.
THE FUND'S SHARES DO NOT REPRESENT A DEPOSIT OR OBLIGATION OF, AND ARE NOT
GUARANTEED OR ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITARY INSTITUTION,
AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY OTHER GOVERNMENTAL AGENCY.
<PAGE>
PROSPECTUS SUMMARY This is only a summary. You should review the more
detailed information contained in the Prospectus and in the Statement of
Additional Information.
- --------------------------------------------------------------------------------
The Fund................... SAL Trust Preferred Fund I (the "Fund") is
a newly organized, closed-end,
nondiversified management investment
company. See "The Fund."
The Offering............... The Fund is offering 725,000 shares of
beneficial interest at $25.00 per share
("Fund Shares") through several
underwriters (the "Underwriters"). You must
purchase at least 50 Fund Shares. The Fund
Shares will be sold in the initial public
offering (the "Offering") without any sales
load or underwriting discounts payable by
investors or the Fund.
Investment Objective....... The Fund's investment objective is to seek
a high level of current income. The Fund is
designed primarily for long-term investors,
and you should not view the Fund as a
vehicle for trading purposes. There can be
no assurance that the Fund will attain its
investment objective. See "The Fund's
Investments."
Special Considerations..... The Fund will invest all of the net
proceeds of this Offering in 9.75%
Cumulative Trust Preferred Securities
("Preferred Securities"). The Preferred
Securities are issued by three community
bank trust entities organized as statutory
trusts under the laws of the State of
Connecticut ("Bank Trusts"), each of which
is established by a community bank holding
company ("Bank Holding Company").
Use of Proceeds............ The net proceeds of the Offering of the
Fund Shares will be approximately
$18,125,000. The costs of the organization
of the Fund and the Offering of the Fund
Shares will be paid by the three Bank
Holding Companies, provided Fund expenses
do not exceed specified limits. If expenses
do exceed such limits, proceeds to the Fund
will decrease accordingly. See "Use of
Proceeds." The Fund will use all of the net
proceeds of the Offering to purchase
Preferred Securities from each Bank Trust.
Each Bank Trust will then purchase 9.75%
junior subordinated debentures (the
"Subordinated Debentures") issued by its
respective Bank Holding Company of an equal
dollar amount to the Preferred Securities.
Each Bank Holding Company will, in turn,
use the proceeds from the sale of the
Subordinated Debentures to finance
additional expansion, repay existing debt
and/or for such other general corporate
purposes as the Bank Holding Company may
determine appropriate.
Investment Manager......... Sterne Agee Asset Management, Inc. will
serve as the Fund's investment manager (the
"Manager"). The Manager will receive an
annual fee, payable on a quarterly basis,
in an amount equal to .10% of the Fund's
net asset value as calculated each quarter.
The Manager is under common control with
Sterne, Agee & Leach, Inc., the managing
underwriter, and the Trust Company of
Sterne Agee & Leach, Inc., the custodian of
the Fund. See "Management of the Fund."
i
<PAGE>
Distributions.............. The Fund seeks to pay a dividend yield
("Dividend Yield") on the Fund Shares at a
fixed rate of 9.75% of the liquidation
amount of the Fund Shares. The Fund expects
to pay distributions quarterly in arrears
at an annual rate equivalent to the
Dividend Yield. The first distribution
payment date will be December 31, 1999. See
"Distributions."
Listing.................... The Fund intends to list the Fund Shares on
the AMEX. The trading or "ticker" symbol of
the Fund Shares is expected to be "PBA."
See "Fund Shares."
Fund Custodian............. The Trust Company of Sterne Agee & Leach,
Inc. will serve as Custodian of the Fund.
See "Fund Custodian and Transfer Agent."
Risk Factors............... You should carefully consider the risks in
connection with this Offering set forth
under "Risk Factors," in particular the
risk that the Preferred Securities may be
redeemed by one or more of the Bank Holding
Companies five years from the date of
issuance (or upon the earlier occurrence of
certain events) and the risk that one or
more of the Bank Holding Companies may, at
any time, or from time to time, defer
payment of distributions on their Preferred
Securities for a period of up to 20
consecutive quarters, during which period
you may be required to include your portion
of the deferred payments in your taxable
income.
ii
<PAGE>
SUMMARY OF FUND EXPENSES
The following table is intended to assist you in understanding the various
costs and expenses that you, as an investor in the Fund, will bear directly or
indirectly.
<TABLE>
<S> <C>
Shareholder Transaction Expenses
Sales Load (as a percentage of offering price)+......................... None
Annual Expenses (as a Percentage of Net Assets)
Management Fees......................................................... 0.10%
Other Expenses++........................................................ 0.67%
Total Annual Expenses................................................... 0.77%
----
Expense Reimbursement+++................................................ 0.77%
Net Expenses............................................................ 0.00%
====
</TABLE>
- --------
+ The Bank Holding Companies will pay the Underwriters 5% of the Per Share
Price to Public in connection with the initial sale of the Fund Shares
offered hereby ($906,250, or $1,042,187.50 if the over-allotment option is
exercised in full). See "Underwriting." You may pay brokerage charges if you
purchase or sell Fund Shares on the AMEX or other trading market.
++ Other Expenses are based on estimated amounts for the current fiscal year.
+++ The Bank Holding Companies will pay, on a pro rata basis, all of the Fund's
annual operating expenses, as well as any expenses associated with the
initial public offering of the Fund Shares, up to an aggregate maximum of
$185,000 per annum which amount will increase annually in accordance with
increases in the Consumer Price Index (CPI). Any expenses in excess of
$185,000 as adjusted by the CPI will be borne by the Fund. The Fund does
not expect that the annual expenses will exceed $185,000 as adjusted by the
CPI. Each Bank Holding Company's contractual obligation to the Fund to pay
such expenses continues so long as its corresponding Preferred Securities
are held by the Fund.
EXAMPLE
The following example illustrates the expenses that you would pay on a $1,000
investment in the Fund, assuming a 5% annual return:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C>
$0 $ 0 $ 0 $ 0
</TABLE>
- --------
The example should not be considered a representation of future expenses. The
example assumes that the fees will continue to be borne by the Bank Holding
Companies, and thus will remain unchanged over 10 years. Further, the Fund's
actual rate of return may be greater or less than the hypothetical 5% return
shown in the example. AS A RESULT, THIS EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF FUTURE EXPENSES. ALTHOUGH THE FUND DOES NOT ANTICIPATE ANY
INCREASE IN EXPENSES, THE FUND'S ACTUAL EXPENSES OVER TIME MAY BE MORE THAN
THOSE SHOWN.
1
<PAGE>
THE FUND
The Fund is a newly organized, closed-end, nondiversified management
investment company registered under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Fund was organized as a statutory business trust
on June 24, 1999, pursuant to a Declaration of Trust governed by the laws of
the State of Delaware (the "Declaration"). As a newly organized entity, the
Fund has no operating history. The Fund's principal office is located at 800
Shades Creek Parkway, Suite 125, Birmingham, Alabama 35209, and its telephone
number is 1-877-978-3763. The Fund intends to hold annual meetings of
shareholders so long as the Fund Shares are listed on the AMEX or another
securities exchange or NASDAQ, and such meetings are required as a condition
to such listing.
ADDITIONAL INFORMATION
The Prospectus and the Statement of Additional Information do not contain
all of the information set forth in the Registration Statement that the Fund
has filed with the SEC. The complete Registration Statement may be obtained
from the SEC's website (http://www.sec.gov) or from the SEC by mail upon
payment of the fee prescribed by its rules and regulations (for information
call 1-800-SEC-0330).
USE OF PROCEEDS
The net proceeds of the Offering of the Fund Shares will be approximately
$18,125,000 ($20,843,750 if the over-allotment option is exercised in full).
The costs of the organization of the Fund and the Offering of the Fund Shares
will be paid by the three Bank Holding Companies, provided Fund expenses do
not exceed specified limits. If expenses do exceed such limits, proceeds to
the Fund will decrease accordingly. See "Underwriting" below. Simultaneously
with the closing of the Offering, the Fund will use all of the net proceeds of
the Offering to purchase and hold Preferred Securities from each Bank Trust.
Each Bank Trust will then purchase Subordinated Debentures issued by its
respective Bank Holding Company. Each Bank Holding Company will, in turn, use
the net proceeds from the sale of the Subordinated Debentures to finance
additional expansion, repay existing debt, repurchase its own securities
and/or for such other general corporate purposes as the Bank Holding Company
may determine appropriate.
THE FUND'S INVESTMENTS
Investment Objective
The Fund's investment objective is to provide a high level of current income
by investing all of its assets in Preferred Securities issued by three Bank
Trusts, each of which is established by a Bank Holding Company to operate, in
effect, as a finance subsidiary of the Bank Holding Company. The Fund seeks to
pay a Dividend Yield on the Fund Shares at a fixed rate of 9.75% of the
liquidation amount of the Fund Shares. However, in the event that the Fund's
expenses exceed $185,000 per annum as adjusted by the CPI, such additional
expenses will be borne by the Fund and will negatively affect the Dividend
Yield. The Fund will pay distributions quarterly in arrears at an annual rate
equivalent to the Dividend Yield. Distributions on the Fund Shares will be
funded by the distributions that the Fund receives from the Preferred
Securities.
Preferred Securities and Bank Trusts
The Preferred Securities are issued by three Bank Trusts, organized as
statutory trusts under the laws of the State of Connecticut and established by
their respective Bank Holding Companies. These Bank Holding Companies are
FirstBancorp, Inc. (Naples, Florida), the holding company for Gulf Coast
National Bank and First National Bank of the Florida Keys; First Southern
Bancorp, Inc. (Boca Raton, Florida), the holding company for First Southern
Bank; and Central Community Corporation (Temple, Texas), the holding company
for First State Bank Central Texas. A brief summary description of each of
these Bank Holding Companies and their respective banks (the
2
<PAGE>
"Banks") may be found below in the section entitled "The Bank Holding
Companies." The Preferred Securities are subject to mandatory redemption upon
repayment of the Subordinated Debentures at their maturity or upon their
earlier redemption. See "--Subordinated Debentures" below.
Each Bank Trust effectively acts as a financing subsidiary for its
respective Bank Holding Company. The Bank Trusts' activities will generally be
limited to: (i) issuing the Preferred Securities to the Fund; (ii) issuing
common securities (the "Common Securities") to the Bank Holding Companies;
(iii) investing the gross proceeds of the sale of the Common Securities and
the Preferred Securities in the Subordinated Debentures; and (iv) engaging in
only those other activities necessary, advisable, or incidental thereto. The
Subordinated Debentures will be the only assets of each Bank Trust, and income
payments on the Subordinated Debentures will be the only revenue of each Bank
Trust. The Subordinated Debentures will be issued by the Bank Holding
Companies pursuant to the Indenture (as amended and supplemented from time to
time, the "Indenture") between each Bank Holding Company and its respective
Bank Trust and State Street Bank and Trust Company as the Indenture Trustee.
The Preferred Securities will not be assigned a credit quality rating by any
nationally recognized securities rating organization ("NRSRO") such as
Standard & Poor's Corporation or Moody's Investors Service.
Subordinated Debentures
The Subordinated Debentures will mature 30 years from their date of
issuance. Each Bank Holding Company reserves the right to redeem their
Subordinated Debentures, in whole or in part, at any time, commencing on that
date which is five years from their date of issuance, or earlier if certain
events occur as described in the Statement of Additional Information under
"Additional Description of the Subordinated Debentures--Special Event
Prepayment." The redemption price is equal to 100% of the principal amount of
the Subordinated Debentures plus accrued and unpaid interest.
Interest on the Subordinated Debentures is payable quarterly in arrears at
an annual rate equal to the Dividend Yield on the Preferred Securities. If an
Event of Default (as defined in the Statement of Additional Information)
occurs under the Subordinated Debentures, or during the time that interest is
deferred under the Subordinated Debentures, no distributions will be declared,
paid or reserved for such Bank Holding Company's obligations or stock ranking
junior to or on a parity with the Subordinated Debentures. Each Bank Holding
Company has the right at any time, or from time to time, to defer interest
payments on the Subordinated Debentures for up to 20 consecutive quarters,
provided that no deferral can extend beyond the stated maturity of the
Subordinated Debentures. During any such period, interest on the Subordinated
Debentures and distributions on the Preferred Securities will not be paid but
will continue to accrue and compound quarterly and will likely result in
taxable income without any corresponding cash flow during such period. Each
Bank Holding Company also has the option at any time to replace its Preferred
Securities held by the Fund with the Subordinated Debentures.
The Subordinated Debentures will not be assigned a credit quality rating by
any NRSRO.
The Guarantee
Each Bank Holding Company will make, through a Preferred Securities
guarantee, a limited and subordinated guarantee (the "Guarantee") of the
Preferred Securities issued by its respective Bank Trust in which the Fund
invests. Each Bank Holding Company guarantees under its Guarantee (i) the
payment of the Preferred Securities' distributions; and (ii) the full payment
of principal upon liquidation or redemption of the Preferred Securities issued
by its respective Bank Trust, in each case to the extent the Bank Trust has
legally available funds on hand at such time. Each Guarantee is also
subordinated and junior in right of payment to each Bank Holding Company's
debt and other obligations that are senior to its obligations under the
Guarantee (which senior obligations constitute substantially all of the debt
and other obligations of each Bank Holding Company). Accordingly, in the event
of a default under the Preferred Securities, no Bank Holding Company will be
required to make payment under its Guarantee to the Fund unless its senior
obligations are paid first, and then only to the extent of the amount of funds
held by the Bank Trust for payment to the Fund, if any.
3
<PAGE>
FUND SHARES
The Fund will issue 725,000 Fund Shares of beneficial interest that
represent an undivided interest in the assets of the Fund. The assets of the
Fund will (after the use of the proceeds of the Offering) consist of
preferred, non-voting shares of beneficial interest of three community Bank
Trusts, each of which consist solely of Subordinated Debentures and payments
thereunder, and the respective Guarantee of its Bank Holding Company. Fund
Shares, when issued, will be fully paid and non-assessable, and will have no
preemptive or conversion rights or rights to cumulative voting.
The Fund will apply to list the Fund Shares on the AMEX.
Shares of closed-end investment companies like the Fund have during some
periods traded at prices higher than net asset value and during other periods
have traded at prices lower than net asset value. Since the market value of
the Fund Shares will be determined by such factors as relative demand for and
supply of such shares in the market, general market and economic conditions
and other factors beyond the control of the Fund, the Fund cannot assure you
that the Fund Shares will trade at a price higher than net asset value in the
future. The Fund Shares are designed primarily for long-term investors, and
you should not view the Fund as a vehicle for short-term trading purposes.
FUNDAMENTAL POLICIES
The Fund has adopted the following fundamental policies. The Fund will not:
. sell short, purchase on margin, or write put and call options;
. borrow money;
. issue senior securities;
. underwrite securities of other issuers, except to the extent the Fund
may be deemed to be underwriting the underlying Preferred Securities;
. purchase or sell real estate or commodities;
. make loans; or
. concentrate its investments (invest 25% or more of the Fund's total
assets) in any particular industry or group of industries, except the
Fund will concentrate its assets in Preferred Securities issued by three
Bank Trust entities.
Neither these fundamental policies nor the investment objective of the Fund
can be changed without the vote of a majority of the outstanding Fund Shares.
A majority of the outstanding Fund Shares means: (i) 67% or more of the Fund
Shares present at a shareholder meeting, if the holders of more than 50% of
the Fund Shares are present or represented by proxy; or (ii) more than 50% of
the Fund Shares, whichever is less. Unless expressly designated as
fundamental, all other policies of the Fund may be changed by the Board of
Trustees without your approval.
4
<PAGE>
The following diagram illustrates the flow of monies from the investing
public through the various entities to the Bank Holding Companies and each of
the securities issued with respect thereto.
[SAL TRUST PREFERRED FUND I FLOW OF FUNDS DIAGRAM APPEARS HERE]
5
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus and the
Statement of Additional Information, you should consider carefully the risk
factors described below in evaluating your decision to invest in the Fund.
Year 2000 Readiness Disclosure. The Fund, its Manager, the Bank Holding
Companies sponsoring the Bank Trusts and their service providers depend on the
smooth functioning of their computer systems. Many computer software systems
in use today cannot recognize the year 2000, but revert to 1900 or some other
date, due to the manner in which some dates were encoded and calculated.
Financial institutions in the United States have been required by their
federal regulators to meet strict guidelines to ensure year 2000 readiness.
Each of the Bank Holding Companies has pledged its compliance with these
guidelines. The Manager has been actively working on necessary changes to its
computer systems to deal with the year 2000 problem and expects that its
systems will be adapted before that date. Although the Bank Holding Companies
and the Manager are monitoring their remedial efforts, there can be no
assurance that they and the services they provide will not be adversely
affected. Accordingly, the Fund Shares may be adversely affected.
Risk Factors Related to the Fund
The following risk factors relate specifically to the structure of the Fund,
any may therefore have a significant impact upon an investment in the Fund
Shares:
Lack of Diversity and Concentration of Risk. The Fund will invest all of the
net proceeds of the Offering in Preferred Securities issued by the three Bank
Trusts which are affiliated with and controlled by (and consequently the
payment of distributions and principal will be made by) the three Bank Holding
Companies located in southeast Florida, southwest Florida and central Texas.
Each Bank Trust will hold as its sole asset the Subordinated Debentures issued
by its corresponding Bank Holding Company. Consequently, in contrast to the
shares of a more diversified and/or nonconcentrated investment company, the
Fund Shares will be particularly susceptible to local economic, political and
regulatory changes and occurrences in each Bank Holding Company's limited
geographic market area. See "--Risk Factors Related to the Bank Holding
Companies--Geographic and Loan Concentration; Significance of Local Economic
Conditions" below.
Closed-end Structure and Absence of Established Public Market for Fund
Shares. The Fund is a closed-end investment company and as such you will not
have the right to cause the Fund to redeem your Fund Shares. Instead, you will
only be able to sell your Fund Shares in secondary transactions. Because the
Fund is newly organized, there is no established secondary market for the Fund
Shares. The Fund has applied for the listing of the Fund Shares on the AMEX
under the trading symbol "PBA." However, if and when approved for listing,
there is no assurance that any market for the Fund Shares will develop or
that, if any market for the Fund Shares develops, it will be maintained or
liquid enough for you to sell your Fund Shares at all or at any particular
price.
No Prior History. The Fund is newly organized and therefore has no prior
history upon which prospective investors can evaluate its performance. In
addition, the Manager has no previous experience in managing similar closed-
end funds.
Option to Defer Distributions. The Fund reserves the right, at its
discretion, to defer payment of any distributions. The Fund does not
anticipate deferring payment of any distributions except to the extent that
the Bank Holding Companies elect to defer payment of the interest on the
Subordinated Debentures (and consequently the Preferred Securities). See "--
Risk Factors Related to the Preferred Securities--Option to Defer Interest
Payments; Tax Consequences" below.
Risk Factors Related to the Preferred Securities
The following risk factors relate specifically to the Preferred Securities
to be held by the Fund, and may therefore have a significant impact on the
value of the Fund Shares:
6
<PAGE>
Ranking of Subordinated Debentures and Guarantees. The Subordinated
Debentures and the Guarantees issued by the Bank Holding Companies are
unsecured and rank subordinate and junior in right of payment to all senior
debt, subordinated debt and additional senior obligations issued by the Bank
Holding Companies. Neither the Indentures, the Guarantees nor the Trust
Agreements (as defined in "Additional Description of the Bank Trusts" in the
Statement of Additional Information) to which the Bank Holding Companies are a
party place any limitations on the amount of secured or unsecured debt,
including senior debt, subordinated debt and additional senior obligations,
that may be incurred by each Bank Holding Company at any time in the future.
Option to Defer Interest Payments; Tax Consequences. The Bank Holding
Companies have the right under the Indenture to defer payment of interest on
the Subordinated Debentures (and consequently defer distributions on the
Preferred Securities and the Fund Shares) at any time, or from time to time,
for a period of up to 20 consecutive quarterly periods (each an "Extension
Period"), provided that no Extension Period may extend beyond the stated
maturity of the Subordinated Debentures. There is no limitation on the number
of times that the Bank Holding Companies may elect to begin a new Extension
Period. During any such Extension Period, interest on the Subordinated
Debentures, distributions on the Preferred Securities and distributions on the
Fund Shares will not be paid but all such interest and distributions will
continue to accrue and compound quarterly. Consequently, even if you are a
cash basis taxpayer, during any Extension Period you will still be required to
recognize the accrued but unpaid distributions as taxable income (in the form
of original issue discount) even though no cash will actually be paid during
that year. Furthermore, a deferral may negatively impact the market price for
the Fund Shares.
Default by one or more of the Bank Holding Companies. The Fund is a non-
diversified closed-end investment company investing all of the net proceeds of
the Offering in the Preferred Securities issued by the three Bank Trusts which
are affiliated with and controlled by (and consequently the payment of
distributions and principal will be made by) the three Bank Holding Companies.
Accordingly, a default by even one of the Bank Holding Companies on its
obligations under the Subordinated Debentures or the Guarantee will have a
material adverse effect on the value of the Fund Shares.
Limited Rights Under the Guarantee. The Guarantee will be issued by each
Bank Holding Company directly to the Fund and provide the Fund with the right
to institute a legal proceeding directly against the Bank Holding Company to
enforce its rights under the Guarantee without first instituting a legal
proceeding against its respective Bank Trust, State Street Bank and Trust
Company as the Guarantee Trustee or any other person or entity. However, the
Fund has very limited rights under the Guarantee as the Guarantee only
requires the Bank Holding Companies to guarantee distributions on their
Preferred Securities to the extent their respective Bank Trusts have legally
available funds on hand at such time. The Bank Trusts have no assets other
than the Subordinated Debentures and consequently maintain no regular funds as
all interest payments on the Subordinated Debentures immediately pass through
the Bank Trusts to the Fund as distributions on the Preferred Securities.
Therefore, in the event that any of the Bank Holding Companies default on
their obligation to pay any amounts payable under the Subordinated Debentures
to their respective Bank Trust, then, because such Bank Trust will possess no
funds for distribution to the Fund as a result of such default, the Bank
Holding Companies will have no obligation to the Fund under the Guarantee. See
"Relationship Among the Preferred Securities, the Subordinated Debentures and
the Guarantee" in the Statement of Additional Information.
Each Bank Holding Company's Option to Redeem Subordinated Debentures. Each
Bank Holding Company, at its sole discretion, can redeem its Subordinated
Debentures, in whole or in part, on or after the date five years from the date
of issuance. In addition, each Bank Holding Company has the right to redeem
the Subordinated Debentures at any time in whole (but not in part) within 180
days following the occurrence of a Capital Event, Tax Event or Investment
Company Event (each as defined below). Any such redemption of Subordinated
Debentures will cause a mandatory redemption of a proportionate amount of
Preferred Securities. If this were to occur, it would most likely result in a
distribution of principal to the Fund's shareholders and a reduction in the
amount of each ongoing quarterly distribution. In addition, the Fund's
investment portfolio would be even less diversified.
7
<PAGE>
"Capital Event" means the receipt by a Bank Trust of an opinion of counsel
experienced in such matters that the Bank Holding Companies cannot, or will
not be permitted by the applicable regulatory authorities to account for the
Preferred Securities as Tier 1 capital under the capital guidelines or
policies of the applicable bank regulatory authorities.
"Tax Event" means the receipt by a Bank Trust of an opinion of counsel
experienced in such matters that: (i) income received or accrued by the Bank
Trusts from the Subordinated Debentures is subject to United States federal
income tax; (ii) interest paid by the Bank Holding Companies on the
Subordinated Debentures is not deductible in whole or in part by the Bank
Holding Companies for United States federal income tax purposes; or (iii) the
Bank Trusts will become subject to more than a minimal amount of other taxes,
duties or other government charges.
"Investment Company Event" means the receipt by a Bank Trust of an opinion
of counsel experienced in such matters that the Bank Trust is or will be
considered an "investment company" required to be registered under the 1940
Act.
Exchange of Subordinated Debentures for Preferred Securities; Tax
Consequences. Each of the Bank Holding Companies will have the right at any
time to terminate its respective Bank Trust and, after satisfaction of claims
of creditors of that Bank Trust, to cause its Subordinated Debentures to be
distributed to the Fund in exchange for its Preferred Securities.
Under current United States federal income tax law, and assuming, as
anticipated by management of the Bank Holding Companies, that the Bank Trusts
will be classified as grantor trusts and not as associations taxable as
corporations, a distribution of Subordinated Debentures in exchange for
Preferred Securities upon the dissolution of a Bank Trust would not be a
taxable event to the Fund or to you, as a shareholder of the Fund. If,
however, the Bank Trusts were classified as associations taxable as
corporations, a distribution of Subordinated Debentures in exchange for
Preferred Securities would constitute a taxable event to the Bank Trusts, to
the Fund and to you, as a shareholder of the Fund.
Subordinated Debentures, Preferred Securities and Guarantees not
Insured. While the Preferred Securities and the Subordinated Debentures
represent a loan to the Bank Holding Companies, neither the Preferred
Securities, the Subordinated Debentures nor the Guarantees are federally
insured by the Federal Deposit Insurance Corporation or any other state or
federal governmental agency.
Absence of Public Market for Preferred Securities, Subordinated Debentures
and Guarantees. The Preferred Securities, Subordinated Debentures and
Guarantees will not be registered with the SEC but will be issued in various
private transactions. The Fund will purchase each of the Preferred Securities
and the Guarantees from the Bank Trusts and the Bank Holding Companies,
respectively, in three separate private transactions pursuant to three
separate Trust Preferred Purchase Agreements. Consequently, the Preferred
Securities, Subordinated Debentures and Guarantees will be restricted
securities for which there can be no public market for at least two years and
for which, thereafter, no public market is expected to ever develop.
In the event that a trading market for any or all of the Preferred
Securities, Subordinated Debentures and Guarantees does ever develop, there
can be no assurance that it can or will be maintained. Accordingly, there can
be no assurance as to the liquidity of the Preferred Securities, Subordinated
Debentures and Guarantees.
Risk Factors Related to the Bank Holding Companies
The following risk factors relate specifically to the Bank Holding
Companies, and may therefore have a significant impact on the value of the
Fund Shares:
Geographic and Loan Concentration; Significance of Local Economic
Conditions. While each of the Bank Holding Companies services different
geographic markets, they are each geographically concentrated in their
respective markets and are thus subject to changing economic conditions in
such geographic markets.
8
<PAGE>
FirstBancorp, Inc. services Naples, Florida, which is on the southwest coast
of Florida, and the Florida Keys. As of June 30, 1999, approximately 90% of
FirstBancorp, Inc.'s loans were classified as real estate and mortgage loans.
Consequently, FirstBancorp, Inc. is subject to adverse changes in the Florida
real estate market and particularly the real estate market of Naples and the
Florida Keys. Furthermore, being located in Florida and particularly the
Florida Keys, collateral for loans and bank branches may be materially
affected by extreme weather conditions such as hurricanes.
Similarly, First Southern Bancorp, Inc. services Palm Beach County and
Broward County, Florida with branches in cities such as Boca Raton and Ft.
Lauderdale, Florida, which are on the southeast coast of Florida. As of June
30, 1999, approximately 75% of First Southern Bancorp, Inc.'s loans were
classified as real estate loans, the majority of which are commercial real
estate. Consequently, like FirstBancorp, Inc., First Southern Bancorp, Inc. is
also subject to adverse changes in the Florida real estate market but is
instead particularly affected by the real estate market along the southeast
coast of Florida as opposed to the southwest coast. Furthermore, as with
FirstBancorp, Inc., First Southern Bancorp, Inc.'s loan collateral and
branches may be materially affected by extreme weather conditions such as
hurricanes.
Central Community Corporation services markets in central Texas including
the greater Austin metropolitan area and maintains its headquarters in Temple,
sixty miles north of Austin. As of June 30, 1999, approximately 51% of Central
Community Corporation's loans were classified as real estate and mortgage
loans. As a result, adverse changes in the general economic conditions and
real estate market of central Texas may have an adverse effect on Central
Community Corporation.
Dependence on Senior Management. Each Bank Holding Company's growth and
development to date has been largely a result of the contributions of certain
of their respective senior executive officers, particularly the chief
executive officers. Because the Bank Holding Companies are each relatively
small bank holding companies, they do not possess the depth of senior
management found within their larger competitors. Consequently, the loss of
the services of any one or more of such individuals could have a material
adverse effect on such Bank Holding Company's business and development. There
is no assurance that replacements for any such officers could provide the same
leadership.
Status of the Bank Holding Companies. Because the Bank Holding Companies are
holding companies, the right of a Bank Holding Company to participate in any
distribution of assets of any of its subsidiaries from dividends or upon such
subsidiary's liquidation or reorganization or otherwise (and thus the ability
of the Fund to benefit indirectly from such distribution) is subject to the
prior claims of creditors of that subsidiary (including depositors), except to
the extent that the Bank Holding Company may itself be recognized as a
creditor of that subsidiary. Accordingly, the Preferred Securities will be
effectively subordinated to all existing and future liabilities of the Bank
Holding Companies' subsidiaries, and the Fund will look only to the assets of
the Bank Holding Companies for payments on the Preferred Securities. None of
the Guarantee, the Indenture, or the Trust Agreement (as defined in
"Additional Description of the Bank Trusts" in the Statement of Additional
Information) places any limitation on the amount of secured or unsecured debt
that may be incurred by the Bank Holding Companies' subsidiaries in the
future.
Fluctuations in Profitability of the Bank Holding Companies and Banks. Each
Bank Holding Company is primarily a holding company with no material business
operations, sources of income or assets of its own other than the shares of
its subsidiaries. The Bank Holding Companies rely primarily on dividends from
such subsidiaries to meet their obligations for payment of principal and
interest on their outstanding debt obligations, if any, and corporate
expenses. Accordingly, each Bank Holding Company's operating results may
fluctuate substantially from period to period as a result of a number of
factors affecting its subsidiaries, including the volume of loan production,
interest rates and risk of credit losses. Further, each Bank Holding Company's
subsidiaries are separate and distinct legal entities and have no obligation,
contingent or otherwise to make any funds available to the Bank Holding
Companies, whether in the form of loans, dividends or otherwise. There are
also regulatory limitations on each Bank's ability to make loans or
distributions or pay dividends to its Bank Holding Company. See "Supervision
and Regulation of the Bank Holding Companies" in the Statement of Additional
Information. Consequently, there is no assurance that each subsidiary bank
will, at all times, be in a
9
<PAGE>
position to make dividends or other distributions to its respective Bank
Holding Company in an amount sufficient for such Bank Holding Company to
service its respective Subordinated Debentures or for its Bank Trust to pay
the distributions due on the Preferred Securities.
Each Bank's profitability is dependent to a large extent on its net interest
income, which is the difference between its income on interest-earning assets
and its expense on interest-bearing liabilities. The Banks, like most
financial institutions, are affected by changes in general interest rate
levels and by other economic factors beyond their control. Interest rate risk
arises in part from the mismatch (i.e., the interest sensitivity gap) between
the dollar amount of repricing or maturing interest earning assets and
interest bearing liabilities, and is measured in terms of the ratio of the
interest rate sensitivity gap to total assets. More interest earning assets
than interest bearing liabilities repricing or maturing over a given time
period is considered asset-sensitive and is reflected as a positive gap, and
more liabilities than assets repricing or maturing over a given time period is
considered liability-sensitive and is reflected as a negative gap. A
liabilities-sensitive position (i.e., a negative gap) may generally enhance
net interest income in a falling interest rate environment (because interest
expense will generally decrease faster than interest income) and reduce net
interest income in a rising interest rate environment (because interest
expense will generally increase faster than interest income), while an asset-
sensitive position (i.e., a positive gap) may generally enhance net interest
income in a rising interest rate environment and will reduce net interest
income in a falling interest rate environment. Fluctuations in interest rates
are not predictable or controllable, and each Bank's asset or liability
sensitive position will vary from time to time. At June 30, 1999,
FirstBancorp, Inc., First Southern Bancorp, Inc. and Central Community
Corporation had one year cumulative gap ratios of 0.71%, 0.78% and 0.88%,
respectively. If a Bank's interest income and profitability declines due to
changes in market rates of interest, its Bank Holding Company's ability to pay
the Subordinated Debentures may be substantially impaired, which could make a
default on the Preferred Securities more likely to occur.
Regulatory Restrictions upon the Payments of Dividends to the Bank Holding
Companies. Each of the banking subsidiaries of the Bank Holdings Companies are
subject to various regulatory restrictions upon the amount of dividends which
they may pay to their respective Bank Holding Companies. Consequently, the
inability of any banking subsidiary to pay dividends to its respective Bank
Holding Company due to regulatory restrictions may have a material adverse
effect on such Bank Holding Company's ability to pay interest or repay
principal with respect to its Subordinated Debentures. See "Supervision and
Regulation of the Bank Holding Companies" in the Statement of Additional
Information.
Additional Risk Factors
See also "Additional Risk Factors" in the Statement of Additional
Information for a discussion of additional risk factors associated with your
investment in the Fund.
FORWARD LOOKING STATEMENTS
Certain statements in this Prospectus and the Statement of Additional
Information constitute forward-looking statements, which involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, levels of activity, performance or achievements of the Bank Holding
Companies or the Fund to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, those listed
under "Risk Factors" and elsewhere in this Prospectus and the Statement of
Additional Information. As a result of the foregoing and other factors, no
assurance can be given as to the future results, levels of activity or
achievements, and neither the Bank Holding Companies, the Fund nor any other
person assumes responsibility for the accuracy and completeness of such
statements.
10
<PAGE>
THE BANK HOLDING COMPANIES
FirstBancorp, Inc., Gulf Coast National Bank and
First National Bank of The Florida Keys
General
FirstBancorp, Inc. ("FirstBancorp") was incorporated under the laws of
Florida in February 1988 as a bank holding company registered under the Bank
Holding Company Act of 1956 for the purpose of holding all the shares of First
National Bank of the Florida Keys. FirstBancorp, headquartered in Naples,
Florida, operates two-wholly owned subsidiary banks, First National Bank of
the Florida Keys, Marathon, Florida and Gulf Coast National Bank, Naples,
Florida. FirstBancorp's only significant business activity is the ownership
and supervision of the two banks. As of June 30, 1999, FirstBancorp had total
consolidated assets of approximately $348 million, net loans of approximately
$252 million, deposits of approximately $288 million and shareholders' equity
of approximately $18.7 million.
First National Bank was incorporated as a nationally-chartered bank in
Marathon, Florida in 1977 under the name "First National Bank of Marathon."
The name was changed to "First National Bank of the Florida Keys" in 1982 to
reflect its growth and expansion throughout the Florida Keys. As of June 30,
1999, the bank had total assets of $164 million.
Gulf Coast National Bank was incorporated as a nationally-chartered bank in
Naples, Florida in 1995. This has allowed FirstBancorp to expand into the
faster-growing Collier County market. FirstBancorp moved its corporate
headquarters to Naples in 1995. As of June 30, 1999, the bank had total assets
of $189 million.
FirstBancorp, through its two subsidiary banks, offers a range of banking
services including residential mortgage, consumer, commercial and real estate
construction lending to customers in their market areas. The banks also offer
a variety of deposit programs to individuals and small businesses at interest
rates consistent with local market conditions. In addition, the banks offer
individual retirement accounts, safe deposit and night depository facilities.
Statement imaging, Internet banking and a website are new services anticipated
to be introduced in 1999. The banks do not offer trust services.
Market
First National Bank and Gulf Coast National Bank maintain the following
banking locations in Monroe and Collier Counties, respectively:
FirstBancorp Banking Locations/Market Share
<TABLE>
<CAPTION>
No. of County Deposit Market
Bank County City Offices Population(1) Share by County(2)
- ---- ------- ---------- ------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
First National Bank of Monroe Marathon 2 78,024 9.84%
the Florida Keys Key West 2
Islamorada 1
Gulf Coast National Bank Collier Naples 4 199,436 3.12%
</TABLE>
- --------
(1) Source: 1990 U.S. Census Bureau
(2) Source: FDIC Internet Site. As of June 30, 1998.
Each bank's primary service area encompasses the county in which it is
headquartered. First National Bank serves Monroe County which includes the
Florida Keys. The economy is primarily based on tourism and service-related
businesses. First National Bank has five offices spread throughout the county.
The bank has two offices in Marathon including its main office. Marathon is
the major population center in the middle keys with a population of
approximately 8,900. According to the Florida Bankers Association December 31,
1998 Branch
11
<PAGE>
Deposit Report, First National Bank is the largest bank in the middle keys
with an approximate 38% deposit market share as of December 31, 1998. The bank
has two offices in Key West. Key West is the largest city in the county with a
population of approximately 25,000. The bank had a 7.1% deposit market share
as of December 31, 1998. The bank operates one office in Islamorada, located
in the upper keys, with a 11.25% deposit market share as of December 31, 1998.
Gulf Coast National Bank serves Collier County including the City of Naples
and its surrounding unincorporated areas. The bank has four branches in
Naples. FirstBancorp anticipates the bank will open its fifth office on Marco
Island in late 1999. The bank is the largest independent community bank in
Collier County with 3.12% market share, as noted above. The economy is
predominantly based on tourism, building construction, retail trade, service-
related businesses and agriculture. The Economic Development Council of
Collier County reports that Collier County has the highest median family
income in Florida.
Business Strategy
FirstBancorp has historically pursued a strategy of growth through internal
expansion and branching while maintaining asset quality. First National Bank
has five offices covering the main population centers in Monroe County.
Recognizing that long-term growth in Monroe County would be steady but
regulated by governmental and land use constraints, the forming of Gulf Coast
National Bank as a de novo bank in Naples has expanded FirstBancorp's
opportunities into one of the fastest growing and most affluent markets in
Florida. With the opening of the Marco Island Office, Gulf Coast National Bank
will have opened five major offices in only four years and established its
core branch network for Collier County. FirstBancorp believes that expanding
its branch network diversifies risk, expands its loan portfolio and enhances
revenue growth.
FirstBancorp may periodically consider establishing branches or other
business facilities in new market areas and expanding into new lines of
business based upon such factors FirstBancorp deems appropriate.
Loan Portfolio
Through the banks, FirstBancorp offers a range of lending services including
residential and commercial real estate, consumer and commercial loans, to
individuals, corporations and small businesses located in the banks' market
areas.
As of June 30, 1999, the banks' consolidated loan portfolio consisted of the
following types and amounts of loans:
<TABLE>
<CAPTION>
Loan Portfolio as of June 30,
1999
--------------------------------
Amount ($) Percentage (%) of
Loan Type (in thousands) Total Portfolio
- --------- -------------- -----------------
<S> <C> <C>
Commercial and Industrial.................... 14,930 5.9
Real Estate--Construction and Land
Development................................. 46,156 18.2
Real Estate--Residential..................... 113,664 44.8
Real Estate--Farmland........................ -- 0
Real Estate--Commercial...................... 71,157 28.0
Agricultural Loans........................... 928 0.4
Consumer Loans............................... 5,575 2.2
Other Loans.................................. 1,516 0.5
------- ----
Gross Loans................................ 253,926 100
Plus: Unamortized Loan Costs--Net........ 254
Less: Allowance for Loan Losses.......... (2,151)
-------
Net Loans.................................. 252,029
</TABLE>
12
<PAGE>
Lending Policy
The banks seek to make loans that meet the needs of the communities they
serve while making a profit that enhances future operations and increases
franchise value. The banks give primary consideration to existing or potential
customers with economic interests in their market areas. 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 banks emphasize the making of residential real estate, commercial real
estate, and construction and land development real estate loans which
comprised 91.4% of the loan portfolio as of June 30, 1999. The banks also
originate residential loans for sale to the secondary market. The banks
establish and implement policies within certain established guidelines,
including lending authority of officers. Each bank periodically monitors its
loan portfolio to identify areas of concern and enable management to take
corrective action when necessary. Lending officers and the banks' boards of
directors meet periodically to review all past due loans, the status of large
loans and certain other matters. Individual lending officers are responsible
for reviewing collection of past due amounts and monitoring changes in the
financial status of borrowers. FirstBancorp retains an outside consultant to
conduct a semi-annual credit review at each bank.
FirstBancorp's nonperforming assets increased from $570,000 at December 31,
1998 to $2.2 million at June 30, 1999. This increase in FirstBancorp's
nonperforming assets is primarily related to a single customer, multiple loan
relationship with a total principal value of approximately $1.6 million.
FirstBancorp believes that it will not incur any material loss on the loans.
Deposits
The principal source of funds for the banks are core deposits consisting of
demand deposits, interest-bearing transaction accounts (NOW), money market
accounts, savings accounts and certificates of deposit. As of June 30, 1999,
the banks' consolidated deposits consisted of the following type and
percentage:
<TABLE>
<CAPTION>
Deposits as of June 30, 1999
-----------------------------
Amount ($) Percentage (%)
Deposit Type (in thousands) of Deposits
- ------------ -------------- --------------
<S> <C> <C>
Non-Interest Bearing Demand Deposits.............. 53,184 18.5
Interest Bearing Deposits......................... 50,506 17.5
Savings Deposits.................................. 87,565 30.4
Certificates of Deposit........................... 96,882(1) 33.6
------- ----
Total Deposits.................................. 288,137 100%
======= ====
</TABLE>
- -------------------------
(1) Includes $55.9 million of certificates of deposit over $100 thousand.
As of June 30, 1999, the banks had no brokered deposits.
Deposit rates can be changed daily by senior management. Management believes
the rates the banks offer are competitive with but typically lower than those
offered by certain other institutions in the banks' market areas. FirstBancorp
focuses on customer service, rather than high rates, to attract and retain
deposits.
13
<PAGE>
Investment Portfolio
As of June 30, 1999, the banks' consolidated investment portfolio consisted
of the following types and amounts of securities:
<TABLE>
<CAPTION>
Investments as of June 30, 1999
------------------------------------
Amount ($)(1) Percentage (%)
Investment Type (in thousands) of Investments
- --------------- ---------------- ---------------
<S> <C> <C>
U.S. Treasury Securities............ 2,003 4.9
U.S. Government Corporations and
Agencies........................... 23,113 56.9
U.S. Agency Mortgage-Backed Securi-
ties............................... 5,658 13.9
Collateralized Mortgage Obliga-
tions.............................. 7,877 19.4
State and Political Subdivision Ob-
ligations.......................... 85 0.2
Equity Securities................... 1,912 4.7
---------------- --------------
Total Investments................. 40,648 100%
================ ==============
</TABLE>
- ----------------------------------
(1) Excludes net unrealized loss of $785 thousand.
As of June 30, 1999, $5.4 million had a remaining maturity less than one
year, $24.3 million had a remaining maturity of one to five years, and $9.0
million had a remaining maturity of over five years. The $1.9 million equity
securities have no maturity date.
Competition
The banking business in Florida is highly competitive, both for making loans
and attracting deposits, and is dominated by a number of major bank holding
companies which have numerous offices and affiliates operating over wide
geographic areas. The banks compete for business with these institutions as
well as with other local community banks, savings and loan associations,
credit unions, brokerage firms, finance companies, mutual funds, mortgage
companies, insurance companies and other financial intermediaries. This
competition is based upon 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 and the convenience of banking facilities.
Many of these large bank holding company competitors have greater resources
and lending limits and may offer certain services, such as trust services,
that the banks do not currently provide. In addition, many non-bank
competitors are not subject to the same extensive federal regulations that
govern bank holding companies and federally insured banks.
Management believes that FirstBancorp and the banks are positioned to
compete in their primary market areas by following a community banking
strategy that emphasizes commitment and involvement in each primary market
area, local and prompt decision-making and offering quality personalized
banking services.
Properties
FirstBancorp's corporate office and main banking office of Gulf Coast
National Bank are both in the Gulf Coast National Bank Building located at
3838 Tamiami Trail North, Naples, Florida. This is a 40,000 square foot, four-
story condominium office building. The bank owns the first two floors with
approximately 20,000 square feet. The bank also owns all of the land and
buildings for its Pine Ridge Road and Airport Road offices. The North Naples
office operates in a temporary facility while a permanent 35,000 square foot,
three-story condominium office building is completed this fall. The bank will
own approximately 7,000 square feet on the first floor. The land for the
future Marco Island Office is currently under contract.
First National Bank of the Florida Keys' main Marathon Shores office is
located at 12640 Overseas Highway in Marathon, Florida. The land and two-story
10,000 square foot building are owned and operated by the bank. The bank also
owns the land and buildings for its second Marathon office and Kennedy Drive
office in
14
<PAGE>
Key West. The Duval Office in Key West is owned as a condominium unit. The
Islamorada office leases its space under a long-term operating lease.
Employees
As of June 30, 1999, FirstBancorp and the banks had 117 full-time and nine
part-time employees.
Legal Proceedings
While FirstBancorp and the banks are from time to time parties to various
legal proceedings arising in the ordinary course of business, management
believes that there are currently no proceedings pending against FirstBancorp
or the banks that will, individually or in the aggregate, have a material
adverse effect on the consolidated financial condition of FirstBancorp.
Selected Consolidated Financial Data
The following information summarizes certain selected consolidated financial
information of FirstBancorp as of and for its fiscal years ended December 31,
1996, 1997 and 1998 and for the six months ended June 30, 1999. For a more
complete overview, please refer to FirstBancorp's full financial statements
and the notes thereto in the Statement of Additional Information. Historical
financial information is not necessarily indicative of results of operations
for any future period or financial condition as of any future date.
15
<PAGE>
FIRSTBANCORP, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Year Ended December 31,
Six Months Ended -------------------------------
June 30, 1999(1) 1998(2) 1997(2) 1996(2)
---------------- --------- --------- ---------
<S> <C> <C> <C> <C>
Selected Results Of
Operations:
Interest income............. $ 11,485 $ 20,592 $ 17,524 $ 13,385
Interest expense............ 5,258 9,544 8,437 5,946
Net interest income......... 6,227 11,048 9,087 7,439
Provision for loan losses... 255 585 474 432
Noninterest income.......... 2,377 3,707 2,903 2,007
Noninterest expenses........ 6,097 10,194 8,595 7,366
Income before income taxes.. 2,252 3,976 2,922 1,648
Net income.................. 1,550 2,492 1,832 904
Per Common Share:
Earnings per common share-
basic...................... $ 0.94 $ 1.53 $ 1.12 $ 0.57
Earnings per common share-
diluted.................... $ 0.89 $ 1.44 $ 1.08 $ 0.56
Cash Dividends declared..... $ 0 $ 0 $ 0 $ 0
Book value per share........ $ 11.36 $ 10.89 $ 9.48 $ 8.36
Average common share
outstanding-basic.......... 1,647,418 1,631,050 1,630,998 1,583,051
Average common shares
outstanding-diluted........ 1,743,839 1,727,471 1,699,767 1,618,212
Selected Balance Sheet Data:
Total assets................ $ 347,754 $ 310,527 $ 254,312 $ 199,609
Securities available for
sale....................... 39,862 22,303 23,201 18,331
Investment securities held
to maturity................ 0 0 0 0
Loans held for sale......... 1,062 1,970 1,669 606
Loans receivable, net....... 252,029 225,563 179,121 144,602
Reserve for loan losses..... 2,151 1,896 1,415 1,156
Deposits.................... 288,137 260,999 216,434 174,878
FHLB advances and other
borrowings................. 34,205 25,922 16,574 5,601
Stockholders' equity........ 18,707 17,720 15,218 13,031
Loan to deposit ratio....... 88.21% 87.15% 83.41% 83.34%
Performance Ratios:(3)
Return on average assets.... 0.91% 0.90% 0.80% 0.57%
Return on average equity.... 16.90% 15.10% 13.09% 6.96%
Net interest margin-taxable
equivalent................. 4.83% 4.88% 4.69% 4.65%
Equity to assets............ 5.38% 5.70% 5.98% 6.53%
Efficiency ratio............ 70.87% 70.73% 72.91% 77.83%
Asset Quality Data:
Nonperforming loans......... $ 1,871 $ 239 $ 506 $ 424
Other real estate owned
(OREO)..................... 331 331 835 375
Nonperforming assets........ 2,202 570 1,341 799
Nonperforming loans/total
loans...................... 0.74% 0.11% 0.28% 0.29%
Nonperforming assets/total
loans + OREO............... 0.87% 0.25% 0.74% 0.55%
Reserve for loan
losses/total loans......... 0.85% 0.83% 0.78% 0.79%
Reserve for loan
losses/nonperforming
loans...................... 114.97% 793.31% 279.64% 272.64%
Reserve for loan
losses/nonperforming
assets..................... 97.68% 332.63% 105.51% 144.68%
Ratio of net charge-offs to
average loans.............. (.01)% 0.05% 0.13% 0.09%
Earnings To Fixed Charge
Coverage Ratios:(4)
Excluding interest on
deposits................... 3.72x 4.49x 5.66x 4.59x
Including interest on
deposits................... 1.43x 1.42x 1.35x 1.28x
Capital Ratios:
Leverage ratio.............. 5.51% 5.86% 6.22% 6.91%
Tier 1 capital (to risk-
weighted assets)........... 8.12% 8.41% 9.04% 9.76%
Total capital (to risk-
weighted assets)........... 9.03% 9.31% 9.88% 10.63%
</TABLE>
- --------
(1) Compiled from unaudited financial statements.
(2) Compiled from audited financial statements.
(3) Annualized for interim period.
(4) The consolidated ratio of earnings to fixed charges has been computed by
dividing income before tax plus fixed charges by fixed charges. Fixed
charges represent all interest expense and the interest factor in rent
expense (ratios are presented both excluding and including interest on
deposits). Interest expense (other than on deposits) includes interest on
federal funds purchased and securities sold under agreements to
repurchase, Federal Home Loan Bank advances, and other borrowed funds.
16
<PAGE>
[MAP APPEARS HERE]
17
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND FIRST SOUTHERN BANK
General
First Southern Bank opened as a Florida State chartered Federal Reserve
member bank in Boca Raton in September of 1987. In April of 1995 the bank's
shareholders voted to form First Southern Bancorp, Inc. (the "FSB Holding
Company") a bank holding company that currently owns approximately 98% of
First Southern Bank stock. Subsequently, First Southern Bank Realty Corp, a
real estate subsidiary was formed to hold branch sites owned by the FSB
Holding Company and leased to the bank.
As of June 30, 1999, First Southern Bank had total assets of approximately
$149.6 million, net loans of approximately $107.3 million, deposits of
approximately $123.5 million and shareholders' equity of approximately $8.5
million.
The FSB Holding Company, through First Southern Bank's six branches in
Florida, offers a broad range of bank related services. First Southern Bank
performs banking services customary for full service community banks of
similar size for customers primarily in Palm Beach and Broward counties. These
services include the making of personal and commercial loans, the furnishing
of personal and commercial checking accounts and the receipt of demand and
time deposit accounts. An emphasis has been placed upon small to medium size
business transactions as well as professionals, (e.g., physicians, attorneys
and CPAs).
Market
The primary service area for each branch is a 5-10 mile radius around each
of the six branches of First Southern Bank. First Southern Bank maintains the
following six branch locations in the highly populated counties of Palm Beach
and Broward in Southeast Florida:
First Southern Bank Banking Locations/Market Share
<TABLE>
<CAPTION>
Deposit Market
County City No. of Offices County Population(1) Share by County(2)
- ------ ---------------- -------------- -------------------- ------------------
<S> <C> <C> <C> <C>
Palm Beach Boca Raton 3 863,518 Less than 1%
Broward Coral Springs 1 1,255,488 Less than 1%
Lighthouse Point 1
Fort Lauderdale 1
</TABLE>
- --------
(1) Source: 1990 U.S. Census Bureau
(2) Source: FDIC Internet Site. As of June 30, 1998.
Broward County's economic base has historically had a large tourism
component. Broward County has also experienced economic growth in various
other industries, including the retail and services sectors.
Recent population and job growth of Palm Beach County has been significant,
with current population estimated to be over one million. According to the
Florida Department of Labor, Palm Beach County added 17,900 non-agricultural
jobs from December 1997 to December 1998, an increase of 4.1%. According to
the Business Development Board of Palm Beach County, among Palm Beach County's
leading industry sectors are medical pharmaceutical/health care; aerospace and
engineering; business/financial/headquarters services; agribusiness; and
computers/information technology.
Broward and Palm Beach Counties have an extensive network of banks, savings
and loan, commercial bank offices and other institutions. However, bank
mergers and acquisitions during recent years have reduced the number of
institutions, and management feels that this consolidation has caused many
customers to explore local community banks as a viable alternative to more
impersonal money center banks.
18
<PAGE>
Business Strategy
The FSB Holding Company's business strategy is to grow the institution while
maintaining high asset quality. The FSB Holding Company will continue to seek
available locations in Palm Beach and Broward Counties, and possibly northern
Miami-Dade County, in markets not overly populated by other community banking
organizations.
Loan Portfolio
First Southern Bank provides a broad range of commercial and retail lending
services to corporations, partnerships, and individuals, including commercial
business loans, commercial and residential real estate construction and
mortgage loans, consumer loans, revolving lines of credit, letters of credit
and accounts receivable financing.
As of June 30, 1999, First Southern Bank's loan portfolio consisted of the
following types and amounts of loans:
<TABLE>
<CAPTION>
Loan Portfolio
as of June 30, 1999
------------------------------
Amount($) Percent (%) of
Loan Type (in thousands) Total Portfolio
- --------- -------------- ---------------
<S> <C> <C>
Commercial and Industrial....................... 19,508 17.9
Real Estate--Construction and Development....... 2,934 2.7
Real Estate--Residential........................ 14,519 13.4
Real Estate--Farmland........................... 0 0.0
Real Estate--Commercial......................... 66,675 61.4
Agricultural Loans.............................. 0 0.0
Consumer........................................ 4,827 4.4
Other........................................... 176 0.2
------- ----
Gross Loans................................... 108,639 100
Less: Unearned Income....................... (41)
Less: Allowance for Loan Losses............. (1,291)
-------
Net Loans..................................... 107,307
</TABLE>
Lending Policy
Certain credit risks are inherent in making loans. These include repayment
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.
First Southern Bank attempts to minimize loan losses through various means
and uses standardized underwriting criteria. In particular, First Southern
Bank generally relies on the cash flow of a debtor as the primary source of
repayment, outside cash flow and liquidity sources of the guarantor as a
secondary source, and the value of the underlying collateral as the tertiary
source of repayment.
First Southern Bank addresses repayment risks by adhering to internal credit
policies and procedures. These policies and procedures 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 First Southern Bank's loan
approval process at which a loan is approved depends on the size of the
borrower's credit relationship with First Southern Bank. Individual lenders
may approve credits up to $100,000 with a concurrent signature of the chief
credit analyst. The chief lending officer can approve loans up to $500,000 and
the President can approve loans up to $750,000. Loans which exceed $750,000
must be approved by the board of directors.
19
<PAGE>
The FSB Holding Company 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 no less than quarterly all past
due loans in their respective portfolios. The bank establishes a watch list of
loans to be reviewed monthly by the bank's board of directors.
Deposits
The principal sources of funds for the banks are core deposits, consisting
of demand deposits, interest-bearing transaction accounts, money market
accounts, savings deposits, and certificates of deposit. Transaction accounts
include checking and negotiable order of withdrawal (NOW) accounts which
customers use for cash management and which provide the bank with a source of
fee income and cross-marketing opportunities, as well as a low cost source of
funds. Certificates of deposit and savings accounts also provide a relatively
stable and low cost source of funding. The largest source of deposits for the
Bank is certificates of deposit. A significant portion of the Bank's
certificates of deposit are in excess of $100,000. As of June 30, 1999, First
Southern Bank had no brokered deposits.
As of June 30, 1999, First Southern Bank's deposits consisted of the
following types and amounts:
<TABLE>
<CAPTION>
Deposits
as of June 30, 1999
--------------------------
Amount ($) Percent (%)
Deposit Type (in thousands) of Deposits
- ------------ -------------- -----------
<S> <C> <C>
Non-interest Bearing Demand Deposits................ 31,469 25.5
Interest Bearing Deposits........................... 41,290 33.4
Savings Deposits.................................... 3,486 2.8
Certificates of Deposit............................. 47,250(1) 38.3
-------- ----
Total Deposits.................................... $123,495 100%
======== ====
</TABLE>
- -------------------------
(1) Includes $12.7 million of certificates of deposit over $100 thousand.
Deposit rates are set monthly by senior management and the ALCO committee.
Management believes that the rates offered by First Southern Bank are
generally competitive with rates offered by other institutions in the bank's
market areas. First Southern Bank focuses on customer service to attract and
retain deposits.
Investment Portfolio
As of June 30, 1999, First Southern Bank's investment portfolio consisted of
the following types and amounts:
<TABLE>
<CAPTION>
Investments
as of June 30, 1999
-----------------------------
Amount ($) Percent (%)
Investment Type (in thousands) of Investments
- --------------- -------------- --------------
<S> <C> <C>
U.S. Treasury Obligations......................... 3,061 10.6
U.S. Government Corporations and Agencies......... 16,313 56.7
Mortgage-backed Securities........................ 8,216 28.6
Other Securities.................................. 1,188 4.1
------- ----
Total Investments............................... $28,778 100%
======= ====
</TABLE>
Competition
The banking business in Florida is highly competitive, both for making loans
and attracting deposits. First Southern Bank competes with myriad entities,
consisting of, among others, other commercial banks, savings banks, savings
and loan associations, credit unions, finance companies, mutual funds,
insurance companies,
20
<PAGE>
brokerage and investment banking firms, asset based non-bank lenders, and
other non-financial entities, including retail stores which may maintain their
own credit programs and certain governmental organizations which may offer
more favorable financing than First Southern Bank. The competition arises out
of competitive interest rates, differing quality and scope of services, and
the convenience of banking facilities.
As a community banking organization, which offers a viable alternative to
more impersonal money center banks, First Southern Bank has been able to
compete effectively with other financial institutions, and management believes
that by continuing to offer quality personalized banking services, First
Southern Bank will be well positioned to compete successfully in its primary
market areas.
Properties
First Southern Bank leases its Lighthouse Point branch from First Southern
Bank Realty Corp. and currently leases its other five branch sites from
unrelated third parties. First Southern Bank Realty Corp. owns a two story
14,122 square foot building in Lighthouse Point, in which the Lighthouse Point
branch occupies 2,000 square feet, the bank's data center, mortgage division
and accounting area occupies approximately 5,000 square feet, and the balance
of such building is leased to outside tenants. The building has been fully
leased since First Southern Bank Realty Corp. acquired it in December of 1996.
In May 1999, First Southern Bank Realty Corp. acquired a 9,500 square foot
building in North Palm Beach, which will be renovated for a 4,000 square foot
branch site and the balance of the building will be leased to outside tenants.
Additionally, First Southern Bank Realty Corp. acquired a tract of land in
Boynton Beach in July, 1999, that will be housing a branch and
operations/commercial loan center. It is anticipated that the North Palm Beach
location will be operational by the fourth quarter of 1999, while the Boynton
Beach facility will not be fully operational until the second quarter of 2000.
Employees
As of June 30, 1999, the FSB Holding Company and First Southern Bank had 61
full-time and 12 part-time employees.
Legal Proceedings
In the ordinary course of operations, the FSB Holding Company and First
Southern Bank are parties to various legal proceedings. Management does not
believe that there is any pending or threatened proceeding against the FSB
Holding Company or First Southern Bank which if determined adversely, would
have a material effect on the business, results of operations, or financial
position of the FSB Holding Company or First Southern Bank.
Selected Consolidated Financial Data
The following information summarizes certain selected consolidated financial
information of the FSB Holding Company as of and for its fiscal years ended
December 31, 1996, 1997 and 1998 and for the six months ended June 30, 1999.
For a more complete overview, please refer to FSB Holding Company's full
financial statements in the Statement of Additional Information. Historical
financial information is not necessarily indicative of results of operations
for any future period or financial condition as of any future date.
21
<PAGE>
FIRST SOUTHERN BANCORP, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Year Ended December 31,
Six Months Ended -----------------------------
June 30, 1999(1) 1998(2) 1997(2) 1996(2)
---------------- -------- --------- --------
<S> <C> <C> <C> <C>
Selected Results of Operations:
Interest income............... $ 5,283 $ 8,904 $ 7,686 $ 6,175
Interest expense.............. 2,035 3,448 2,899 2,656
Net interest income........... 3,248 5,456 4,787 3,519
Provision for loan losses..... 86 255 110 --
Noninterest income............ 691 1,393 740 681
Noninterest expenses.......... 2,853 4,798 4,043 3,242
Income before income taxes.... 1,000 1,768 1,335 958
Net income.................... 597 1,093 848 586
Per Common Share:
Earnings per common share-
basic........................ $ 0.88 $ 1.71 $ 1.29 $ 0.90
Earnings per common share-
diluted...................... $ 0.86 $ 1.60 $ 1.23 $ 0.87
Cash Dividends declared....... $ 0 $ 0 $ 0 $ 0
Book value per share.......... $ 11.59 $ 11.69 $ 10.02 $ 8.72
Average common share
outstanding-basic............ 676,742 640,233 655,029 648,756
Average common shares
outstanding-diluted.......... 697,522 684,181 688,701 677,268
Selected Balance Sheet Data:
Total assets.................. $151,103 $129,502 $ 101,664 $ 94,462
Securities available for
sale......................... 27,750 21,904 17,627 20,549
Investment securities held to
maturity..................... -- -- -- --
Loans held for sale........... -- -- -- --
Loans receivable, net......... 107,307 81,775 66,138 52,658
Reserve for loan losses....... 1,291 1,246 1,066 961
Deposits...................... 123,429 108,021 88,614 82,741
FHLB advances and other
borrowings................... 19,723 13,061 5,690 5,172
Stockholders' equity.......... 8,078 7,504 6,347 5,689
Loan to deposit ratio......... 87.94% 76.85% 75.83% 64.80%
Performance Ratios:(3)
Return on average assets...... .85% 0.98% 0.89% 0.79%
Return on average equity...... 14.88% 14.62% 13.68% 11.33%
Net interest margin-taxable
equivalent................... 4.74% 4.88% 5.06% 4.46%
Equity to assets.............. 5.35% 5.79% 6.24% 6.02%
Efficiency ratio.............. 72.43% 71.69% 74.54% 77.06%
Asset Quality Data:
Nonperforming loans........... $ 219 $ 405 $ 603 $ 417
Other real estate owned
(OREO)....................... 164 218 0 283
Nonperforming assets.......... 383 648 603 700
Nonperforming loans/total
loans........................ 0.20% 0.58% 0.90% 0.78%
Nonperforming assets/total
loans + OREO................. 0.35% 0.92% 0.90% 1.30%
Reserve for loan losses/total
loans........................ 1.19% 1.78% 1.59% 1.79%
Reserve for loan
losses/nonperforming loans... 589.50% 307.41% 176.78% 230.46%
Reserve for loan
losses/nonperforming assets.. 337.08% 192.13% 176.78% 137.28%
Ratio of net charge-offs to
average loans................ .08% 0.10% 0.01% 0.05%
Earnings to Fixed Charge
Coverage Ratios:(4)
Excluding interest on
deposits..................... 2.46x 3.36x 3.21x 4.42x
Including interest on
deposits..................... 1.34x 1.50x 1.43x 1.36x
Capital Ratios:
Leverage ratio................ 5.80% 5.84% 6.62% 6.50%
Tier 1 capital (to risk-
weighted assets)............. 7.52% 8.32% 9.12% 10.05%
Total capital (to risk-
weighted assets)............. 8.65% 9.57% 10.37% 11.30%
</TABLE>
- --------
(1) Compiled from unaudited financial statements
(2) Compiled from audited financial statements.
(3) Annualized for interim period
(4) The consolidated ratio of earnings to fixed charges has been computed by
dividing income before tax plus fixed charges by fixed charges. Fixed
charges represent all interest expense and the interest factor in rent
expense (ratios are presented both excluding and including interest on
deposits). Interest expense (other than on deposits) includes interest on
federal funds purchased and securities sold under agreements to
repurchase, Federal Home Loan Bank advances, and other borrowed funds.
22
<PAGE>
[MAP APPEARS HERE]
23
<PAGE>
CENTRAL COMMUNITY CORPORATION AND FIRST STATE BANK CENTRAL TEXAS
General
Central Community Corporation ("CCC") was incorporated under the laws of
Delaware in 1990 as a one bank holding company for the purpose of acquiring
First State Bank Central Texas ("First State"). First State is a Texas state
nonmember bank chartered in 1909 and regulated by the Texas Department of
Banking and the Federal Deposit Insurance Corporation. The existing local
control investor group purchased First State in 1987 when it had total assets
of approximately $4 million and relocated its main offices to the bank's
current location in Temple, Texas.
In 1996, a Delaware subsidiary of CCC was formed, FSBT, Inc., to hold 100%
of the outstanding common stock of First State. As of June 30, 1999, CCC had
total consolidated assets of approximately $210.9 million, net loans of
approximately $132.4 million, deposits of approximately $179.4 million, and
shareholders' equity of approximately $17.2 million. First State operates 12
banking offices in six contiguous central Texas counties.
First State offers a broad range of bank and bank-related services. It
performs banking services customary for full service banks of similar size for
customers in their respective service areas. These services include the making
of personal and commercial loans, the furnishing of personal and commercial
checking accounts and the receipt of demand and time deposit accounts. The
bank does not offer trust services.
First State has grown through a combination of internal growth, the
acquisition of other community banks and branches and the opening of new
community banking offices. Operating under a community banking philosophy,
First State seeks to develop broad customer relationships based on service and
convenience. Despite the adverse economic downturn in Texas in the late
1980's, First State has been profitable with good growth every year since
being acquired by the existing controlling ownership in 1987.
Growth through acquisitions includes acquiring Salado National Bank
(approximately $17 million in assets) in September, 1993; Citizens State Bank
of Lometa (approximately $15 million in assets) in March, 1995; the Marlin
branch of First Bank of Texas (approximately $20 million in assets) in
February, 1997; and the First National Bank of Goldthwaite (approximately $22
million in assets) in February, 1997. During 1998, First State entered the
greater Austin banking market through opening an Austin full service branch in
February, 1998, and opening a Georgetown loan production office in December,
1998.
Market
First State maintains the following 12 banking offices in central Texas:
First State Banking Locations/Market Share
<TABLE>
<CAPTION>
Branch Deposits Market
County City No. of Offices County Population(1) Share by County(2)
- ------ ------------- -------------- -------------------- ----------------------
<S> <C> <C> <C> <C>
Bell Belton 1 191,073 5.61%
Little
River/Academy 1
Salado 1
Temple 2
Falls Chilton 1 17,712 22.24%
Marlin 1
Lampasas Lampasas 1 13,541 13.63%
Lometa 1
Mills Goldthwaite 1 4,531 16.57%
Travis Austin 1 576,407 --
Williamson Georgetown 1 139,551 --
</TABLE>
- --------
(1) Source: 1990 U.S. Census Bureau.
(2) Source: FDIC Internet Site. As of June 30, 1998. The Austin and Georgetown
offices were not in existence as of June 30, 1998. However, their market
share is currently less than 1%.
24
<PAGE>
First State's primary market consists of the communities served by its 12
locations in the six contiguous counties in central Texas. First State
believes that economic growth in its current market areas will exceed the
level experienced statewide during the next several years. Temple, the
location of First State's main office, is located approximately 60 miles north
of Austin, Texas on Interstate 35. First State should benefit economically
from expanding international trade activity in the "I-35 Corridor." The
increased traffic along this "NAFTA Highway" linking the interior United
States with Canada and Mexico has enhanced economic activity through the
center of First State's market area and created opportunities for growth. The
economic base in Bell County is diversified and has become a center for
government, medical services, distribution and light industrial production.
Falls, Lampasas and Mills counties remain predominantly agricultural markets;
Travis and Williamson counties to the south of Bell County have a diversified
economy based on education, state government, tourism and industry. In recent
years, both Travis and Williamson counties have experienced significant growth
as the result of high technology companies moving into the area and related
support company start-ups.
Business Strategy
First State intends to continue its responsive community banking philosophy
of developing broad customer relationships while maintaining its conservative
approach to lending and strong asset quality. Its business strategy is to
continue a pattern of above average growth through acquisitions and the
opening of new branches in and around the greater Austin, Texas area in Travis
and Williamson Counties. While several regional and national banks have
offices in this area, management feels that the bank's market niche of small
and medium sized commercial customers is currently under served by these
institutions and provides opportunities for growth. Additionally, management
expects a further expansion into the greater Austin area will provide for
continued diversification of the existing asset base.
Loan Portfolio
First State provides a broad range of commercial and retail lending services
to corporations, partnerships and individuals. Lending activity includes
commercial business loans, agricultural production, commercial and residential
construction, mortgage loans and consumer loans. Historically, the bank has
emphasized agricultural lending, based on the market it served. As of June 30,
1999, the agricultural loan portfolio consisted primarily of cattle loans, and
the portfolio had fewer than 0.10% of its non-government guaranteed loans
categorized as past due. Management believes that the loan portfolio is
diversified as to concentration of credit to single industries and related
groups of borrowers.
At June 30, 1999, First State's loan portfolio consisted of the following
types and amounts of loans:
<TABLE>
<CAPTION>
Loan Portfolio as of June
30, 1999
--------------------------------
Amount ($) Percentage (%) of
Loan Type (in thousands) Total Portfolio
- --------- -------------- -----------------
<S> <C> <C>
Commercial and Industrial.................... 31,563 23.4
Real Estate--Construction and Land
Development................................. 29,265 21.7
Real Estate--Residential..................... 12,481 9.2
Real Estate--Farmland........................ 5,095 3.8
Real Estate--Commercial...................... 21,793 16.2
Agricultural................................. 15,849 11.7
Consumer..................................... 15,348 11.4
Other........................................ 3,500 2.6
------- ----
Gross Loans................................ 134,894 100
Less: Unearned Income.................... (739)
Less: Allowance for Loan Loss............ (1,797)
-------
Net Loans.................................. 132,358
</TABLE>
25
<PAGE>
Construction and development loans were $29.3 million at June 30, 1999,
which was an increase of $13.2 million or 82% from $16.1 million at June 30,
1998. This increase is primarily due to First State's opening in 1998 of
banking offices in Austin and Georgetown.
Lending Policy
First State seeks to make loans that meet the needs of the communities
served while maintaining appropriate asset quality and earnings. Targeted
markets include commercial and consumer loans, emphasizing commercial loans to
small and medium sized businesses.
First State regularly monitors its loan portfolio to identify areas of
concern and to enable management to take corrective action when necessary.
Lending officers and the Board of Directors meet periodically to review all
past due loans, the status of large loans and certain other matters.
Individual lending officers are responsible for reviewing collection of past
due amounts and monitoring any changes in the financial status of borrowers.
There are credit risks associated with the making of any loan. First State
attempts to minimize this risk through various means including the use of
standardized underwriting criteria, lending authority limits for officers and
a centralized administration of lending activity. This centralized department
provides loan review, quality control, compliance and monitoring services to
the branch offices. Additional loan review and compliance reviews are
contracted from third party vendors.
Deposits
The principal source of funds for First State is core deposits consisting of
transaction, savings and time deposits. First State has a broad base of
commercial and retail deposit customers with no single customer providing more
than 2% of total deposits. At June 30, 1999, First State's deposit base
consisted of the following:
<TABLE>
<CAPTION>
Deposits as of June 30,
1999
--------------------------
Amount ($) Percent (%)
Deposit Type (in thousands) of Deposits
------------ -------------- -----------
<S> <C> <C>
Non-Interest Bearing Demand Deposits.............. 37,846 21.1
Interest Bearing Deposits......................... 27,067 15.1
Savings Deposits.................................. 20,263 11.3
Certificates of Deposits(1)....................... 94,226 52.5
------- ----
Total Deposits.................................. 179,402 100%
======= ====
</TABLE>
- -------------------------
(1) Includes $35.3 million of certificates of
deposit over $100 thousand.
First State is a member of the Federal Home Loan Bank System and, as such,
utilizes its lending program. At June 30, 1999, the balance of FHLB advances
was $7,977,000. These advances are used primarily to provide longer term fixed
rate funds for mortgage lending activities.
As of June 30, 1999, First State had no brokered deposits.
Investment Portfolio
As of June 30, 1999, First State's investment security portfolio consisted
of:
<TABLE>
<CAPTION>
Investments as of June
30, 1999
-----------------------------
Amount ($) Percent (%)
Investment Type (in thousands) of Investments
--------------- -------------- --------------
<S> <C> <C>
U.S. Treasury Obligations..................... 14,155 23.7
U.S. Government Agency Debt................... 11,668 19.5
Mortgage-Backed Securities.................... 1,458 2.4
Collateralized Mortgage Obligations........... 14,865 24.9
Obligations of State & Political Subdiv....... 11,943 20.0
Corporate Debt Obligations.................... 4,890 8.2
Equity Securities............................. 696 1.2
Mutual Fund Balances.......................... 69 0.1
------ ----
Total Securities............................ 59,744 100%
====== ====
</TABLE>
26
<PAGE>
Competition
The banking business is highly competitive, and the profitability of First
State depends principally on the bank's ability to compete in its markets.
First State competes with other commercial banks, savings banks, savings and
loan associations, credit unions, finance companies, mutual funds, insurance
companies, brokerage and investment banking firms, asset based non-bank
lenders and certain other non-financial entities, including retail stores
which may maintain their own credit programs and certain governmental
organizations which may offer more favorable financing than First State. First
State has been able to compete effectively with other financial institutions
by emphasizing customer service, technology and responsive decision-making on
loans, by establishing long-term customer relationships and building customer
loyalty, and by providing products and services designed to address the
specific needs of its customers.
Properties
First State operates from 12 banking locations and one operations center.
All facilities are owned unencumbered by First State, excluding two branch
offices (Georgetown and Austin) and the 2,500 square foot operation center,
which are leased. The leased facilities have leases with remaining terms
between one and four years. CCC and First State maintain their executive
offices and one branch location in a 4,020 square foot building located at
5550 SW H.K. Dodgen Loop, Temple, Texas. CCC and First State maintain their
Credit Administration and Accounting at 402-410 North Main, Temple, Texas.
Employees
As of June 30, 1999, CCC and First State had approximately 77 full-time and
14 part-time employees. CCC and First State provide medical and
hospitalization insurance to its full-time employees. CCC and First State
consider their relations with employees to be excellent. Neither CCC nor First
State is a party to any collective bargaining agreement.
Legal Proceedings
CCC and First State from time to time are parties to or otherwise involved
in legal proceedings arising in the normal course of business. Management does
not believe that there is any pending or threatened proceeding against CCC or
First State which, if determined adversely, would have a material effect on
the business, results of operations or financial condition of CCC or First
State.
Selected Consolidated Financial Data
The following information summarizes certain selected consolidated financial
information of CCC as of and for its fiscal years ended December 31, 1996,
1997 and 1998 and for the six months ended June 30, 1999. For a more complete
overview, please refer to CCC's full financial statements and the notes
thereto in the Statement of Additional Information. Historical financial
information is not necessarily indicative of results of operations for any
future period or financial condition as of any future date.
27
<PAGE>
CENTRAL COMMUNITY CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Six Months Ended Year Ended December 31,
June -----------------------
30, 1999 (1) 1998 (2) 1997 (2) 1996 (1)
---------------- -------- -------- --------
<S> <C> <C> <C> <C>
Selected Results Of Operations:
Interest income............... $ 7,994 $ 15,127 $ 13,475 $ 9,610
Interest expense.............. 3,363 6,595 5,527 3,714
Net interest income........... 4,631 8,532 7,948 5,896
Provision for loan losses..... 475 480 420 260
Noninterest income............ 1,296 2,316 1,893 1,347
Noninterest expenses.......... 3,188 5,950 5,205 3,937
Income before income taxes.... 2,264 4,418 4,216 3,046
Net income.................... 1,563 3,108 2,792 3,061
Per Common Share:
Earnings per common share-
basic........................ $ 51.51 $ 102.80 $ 92.83 $ 102.44
Earnings per common share-
diluted...................... $ 47.78 $ 95.33 $ 86.05 $ 94.91
Cash Dividends declared....... $ 0 $ 10 $ 10 $ 0
Book value per share.......... $ 566 $ 569 $ 472 $ 377
Average common share
outstanding-basic............ 30,344 30,233 30,076 29,881
Average common shares
outstanding-diluted.......... 32,714 32,603 32,446 32,251
Selected Balance Sheet Data:
Total assets.................. $210,884 $214,126 $190,217 $129,601
Securities available for
sale......................... 59,744 60,752 60,950 25,301
Investment securities held to
maturity..................... 0 0 0 0
Loans held for sale........... 0 120 0 218
Loans receivable, net......... 132,358 130,744 107,261 89,870
Reserve for loan losses....... 1,797 1,743 1,178 908
Deposits...................... 179,402 187,547 169,560 111,559
FHLB advances and other
borrowings................... 12,777 7,460 4,344 5,880
Stockholders' equity.......... 17,185 17,206 14,197 11,265
Loan to deposit ratio......... 73.78% 69.71% 63.26% 80.56%
Performance Ratios: (3)
Return on average assets...... 1.48% 1.52% 1.56% 2.76%
Return on average equity...... 18.09% 19.60% 21.67% 30.94%
Net interest margin-taxable
equivalent................... 4.98% 4.92% 5.37% 5.77%
Equity to assets.............. 8.15% 8.04% 7.46% 8.69%
Efficiency ratio.............. 53.79% 54.85% 52.89% 54.36%
Asset Quality Data:
Nonperforming loans........... $ 444 $ 1,550 $ 247 $ 850
Other real estate owned
(OREO)....................... 328 101 175 840
Nonperforming assets.......... 772 1,651 422 1,690
Nonperforming loans/total
loans........................ 0.33% 1.17% 0.23% 0.94%
Nonperforming assets/total
loans + OREO................. 0.58% 1.25% 0.39% 1.84%
Reserve for loan losses/total
loans........................ 1.34% 1.32% 1.09% 1.00%
Reserve for loan
losses/nonperforming loans... 404.73% 112.45% 476.92% 106.82%
Reserve for loan
losses/nonperforming assets.. 232.77% 105.57% 279.15% 53.73%
Ratio of net charge-offs to
average loans................ 0.32% (0.07)% 0.24% 0.24%
Earnings To Fixed Charge
Coverage Ratios: (4)
Excluding interest on
deposits..................... 7.97x 11.62x 14.64x 9.80x
Including interest on
deposits..................... 1.67x 1.67x 1.76x 1.82x
Capital Ratios:
Leverage ratio................ 7.76% 7.16% 6.39% 10.22%
Tier 1 capital (to risk-
weighted assets)............. 10.73% 9.90% 9.09% 12.22%
Total capital (to risk-
weighted assets)............. 11.91% 11.08% 10.03% 13.10%
</TABLE>
- --------
(1)Compiled from unaudited financial statements.
(2)Compiled from audited financial statements.
(3)Annualized for interim period.
(4) The consolidated ratio of earnings to fixed charges has been computed by
dividing income before tax plus fixed charges by fixed charges. Fixed
charges represent all interest expense and the interest factor in rent
expense (ratios are presented both excluding and including interest on
deposits). Interest expense (other than on deposits) includes interest on
federal funds purchased and securities sold under agreements to
repurchase. Federal Home Loan Bank advances, and other borrowed funds.
28
<PAGE>
[MAP APPEARS HERE]
29
<PAGE>
MANAGEMENT OF THE FUND
Investment Manager
Sterne Agee Asset Management, Inc., 800 Shades Creek Parkway, Suite 125,
Birmingham, Alabama 36209, serves as the investment manager (the "Manager") to
the Fund pursuant to an investment management agreement (the "Management
Agreement"). Because the Fund intends to buy and hold the Preferred
Securities, the Manager will not generally be making day-to-day investment
decisions for the Fund. Nonetheless, the Manager is responsible for managing
the Fund's business affairs and providing certain clerical, bookkeeping and
administrative services, including fund accounting and shareholder services.
For its services to the Fund, the Manager receives a fee, paid quarterly by
the Fund and reimbursed by the Bank Holding Companies, at an annual rate of
0.10% of the net asset value of the Fund as calculated each quarter. See "Net
Asset Value" below. The Manager has been a registered investment adviser since
May 1988.
The Manager, Sterne, Agee & Leach, Inc., which is the managing underwriter
of the Fund Shares, and the Trust Company of Sterne, Agee & Leach, Inc. are
each wholly-owned subsidiaries of Sterne, Agee & Leach Group, Inc., a Delaware
holding company. Founded in 1916, Sterne, Agee & Leach, Inc. and its
affiliates have approximately $4.9 billion of assets under management as of
June 30, 1999. Prior to the date of this Offering, the Manager may be deemed
to control the Fund due to its ownership of all the 4,000 then outstanding
Fund Shares.
Trustees and Officers
The Board of Trustees is responsible for the management of the Fund,
including general supervision of the duties performed by the Manager. The
Trustees of the Fund are James S. Holbrook, Jr., James A. Taylor, Sr. and
Robert M. Couch. Mr. Holbrook is an "interested person" (as the term
"interested person" is defined in the 1940 Act) and James A. Taylor, Sr. and
Robert M. Couch are "disinterested persons." More information regarding the
Trustees and officers of the Fund, including their principal occupations and
other affiliations during the past five years, is set forth under "Management
of the Fund" in the Statement of Additional Information.
NET ASSET VALUE
Net asset value is calculated (i) on the last business day of each quarter,
and (ii) at such other times as determined by the Fund's Trustees. Net asset
value of the Fund is the value of the Fund's net assets (the value of its
assets less its liabilities, exclusive of capital stock and surplus). So long
as there remains no market for the Preferred Securities held by the Fund, the
Preferred Securities will be valued as determined in good faith by the Fund's
Trustees, although the actual calculation may be done by others. In making
this determination the Trustees will consider, among other things, publicly
available information regarding the issuers, market conditions and values
ascribed to comparable securities issued by comparable companies.
In the absence of an active trading market for any Preferred Securities
acquired by the Fund, valuing the Preferred Securities held by the Fund will
be difficult. The Fund's Trustees are responsible for making a good faith
determination of the fair value of the Fund's assets. Such determination must
approximate market value, which means the value that the Trustees reasonably
believe could be received in the short term upon the sale of the securities
held by the Fund. The Trustees of the Fund have established and will regularly
monitor procedures to value the Fund's Preferred Securities. Initially, the
Preferred Securities held by the Fund are valued at cost. In determining the
fair value of such securities, the Trustees (or their agent) ordinarily will
consider the following factors: the existence of restrictions upon the sale of
the security; the public trading values of comparable debt securities of
comparable companies and the current yield to call on comparable securities;
changes in the financial condition and prospects of the issuer; and any other
factors affecting fair value, all in accordance with the 1940 Act.
30
<PAGE>
DISTRIBUTIONS
The Fund expects to pay a Dividend Yield at a fixed rate of 9.75%. However,
in the event that the Fund's expenses exceed $185,000 per annum, as adjusted
by the CPI, such additional expenses will be borne by the Fund and will
negatively affect the Dividend Yield. The Fund will pay distributions
quarterly in arrears, commencing December 31, 1999, at an annual rate
equivalent to the Dividend Yield, except that under certain circumstances
distributions may be deferred. The net income of the Fund consists of all
interest income accrued on portfolio assets less all expenses of the Fund. The
Fund does not anticipate incurring any expenses other than those expenses paid
by the Bank Holding Companies. Expenses of the Fund, if any, are accrued each
day. All the net investment income of the Fund will be distributed quarterly,
in arrears. Annually, the Fund also intends to distribute ordinary taxable
income and net capital gains, if any.
TAX MATTERS
Federal Income Tax Consequences
The following is a summary of the principal United States federal income tax
consequences of your purchase, ownership and disposition of Fund Shares when
you purchase Fund Shares upon initial issuance and hold the Fund Shares as a
capital asset. This summary addresses the United States federal income tax
consequences of a shareholder who is a citizen or resident of the United
States, a domestic corporation, a domestic partnership, an estate the income
of which is includible in its gross income for United States federal income
tax purposes regardless of its source, and a trust, if a court within the
United States is able to exercise primary supervision over the administration
of the trust and one or more United States person has the authority to control
all substantial decisions of the trust ("U.S. Investors"). This summary does
not address the tax consequences of persons who are not U.S. Investors or
persons that have a functional currency other than the U.S. dollar. In
addition, this summary does not discuss certain tax consequences that may
apply to persons subject to special tax treatment such as banks, thrifts,
insurance companies, real estate investment trusts, regulated investment
companies, securities dealers, tax exempt organizations, and persons who hold
the Fund Shares as a position in a "straddle," "synthetic investment,"
"hedge," "conversion transaction" or other investment in which the Fund Shares
may be integrated with another instrument. This summary does not discuss the
tax laws of any state, local or foreign government that might apply to Fund
Shares.
This summary is based upon applicable provisions of the Internal Revenue
Code of 1986 (the "Code"), Treasury Regulations and administrative rulings and
court decisions. These legal authorities, now in effect, may be changed at any
time in a manner that could adversely affect you, as an investor in the Fund.
Furthermore, since these legal authorities are subject to various
interpretations, the United States federal income tax treatment of the
purchase, ownership and disposition of Fund Shares, may be different from the
treatment discussed in this Summary.
YOU SHOULD CONSULT YOUR TAX ADVISOR WITH RESPECT TO THE FEDERAL, STATE, LOCAL
AND FOREIGN TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF
FUND SHARES.
Classification of the Fund
The Fund will not be subject to federal income tax on any payments the Fund
receives or accrues, including original issue discount ("OID"). This treatment
of the Fund as a nontaxable entity is consistent with Tax Counsel's opinion
that the Fund will be classified as a grantor trust and not as an association
taxable as a corporation for federal income tax purposes. The Fund does not
qualify as a regulated investment company under Subchapter M of the Code.
Tax Treatment of Shareholders
As a shareholder, you will be required to include in your gross income your
share of each item of income or gain, including OID, attributable to the
Subordinated Debentures, as if you directly owned an interest in each
31
<PAGE>
of the Subordinated Debentures issued by the Bank Holding Companies to the
Bank Trusts. Your interest in the Subordinated Debentures is based on the
Fund's undivided interest in the Subordinated Debentures represented by the
Preferred Securities and your proportionate interest in the Fund represented
by your Fund Shares. See "Additional Risk Factors" and "Additional Tax
Discussion" in the Statement of Additional Information.
Sale of Fund Shares
If you sell Fund Shares you will recognize gain or loss equal to the
difference between your adjusted tax basis in the sold Fund Shares and the
amount you realized in the sale. Your basis in the Fund Shares generally will
equal your initial purchase price, increased by OID previously includible in
your gross income to the date of sale and decreased by the amount of payments
you received on the Fund Shares. Recognized gain or loss generally will be a
capital gain or loss and generally will be a long-term capital gain or loss if
you held the sold Fund Shares for more than one year.
Additional Discussion
Additional discussion of United States federal income tax rules relating to
your purchase, ownership and disposition of Fund Shares is set forth in the
Statement of Additional Information.
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
several Underwriters named below, acting through Sterne, Agee & Leach, Inc.,
as representative of the several Underwriters (the "Representative"), have
agreed, severally, to purchase from the Fund the number of Fund Shares set
forth opposite their respective names:
<TABLE>
<CAPTION>
Number of
Fund
Shares Percentage
--------- ----------
<S> <C> <C>
Allan C. Ewing & Co........................................ 25,000 3.45%
50 N. Laura Street
Suite 3625
Jacksonville, FL 32202
Edgar M. Norris & Co., Inc................................. 25,000 3.45%
15 South Main Street
Suite 810
Greenville, SC 29601
Hoefer & Arnett, Inc....................................... 13,000 1.79%
353 Sacramento Street
10th Floor
San Francisco, CA 94111
Howe Barnes Investments, Inc............................... 13,000 1.79%
135 S. LaSalle Street
Suite 1500
Chicago, IL 60603
J.C. Bradford & Co......................................... 25,000 3.45%
330 Commerce Street
Nashville, TN 37201
John G. Kinnard & Co., Inc................................. 25,000 3.45%
920 Second Avenue South
Suite 200
Minneapolis, MN 55402
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Number of
Fund
Shares Percentage
--------- ----------
<S> <C> <C>
Moors & Cabot Inc.......................................... 13,000 1.79%
111 Devonshire Street
Boston, MA 02109
Ryan, Beck & Co., Inc...................................... 13,000 1.79%
220 S. Orange Avenue
Livingston, NJ 07039
Scott & Stringfellow, Inc.................................. 25,000 3.45%
909 E. Main Street
6th Floor
Richmond, VA 23219
Southwest Securities, Inc.................................. 13,000 1.79%
1201 Elm Street
Suite 3500
Dallas, TX 75270
Sterne, Agee & Leach, Inc.................................. 510,000 70.35%
950 E. Paces Ferry Road
Suite 1475
Atlanta, GA 30326
Wachovia Securities........................................ 25,000 3.45%
201 N. Tryon Street
20th Floor
Charlotte, NC 28202
------- -----
Total.................................................... 725,000 100%
======= =====
</TABLE>
The several Underwriters have agreed in the underwriting agreement, subject
to certain terms and conditions set forth therein to purchase all of the Fund
Shares offered hereby, if any of such Fund Shares are purchased. In the event
of default by an Underwriter, the underwriting agreement provides that, in
certain circumstances, purchase commitments of the non-defaulting Underwriters
may be increased or the underwriting agreement may be terminated.
The Offering price and Dividend Yield have been determined by negotiations
among the Bank Holding Companies, the Fund and the Underwriters, and the
Offering price of the Fund Shares may not be indicative of the market price
following this Offering. The Representative will have no obligation to make a
market in the Fund Shares, however, and may cease market-making activities, if
commenced, at any time.
In view of the fact that the net proceeds of the sale of the Fund Shares
will be ultimately used to purchase the Subordinated Debentures of the Bank
Holding Companies, the Bank Holding Companies have agreed to pay as
compensation to the Underwriters arranging the investment of such proceeds
therein, an amount in immediately available funds of 5% of the price to the
public of the Fund Shares or $1.25 per Fund Share ($906,250 in total, or
$1,042,187.50 if the Underwriters' over-allotment option is exercised in full)
for the accounts of the several Underwriters.
In addition, FirstBancorp, Inc. and First Southern Bancorp, Inc. are
obligated to pay the legal fees of the Representative up to an aggregate
maximum of $27,172.41.
In the event that this Offering is not closed by September 30, 1999 as a
result of the actions or inactions of any of the Bank Holding Companies, any
such Bank Holding Company has agreed to reimburse the
33
<PAGE>
Representative for out-of- pocket expenses in excess of the legal fees
accounted for above incurred in connection with this Offering as follows: (i)
FirstBancorp, Inc. and First Southern Bancorp, Inc. have agreed to reimburse
the Representative up to a maximum of $20,000 each; and (ii) Central Community
Corporation has agreed to reimburse the Representative up to a maximum of
$50,000.
The Fund will incur various expenses in registering the Fund Shares, all of
which will be reimbursed by the Bank Holding Companies up to a limit of 2% of
all proceeds to FirstBancorp, Inc. and First Southern Bancorp, Inc. and 8% of
all proceeds to Central Community Corporation. The Fund's estimated expenses
of this Offering, excluding underwriting discount, are as follows:
<TABLE>
<S> <C>
Registration fee................................................... $ 6,575
Printing costs..................................................... $100,000
Legal fees and expenses............................................ $100,000
Accounting fees and expenses....................................... $ 6,500
NASD fees.......................................................... $ 2,865
AMEX fees.......................................................... $ 10,000
Miscellaneous...................................................... $ 20,000
--------
Total............................................................ $240,040
========
</TABLE>
This Offering of the Fund Shares 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 Fund Shares. All
funds for the payment of Fund Shares are due on the third business day
following the date that the sale is confirmed, which is expected to be the
effective date of the Offering.
The Fund 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 108,750 additional Fund Shares
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 Fund will be obligated, pursuant to the option, to
sell such Fund 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 725,000 Fund Shares offered in this Offering. If purchased, the
Underwriters will sell these additional Fund Shares on the same terms as those
on which the Fund Shares are being offered. Interest will start accruing on
the date of issuance of the option Fund Shares, rather than the date of the
closing of the sale of the initial 725,000 Fund Shares.
The Underwriters have advised the Fund that they propose initially to offer
the Fund Shares to the public at the public offering price set forth on the
cover of this Prospectus, and to certain dealers at such price less a
concession not in excess of $0.62 per Fund Share. The Underwriters may allow,
and such dealers may re-allow, discounts not in excess of $0.10 per Fund Share
on sales to certain other dealers. The Representative has informed the Fund
that the Underwriters do not intend to confirm sales to accounts over which
they exercise discretionary authority.
There currently is no market for the Fund Shares. Consequently, the initial
Offering price has been determined by negotiation by and between the Fund and
Sterne Agee. The Fund will apply to list the Fund Shares on the AMEX under the
symbol "PBA"; however, there can be no assurance that an active trading market
will develop.
In connection with and during this Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the market price of
the Fund Shares. These transactions may include stabilization transactions
under which persons may bid for or purchase Fund Shares to stabilize its
market price. The
34
<PAGE>
Underwriters may also create a "short position" for their own account by
selling more Fund Shares in this Offering than they are committed to purchase,
and in that case they may purchase Fund 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
108,750 Fund 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 Fund 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 Fund Shares at a higher level
than the level which the Fund 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.
The underwriting agreement provides that the Fund and the Manager will
indemnify the Underwriters against certain liabilities, including certain
liabilities under the Securities Act of 1933, as amended. The Bank Holding
Companies have made similar indemnifications to the Underwriters and the Fund
with respect to certain information contained in this Prospectus and Statement
of Additional Information regarding the Bank Holding Companies, the Bank
Trusts and agreements relating to this Offering.
The foregoing is a summary of certain principal terms of the underwriting
agreement. 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.
The Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
FUND CUSTODIAN AND TRANSFER AGENT
The Trust Company of Sterne, Agee & Leach, Inc., 800 Shades Creek Parkway,
Suite 125, Birmingham, AL 35209, will serve as Custodian of the Fund. The
Trust Company of Sterne, Agee & Leach, Inc. will perform the Fund's custodial
and portfolio accounting services, as well as serve as the Fund's dividend
paying agent.
Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York
10004, will serve as transfer agent to the Fund.
EXPERTS
Arthur Andersen LLP serves as independent accountant for the Fund.
Osburn, Henning and Company serves as independent accountant for
FirstBancorp, Inc.
Ernst & Young LLP serves as independent accountant for Central Community
Corporation.
McGladrey & Pullen, LLP serves as independent accountant for First Southern
Bancorp, Inc.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP, Washington D.C., serves as legal counsel to the
Fund.
Ritchie & Rediker, L.L.C., Birmingham Alabama, serves as legal counsel to
the Underwriters.
35
<PAGE>
BACK COVER
TABLE OF CONTENTS OF THE STATEMENT
OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Additional Description of the Bank Trusts................................ S-2
Additional Risk Factors.................................................. S-2
Additional Description of the Preferred Securities....................... S-4
Additional Description of the Subordinated Debentures.................... S-9
Additional Description of the Guarantee.................................. S-14
Relationship Among the Preferred Securities, the Subordinated Debentures
and the Guarantee....................................................... S-16
Management of the Fund................................................... S-18
Supervision and Regulation of the Bank Holding Companies................. S-19
Additional Tax Discussion................................................ S-24
Index to the Financial Statements........................................ F-1
Balance Sheet of the Fund................................................ F-3
Financial Statements of FirstBancorp, Inc................................ F-7
Financial Statements of First Southern Bancorp, Inc...................... F-29
Financial Statements of Central Community Corporation.................... F-53
</TABLE>
36
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
SAL Trust Preferred Fund I
SAL Trust Preferred Fund I (the "Fund") is a newly organized, closed-end,
nondiversified management investment company. The Fund's investment objective
is to provide a high level of current income by investing in Cumulative Trust
Preferred Securities issued by three community bank trust entities.
This Statement of Additional Information does not constitute a prospectus, but
should be read in conjunction with the Prospectus relating thereto dated
September 27, 1999 (the "Prospectus"). This Statement of Additional
Information does not include all information that a prospective investor
should consider before purchasing Fund Shares, and investors should obtain and
read the Prospectus prior to purchasing such Fund Shares. A copy of the
Prospectus may be obtained without charge by calling 1-877-978-3763. You may
also obtain a copy of the Prospectus on the Securities and Exchange
Commission's web site (http://www.sec.gov). Capitalized terms used but not
defined in this Statement of Additional Information have the meanings ascribed
to them in the Prospectus.
The information in this Statement of Additional Information is not complete
and may be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission (the "SEC") is
effective. This Statement of Additional Information is not an offer to buy
these securities in any state where the offer or sale is not permitted.
Statements contained in the Prospectus and this Statement of Additional
Information as to the contents of any contract or other documents referred to
are not necessarily complete, and, in each instance, reference is made to the
copy of such contract or other document filed as an exhibit to the
Registration Statement of which the Prospectus and this Statement of
Additional Information form a part, each such statement being qualified in all
respects by such reference.
This Statement of Additional Information is dated
September 27, 1999
<PAGE>
ADDITIONAL DESCRIPTION OF THE BANK TRUSTS
Each Bank Holding Company is the owner of all of the Common (voting)
Securities of its respective Bank Trust. The Fund is the owner of all the
Preferred (nonvoting) Securities of each Bank Trust. Each Bank Trust is a
statutory trust formed under Connecticut law pursuant to (i) a trust
agreement, dated as of September 9, 1999, executed by the respective Bank
Holding Company, as depositor, and State Street Bank and Trust Company ("State
Street") as property trustee and certain individuals as administrative
trustees; and (ii) a certificate of trust filed with the Connecticut Secretary
of State on September 9, 1999. The initial trust agreements will be amended
and restated in their entirety as of the closing date of the Offering (as so
amended and restated, the "Trust Agreements") substantially in the form filed
with the SEC as an exhibit to the registration statement containing this
Statement of Additional Information. The Trust Agreements will, among other
things, appoint State Street, as "Property Trustee" to hold legal title to the
Subordinated Debentures in trust for the benefit of the Bank Holding Companies
and the Fund. The Trust Agreements will also appoint several "Administrative
Trustees" who have the power, duty and authority to cause the Bank Trusts to
issue and sell the Common Securities and the Preferred Securities and to
execute any documents necessary to effectuate that issuance and sale.
Each Bank Trust exists for the exclusive purposes of (i) issuing Preferred
Securities to the Fund; (ii) issuing Common securities to each respective Bank
Holding Company; (iii) investing the gross proceeds of the sale of the Common
Securities and the Preferred Securities in the Subordinated Debentures; and
(iv) engaging in only those other activities necessary, advisable, or
incidental thereto. The Subordinated Debentures will be the only assets of the
Bank Trusts and payments on the Subordinated Debentures will be the only
revenue of the Bank Trusts. The Subordinated Debentures will be issued by each
Bank Holding Company pursuant to Indentures between each Bank Holding Company
and State Street, as "Debenture Trustee."
ADDITIONAL RISK FACTORS
In addition to the risk factors contained in the Prospectus, you should
consider carefully the risk factors described below in evaluating your
decision to invest in the Fund.
Risk Factors Related to the Preferred Securities
The following risk factors relate specifically to the Preferred Securities
to be held by the Fund, and may therefore have a significant impact on the
value of the Fund Shares:
No Sinking Fund. The Subordinated Debentures will not be subject to any
sinking fund. As a result, there will be no money set aside in a separate
custodial account for the purpose of ensuring that the Bank Holding Companies
meet their obligations to pay any distribution or repay the principal of the
Subordinated Debentures upon maturity or earlier redemption.
Limited Voting Rights. The Fund will generally have limited voting rights
relating only to specific matters, including modification of the terms of the
Preferred Securities, and the exercise of the Bank Trusts' rights as holders
of the Subordinated Debentures. The voting rights to appoint, remove or
replace, or to increase or decrease the number of the Trustees of the Bank
Trusts are vested exclusively in the Bank Holding Companies and not the Fund,
with certain exceptions. See "Additional Description of the Preferred
Securities--Voting Rights; Amendment of the Trust Agreement" below.
Limited Covenants. The covenants in the Indentures restricting activities of
the Bank Holding Companies are limited and there are no such covenants in the
Trust Agreements. As a result, neither the Indentures nor the Trust Agreements
limits the ability of any Bank Holding Company or any subsidiary to incur or
assume additional indebtedness or other obligations. Additionally, neither the
Indentures nor the Trust Agreements contain any financial ratios or specified
levels of liquidity to which the Bank Holding Companies must adhere.
Therefore, the provisions of these governing instruments should not be
considered a significant factor in evaluating whether each Bank Holding
Company will be able to comply with its obligations under its Subordinated
Debentures or its Guarantee.
S-2
<PAGE>
Risk Factors Related to the Bank Holding Companies
The following risk factors relate specifically to the Bank Holding
Companies, and may therefore have a significant impact on the value of the
Fund Shares:
Interest Rate Fluctuations. Changes in interest rates can have differing
effects on various aspects of the Bank Holding Companies' businesses,
particularly on the net interest income of each Bank Holding Company, the rate
of loan prepayments, the volume of residential mortgage loans originated or
produced, the sales of residential mortgage loans on the secondary market and
the value of each Bank Holding Company's mortgage servicing rights.
Unexpected Loan Losses. Industry experience indicates that a portion of any
bank's loans held in its own portfolio will become delinquent and a portion of
the loans will become charge-offs, resulting in losses to the bank. Regardless
of the underwriting criteria used by each of the Banks, losses may be
experienced as a result of various factors beyond a bank's control, including,
among other things, changes in market conditions affecting the value of
properties and problems affecting the credit of the borrower. Each Bank's
determination of the adequacy of its allowance for possible loan losses is
based on various considerations, including an analysis of the risk
characteristics of various classifications of loans, previous loan loss
experience, specific loans which would have loan loss potential, delinquency
trends, estimated fair value of the underlying collateral, current economic
conditions, the views of each Bank's regulators (who have the authority to
require additional reserves), geographic and industry loan concentration and
other factors. If delinquency levels were to increase as a result of adverse
general economic conditions, the loan loss reserve so determined by each Bank,
however, may not be adequate. Accordingly, the ability of each Bank's Bank
Holding Company to make payments on the Subordinated Debentures may be
impaired, which could make a default on the Preferred Securities more likely
to occur.
Growth. There can be no assurance that the Banks will be able to adequately
and profitably manage their future growth. Failure by a Bank Holding Company
to manage its growth effectively or sustain historical increases in loan
origination volume could have a material adverse effect on the Bank Holding
Company's business, financial condition, and results of operations, and
consequently its ability to repay the Subordinated Debentures.
Competition. Each of the Banks faces substantial competition in purchasing
and originating loans and in attracting deposits. Competitors include national
and state banks, trust companies, thrifts and thrift holding companies,
insurance companies, mortgage banking operations, credit unions, finance
companies, money market funds and other financial and non-financial companies,
many of which offer products similar to those offered by the Banks. Many
competing providers have greater financial resources than the Banks, offer
additional services, have a wider geographic presence or more accessible
branch and loan production offices. Accordingly, if any Bank is not successful
in competing, then a material adverse effect on the Bank Holding Company's
ability to pay the Subordinated Debentures may occur.
S-3
<PAGE>
ADDITIONAL DESCRIPTION OF THE PREFERRED SECURITIES
The Preferred Securities will represent undivided beneficial interests in
the assets of each Bank Trust and the Fund will be entitled to a preference
over the Common Securities in certain circumstances with respect to
distributions and amounts payable upon redemption of the Common Securities and
the Preferred Securities or liquidation of each Bank Trust. See "--
Subordination of Common Securities" below. Certain material terms of the Trust
Agreements are summarized below. The following description does not purport to
be complete and is subject to, and is qualified in its entirety by reference
to, the Trust Agreement which is filed with the SEC as an exhibit to the
Fund's registration statement.
General
The Preferred Securities will initially be limited to $18,125,000
liquidation amount at any one time outstanding (unless the Underwriters
exercise their over-allotment option in full, and the aggregate liquidation
amount of the Preferred Securities will then be $20,843,750). The Preferred
Securities will rank equally, and payments will be made thereon pro rata, with
the Common Securities of the Bank Trust except as described under "--
Subordination of Common Securities" below. Legal title to the Subordinated
Debentures will be held by State Street, as Property Trustee, in trust for the
benefit of the Fund and the Bank Holding Companies. The Guarantee will not
guarantee payment of distributions or amounts payable on redemption of the
Preferred Securities or liquidation of the Bank Trusts when the Bank Trusts do
not have funds on hand legally available for such payments. See "Additional
Description of the Guarantee" below.
Distributions
The Preferred Securities represent preferred undivided beneficial interests
in the assets of the Bank Trusts. Distributions on the Preferred Securities
will accrue at the annual rate of 9.75% of the stated liquidation amount of
$25.00 per Preferred Security from the date of issuance, payable quarterly in
arrears on March 31, June 30, September 30 and December 31 of each year, to
the Fund, as the holder of the Preferred Securities. Distributions will
accumulate from the date the Preferred Securities are issued. The first
distribution payment date for the Preferred Securities will be December 31,
1999. The amount of distributions payable for any period will be computed on
the basis of a 360-day year of twelve 30-day months.
Each of the Bank Holding Companies, or any one of them, has the right under
the Indenture to defer payment of interest on the Subordinated Debentures at
any time or from time to time for a period not exceeding 20 consecutive
quarterly periods with respect to each Extension Period, provided that no
Extension Period may extend beyond the stated maturity of the Subordinated
Debentures. As a consequence of any such deferral of interest payments by any
Bank Holding Company, quarterly distributions on its Preferred Securities will
also be deferred by its Bank Trust during any such Extension Period. Deferred
distributions to which the Fund is entitled, and deferred distributions by the
Fund to which the Fund's shareholders are entitled, will accumulate, with
interest thereon, at the annual rate of 9.75% compounded quarterly, from the
relevant payment date for such distributions. The term "distributions"
includes any such additional interest. See "Additional Description of the
Subordinated Debentures--Option to Extend Interest Payment Date" below for a
discussion of the restrictions imposed on a Bank Holding Company that elects
to defer payment of interest on the Subordinated Debentures.
During any Extension Period, the Bank Holding Company that elected the
deferral may extend the Extension Period as long as the Extension Period does
not exceed 20 consecutive quarterly periods or extend beyond the stated
maturity of the Subordinated Debentures. Upon the termination of any such
Extension Period and the payment of all amounts then due, and subject to the
foregoing limitations, that Bank Holding Company may elect to begin a new
Extension Period. The Bank Holding Company must give State Street, as Property
Trustee, as well as the Administrative Trustees and the Debenture Trustee
notice of its election of any Extension Period or any extension thereof at
least one business day prior to the earlier of:
(i) the date the distributions on the Preferred Securities would have been
payable except for the election to begin or extend the Extension
Period; and
S-4
<PAGE>
(ii) the date the Bank Trust is required to give notice to the Fund of the
record date or the date such distributions are payable, but in any
event not less than one business day prior to such record date.
There is no limitation on the number of times that any Bank Holding Company
may elect to begin an Extension Period. During any Extension Period, the Bank
Holding Company electing to defer payment of interest on the Subordinated
Debentures is subject to certain restrictions. For a description of these
restrictions, see below, under "Additional Description of the Subordinated
Debentures--Option to Extend Interest Payment Date."
None of the Bank Holding Companies have any current intention of exercising
their rights to defer payments of interest by extending the interest payment
period on the Subordinated Debentures. However, there can be no assurance that
the Bank Holding Companies will not elect to defer interest payments in the
future.
The revenue of the Bank Trusts available for distribution to the Fund is
limited to payments under the Subordinated Debentures in which the Bank Trusts
will invest the proceeds from the issuance and sale of the Common Securities
and the Preferred Securities. If any of the Bank Holding Companies do not make
interest payments on their Subordinated Debentures, its Property Trustee will
not have funds available to pay distributions on its Preferred Securities. The
payment of distributions on Preferred Securities by a Bank Trust is guaranteed
by the corresponding Bank Holding Company on a limited, subordinated basis as
set forth below under "Additional Description of the Guarantee."
Special Event Redemption
If a Capital Event, Tax Event or Investment Company Event (each as defined
herein, see "Additional Description of the Subordinated Debentures" below)
occurs, then the Bank Holding Companies will have the right, within 180 days
following the occurrence of such event to prepay the Subordinated Debentures
in whole (but not in part) in the manner set forth under "Additional
Description of the Subordinated Debentures--Special Event Prepayment," and
therefore to cause a mandatory redemption of the corresponding Preferred
Securities prior to their stated maturity. A Capital Event, Tax Event or an
Investment Company Event each is sometimes referred to herein as a "Special
Event."
Redemption Payments
Upon the mandatory repayment of any of the Subordinated Debentures at the
stated maturity of the Subordinated Debentures or upon the earlier prepayment
of any of the Subordinated Debentures (upon the occurrence of a Special Event
at any time or at the option of any of the Bank Holding Companies after
September 30, 2004), the proceeds from such repayment shall be applied by the
Property Trustee to redeem the Common Securities and the Preferred Securities,
upon not less than 30 nor more than 60 days notice prior to the date fixed for
repayment or redemption, at a redemption price equal to 100% of the aggregate
liquidation amount of the Common Securities and the Preferred Securities so
redeemed, plus accumulated and unpaid distributions due thereon to the date of
payment, if any (the "Redemption Price").
Liquidation of Bank Trusts and Distribution of Subordinated Debentures
Each Bank Trust will automatically dissolve and its affairs will be wound up
upon the first of any of the following events:
(i) certain events of bankruptcy, dissolution or liquidation of its
respective Bank Holding Company;
(ii) the distribution of its Subordinated Debentures to the Fund, if that
Bank Holding Company has given written direction to the Property
Trustee to dissolve its Bank Trust (which direction is optional and
wholly within the discretion of the Bank Holding Company at any time);
(iii) redemption of all of the Common Securities and the Preferred
Securities as described above;
S-5
<PAGE>
(iv) expiration of the term of the Bank Trust; and
(v) the entry of an order for the dissolution of the Bank Trust by a court
of competent jurisdiction.
Each Bank Holding Company will have the right at any time to liquidate its
respective Bank Trust and cause its Subordinated Debentures to be distributed
to the Fund. The Fund believes that under current United States federal income
tax law, a distribution of Subordinated Debentures in exchange for Preferred
Securities should not be taxable event to the Fund. Should there be a change
in law, a change in legal interpretation, a Tax Event or other circumstances,
however, a distribution of Subordinated Debentures could be a taxable event to
the Fund.
In the event of termination of any Bank Trust, that Bank Trust will be
liquidated by State Street and the Administrative Trustees as expeditiously as
State Street and the Administrative Trustees determine to be possible by
distributing, after satisfaction of liabilities to creditors of the
liquidating Bank Trust, to its respective Bank Holding Company and the Fund
the Subordinated Debentures, unless distribution is determined by the Property
Trustee not to be practicable. If distribution is not practicable, its
respective Bank Holding Company and the Fund will be entitled to receive out
of the assets of that Bank Trust legally available for distribution to them,
after satisfaction of liabilities to creditors of that Bank Trust, an amount
equal to the aggregate of the liquidation amount of the Common Securities and
the Preferred Securities, as the case may be, plus accumulated and unpaid
distributions thereon to the date of payment (the "Liquidation Distribution").
If the Liquidation Distribution can be paid only in part because that Bank
Trust has insufficient assets on hand legally available to pay in full the
aggregate Liquidation Distribution, then the amounts payable directly by that
Bank Trust on its Common Securities and the Preferred Securities will be paid
on a pro rata basis, except that if a Debenture Event of Default (as defined
in "--Events of Default; Notice" below) has occurred and is continuing, the
Preferred Securities will have a priority over the Common Securities. See "--
Subordination of Common Securities" below.
Redemption Procedures
The Common Securities and the Preferred Securities will be redeemed at the
Redemption Price with the proceeds from the contemporaneous repayment of the
Subordinated Debentures. Any redemption of the Common Securities and the
Preferred Securities will be made and the Redemption Price will be payable on
the redemption date only to the extent that the Bank Trusts have funds legally
available for the payment of such Redemption Price. Distributions on Preferred
Securities called for redemption will continue to accumulate at the then
applicable rate, from the redemption date originally established by the Bank
Trusts to the date such Redemption Price is actually paid, in which case the
actual payment date will be the redemption date for purposes of calculating
the Redemption Price.
Notice of any redemption will be mailed at least 30 days but not more than
60 days prior to the redemption date to the Fund. Unless the Bank Holding
Companies default in payment of the applicable Redemption Price on, or in the
repayment of, the Subordinated Debentures, on and after the redemption date,
distributions will cease to accrue on the Common Securities and the Preferred
Securities called for redemption.
Subordination of Common Securities
Payment of distributions on, and the Redemption Price of, the Preferred
Securities and the Common Securities, as applicable, will be made pro rata
based on the liquidation amount of the Preferred Securities and the Common
Securities; provided, however, that if on any distribution date or redemption
date a Debenture Event of Default has occurred and is continuing, no payment
of any distribution on, or Redemption Price of, any of the Common Securities,
will be made unless payment in full in cash of all accumulated and unpaid
distribution on all of the Preferred Securities for all distribution periods
terminating on or prior thereto has been made or provided for, and all funds
available to the Property Trustee will first be applied to the payment in full
in cash of all distributions on the Preferred Securities then due and payable.
S-6
<PAGE>
In the case of any Event of Default (as defined below), the applicable Bank
Holding Company as holder of Common Securities will be deemed to have waived
any right to act with respect to such Event of Default until the effect of
such Event of Default has been cured, waived or otherwise eliminated. Until
any such Event of Default has been so cured, waived or otherwise eliminated,
the Property Trustee will act solely on behalf of the Fund and not on behalf
of the Bank Holding Company as holder of the Common Securities, and only the
Fund will have the right to direct the Property Trustee to act on its behalf.
Events of Default; Notice
Any one of the following events constitutes an event of default under the
Trust Agreements (an "Event of Default") with respect to Preferred Securities:
(i) the occurrence of a Debenture Event of Default (see "Additional
Description of the Subordinated Debentures--Debenture Events of
Default"); or
(ii) default by a Bank Trust in the payment of any distribution when it
becomes due and payable, and continuation of such default for a period
of 30 days (except due to the deferral of any due date in the case of
an Extension Period); or
(iii) default by a Bank Trust in the payment of any redemption price of any
Common or Preferred Securities when it comes due and payable; or
(iv) default in the performance, or breach, in any material respect, of any
covenant or warranty of State Street or the Administrative Trustees
(other than a covenant or warranty a default in the performance of
which or the breach of which is dealt with in clauses (ii) or (iii)
above), and continuation of such default or breach for a period of 60
days after there has been given, by registered or certified mail, to
State Street and the Administrative Trustees by the Fund, a written
notice specifying such default or breach and requiring it to be
remedied and stating that such notice is a "Notice of Default" under
the Trust Agreements; or
(v) the occurrence of certain events of bankruptcy or insolvency with
respect to State Street, as Property Trustee, and the failure by the
Bank Holding Companies to appoint a successor Property Trustee within
60 days thereof.
Within one business day after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee will transmit
notice of the Event of Default to the Fund, the Administrative Trustees and
the corresponding Bank Holding Company unless the Event of Default has been
cured or waived.
If an Event of Default has occurred and is continuing, the Preferred
Securities will have preference over the Common Securities as described under
"--Liquidation of Bank Trusts and Distribution of Subordinated Debentures" and
"--Subordination of Common Securities" above.
Removal of State Street and the Administrative Trustees
Unless a Debenture Event of Default has occurred and is continuing, State
Street, as Property Trustee, or the Administrative Trustees may be removed at
any time by the Bank Holding Companies, as holders of the Common Securities.
If a Debenture Event of Default has occurred and is continuing, State Street,
as Property Trustee, may be removed at such time by the Fund, as holder of the
Preferred Securities. In no event will the Fund have the right to vote to
appoint, remove or replace the Administrative Trustees. Those voting rights
are vested exclusively in the Bank Holding Companies as the holders of the
Common Securities. No resignation or removal of State Street or the
Administrative Trustees and no appointment of a successor trustee will be
effective until the acceptance of appointment by the successor trustee in
accordance with the provisions of the Trust Agreement. However, the Bank
Holding Companies must maintain State Street or another qualified bank or
trust company reasonably acceptable to the Fund as the Property Trustee,
Indenture Trustee and Guarantee Trustee.
S-7
<PAGE>
Voting Rights; Amendment of the Trust Agreement
Except as provided below and under "--Removal of State Street and the
Administrative Trustees" and "Additional Description of the Guarantee--
Amendments and Assignment" and as otherwise required by law and the Trust
Agreements, the Fund will have no voting rights as holder of the Preferred
Securities.
Each Trust Agreement may be amended from time to time by the Bank Holding
Companies, State Street and the Administrative Trustees without the consent of
the Fund to:
(i) cure any ambiguity, correct or supplement any provisions in the Trust
Agreement that may be inconsistent with any other provision of the
Trust Agreement, or add any other provisions with respect to matters or
questions arising under the Trust Agreement; or
(ii) modify, eliminate or add to any provisions of the Trust Agreement to
the extent necessary:
(A) to ensure that the Bank Trusts will be classified for United States
federal income tax purposes as grantor trusts at all times that the
Common Securities and the Preferred Securities are outstanding;
(B) to ensure that the Bank Trusts will not be required to register as
"investment companies" under the 1940 Act; or
(C) to ensure that the proceeds from the sale of the Common Securities
and the Preferred Securities will constitute "Tier 1 capital" under
capital adequacy requirements which may be applicable to the Bank
Holding Companies; provided, however, that in the case of the
foregoing clause (i), such action shall not adversely affect in any
material respect the interests of the Fund as holder of the
Preferred Securities, and any amendments of the Trust Agreement will
become effective when notice thereof is given to the Fund and the
Bank Holding Companies.
The Trust Agreement may be amended by the Bank Holding Companies, State
Street and the Administrative Trustees:
(i) with the consent of the Fund; and
(ii) upon receipt by State Street and the Administrative Trustees of an
opinion of counsel to the effect that such amendment or the exercise
of any power granted to State Street and the Administrative Trustees
in accordance with such amendment will not affect the status of the
Bank Trusts as grantor trusts for United States federal income tax
purposes or the Bank Trusts' exemption from status as "investment
companies" under the 1940 Act, provided that, without the consent of
the Fund and the Bank Holding Companies, the Trust Agreement may not
be amended to:
(A) change the amount or timing of any distribution or other payment on
or in respect of the Common or Preferred Securities or otherwise
adversely affect the amount of any other payment required to be made
in respect of the Common Securities or the Preferred Securities as
of a specified date; or
(B) restrict the right of the Bank Holding Companies or the Fund to
institute suit for the enforcement of any such payment on or after
such date.
So long as any Subordinated Debentures are held by State Street, as Property
Trustee, the Administrative Trustees may not, without the consent of the Fund:
(i) direct the time, method and place of conducting any proceeding for any
remedy available to State Street, as Debenture Trustee, or execute any
trust or power conferred on State Street, as Debenture Trustee, with
respect to the Subordinated Debentures;
(ii) waive certain past defaults under the Indenture;
(iii) exercise any right to rescind or annul a declaration of acceleration
of the maturity of the principal of the Subordinated Debentures; or
(iv) consent to any amendment, modification or termination of the Indenture
or the Subordinated Debentures (if consent of the Fund is required)
without obtaining the prior approval of the Fund. State Street and the
Administrative Trustees will not revoke any action previously
authorized or approved
S-8
<PAGE>
by the Fund except by subsequent action of the Fund. State Street, as
Property Trustee, will notify the Fund of any notice of default with
respect to the Subordinated Debentures. In addition to obtaining the
foregoing approvals by the Fund, prior to taking any of the foregoing
actions, State Street and the Administrative Trustees shall obtain an
opinion of counsel experienced in such matters to the effect that the
Bank Trusts will not be classified as associations taxable as
corporations for United States federal income tax purposes on account of
such action.
Any required approval of the Fund may be given by the Manager of the Fund.
State Street, as Property Trustee, will notify the Manager of the Fund of any
meeting at which the Fund is entitled to vote, or of any matter upon which
action by written consent of the Fund is to be taken. No vote or consent of
the Fund will be required for the Bank Trusts to redeem and cancel their
Preferred Securities in accordance with the Trust Agreement.
Notwithstanding that the Fund is entitled to vote or consent under any of
the circumstances described above, any of the Preferred Securities that may be
owned by the Bank Holding Companies, State Street, the Administrative Trustees
or any affiliate of the Bank Holding Companies will, for purposes of such vote
or consent, be treated as if they were not outstanding.
ADDITIONAL DESCRIPTION OF THE SUBORDINATED DEBENTURES
The Subordinated Debentures are to be issued under the Indenture to the
respective Bank Trusts. Certain material terms of the Indenture are summarized
below. This summary of certain terms and provisions of the Subordinated
Debentures and the Indenture does not purport to be complete, and is qualified
in its entirety by reference to all of the provisions of the Indenture filed
with the SEC as an exhibit to the Fund's registration statement.
General
Concurrently with the issuance of the Preferred Securities, each of the Bank
Trusts will invest the proceeds thereof, together with the consideration paid
by the Bank Holding Companies for the Common Securities (which shall be equal
to 3% of the Offering), in Subordinated Debentures issued by each respective
Bank Holding Company. The Subordinated Debentures will bear interest at the
annual rate of 9.75% of the principal amount thereof, payable quarterly in
arrears on March 31, June 30, September 30 and December 31 of each year (each,
an "Interest Payment Date"), commencing December 31, 1999, to State Street, as
Property Trustee for the Bank Trusts, subject to certain exceptions. It is
anticipated that, until the liquidation, if any, of the Bank Trusts, each
Subordinated Debenture will be held in the name of the Property Trustee in
trust for the benefit of the Bank Holding Companies and the Fund. The amount
of interest payable for any period will be computed on the basis of a 360-day
year of twelve 30-day months. Accrued interest that is not paid on the
applicable Interest Payment Date will bear additional interest on the amount
thereof at the annual rate of 9.75% thereof, compounded quarterly. The term
"interest", as used herein, includes quarterly interest payments, interest on
quarterly interest payments not paid on the applicable Interest Payment Date
and additional sums (as described herein), as applicable. The Subordinated
Debentures will be issued in denominations of $25.00 and integral multiples
thereof. The Subordinated Debentures will mature on September 30, 2029 except
as described below.
The Subordinated Debentures will be unsecured and subordinate and rank
junior in right of payment to the extent and in the manner set forth in the
Indenture to all Senior Debt (as defined below, in "--Subordination"). The
Indenture does not limit the incurrence or issuance of other secured or
unsecured debt of the Bank Holding Companies, including Senior Debt, or other
obligations. See "--Subordination" below. In addition, the Bank Holding
Companies are holding companies and almost all of the operating assets of the
Bank Holding Companies and their consolidated subsidiaries are owned by those
subsidiaries. Accordingly, the Bank Holding Companies rely primarily on
dividends from their subsidiaries to meet debt service obligations and pay
operating expenses. The inability of the Bank Holding Companies' direct and
indirect subsidiaries to pay dividends to their respective
S-9
<PAGE>
Bank Holding Companies in an amount sufficient to meet debt service
obligations and pay operating expenses would have a material adverse effect on
the Bank Holding Companies, Bank Trusts, the Fund and the Fund Shares.
Because the Bank Holding Companies are holding companies, their right to
participate in any distribution of the assets of their subsidiaries upon its
liquidation or reorganization or otherwise, is subject to the prior claims of
creditors of that subsidiary, except to the extent that its Bank Holding
Company may itself be recognized as a creditor of that subsidiary.
Accordingly, the Subordinated Debentures will be effectively subordinated to
all existing and future liabilities of each Bank Holding Company's
subsidiaries, including the respective Banks, and the Fund will look only to
the assets of each Bank Holding Company for distributions on the Preferred
Securities.
In addition, as the Bank Holding Companies are non-operating holding
companies, almost all of the operating assets of each Bank Holding Company are
owned by the respective Bank Holding Companies' subsidiaries. Each Bank
Holding Company relies primarily on dividends from its subsidiaries to meet
its obligations for payment of principal and interest on its outstanding debt
obligations, if any, and corporate expenses. Each of the Banks is subject to
certain restrictions imposed by federal or state law on any extensions of
credit to, and certain other transactions with, its respective Bank Holding
Company, and on investments in stock or other securities thereof. Such
restrictions prevent the Bank Holding Companies and such other affiliates from
borrowing from their respective Banks unless the loans are secured by various
types of collateral. Further, such secured loans, other transactions and
investments by each Bank are generally limited in amount as to its Bank
Holding Company and as to each of its other affiliates to 10% of the
respective Bank's capital and surplus and as to the Bank Holding Company and
all of such other affiliates to an aggregate of 20% of the respective Bank's
capital and surplus. In addition, payment of dividends to the Bank Holding
Companies by their respective Banks is subject to ongoing review by banking
regulators and is subject to various statutory limitations and in certain
circumstances requires prior approval by banking regulatory authorities.
Federal and state regulatory agencies also have the authority to limit further
the Banks' payment of dividends based on other factors, such as the
maintenance of adequate capital for the Banks, which could reduce the amount
of dividends otherwise payable.
Option to Extend Interest Payment Date
Each Bank Holding Company will have the right under its Indenture at any
time during the term of the Subordinated Debentures to defer the payment of
interest on the Subordinated Debentures at any time or from time to time for a
period not exceeding 20 consecutive quarterly periods with respect to each
Extension Period, provided that no Extension Period may extend beyond the
stated maturity of the Subordinated Debentures. At the end of an Extension
Period, the Bank Holding Company or Companies that deferred the payment of
interest must pay all interest then accrued and unpaid (together with
additional interest accrued on such deferred interest at the annual rate of
9.75%, compounded quarterly). During an Extension Period, interest will
continue to accrue and the Bank Trusts, will be required to accrue interest
income for United States federal income tax purposes prior to the receipt of
cash attributable to such income. See "Additional Tax Discussion" below.
During any such Extension Period, the Bank Holding Company electing to defer
payment of interest on the Subordinated Debentures generally may not:
(i) declare or pay any dividends or distributions on, or redeem, purchase,
acquire, or make a liquidation payment with respect to, any of its
capital stock (which includes common and preferred stock); or
(ii) make any payment of principal or interest on or repay, repurchase or
redeem any of its debt securities that rank equally with or junior in
right of payment to the Subordinated Debentures (other than the
Guarantee).
Prior to the termination of any such Extension Period, the Bank Holding
Company or Companies that elected the deferral may further extend the
Extension Period, provided that such extension does not cause such Extension
Period to exceed 20 consecutive quarterly periods or to extend beyond the
stated maturity of the
S-10
<PAGE>
Subordinated Debentures. Upon the termination of any such Extension Period and
the payment of all amounts then due on any Interest Payment Date, the Bank
Holding Company may elect to begin a new Extension Period, subject to the
above requirements. No interest will be due and payable during an Extension
Period, except at the end of the period. If the Property Trustee is the only
registered holder of the Subordinated Debentures at the time a Bank Holding
Company elects an Extension Period, the Bank Holding Company must give State
Street, as Property Trustee and Indenture Trustee, notice of its election of
any Extension Period (or an extension thereof) at least one business day prior
to the earlier of (i) the next date on which the distributions on the
Preferred Securities would have been payable except for the election to begin
or extend such Extension Period or (ii) the date the Bank Trust is required to
give notice to the Fund of the record date or the date such distributions are
payable, but in any event not less than one business day prior to such record
date. The Administrative Trustees will notify the Fund and the Fund will
notify its shareholders of the Bank Holding Company's or Companies' election
to begin or extend a new Extension Period to the Fund. There is no limitation
on the number of times that a Bank Holding Company may elect to begin a new
Extension Period.
Special Event Prepayment
If a Capital Event, Tax Event or an Investment Company Event (as defined
below) (each, a "Special Event") occurs, each Bank Holding Company may, at its
option, prepay its Subordinated Debentures in whole (but not in part) at any
time within 180 days of the occurrence of such Special Event, at a prepayment
price (the "Prepayment Price") equal to 100% of the principal amount of such
Subordinated Debentures plus accrued and unpaid interest thereon, if any, to
the date of such prepayment.
A "Capital Event" means the receipt by a Bank Trust of an opinion of counsel
experienced in such matters that the Bank Holding Companies cannot, or within
90 days after the date of the opinion of such counsel will not, be permitted
by the applicable regulatory authorities, due to a change in law, regulation,
policy or guideline or interpretation or application of law or regulation,
policy or guideline, to account for the Preferred Securities as Tier 1 capital
under the capital guidelines or policies of the Federal Reserve or other
applicable federal or state banking regulation.
"Tax Event" means the receipt by a Bank Trust of an opinion of counsel
experienced in such matters to the effect that there is more than an
insubstantial risk that (i) income received or accrued by the Bank Trusts from
the Subordinated Debentures is, or will be within 90 days of the date of such
opinion, subject to United States federal income tax; (ii) interest payable by
its Bank Holding Company on the Subordinated Debentures is not, or within 90
days of the date of such opinion will not be, deductible in whole or in part
by the Bank Holding Company for United States federal income tax purposes; or
(iii) the Bank Trust is, or will be within 90 days of the date of such
opinion, subject to more than a minimal amount of other taxes, duties or other
governmental charges.
"Investment Company Event" means the receipt by a Bank Trust of an opinion
of counsel experienced in such matters, to the effect that there is more than
an insubstantial risk that the Bank Trust is or will be considered an
"investment company" required to be registered under the 1940 Act.
Notice of any prepayment will be mailed at least 30 days but not more than
60 days before the redemption date to the Bank Trusts to be prepaid at their
registered addresses. Unless a Bank Holding Company defaults in payment of the
Prepayment Price, on and after the prepayment due date interest ceases to
accrue on its Subordinated Debentures called for prepayment.
If a Bank Trust is required to pay any additional taxes, duties or other
governmental charges solely by reason of its holding the Subordinated
Debentures, then its Bank Holding Company will pay those additional amounts to
the Bank Trust as additional interest under the Indenture.
S-11
<PAGE>
Optional Prepayment After Five Years
The Bank Holding Companies will have the right to prepay their respective
Subordinated Debentures, in whole at any time, or in part from time to time,
at their option at any time after September 30, 2004 (five years after
issuance), at the Prepayment Price plus accrued and unpaid interest.
Debenture Events of Default
The Indenture provides that any one or more of the following described
events with respect to the Subordinated Debentures constitutes an Event of
Default (a "Debenture Event of Default"):
(i) failure for 30 days to pay any interest on the Subordinated Debentures,
when due (subject to the deferral of any due date in the case of an
Extension Period); or
(ii) failure to pay any principal on the Subordinated Debentures when due
whether at maturity, upon redemption, by declaration of acceleration
of maturity or otherwise; or
(iii) failure to observe or perform in any material respect certain other
covenants contained in the Indenture for 90 days after written notice
to the Bank Holding Companies from the Debenture Trustee or the Bank
Trusts, or the Fund in the case of a distribution of Subordinated
Debentures; or
(iv) certain events in bankruptcy, insolvency or reorganization of the Bank
Holding Companies.
The Bank Trusts or the Fund, as the case may be, have the right to direct
the time, method and place of conducting any proceeding for any remedy
available to the Debenture Trustee. The Debenture Trustee or the Fund may
declare the entire principal of the Subordinated Debentures due and payable
immediately upon a Debenture Event of Default. The Bank Trusts may annul such
declaration if the default (other than the nonpayment of the principal of the
Subordinated Debentures which has become due solely by such acceleration) has
been cured and a sum sufficient to pay all matured installments of interest
and principal due otherwise than by acceleration has been deposited with the
Debenture Trustee.
Consolidation, Merger, Sale of Assets and Other Transactions
The Indenture provides that any Bank Holding Company may consolidate with,
merge with or into any other person or convey, transfer or lease its
properties and assets as an entirety or substantially as an entirety to any
person, but only if the successor person is organized under the laws of the
United States, any State or the District of Columbia, and such successor
person expressly assumes that Bank Holding Company's obligations under its
Subordinated Debentures.
The general provisions of the Indentures do not afford a Bank Trust
protection in the event of a highly leveraged or other transaction involving
its respective Bank Holding Company that may adversely affect the Bank Trust.
Subordination
In the Indenture, the Bank Holding Companies and their Bank Trusts covenant
and agree that their Subordinated Debentures will be subordinate and junior in
right of payment to all Senior Debt (as defined below), whether outstanding at
the date of the Indenture or thereafter incurred, to the extent provided in
the Indenture. Upon any payment or distribution by a Bank Holding Company of
assets to creditors upon any liquidation, dissolution, winding up,
reorganization, assignment for the benefit of creditors, marshaling of assets
or any bankruptcy, insolvency, debt restructuring or similar proceedings in
connection with any bankruptcy, insolvency, debt restructuring or similar
proceedings of the Bank Holding Company, the holders of Senior Debt will first
be entitled to receive payment in full in respect of such Senior Debt before
the Bank Trusts (and therefore, before the Fund and its shareholders) will be
entitled to receive or retain any payment in respect thereof.
S-12
<PAGE>
In the event of the acceleration of the maturity of Subordinated Debentures,
the holders of all Senior Debt outstanding at the time of such acceleration
will first be entitled to receive payment in full in respect of such Senior
Debt before the Bank Trusts will be entitled to receive or retain any payment
in respect of the Subordinated Debentures.
No payments on account of principal or interest, if any, in respect of the
Subordinated Debentures will be made if a default in any payment with respect
to Senior Debt or an event of default with respect to any Senior Debt
resulting in the acceleration of the maturity thereof has occurred and is
continuing, or if any judicial proceeding is pending with respect to any such
default.
"Senior Debt" means, with respect to a Bank Holding Company and its
subsidiaries, the principal of (and premium, if any) and interest, if any
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to a Bank Holding Company whether or
not such claim for post-petition interest is allowed in such proceeding), on
debt, whether incurred on or prior to the date of the Indenture or thereafter
incurred, unless, such obligations, by their express terms, are not superior
in right of payment to the Subordinated Debentures or to other debt which is
of equal rank or subordinated to the Subordinated Debentures.
However, Senior Debt does not include:
(i) any debt of a Bank Holding Company which when incurred and without
respect to any election under section 1111(b) of the United States
Bankruptcy Code of 1978, as amended, was without recourse to the Bank
Holding Company;
(ii) any debt of a Bank Holding Company to any of its subsidiaries;
(iii) any debt to any employee of a Bank Holding Company;
(iv) any debt which by its terms is subordinated to trade accounts payable
or accrued liabilities arising in the ordinary course of business to
the extent that payments made to the holders of such debt by the
holders of the Subordinated Debentures as a result of the
subordination provisions of the Indenture would be greater than they
otherwise would have been as a result of any obligation of such
holders to pay amounts over to the obligees on such trade accounts
payable or accrued liabilities arising in the ordinary course of
business as a result of subordination provisions to which such debt is
subject;
(v) the principal of and interest, if any (including interest accruing on
or after the filing of any petition in bankruptcy or for reorganization
relating to a Bank Holding Company whether or not such claim for post-
petition interest is allowed in such proceeding), on debt, whether
incurred on or prior to the date of the Indenture or thereafter
incurred, which is by its terms expressly provided to be junior and
subordinate to other debt of the Bank Holding Company (other than the
Subordinated Debentures); and
(vi) trade accounts payable or accrued liabilities to trade creditors
arising in the ordinary course of business.
By reason of such subordination, in the event of an insolvency or other
defaults by a Bank Holding Company, creditors of the Bank Holding Company who
are holders of Senior Debt, as well as certain general creditors of the Bank
Holding Company, may recover more, ratably, than its respective Bank Trust.
Additionally, the Bank Holding Companies currently conduct substantially all
of their operations through subsidiaries, and the Bank Trusts will be
structurally subordinated to the creditors of the Bank Holding Companies'
subsidiaries.
The Indenture places no limitation on the amount of additional secured or
unsecured debt, including the Senior Debt, or other obligations, that may be
incurred by the Bank Holding Companies. The Bank Holding Companies expect from
time to time to incur additional indebtedness and obligations, including
Senior Debt.
Information Concerning The Debenture Trustee
The Debenture Trustee is under no obligation to exercise any of the powers
vested in it by the Indenture at the request of the Bank Trusts unless offered
reasonable indemnity by the Bank Trusts against the costs, expenses and
liabilities which might be incurred thereby. The Debenture Trustee is not
required to expend or risk its own funds or otherwise incur personal financial
liability in the performance of its duties if the Debenture Trustee reasonably
believes that repayment or adequate indemnity is not reasonably assured to it.
S-13
<PAGE>
From time to time, the Debenture Trustee and/or its affiliates may extend
credit and may provide other financial services to the Bank Holding Companies.
ADDITIONAL DESCRIPTION OF THE GUARANTEE
The Guarantee will be executed and delivered by the Bank Holding Companies
concurrently with the issuance by the Bank Trusts of the Preferred Securities
for the benefit of the Fund. State Street Bank and Trust Company will act as
guarantee trustee ("Guarantee Trustee") under the Guarantee. Certain material
terms of the Guarantee are summarized below. This summary of certain
provisions of the Guarantee does not purport to be complete and is subject to,
and qualified in its entirety by reference to, all of the provisions of the
Guarantee, which is filed with the SEC as an exhibit to the Fund's
registration statement. The Guarantee Trustee will hold the Guarantee for the
benefit of the Fund.
General
The Bank Holding Companies will irrevocably agree to pay in full on a
subordinated basis, to the extent set forth herein, the Guarantee Payments (as
defined below) to the Fund, as and when due, regardless of any defense, right
of set-off or counterclaim that the Bank Trusts may have or assert other than
the defense of payment. The Guarantee of each Bank Holding Company applies
only to payments due on the Preferred Securities issued by its corresponding
Bank Trust. The following payments with respect to the Preferred Securities,
to the extent not paid by or on behalf of the Bank Trusts (the "Guarantee
Payments"), will be subject to the Guarantee:
(i) any accumulated and unpaid distributions required to be paid on
Preferred Securities, to the extent the Bank Trusts have funds on hand
at such time legally available therefor;
(ii) the Redemption Price with respect to any Preferred Securities called
for redemption, to the extent that the Bank Trusts have funds on hand
at such time legally available therefor; or
(iii) upon a voluntary or involuntary termination and liquidation of the
Bank Trusts (unless the Subordinated Debentures are distributed to
the Fund), the lesser of:
(a) the aggregate liquidation amount of the Preferred Securities plus
all accrued and unpaid distributions; and
(b) the amount of assets of the Bank Trusts remaining available for
distribution to the Fund.
Accordingly, if a default occurs on the Preferred Securities and the
defaulting Bank Trust does not have the funds on hand to pay amounts due and
unpaid on the Preferred Securities, the Fund will have no recourse under the
Guarantee to seek payment from the corresponding Bank Holding Company.
Therefore, the Guarantee may provide little additional recourse to the Fund.
If a Bank Trust defaults on the Preferred Securities, such default would most
likely be due to a failure by its Bank Holding Company to make required
payments on the Subordinated Debentures, in which case the Bank Trust will
have no funds on hand to be paid under the Guarantee. A Bank Holding Company's
obligation to make a Guarantee Payment may be satisfied by direct payment of
the required amounts by the Bank Holding Company to the Fund or by causing its
respective Bank Trust to pay such amounts to the Fund.
The Guarantee will rank subordinate and junior in right of payment to all
Senior Debt and other liabilities of the Bank Holding Company (other than
capital stock) to the extent provided therein. See "--Status; Subordination"
below.
In addition, because the Bank Holding Companies are holding companies, the
right of the Bank Holding Companies to participate in any distribution of
assets of any subsidiary upon such subsidiary's liquidation or reorganization
or otherwise is subject to the prior claims of creditors of that subsidiary,
except to the extent that a Bank Holding Company may itself be recognized as a
creditor of that subsidiary. Accordingly, the Bank Holding Companies'
obligations under the Guarantee will be effectively subordinated to all
existing and future
S-14
<PAGE>
liabilities of the Bank Holding Companies' direct and indirect subsidiaries,
and claimants should look only to the assets of the Bank Holding Companies for
payments thereunder. See "Additional Description of the Subordinated
Debentures--General" above. The Guarantee does not limit the incurrence or
issuance of other secured or unsecured debt of the Bank Holding Companies,
including Senior Debt, whether under the Indenture, any other indenture that
the Bank Holding Companies may enter into in the future or otherwise.
Status; Subordination
The Guarantee will constitute an unsecured obligation of each Bank Holding
Company and will rank subordinate and junior in right of payment to all Senior
Debt in the same manner as the Subordinated Debentures and also will rank
subordinate and junior in right of payment to all other liabilities of that
Bank Holding Company.
The Guarantee will constitute a guarantee of payment and not of collection
(i.e., the guaranteed party may institute a legal proceeding directly against
Bank Holding Company to enforce its rights under the Guarantee without first
instituting a legal proceeding against any other person or entity). The
Guarantee will be held for the benefit of the Fund. The Guarantee will not be
discharged except by payment of the Guarantee Payments in full to the extent
not paid by the Bank Trusts or upon distribution to the Fund of the
Subordinated Debentures. The Guarantee does not place a limitation on the
amount of additional Senior Debt that may be incurred by each Bank Holding
Company. The Bank Holding Companies expect from time to time to incur
additional indebtedness constituting Senior Debt.
Amendments and Assignment
Except with respect to any changes that do not materially adversely affect
the rights of the Fund (in which case no vote of the Fund will be required),
the Guarantee may not be amended without the prior approval of the Fund. All
guarantees and agreements contained in the Guarantee Agreement will bind the
successors, assigns, receivers, trustees and representatives of the Bank
Holding Companies and will inure to the benefit of the Fund.
Events of Default
An Event of Default under the Guarantee will occur upon the failure of a
Bank Holding Company to perform any of its payment or other obligations
thereunder. The Fund will have the right to direct the time, method and place
of conducting any proceeding for any remedy available to the Guarantee Trustee
in respect of the Guarantee or to direct the exercise of any trust or power
conferred upon the Guarantee Trustee under the Guarantee.
If the Guarantee Trustee fails to enforce the Guarantee, the Fund may
institute a legal proceeding directly against the applicable Bank Holding
Companies to enforce its rights under the Guarantee without first instituting
a legal proceeding against the Bank Trusts, the Guarantee Trustee or any other
person or entity.
Certain Covenants of the Bank Holding Companies
In its respective Guarantee, each Bank Holding Company will covenant that,
so long as any of its respective Preferred Securities remain outstanding, if
and during the time that an Event of Default under the Guarantee has occurred
and is continuing, that Bank Holding Company will not:
(i) declare or pay any dividends or distributions on, or redeem, purchase,
acquire, or make a liquidation payment with respect to, any of its
capital stock (which includes common and preferred stock); or
(ii) make any payment of principal or interest on or repay or repurchase or
redeem any of its debt securities that rank equally with or junior in
right of payment to its Subordinated Debentures.
Termination
The Guarantee will terminate and have no further force and effect upon full
payment of the Redemption Price of the Preferred Securities, upon full payment
of the liquidation amount payable upon liquidation of the
S-15
<PAGE>
Bank Trusts or upon distribution of Subordinated Debentures to the Fund. The
Guarantee will continue to be effective or will be reinstated, as the case may
be, if at any time the Fund must restore payment of any sums paid under the
Preferred Securities or the Guarantee, such as in the event of an order by a
bankruptcy court.
Information Concerning the Guarantee Trustee
The Guarantee Trustee, other than during the continuance of a default with
respect to a Guarantee, will undertake to perform only such duties as are
specifically set forth in such Guarantee and, after default, must exercise the
same degree of care as a prudent individual would exercise in the conduct of
his or her own affairs. Subject to such provisions, the Guarantee Trustee is
under no obligation to exercise any of the powers vested in it by the
Guarantee at the request of the Fund, unless offered reasonable indemnity
against the costs, expenses and liabilities which might be incurred thereby.
The Guarantee Trustee is not required to expend or risk its own funds or
otherwise incur personal financial liability in the performance of its duties
if it reasonably believes that repayment or adequate indemnity is not
reasonably assured to it.
From time to time the Guarantee Trustee and/or its affiliates may extend
credit and may provide other financial services to the Bank Holding Companies.
RELATIONSHIP AMONG THE PREFERRED SECURITIES, THE
SUBORDINATED DEBENTURES AND THE GUARANTEE
Limited Guarantee
Payments of distributions and other amounts due on the Preferred Securities
(to the extent the Bank Trusts have funds on hand legally available for the
payment of such distributions) will be irrevocably guaranteed by the Bank
Holding Companies only to the extent set forth under "Additional Description
of the Guarantee" above. Taken together, the Bank Holding Companies'
obligations under the Subordinated Debentures, the Indenture, the Trust
Agreement and the Guarantee will provide, in the aggregate and subject to
their respective terms as described above, a full and irrevocable, but
subordinated, obligation for payments of distributions and other amounts due
on the Preferred Securities. If, and to the extent that, any Bank Holding
Company does not make the required payments on its Subordinated Debentures,
its respective Bank Trusts will not have sufficient funds to make the related
payments, including distributions, on its respective Preferred Securities. The
Guarantee will not cover any such payment when a Bank Trust does not have
sufficient funds on hand legally available therefor. In such event, a remedy
of the Fund is to institute a lawsuit or other legal action to collect amounts
due; however, generally the Fund will not have a right to receive payment
until all Senior Debt of the Bank Holding Company is paid in full.
Sufficiency of Payments
As long as payments of interest and other payments are made when due on the
Subordinated Debentures, such payments will be sufficient to cover
distributions and other payments due on the Preferred Securities, primarily
because:
(i) the aggregate principal amount or Prepayment Price of the Subordinated
Debentures will be equal to the sum of the liquidation amount or
Redemption Price, as applicable, of the Common Securities and the
Preferred Securities;
(ii) the interest rate and interest and other payment dates on the
Subordinated Debentures will match the distribution rate and
distribution and other payment date for the Common Securities and the
Preferred Securities;
(iii) each Bank Holding Company will pay for all and any costs, expenses
and liabilities of its respective Bank Trust except that Bank Trust's
obligations to the Fund; and
(iv) the Trust Agreement will provide that the Bank Trusts are not
authorized to engage in any activity that is not consistent with the
limited purpose thereof.
S-16
<PAGE>
Enforcement of Rights of the Fund; Defaults and Subordination
The Fund may institute a legal proceeding directly against any Bank Holding
Company to enforce its rights under the Guarantee without first instituting a
legal proceeding against the Guarantee Trustee, the Bank Trusts or any other
person or entity.
A Bank Holding Company's default or event of default under any Senior Debt
would not constitute a default or Event of Default under the Trust Agreement.
However, in the event of payment defaults under, or acceleration of, Senior
Debt, the subordination provisions of the Indenture will provide that no
payments may be made in respect of the Subordinated Debentures until such
Senior Debt has been paid in full or any payment default thereunder has been
cured or waived. Failure to make required payments on Subordinated Debentures
constitutes an Event of Default under its respective Trust Agreement.
Limited purpose of the Bank Trusts
The Preferred Securities represent preferred undivided beneficial interests
in the assets of the Bank Trusts and the Bank Trusts exist for the sole
purpose of issuing and selling the Common Securities and the Preferred
Securities, using the proceeds from the sale of the Common Securities and the
Preferred Securities to acquire the Subordinated Debentures and engaging in
only those other activities necessary, advisable or incidental thereto. A
principal difference between the rights of the Fund and the Bank Trusts is
that the Bank Trusts will be entitled to receive from the Bank Holding
Companies the principal and interest on Subordinated Debentures held, while
the Fund is entitled to receive distributions on the Preferred Securities from
the Bank Trusts (or, in certain circumstances, from the Bank Holding Companies
under the Guarantee) if and to the extent the Bank Trusts have funds on hand
legally available for the payment of such distributions.
Rights upon Termination; Priority of Claims
Unless the Subordinated Debentures are distributed to the Fund, upon any
voluntary or involuntary termination and liquidation of the Bank Trusts, the
Fund will be entitled to receive, out of assets held by the Bank Trusts, after
satisfaction of liabilities to creditors as provided by applicable law, the
Liquidation Distribution. See "Additional Description of the Preferred
Securities--Liquidation of Bank Trusts and Distribution of Subordinated
Debentures" above. Upon any voluntary or involuntary liquidation or bankruptcy
of a Bank Holding Company, the Property Trustee, as holder of the Subordinated
Debentures, would be a subordinated creditor of that Bank Holding Company,
subordinated in right of payment to all Senior Debt as set forth in the
Indenture, but entitled to receive payment in full of principal and interest,
before any stockholders of that Bank Holding Company receive payments or
distributions. Since each Bank Holding Company will be the guarantor under the
Guarantee and will agree to pay for all costs, expenses and liabilities of its
Bank Trust (other than that Bank Trust's obligations to the Bank Holding
Companies and the Fund) the positions of the Fund and the Bank Trusts relative
to other creditors and to stockholders of the Bank Holding Companies in the
event of liquidation or bankruptcy of a Bank Holding Company are expected to
be similar. Although, in the event of bankruptcy or insolvency proceedings
involving a Bank Holding Company, that Bank Holding Company's obligations
under the Guarantee will rank subordinate and junior in right of payment to
all liabilities of the Bank Holding Company but senior to any obligations in
respect of any class of capital stock of the Bank Holding Company.
S-17
<PAGE>
MANAGEMENT OF THE FUND
Trustees and Officers
The management of the Fund, including general supervision of the duties
performed for the Fund under the Investment Management Agreement, is the
responsibility of the Board of Trustees. The number of trustees of the Fund is
currently set at three, one of whom, Mr. Holbrook, is an "interested person"
(as the term "interested person" is defined in the 1940 Act) and two of whom
are "disinterested persons." The name, date of birth, position with the Fund,
business address and principal occupation and other affiliations during the
past five years are set forth below for each trustee and officer of the Fund.
<TABLE>
<CAPTION>
Name, Date of Birth,
Position with the Fund Principal Occupations and Other Affiliations
and Business Address During the Past Five Years
---------------------- --------------------------------------------
<C> <S>
James S. Holbrook, Jr., Chairman of the Board and CEO of Sterne,
7/12/44, Chairman of the Board, Agee & Leach, Inc., since 1990 and its
Trustee and President, holding company, Sterne Agee & Leach Group,
800 Shades Creek Parkway, Inc. ("SAL Group"), since SAL Group's
Suite 125, formation in 1996. Mr. Holbrook serves as
Birmingham, Alabama 35209 the Chairman of the Board for each of SAL
Group's other subsidiaries, which include
the Manager of the Fund, Sterne Agee Asset
Management, Inc., and the Custodian of the
Fund, The Trust Company of Sterne, Agee &
Leach, Inc. Mr. Holbrook also serves as a
director for Bobby Allison Wireless
Corporation.
Robert M. Couch, Executive Vice President of New South
4/3/57, Trustee, Bancshares, Inc. since 1994; President of
1900 Crestwood Boulevard, New South Federal Savings Bank since June
Birmingham, Alabama 35210 1997; Director New South Federal Savings
Bank since January 1995; Vice Chairman of
New South Federal Savings Bank from March
1995 until June 1997; President of
Collateral Mortgage Ltd. since August 1995;
and Executive Vice President of Collateral
Mortgage Ltd. from October 1993 to August
1995.
James A. Taylor, Sr., Chairman of the Board and Chief Executive
3/15/42, Trustee, Officer of The Banc Corporation, a Delaware
17 North 20th Street, bank holding company based in Birmingham,
Birmingham, Alabama 35203 Alabama since its incorporation in April
1998; President of The Banc Corporation
since its incorporation in April 1998 until
November 1998; Chairman of the Board,
President and Chief Executive Officer of
Warrior Capital Corporation, an Alabama
banking corporation from October 1997 until
its merger into The Banc Corporation in
September 1998; 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;
Chairman of the Board and Chief Executive
Officer of various banks and bank holding
companies that ultimately comprised ANB from
1981 until 1996. Mr. Taylor also currently
serves on the Board of Directors of the
American Sports Medicine Institute.
F. Eugene Woodham, Chief Financial Officer of Sterne, Agee &
2/18/52, Secretary and Treasurer, Leach, Inc. since 1995 and its holding
800 Shades Creek Parkway, company, SAL Group, since SAL Group's
Suite 125, formation in 1996. Mr. Woodham serves on the
Birmingham, Alabama 35209 Board of Directors for each of SAL Group's
other subsidiaries, which include the
Manager of the Fund, Sterne Agee Asset
Management, Inc., and the Custodian of the
Fund, The Trust Company of Sterne, Agee &
Leach, Inc. For the nine years prior to
1995, Mr. Woodham served in various
capacities with Secor Bank, Federal Savings
Bank, most recently as President and
Chairman of the Board of Directors (after
its acquisition by Regions Bank in 1993).
</TABLE>
S-18
<PAGE>
The Fund pays each of its Trustees who is not a director, officer or
employee of Sterne Agee Asset Management, Inc., or any of its affiliates
$3,000 for each Board meeting attended in-person or by telephone. In addition,
the Fund will reimburse these Trustees for travel and out-of-pocket expenses
incurred in connection with meetings of the Board of Trustees. Other Trustees
and Officers receive no compensation or expense reimbursement from the Fund.
Investment Manager
Sterne Agee Asset Management, Inc., 800 Shades Creek Parkway, Suite 125,
Birmingham, Alabama 36209, serves as the Manager to the Fund. The Manager is a
wholly-owned subsidiary of Sterne, Agee & Leach Group, Inc., which also serves
as the holding company for the Representative of the Underwriters.
SUPERVISION AND REGULATION OF THE BANK HOLDING COMPANIES
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 such as
the Fund. 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 Bank
Holding Companies and the Banks 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 Bank Holding Companies
The Bank Holding Companies are bank holding companies registered under the
Bank Holding Company Act of 1956 ("BHCA"), and the Bank Holding Companies are
subject to supervision, regulation and examination by the Federal Reserve. In
addition, as a nationally chartered bank, Gulf Coast National Bank, a wholly-
owned subsidiary of FirstBancorp, Inc., is subject to the regulation,
supervision, examination and reporting requirements of the Office of the
Comptroller of the Currency ("OCC"). 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. 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 Bank Holding Companies' principal source of funds to make distributions
on the Subordinated Debentures will be cash dividends that the Bank Holding
Companies receive from the Banks. The payment of dividends by the Banks to the
Bank Holding Companies is subject to certain restrictions imposed by federal
banking laws, regulations and authorities. See "--The Banks" below.
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
S-19
<PAGE>
could impose stricter limits on a Bank's payment of dividends to its Bank
Holding Company 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 bankruptcy 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 activity 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 exception to these
prohibitions allows the acquisition of interests in companies whose activities
are found by the Federal Reserve, by 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 an ongoing 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 and
the company is not well capitalized or considered well managed, or is subject
to unresolved supervisory issues. 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
S-20
<PAGE>
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 and OCC have 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. For each Bank Holding Company's specific capital
ratios, see the Selected Consolidated Financial Data tables of each Bank
Holding Company in the Prospectus under "The Bank Holding Companies".
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 required to maintain a leverage
ratio of up to 200 basis points above the regulatory minimum. As of June 30,
1999, the leverage ratio for each of the Bank Holding Companies was as
follows: First Southern Bancorp, Inc. 5.80%, FirstBancorp, Inc. 5.51% and
Central Community Corporation 7.76%.
The federal banking agencies' risk-based ratios 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 lessor 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
S-21
<PAGE>
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 any
of the Bank Holding Companies, or otherwise obtaining control or a
"controlling influence" over any of the Bank Holding Companies.
The Banks
Each of the Bank's deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC") to the extent provided by law. Each Bank is also subject
to numerous state and federal statutes and regulations that affect its
business, activities, and operations, and each is supervised and examined by
one or more state or federal bank regulatory agencies.
First Southern Bank is a state-chartered bank and a member of the Federal
Reserve System and is therefore subject to supervision and examination by the
Federal Reserve, the FDIC and the Florida Department of Banking and Finance.
First State Bank Central Texas, on the other hand, is a state-chartered bank,
but is not a member of the Federal Reserve System, and is therefore subject to
supervision and examination by the FDIC and the Texas Department of Banking
rather than the Federal Reserve. First National Bank of the Florida Keys and
Gulf Coast National Bank are nationally chartered banks and are therefore
subject to regulation, supervision, and examination by the OCC and the FDIC.
The federal banking regulator for each of the Banks, as well as the
appropriate state banking authority for each of the Banks that is a state
chartered bank, regularly examines the operations of the Banks and is given
authority to approve or disapprove mergers, consolidations, the establishment
of branches, and similar corporate actions. The federal and state banking
regulators also have the power to prevent the continuance or development of
unsafe or unsound banking practices or other violations of law.
The Banks are subject to the provisions of the Community Reinvestment Act
(the "CRA"). Under the terms of the CRA, the Banks have a continuing and
affirmative obligation consistent with their safe and sound operations to help
meet the credit needs of their entire communities, including low- and
moderate-income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The CRA requires each appropriate federal bank regulatory agency, in
connection with its examination of a subsidiary depository institution, to
assess such institution's record in assessing and meeting the credit needs of
the community served by that institution, including low- and moderate-income
neighborhoods. The regulatory agency's assessment of the institution's record
is made available to the public. Further, such assessment is required of any
institution which has applied to: (i) charter a national bank; (ii) obtain
deposit insurance coverage for a newly chartered institution; (iii) establish
a new branch office that will accept deposits; (iv) relocate an office; or (v)
merge or consolidate with, or acquire the assets or assume the liabilities of,
a federally regulated financial institution. In the case of a bank holding
company applying for approval to acquire a bank or other bank holding company,
the Federal Reserve will assess the records of each subsidiary depository
institution of the applicant bank holding company,
S-22
<PAGE>
and such records may be the basis for denying the application. All of the
Banks received at least a "satisfactory" CRA rating in their most recent
examinations.
Payment of Dividends. The Bank Holdings Companies are legal entities
separate and distinct from their banking and other subsidiaries. The principal
source of cash flow of the Bank Holding Companies, including cash flow to pay
dividends to its stockholders and distributions on the Subordinated Debentures
to its Bank Trust, are dividends from the Banks. There are statutory and
regulatory limitations on the payment of dividends by the Banks to the Bank
Holding Companies as well as the Bank Holding Companies to its stockholders.
If, in the opinion of a federal regulatory agency, an institution under its
jurisdiction is engaged in or is about to engage in an unsafe or unsound
practice (which, depending on the financial condition of the institution,
could include the payment of dividends), such agency may require, after notice
and hearing, that such institution cease and desist from such practice. The
federal banking agencies have indicated that paying dividends that deplete an
institution's capital base to an inadequate level would be an unsafe and
unsound banking practice. Under the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), an insured institution may not pay any
dividend if payment would cause it to become undercapitalized or if it already
is undercapitalized. See "--Corrective Measures for Capital Deficiencies"
below. Moreover, the Federal Reserve and the FDIC have issued policy
statements which provide that bank holding companies and insured banks should
generally pay dividends only out of current operating earnings.
Capital Adequacy Requirements. The FDIC (and the OCC as to national banks)
has adopted regulations establishing minimum requirements for the capital
adequacy of insured institutions, i.e., the Banks. 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 ratio 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 Bank Holding
Companies discussed above. As of June 30, 1999, First Southern Bank's ratio of
Tier 1 capital to total risk-weighted assets was 8.02% and its ratio of total
capital to total risk weighted assets was 9.16%. As of June 30, 1999, First
National Bank of the Florida Keys and Gulf Coast National Bank's ratio of Tier
1 capital to total risk weighted assets was 9.44% and 9.59%, respectively, and
their ratio of total capital to total risk weighted assets was 10.56% and
10.28% respectively. As of June 30, 1999, First State Bank Central Texas's
ratio of Tier 1 capital to total risk weighted assets was 11.27%, and its
ratio of total capital to total risk weighted assets was 12.42%.
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 level
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. Each of First Southern Bank, First
National Bank of the Florida Keys, Gulf Coast National Bank and First State
Bank Central Texas is classified as "adequately capitalized," "well
capitalized," "well capitalized" and "well capitalized," respectively, 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
S-23
<PAGE>
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 in subject to
mandated capital raising activities, restriction on interest rates paid and
transactions with affiliates, removal of management, and other restrictions.
The FDIC has only very 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.
The FDIC established a process for raising or lowering all deposit insurance
rates for insured institutions semi-annually if conditions warrant a change.
Under this 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 rule making with
opportunity for public comment.
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 a Bank Holding Company 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
applicable state banking regulatory authorities also have broad enforcement
powers over banks in their jurisdictions, including the power to impose
orders, remove officers and directors, impose fines and appoint supervisors
and conservators.
Consumer Laws and Regulations. In addition to the laws and regulations
already discussed herein, the Banks are 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 Trust 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 Banks must comply with the applicable
provisions of these consumer protection laws and regulations as part of their
ongoing customer relations.
ADDITIONAL TAX DISCUSSION
Classification of the Subordinated Debentures
Tax Counsel has advised each Bank Holding Company that in Tax Counsel's
opinion, the Subordinated Debentures should be classified under current law as
indebtedness for United States federal income tax purposes. No assurance can
be given, however, that the Internal Revenue Service will not successfully
challenge that position. In determining whether a financial instrument is to
be treated as debt or equity for federal income tax purposes, the Internal
Revenue Service considers a number of factors including whether the
instruments are
S-24
<PAGE>
intended to be treated as debt or equity for non-tax purposes, including
regulatory, rating agency, or financial purposes. The intended treatment of
the arrangement involving the Subordinated Debentures and the Preferred
Securities under bank regulatory capital guidelines as Tier 1 Equity and not
as indebtedness could cause the Internal Revenue Service to challenge the Bank
Holding Companies' treatment of the Subordinated Debentures as indebtedness.
The discussion below assumes that the Subordinated Debentures issued by each
Bank Holding Company will be classified for United States federal income tax
purposes as indebtedness of such Bank Holding Company.
Classification of Bank Trusts
Tax Counsel will render its opinion generally to the effect that under
current law and assuming full compliance with the terms of the Trust Agreement
and Indenture of each Bank Trust that each Bank Trust will be classified for
United States federal income tax purposes as a trust that is taxable as a
grantor trust and not as an association taxable as a corporation. In addition,
the Fund does not qualify as a regulated investment company under Subchapter M
of the Code. Accordingly, for United States federal income tax purposes, the
Fund generally should be considered the owner of an undivided interest in the
Subordinated Debentures.
Interest Income and Original Issue Discount
Each Bank Holding Company has the right, under the terms of the Subordinated
Debentures, to defer payments of interest by extending interest payment
periods on the Subordinated Debentures. The right to extend interest payment
periods would cause the Subordinated Debentures to be treated as debt
instruments with contingent payments issued with OID unless the likelihood
that interest payment periods will be extended is "remote." The Bank Holding
Companies intend to report the interest on the Subordinated Debentures as OID
(even though no Bank Holding Company has a current intention to exercise its
right to defer interest payments). As a result, a shareholder of the Fund must
include its pro rata share of the OID in income on an economic accrual basis
regardless of its method of tax accounting, even though such accrual causes
amounts to be included in income prior to the receipt of cash attributable to
the interest. Actual payments and distributions of stated interest will not be
reported as taxable income. Accordingly, a shareholder of the Fund might be
required to pay more in taxes on Fund Share income than it receives in Fund
Share distributions with respect to periods in which the interest payments on
the Subordinated Debentures are deferred.
If (as expected) the issue price of the Subordinated Debentures equals their
stated principal amount, the total amount of OID (i.e., the excess of the
total amount of payment due on the Subordinated Debentures over their issue
price) will equal the total amount of interest payable on the Subordinated
Debentures (assuming no redemption before maturity). Accordingly, the amount
of OID which accrues in any semi-annual period ending on a distribution date
will approximately equal the amount of the interest that accrues on the
Subordinated Debentures during that period. For a shareholder who uses the
calendar year as its taxable year, the amount of OID to be included in income
for a taxable year should be equal to the distributions received in such year
except during an Extension Period or in a year in which the Fund disposes of
Preferred Securities or the shareholder disposes of its Fund Shares.
The amount of OID that must be included in a shareholder's income for a
taxable year is the sum of the "daily portions" of OID, allocated ratably to
each day in an accrual period, on the shareholder's pro rata share of the
Fund's undivided interest in the Subordinated Debentures for all days during
the year that the shareholder owns its Fund Shares. The amount of OID
allocable to each accrual period is the product of the "adjusted issue price"
of the Subordinated Debentures and their yield to maturity. The adjusted issue
price at the beginning of an accrual period generally will equal that stated
principal amount if, as expected, the issue price is the stated principal
amount and all accrued interest is paid on each Interest Payment Date. If a
Bank Holding Company were to exercise its right to defer any payment of
interest on the Subordinated Debentures, however, the adjusted issue price
would increase by the amount of accrued but deferred interest, and the amount
of OID accruing during subsequent accrual periods would increase (until all
deferred interest had been paid).
S-25
<PAGE>
Because income on a Fund Share will constitute OID, a corporate holder of a
Fund Share will not be entitled to a dividends-received deduction with respect
to any income recognized with respect to the Fund Share.
Receipt of Subordinated Debentures or Cash upon Liquidation of the Bank Trust
Each Bank Holding Company will have the right at any time to liquidate its
associated Bank Trust and cause its Subordinated Debentures to be distributed
pro rata to the Fund. Under current law, and assuming, based on the opinions
of Tax Counsel, that the Bank Trusts will be classified as grantor trusts and
not associations taxable as corporations, a distribution of Subordinated
Debentures from a Bank Trust to the Fund for United States federal income tax
purposes, would be treated as a nontaxable event to each shareholder of the
Fund. If, however, the Bank Trusts were classified for United States federal
income tax purposes as associations taxable as corporations at the time of the
distribution, a distribution of Subordinated Debentures would constitute a
taxable event to the Bank Trusts and to the shareholders and a shareholder's
holding period in the shareholder's proportionate share of the Subordinated
Debentures would begin on the date such Subordinated Debentures were received.
Under certain circumstances described herein, the Subordinated Debentures
may be redeemed for cash and the proceeds of such redemption distributed to
the Fund. Under current law, such a redemption would, for United States
federal income tax purposes, constitute a taxable disposition of a
shareholder's proportionate share of the redeemed Subordinated Debentures as
if the shareholder had sold its Fund Shares for cash.
Sale of Fund Shares
A shareholder that disposes of Fund Shares between record dates for payments
of distributions thereon will be required to include accrued but unpaid OID on
the Fund Shares through the date of disposition in income as ordinary income
and to add such amount to such Shareholder's adjusted tax basis in its Fund
Shares. If the Fund Shares trade at a price that does not accurately reflect
the value of accrued but unpaid OID with respect to the underlying
Subordinated Debentures and the selling price is less than the shareholder's
adjusted tax basis, a shareholder will recognize a capital loss. Subject to
certain limited exceptions, capital losses cannot be applied to offset
ordinary income for United States federal income tax purposes.
Each shareholder will be required to include in income for a taxable year
the amount of OID for the year attributable to the Subordinated Debentures as
if the shareholder directly held the Subordinated Debentures. OID is
includible in income for a taxable year even if no cash is actually paid
during that year and the shareholder is a cash basis taxpayer. If the
shareholder disposes of the Fund Shares before the record date for the payment
of the cash attributable to the OID which has been included in the
shareholder's income, the shareholder's tax basis in the Fund Shares will be
increased. Therefore, the shareholder may incur a capital loss on the
disposition even though the OID was previously includible as ordinary income.
Backup Withholding
Payments made on, and proceeds from the sale of, Fund Shares may be subject
to a "backup" withholding tax of 31 percent unless the shareholder complies
with certain identification requirements. Any withheld amounts will be allowed
as a credit against the Shareholder's United States federal income tax,
provided the required information is provided to the Internal Revenue Service.
S-26
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Audited Balance Sheet of the Fund.................................. F-3 - F-6
Audited Financial Statements of FirstBancorp, Inc.................. F-7 - F-25
Unaudited Financial Statements of FirstBancorp, Inc................ F-26 - F-27
Audited Financial Statements of First Southern Bancorp, Inc........ F-29 - F-49
Unaudited Financial Statements of First Southern Bancorp, Inc...... F-50 - F-51
Audited Financial Statements of Central Community Corporation...... F-53 - F-70
Unaudited Financial Statements of Central Community Corporation.... F-71 - F-72
</TABLE>
F-1
<PAGE>
[THIS PAGE LEFT BLANK INTENTIONALLY.]
F-2
<PAGE>
AUDITED STATEMENT OF ASSETS AND LIABILITIES
SAL TRUST PREFERRED FUND I
AUGUST 19, 1999
F-3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SAL Trust Preferred Fund I:
We have audited the accompanying statement of assets and liabilities of SAL
TRUST PREFERRED FUND I (the "Fund") as of the opening day of business on
August 19, 1999, the date of deposit. The financial statement is the
responsibility of the Fund's management. Our responsibility is to express an
opinion on the financial statement 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 statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. 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 statement referred to above presents fairly,
in all material respects, the financial position of SAL Trust Preferred Fund I
at the opening day of business on August 19, 1999 in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
Birmingham, Alabama
August 19, 1999
F-4
<PAGE>
SAL TRUST PREFERRED FUND I
STATEMENT OF ASSETS AND LIABILITIES
AT THE OPENING OF BUSINESS ON AUGUST 19, 1999, THE DATE OF DEPOSIT
<TABLE>
<S> <C>
ASSETS:
Cash and cash equivalents............................................ $100,000
========
Net assets applicable to 4,000 common shares of beneficial
interest issued and outstanding....................................... $100,000
========
</TABLE>
F-5
<PAGE>
SAL TRUST PREFERRED FUND I
NOTES TO FINANCIAL STATEMENT
AT THE OPENING OF BUSINESS ON AUGUST 19, 1999, DATE OF DEPOSIT
1. Organization and Risk Factors
SAL Trust Preferred Fund I (the "Fund") was formed under an Agreement and
Declaration of Trust dated July 24, 1999 as a closed-end, nondiversified
management investment company. The Fund has been inactive since that date
except for matters relating to its organization and registration under the
Investment Company Act of 1940 and the sale of 4,000 shares of its beneficial
interest to Sterne Agee Asset Management, Inc., the Fund's investment manager.
The Fund will offer 725,000 shares of beneficial interest at $25.00 per
share through several underwriters in an initial public offering (the
"Offering") without any sales load or underwriting discounts payable by
investors or the Fund. Fund shares, when issued, will be fully paid and
nonassessable, and will have no preemptive or conversion rights or rights to
cumulative voting.
It is the intention of management of the Fund to invest substantially all of
its assets in Cumulative Trust Preferred securities issued in approximately
equal amounts by three statutory trusts, controlled respectively, by three
bank holding companies (First Bancorp, Inc.--Naples, Florida; First Southern
Bancorp, Inc.--Boca Raton, Florida; and Central Community Corporation--Temple,
Texas). It is anticipated that the assets of each statutory trust will consist
solely of subordinated debentures and payments thereunder. This concentration
may result in susceptibility to changes in each bank holding company's limited
geographic market area.
While the Fund's investment objective is to seek a high level of current
income for long-term investors, there can be no assurance that the Fund will
attain its investment objective. In addition, the investment manager has no
previous experience in managing similar closed-end funds.
The Fund's investment manager will receive an annual fee, payable on a
quarterly basis, in a maximum amount equal to .10% of the Fund's average daily
net asset value (including assets attributable to any Fund shares that may be
outstanding liquidation amount).
2. Summary of Accounting Policies
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
disclosures of contingent assets and liabilities at the date of the financial
statements.
Cash and Cash Equivalents
Cash and cash equivalents represents a principal cash deposit in an
interest-bearing money market account with the Trust Company of Sterne, Agee
and Leach, an affiliate of the Fund's investment manager.
F-6
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
FIRSTBANCORP, INC. AND SUBSIDIARIES
DECEMBER 31, 1998
F-7
<PAGE>
FIRSTBANCORP, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants......................... F-9
Consolidated Balance Sheets................................................ F-10
Consolidated Statements of Income.......................................... F-11
Consolidated Statements of Shareholders' Equity............................ F-12
Consolidated Statements of Cash Flows...................................... F-13
Notes to Consolidated Financial Statements................................. F-14
</TABLE>
F-8
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders
FirstBancorp, Inc.
Naples, Florida
We have audited the accompanying consolidated balance sheets of
FirstBancorp, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to report on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
FirstBancorp, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
OSBURN, HENNING AND COMPANY
Orlando, Florida
February 19, 1999
F-9
<PAGE>
FIRSTBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
------
Cash and due from banks.............................. $ 13,697,608 $ 12,639,092
Federal funds sold................................... 14,010,000 20,530,000
------------ ------------
Cash and Cash Equivalents.......................... 27,707,608 33,169,092
Securities available for sale........................ 22,302,911 23,201,290
Loans held for sale.................................. 1,970,297 1,668,550
Loans, net........................................... 225,562,532 179,121,155
Premises and equipment............................... 14,348,607 13,512,635
Other real estate.................................... 331,000 835,000
Other assets......................................... 18,303,796 2,803,919
------------ ------------
TOTAL ASSETS..................................... $310,526,751 $254,311,641
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities
- -----------
Deposits:
Noninterest-bearing................................. $ 51,448,364 $ 35,612,657
Interest-bearing:
Savings, time and demand........................... 150,965,236 132,580,151
Time, $100,000 and over............................ 58,585,834 48,241,165
------------ ------------
Total Deposits..................................... 260,999,434 216,433,973
Short-term borrowings............................... 25,921,998 16,573,660
Other liabilities................................... 3,485,598 3,085,790
Long-term debt...................................... 2,400,000 3,000,000
------------ ------------
Total Liabilities.................................. 292,807,030 239,093,423
Commitments and Contingencies--Note 15
- --------------------------------------
Shareholders' Equity
- --------------------
Common stock--$.01 par value, 5,000,000 shares
authorized; 1,627,403 and 1,604,729 shares issued
and outstanding.................................... 16,274 16,047
Additional paid-in capital.......................... 11,251,196 10,797,943
Retained earnings................................... 6,384,392 4,341,699
Accumulated other comprehensive income.............. 67,859 62,529
------------ ------------
Total Shareholders' Equity......................... 17,719,721 15,218,218
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......... $310,526,751 $254,311,641
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-10
<PAGE>
FIRSTBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
Interest Income
Interest and fees on loans........................... $17,824,061 $15,276,452
Interest on securities............................... 1,457,130 1,488,945
Interest on federal funds sold and other............. 1,310,860 758,783
----------- -----------
Total Interest Income.............................. 20,592,051 17,524,180
----------- -----------
Interest Expense
Interest on deposits................................. 8,404,459 7,809,034
Interest on short-term borrowings.................... 848,405 339,525
Interest on long-term debt........................... 290,872 288,192
----------- -----------
Total Interest Expense............................. 9,543,736 8,436,751
----------- -----------
Net Interest Income................................ 11,048,315 9,087,429
Provision for Loan Losses.............................. 585,000 474,000
----------- -----------
Net Interest Income After Provision For Loan
Losses............................................ 10,463,315 8,613,429
----------- -----------
Noninterest Income
Service charges and fees............................. 1,251,600 1,399,292
Securities gains..................................... 7,487 1,499
Gain on sale of loans................................ 1,159,782 570,815
Other................................................ 1,287,632 931,421
----------- -----------
Total Noninterest Income........................... 3,706,501 2,903,027
----------- -----------
Noninterest Expense
Salaries and benefits................................ 4,531,251 3,577,541
Occupancy expense.................................... 885,341 863,480
Equipment expense.................................... 1,063,653 971,144
Other operating expense.............................. 3,713,471 3,182,449
----------- -----------
Total Noninterest Expense.......................... 10,193,716 8,594,614
----------- -----------
Income Before Income Taxes......................... 3,976,100 2,921,842
Income Taxes........................................... 1,483,926 1,089,564
----------- -----------
NET INCOME......................................... $ 2,492,174 $ 1,832,278
=========== ===========
Earnings Per Share:
Basic................................................ $ 1.53 $ 1.12
=========== ===========
Diluted.............................................. $ 1.44 $ 1.08
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-11
<PAGE>
FIRSTBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Total
----------------- Paid-in Retained Comprehensive Shareholders'
Shares Amount Capital Earnings Income Equity
--------- ------- ----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1996................... 1,558,685 $15,587 $10,107,743 $2,900,081 $ 7,550 $13,030,961
Comprehensive Income:
Net income for 1997.... -- -- -- 1,832,278 -- 1,832,278
Other comprehensive
income, net of
deferred income tax:
Change in unrealized
gain or loss on
securities available
for sale.............. -- -- -- -- 54,979 54,979
-----------
Total Comprehensive
Income.............. 1,887,257
-----------
1.67% common stock
dividend declared in
1996, paid in 1997..... 26,044 260 390,400 (390,660) -- --
Sale of 20,000 shares of
common stock at $15 per
share to the Company's
KSOP Plan.............. 20,000 200 299,800 -- -- 300,000
--------- ------- ----------- ---------- ------- -----------
BALANCE, DECEMBER 31,
1997................... 1,604,729 16,047 10,797,943 4,341,699 62,529 15,218,218
Comprehensive Income:
Net income for 1998.... -- -- -- 2,492,174 -- 2,492,174
Other comprehensive
income, net of
deferred income tax:
Change in unrealized
gain or loss on
securities available
for sale.............. -- -- -- -- 5,330 5,330
-----------
Total Comprehensive
Income.............. 2,497,504
-----------
1.40% common stock
dividend declared in
1997, paid in 1998..... 22,474 225 449,255 (449,481) -- --
Issuance of 200 shares
of common stock at $20
per share.............. 200 2 3,998 -- -- 4,000
--------- ------- ----------- ---------- ------- -----------
BALANCE, DECEMBER 31,
1998................... 1,627,403 $16,274 $11,251,196 $6,384,392 $67,859 $17,719,721
========= ======= =========== ========== ======= ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-12
<PAGE>
FIRSTBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income........................................ $ 2,492,174 $ 1,832,278
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 852,687 784,064
Provision for loan losses....................... 585,000 474,000
Provision for losses on other real estate....... -- 43,980
Provision (benefit) for deferred tax............ (133,566) 105,986
Amortization (accretion) on securities.......... 48,158 (4,240)
Changes in assets and liabilities:
Loans held for sale............................. (301,747) (1,062,727)
Other assets.................................... (384,875) (514,765)
Other liabilities............................... 397,677 (13,527)
------------ ------------
Net Cash Provided By Operating Activities..... 3,555,508 1,645,049
------------ ------------
INVESTING ACTIVITIES
Purchases of securities available for sale........ (17,914,545) (8,999,789)
Maturities, calls and principal collections on
securities available for sale.................... 18,773,230 4,054,727
Increase in loans................................. (47,026,376) (35,576,109)
Investment in bank-owned life insurance policies.. (15,000,000) --
Acquisition of premises and equipment............. (1,671,100) (3,762,103)
Proceeds from sale of repossessed collateral...... 504,000 100,694
------------ ------------
Net Cash Used In Investing Activities......... (62,334,791) (44,182,580)
------------ ------------
FINANCING ACTIVITIES
Net change in deposits............................ 44,565,461 41,556,328
Net change in short-term borrowings............... 9,348,338 10,972,478
Reduction in long-term debt....................... (600,000) --
Issuance of common stock.......................... 4,000 300,000
------------ ------------
Net Cash Provided By Financing Activities..... 53,317,799 52,828,806
------------ ------------
Net Increase (Decrease) in Cash and Cash
Equivalents.................................. (5,461,484) 10,291,275
Cash and Cash Equivalents:
Beginning................................. 33,169,092 22,877,817
------------ ------------
Ending.................................... $ 27,707,608 $ 33,169,092
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-13
<PAGE>
FIRSTBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--Organizational Background and Basis of Financial Statement
Presentation
Organizational Background and Consolidation Policy
FirstBancorp, Inc. (the Company) is a Florida corporation organized during
1988 for the purpose of becoming a bank holding company pursuant to the Bank
Holding Company Act of 1956. At December 31, 1998, the Company owns 100% of
two nationally-chartered commercial banks and a non-banking subsidiary. The
Company's headquarters are in Naples, Florida.
The Company's banking subsidiaries are First National Bank of the Florida
Keys (FNB) in Marathon, Florida, and Gulf Coast National Bank (GCNB) in
Naples, Florida. GCNB opened as a de novo banking institution in August, 1995.
The accompanying consolidated financial statements include the financial
results of the Company and its subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Statement of Cash Flows
For purposes of the statements of cash flows, the Company considers due from
banks and federal funds sold to be cash equivalents. Interest paid totaled
$9,414,811 and $8,777,567 in 1998 and 1997, respectively. Income taxes paid
totaled $1,525,000 and $930,000 during 1998 and 1997, respectively.
Reclassifications
Certain amounts and captions presented in the 1997 financial statements have
been reclassified to conform to the 1998 presentation. These reclassifications
had no effect on total assets, liabilities, equity or income as previously
reported.
NOTE 2--Summary of Significant Accounting Policies
The Company has adopted Statement of Financial Accounting Standard No. 130,
"Reporting Comprehensive Income" (SFAS 130). SFAS 130 requires the reporting
of comprehensive income in addition to net income. Comprehensive income is
comprised of net income and items of "other comprehensive income". The
Company's only item of other comprehensive income is the unrealized gain or
loss on the Banks' available for sale investment securities portfolios.
In accordance with SFAS 130, the Company has presented the accompanying
financial statements to reflect the effects of application of the provisions
of SFAS 130 for 1997 as well as for the current year.
Securities Available for Sale
The Banks use their securities portfolios for asset/liability, liquidity,
and other funds management purposes. Because of the indefinite holding periods
of these securities, they are classified as securities available for sale.
Securities available for sale are accounted for on a fair value basis with net
unrealized gains and losses, net of any associated income tax effect, included
in other comprehensive income.
Amortization and accretion are recognized as adjustments to interest income.
Realized gains and losses are determined using the specific identification
method.
Loans and Allowance For Loan Losses
Loans are stated at the amount of unpaid principal, reduced by an allowance
for loan losses and by unearned loan income. Interest on substantially all
loans is calculated by using the simple interest method on daily balances
F-14
<PAGE>
FIRSTBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of the principal amounts outstanding except for those classified as nonaccrual
loans. The accrual of interest is discontinued when future collection of
principal or interest in accordance with the contractual terms may be
doubtful.
Loan fees, net of related origination costs, are capitalized and amortized
as yield adjustments over the respective loan terms using a method which
approximates the interest method. Interest and fees on loans includes loan
fees recognized as yield adjustments of $855,000 and $495,000 in 1998 and
1997, respectively.
The allowance for loan losses is established through a provision for loan
losses charged against income. Loans are charged against the allowance for
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, past loan
loss experience and, in some cases, industry historical loss experience.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation
computed principally on the straight-line method over the estimated useful
lives of the assets. These lives are summarized as follows:
<TABLE>
<CAPTION>
Asset Estimated Lives
----- ---------------
<S> <C>
Building and improvements.................................... 15-40 years
Equipment and furnishings.................................... 5-7 years
</TABLE>
Maintenance and repairs to premises and equipment are charged to operations,
and improvements and additions are capitalized.
Other Real Estate
The Banks record as other real estate those properties foreclosed as a
result of defaulted real estate loans where repayment is otherwise remote. At
the time of foreclosure, the properties are reclassified from loans to other
real estate at the lower of fair value, less estimated costs to sell, or cost.
Any gain or loss upon the subsequent sale is recorded in current operations.
Income Taxes
The Company and the Banks use the liability method of accounting for
deferred income tax. Under this method, deferred income taxes reflect the net
tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes, and the amounts used for
income tax purposes. Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through the annual provision for income taxes.
The Company and its subsidiaries file consolidated federal and state income
tax returns. Tax is allocated among the entities on an "as though separate"
basis.
Dividends
The Company's ability to pay dividends is principally dependent upon
dividends it receives from its bank subsidiaries. The Banks are limited by
applicable banking statutes as to the amount of dividends they may pay in any
given year. Such restrictions generally limit dividends to an amount not
exceeding net income for the current and two preceding years, unless
additional amounts are approved by the regulatory authorities.
F-15
<PAGE>
FIRSTBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On November 23, 1998, the Company's Board of Directors declared a 1.23%
common stock dividend payable January 4, 1999 to shareholders as of December
1, 1998.
Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period.
Diluted earnings per share includes the effect of unexercised stock options
using the treasury stock method. The treasury stock method assumes that common
stock was purchased at the average market price during the period. For the
years ended December 31, 1998 and 1997, the reconciliation of the denominators
of the basic and diluted per-share computations is as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Weighted average common shares........................... 1,631,050 1,630,998
Weighted average stock options........................... 96,421 68,769
--------- ---------
Shares used for diluted.................................. 1,727,471 1,699,767
========= =========
</TABLE>
For purposes of determining weighted average common shares, stock dividends
have been given retroactive effect to January 1, 1997. These dividends, and
therefore weighted average common shares, include approximately 20,000 shares
for the stock dividend declared in November, 1998, and paid on January 4,
1999.
NOTE 3--Securities Available for Sale
The amortized cost and estimated fair value of securities available for sale
as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U. S. Treasury securities.... $ 2,612,887 $ 30,491 $ -- $ 2,643,378
U. S. Government agencies.... 17,898,685 88,163 11,408 17,975,440
States and political
subdivisions................ 90,000 662 -- 90,662
Federal Home Loan Bank
stock....................... 1,250,000 -- -- 1,250,000
Federal Reserve Bank and FNMA
stocks...................... 343,625 -- 194 343,431
----------- -------- ------- -----------
$22,195,197 $119,316 $11,602 $22,302,911
=========== ======== ======= ===========
</TABLE>
The amortized cost and estimated fair value of securities available for sale
as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U. S. Treasury securities.... $ 7,243,941 $ 18,756 $ 680 $ 7,262,017
U. S. Government agencies.... 14,440,974 91,096 10,677 14,521,393
States and political
subdivisions................ 95,000 755 -- 95,755
Federal Home Loan Bank
stock....................... 1,002,500 -- -- 1,002,500
Federal Reserve Bank and FNMA
stocks...................... 319,625 -- -- 319,625
----------- -------- ------- -----------
$23,102,040 $110,607 $11,357 $23,201,290
=========== ======== ======= ===========
</TABLE>
F-16
<PAGE>
FIRSTBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The amortized cost and estimated fair value of securities available for sale
at December 31, 1998, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
----------- -----------
<S> <C> <C>
Due in one year or less............................. $ 3,614,511 $ 3,648,878
Due after one year through five years............... 8,060,799 8,085,042
Due after five years through ten years.............. 507,128 512,050
----------- -----------
12,182,438 12,245,970
Mortgage-backed and equity securities............... 10,012,759 10,056,941
----------- -----------
$22,195,197 $22,302,911
=========== ===========
</TABLE>
There were no sales of securities in 1998 or 1997, but the Company realized
gains of $7,487 and $1,499 in 1998 and 1997, respectively, on securities
called during those years.
Interest on investment securities includes tax-exempt interest of $9,669 and
$10,200 in 1998 and 1997, respectively.
At December 31, 1998, investment securities with an amortized cost and
estimated fair value of approximately $17,610,000 and $17,708,000,
respectively, were pledged to secure public funds, the Banks' Treasury Tax and
Loan accounts and repurchase agreements.
NOTE 4--Loans
The composition of loans at December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Commercial and industrial........................ $ 14,912,533 $ 13,657,047
Real estate and mortgage......................... 205,148,317 161,222,231
Consumer......................................... 7,035,347 5,436,059
------------ ------------
227,096,197 180,315,337
Less:
Unearned (income) costs........................ 362,325 220,409
Allowance for loan losses...................... (1,895,990) (1,414,591)
------------ ------------
Net loans........................................ $225,562,532 $179,121,155
============ ============
</TABLE>
Changes in the allowance for loan losses during the years ending December
31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Beginning balance.................................... $1,414,591 $1,155,831
Provision............................................ 585,000 474,000
Charge-offs, net of recoveries....................... (103,601) (215,240)
---------- ----------
Ending Balance....................................... $1,895,990 $1,414,591
========== ==========
</TABLE>
Loans on which the accrual of interest has been discontinued amounted to
approximately $132,000 and $180,000 at December 31, 1998 and 1997,
respectively. Interest income that would have been recorded under
F-17
<PAGE>
FIRSTBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the original terms of these loans, had the accrual of interest not been
discontinued, was immaterial in both years. Loans having balances of $142,917
and $603,532 were transferred to other real estate in 1998 and 1997,
respectively.
Officers, directors, and companies in which they hold a ten percent or more
beneficial ownership, borrow from the Banks in the ordinary course of
business. Amounts due from these parties at December 31, 1998 and 1997 were
approximately $5,168,000 and $2,571,000, respectively, and are included in net
loans.
FNB and GCNB have given the Federal Home Loan Bank of Atlanta (FHLB) a
blanket lien on their residential real estate loan portfolios, approximately
$73 million at December 31, 1998, to collateralize short-term borrowings
discussed in Note 8.
NOTE 5--Premises and Equipment
Major classifications of these assets are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Land............................................... $ 4,047,787 $ 3,996,470
Buildings and improvements......................... 9,227,827 8,474,404
Equipment and furnishings.......................... 4,404,552 3,631,650
Bank construction.................................. 274,901 181,443
----------- -----------
17,955,067 16,283,967
Accumulated depreciation and amortization.......... (3,606,460) (2,771,332)
----------- -----------
$14,348,607 $13,512,635
=========== ===========
</TABLE>
Depreciation and amortization of premises and equipment was $834,123 and
$784,065 for 1998 and 1997, respectively.
NOTE 6--Bank-Owned Life Insurance Policies
In late December, 1998, the Banks funded a $15,000,000 single-premium
payment for approximately $56 million in face value of bank-owned life
insurance policies on substantially all of their officers and employees. The
purpose of the policies is to defray future employee benefit costs through
cash surrender value and the growth thereof in future years. This payment
created cash surrender value of life insurance of approximately $15 million,
which amount is included in "Other assets" on the accompanying 1998 balance
sheet.
NOTE 7--Deposits
At December 31, 1998, the scheduled maturities of time certificates of
deposit are as follows:
<TABLE>
<CAPTION>
(In Thousands)
--------------
<S> <C>
1999.......................................................... $ 82,477
2000.......................................................... 12,236
2001.......................................................... 3,959
2002.......................................................... 678
2003 and thereafter........................................... 1,227
--------
$100,577
========
</TABLE>
F-18
<PAGE>
FIRSTBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 8--Short-Term Borrowings
FNB and GCNB had short-term borrowings at December 31 as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
FHLB lines of credit................................ $25,000,000 $15,000,000
Customer repurchase agreements...................... 891,126 1,073,660
TT&L note option.................................... 30,872 500,000
----------- -----------
$25,921,998 $16,573,660
=========== ===========
</TABLE>
The FHLB lines of credit provide for up to $40 million in credit, not to
exceed 75% of the Banks' residential loan portfolios. The amount outstanding
at December 31, 1998 matures August 25, 2008 and bears interest at 4.94%. The
interest rate may be converted to a LIBOR-based rate at the discretion of
FHLB, but not before August 25, 1999. If the interest rate is converted, the
Company may prepay the lines subject to a prepayment amount agreed to by both
parties. The committed but unadvanced portion of the lines ($15 million) are
daily revolving lines, and bear interest at a rate slightly less than the Fed
Funds rate. The high balance and average amount outstanding under the FHLB
lines during 1998 were $25 million and $15.4 million, respectively. Average
outstandings during 1998 under the customer repurchase agreements and the TT&L
note option were $1,087,000. These borrowings are also on a day to day basis,
and bear interest tied to the Fed Funds rate. The effective rate paid on
short-term borrowings during 1998 and 1997 was 5.3% and 5.7%, respectively.
NOTE 9--Long-Term Debt
On June 14, 1996, the Company entered into an agreement with an unrelated
financial institution for $5 million in new debt. This debt consists of a $2
million revolving line of credit, and a $3 million term loan. As of December
31, 1998, the Company has not taken any advances under the line of credit. The
term loan was fully advanced June 14, 1996 and had a balance of $2.4 million
and $3 million at December 31, 1998 and 1997, respectively.
The term loan requires interest-only payments through December 31, 1997 at
8.75%, and then $50,000 per month principal repayments plus interest at 8.75%
until June 30, 1999, then at LIBOR plus 2.25 points. The term loan matures
December 31, 2002, and the revolving line of credit matures June 30, 2000.
Both notes are collateralized by the Company's pledge of all of the stock
owned in FNB and GCNB.
NOTE 10--Employee Benefit Plans
The Banks have a 401(k) and profit sharing plan for eligible employees
(those who have completed at least 6 months of service and attained the age of
20.5 years). The employee becomes 25% vested in the Bank's contributions upon
entry to the plan, and is fully vested after five years of service. The plan
holds approximately 65,000 shares of Company stock at December 31, 1998,
approximately 5,000 of which are unearned. The estimated fair value of
unearned shares at December 31, 1998 is $123,600. The expense related to this
plan was $114,890 and $72,230 in 1998 and 1997, respectively.
In addition, the Banks have provided deferred compensation agreements for
certain of their current directors and officers and, in the case of FNB,
certain former directors and officers. Deferred compensation expense related
to these agreements was $72,000 and $49,500 in 1998 and 1997, respectively.
The related liability, included in other liabilities, was approximately
$502,000 and $508,000 at December 31, 1998 and 1997, respectively.
NOTE 11--Stock Options
In 1991, the Company approved a stock option/stock appreciation rights plan
(the Plan) under which the Board of Directors could grant up to 51,547 stock
options and 25,774 stock appreciation rights to any employee
F-19
<PAGE>
FIRSTBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of the Company or the Banks. The Plan required the grant price to be equal to
the fair value of the underlying stock on the date of grant. Options granted
under the Plan vest immediately and are exercisable at any time within ten
years from the date of grant. During 1991, the Company granted its president
options for 51,547 shares at an exercise price of $5.82, and 23,196 stock
appreciation rights. None of these options or rights have been exercised, and
they remain outstanding at December 31, 1998.
During 1996, the Board of Directors amended the 1991 plan, increasing the
number of options which could be granted under the plan. Upon amendment,
options for an additional 118,043 shares were granted to key personnel,
101,032 of which vested immediately and are exercisable at any time before
their ten year expiration at $14.55 per share. The remaining 17,011 options
had the same terms as the other 1996 options, but vest over a three year
period beginning in 1997. During 1998, options for 37,500 shares were granted
with an exercise price of $20 per share. These options vest immediately and
otherwise have terms essentially identical to the 1996 options.
The following table reflects activity and balances of options at and for the
years ending December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
Weighted Weighted
Number of Options Number Avg. Price Number Avg. Price
----------------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Outstanding January 1.................. 169,590 $11.89 169,590 $11.89
Granted during year.................... 37,500 $20.00 -- $ --
------- -------
Outstanding December 31................ 207,090 $13.36 169,590 $11.89
======= =======
</TABLE>
At December 31, 1998, 201,419 options are exercisable, with 51,547 having an
exercise price of $5.82. The balance are exercisable at amounts ranging from
$14.55 to $20.00 per share. The weighted average remaining contractual life at
December 31, 1998 is 6.9 years.
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation". As permitted by the
provisions of SFAS No. 123, the Company applies APB Opinion 25 and related
interpretations in accounting for its stock option plan and, accordingly, does
not recognize compensation cost for other than its stock appreciation rights.
The Company has based the fair value of its options on a standardized option
pricing model. If the Company had elected to recognize compensation costs
relating to those options vesting in 1998, net income as reported would have
been reduced by approximately $195,000. The pro forma effect on 1997 net
income of options vesting in 1997 was immaterial.
During 1998 and 1997, the Company charged earnings for $144,000 and $68,581,
respectively, for the stock appreciation rights associated with the 1991
options.
NOTE 12--Other Operating Expense
Expense categories in excess of $100,000 in either 1998 or 1997 included in
consolidated other operating expense are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Data processing.............................................. $522,630 $444,348
Advertising.................................................. 354,276 340,775
Telephone.................................................... 283,829 221,004
Stationary and supplies...................................... 232,013 204,260
Postage and courier.......................................... 207,668 197,571
Legal and professional....................................... 174,518 158,097
Directors fees............................................... 151,850 134,000
Regulatory fees and deposit insurance........................ 112,229 117,241
</TABLE>
F-20
<PAGE>
FIRSTBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 13--Income Taxes
Components of income taxes for the years ended December 31, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
Current Deferred Total
---------- --------- ----------
<S> <C> <C> <C>
1998
----
Federal..................................... $1,414,774 $(120,000) $1,294,774
State....................................... 202,718 (13,566) 189,152
---------- --------- ----------
$1,617,492 $(133,566) $1,483,926
========== ========= ==========
1997
----
Federal..................................... $ 862,716 $ 96,456 $ 959,172
State....................................... 120,862 9,530 130,392
---------- --------- ----------
$ 983,578 $ 105,986 $1,089,564
========== ========= ==========
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- --------
<S> <C> <C>
Deferred tax assets:
Excess book loan loss provision.................... $ 608,000 $390,000
Deferred compensation taxed........................ 340,000 190,000
Pre-opening costs.................................. 49,000 80,000
OREO loss provision................................ 42,000 42,000
Other accounting accruals taxed.................... 5,060 55,504
---------- --------
1,044,060 757,504
---------- --------
Deferred tax liabilities:
Tax over book unearned loan fees................... 396,000 373,000
Tax over book depreciation expense................. 222,000 92,000
---------- --------
618,000 465,000
---------- --------
426,060 292,504
Deferred tax attributable to unrealized gain on
securities available for sale..................... (39,856) (36,723)
---------- --------
Net Deferred Tax Asset........................... $ 386,204 $255,781
========== ========
</TABLE>
The difference between income taxes computed using the federal statutory
rate of 34% and as recorded is attributable principally to Florida's state
corporate income tax of 5.5%, adjusted for certain credits.
NOTE 14--Regulatory Matters
The Banks are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Banks' financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Banks must meet specific capital guidelines that involve quantitative measures
of their assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Banks'
F-21
<PAGE>
FIRSTBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 Banks to maintain minimum amounts and ratios 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). If such
minimum amounts and ratios are met, the Banks are considered "adequately
capitalized". If a bank exceeds the requirements of "adequately capitalized"
and meets even more stringent minimum standards, it is considered to be "well
capitalized". Management believes that as of December 31, 1998 and 1997, both
Banks meet and exceed all capital adequacy requirements to which they are
subject.
As of December 31, 1998, the most recent notification from the Banks'
regulatory agency categorized the Banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Banks must maintain Total risk-based, Tier I risk-based, and
Tier I leverage ratios as set forth in the table which follows. There are no
conditions or events since that notification that management believes have
changed the institutions' category.
<TABLE>
<CAPTION>
Minimum to Remain
Actual Well Capitalized
------------- -------------------
Amount Ratio Amount Ratio
------- ----- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital (to Risk Weighted Assets):
Consolidated.......................... $19,523 9.31% $ 20,958 10.0%
FNB................................... $11,028 10.09% $ 10,927 10.0%
GCNB.................................. $10,555 10.31% $ 10,238 10.0%
Tier I Capital (to Risk Weighted
Assets):
Consolidated.......................... $17,627 8.41% $ 12,575 6.0%
FNB................................... $ 9,807 8.97% $ 6,556 6.0%
GCNB.................................. $ 9,831 9.50% $ 6,143 6.0%
Tier I Capital (to Average Assets):
Consolidated.......................... $17,628 5.86% $ 15,042 5.0%
FNB................................... $ 9,807 6.65% $ 7,369 5.0%
GCNB.................................. $ 9,831 6.43% $ 7,644 5.0%
As of December 31, 1997:
Total Capital (to Risk Weighted Assets):
Consolidated.......................... $16,570 9.88% $ 16,891 10.0%
FNB................................... $ 9,824 10.47% $ 9,379 10.0%
GCNB.................................. $ 8,208 10.81% $ 7,593 10.0%
Tier I Capital (to Risk Weighted
Assets):
Consolidated.......................... $15,155 9.04% $ 10,134 6.0%
FNB................................... $ 8,807 9.39% $ 5,628 6.0%
GCNB.................................. $ 7,810 10.29% $ 4,556 6.0%
Tier I Capital (to Average Assets):
Consolidated.......................... $15,155 6.22% $ 13,435 5.0%
FNB................................... $ 8,807 6.93% $ 6,358 5.0%
GCNB.................................. $ 7,810 6.28% $ 6,215 5.0%
</TABLE>
F-22
<PAGE>
FIRSTBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 15--Commitments and Contingencies
Financial Instruments With Off-Balance-Sheet Risk
The financial statements do not reflect various commitments and contingent
liabilities that arise in the normal course of business to meet the financing
needs of customers. These include commitments to extend credit and honor
stand-by letters of credit. These instruments involve, to varying degrees,
elements of credit, interest rate and liquidity risks in excess of amounts
reflected in the balance sheets. The extent of the Company's and its bank
subsidiaries' involvement in these commitments or contingent liabilities is
expressed by the contractual, or notional, amounts of the instruments.
Commitments to extend credit, which amount to $53,665,000 and $37,720,000 at
December 31, 1998 and 1997, respectively, represent legally binding agreements
to lend to customers with fixed expiration dates or other termination clauses.
Since many commitments are expected to expire without being funded, committed
amounts do not necessarily represent future liquidity requirements. The amount
of collateral obtained, if any, is based on management's credit evaluation in
the same manner as though an immediate credit extension were to be granted.
Collateral held varies, but may include accounts receivable, inventory or
other tangible personal property, as well as marketable securities or
certificates of deposit.
Stand-by letters of credit are conditional commitments issued by the Banks
guaranteeing the performance of a customer to a third party. The decision
whether to guarantee such performance and the extent of collateral
requirements are made considering the same factors as are considered in credit
extension. The Banks had $310,150 and $825,415 outstanding on stand-by letters
of credit at December 31, 1998 and 1997, respectively.
The Company guarantees indirect indebtedness of its non-bank subsidiary in
the amount of approximately $1,211,000 at December 31, 1998.
Concentrations of Credit Risk
The Banks originate residential and commercial real estate loans, and other
consumer and commercial loans primarily in their immediate market areas and
adjacent counties in Florida. In addition, they may occasionally purchase
loans. Although the banks have diversified loan portfolios, a substantial
portion of their borrowers' ability to repay their loans is dependent upon
economic conditions in the Banks' market areas.
Advances from the Federal Home Loan Bank
The amount available under these lines at December 31, 1998 is $15,000,000.
Use of Estimates in Preparation of Financial Statements
The process of preparing financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
regarding certain types of assets, liabilities, revenues and expenses. For the
Banks, such estimates significantly affect the amount at which the allowances
for loan losses are carried, the amount of deferred tax assets that are
dependent upon future taxable income and the likelihood and timing of
realization of such assets, and the factors and amounts entering into the
estimate of fair value of financial instruments disclosed in Note 17. All such
estimates relate to unsettled transactions and events as of the date of the
financial statements and, accordingly, upon settlement it is likely that
actual amounts will differ from currently estimated amounts.
F-23
<PAGE>
FIRSTBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Leases and Other Commitments
One of the Banks is obligated under operating lease agreements for
facilities. Future minimum lease payments at December 31, 1998 under non-
cancelable operating leases relating to these leases are as follows:
<TABLE>
<S> <C>
1999................................. $87,180
2000................................. 67,180
2001................................. 57,180
2002................................. 52,170
2003................................. 12,380
</TABLE>
The Banks and the Company are obligated under various other leases for
fixtures and equipment and a vehicle. These leases have terms ranging from
three to five years, with payments aggregating approximately $100,000 per
year.
Rent expense for all rental agreements, cancelable and non-cancelable,
totaled approximately $213,000 and $224,000 in 1998 and 1997, respectively.
In addition to rental and leasing arrangements, both Banks are obligated
under commitments for various services from their data service and equipment
maintenance service companies.
NOTE 16--Fair Value of Financial Instruments
The table which follows shows the estimated fair value and the related
carrying amounts of the Banks' financial instruments at December 31, 1998.
For purposes of this disclosure, the estimated fair value for cash and cash
equivalents is considered to approximate their carrying amounts. The estimated
fair value for securities is based on quoted market values for the individual
or equivalent securities. The estimated fair value for loans is based on
interest rates the Banks would have charged borrowers at December 31, 1998 for
similar loans, maturities and terms.
The estimated fair value for demand and savings deposits is based on their
carrying amount. The estimated fair value for time deposits is based on rates
the Banks offered at December 31, 1998 for deposits of similar remaining
maturities. The estimated fair value for other financial instruments and off-
balance-sheet loan commitments are considered to approximate carrying amounts
at December 31, 1998. Assets and liabilities of the Banks that are not defined
as financial instruments, such as premises and equipment, are excluded from
these disclosures.
<TABLE>
<CAPTION>
Carrying Estimated
Amount Fair Value
-------- ----------
(In Thousands)
<S> <C> <C>
Financial Assets
Cash and cash equivalents.............................. $ 27,708 $ 27,708
Securities available for sale.......................... 22,303 22,303
Loans held for sale.................................... 1,970 1,966
Loans.................................................. 227,096 225,847
Financial Liabilities
Demand and Savings Deposits............................ 202,413 202,413
Time Deposits.......................................... 58,586 58,787
Short-term borrowings.................................. 25,922 25,979
Long-term debt......................................... 2,400 2,400
</TABLE>
F-24
<PAGE>
FIRSTBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Non-financial instruments typically not recognized in the financial
statements nevertheless may have value but are not included in the above
disclosures. These include, among other items, the estimated earnings power of
core deposit accounts, the earnings potential of loan servicing rights,
customer goodwill, and similar items.
While these estimates of fair value are based on management's judgment of
the most appropriate factors, there is no assurance that, were the Banks to
have disposed of such items at December 31, 1998, the estimated fair values
would necessarily have been achieved at that date, since market values may
differ depending on various circumstances. The estimated fair values at
December 31, 1998 should not necessarily be considered to apply at subsequent
dates.
F-25
<PAGE>
FIRSTBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
------
Cash and due from banks.............................. $ 15,793,148 $ 7,639,055
Federal funds sold................................... 3,665,000 24,620,000
------------ ------------
Cash and Cash Equivalents.......................... 19,458,148 32,259,055
------------ ------------
Securities available for sale........................ 39,861,551 24,231,936
Loans held for sale.................................. 1,061,569 2,547,573
Loans, net........................................... 252,029,352 185,805,711
Premises and equipment, net.......................... 16,332,364 14,779,412
Other real estate.................................... 331,000 835,000
Other assets......................................... 18,679,774 2,594,771
------------ ------------
TOTAL ASSETS..................................... $347,753,758 $263,053,458
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities
- -----------
Deposits:
Noninterest-bearing................................. $ 53,183,220 $ 39,978,462
Interest-bearing:
Savings, time and demand........................... 179,052,816 132,178,886
Time, $100,000 and over............................ 55,900,599 56,436,203
------------ ------------
Total Deposits................................... 288,136,635 228,593,551
------------ ------------
Short-term borrowings............................... 34,204,832 11,365,561
Other liabilities................................... 3,426,156 3,390,167
Long-term debt...................................... 3,279,074 3,321,820
------------ ------------
Total Liabilities................................ 329,046,697 246,671,099
Shareholders' Equity
- --------------------
Common stock........................................ 16,474 16,272
Additional paid-in capital.......................... 11,751,371 11,247,198
Retained earnings................................... 7,434,421 5,077,842
Accumulated other comprehensive income (loss)....... (495,205) 41,047
------------ ------------
Total Shareholders' Equity....................... 18,707,061 16,382,359
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY....... $347,753,758 $263,053,458
============ ============
</TABLE>
F-26
<PAGE>
FIRSTBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
1999 1998
------------- ------------
<S> <C> <C>
Interest Income
Interest and fees on loans........................ $ 10,042,399 $ 8,460,250
Interest on securities............................ 995,026 772,464
Interest on federal funds sold and other.......... 447,213 635,482
------------- ------------
Total Interest Income........................... 11,484,638 9,868,196
------------- ------------
Interest Expense
Interest on deposits.............................. 4,430,735 4,145,276
Interest on short-term borrowings................. 678,973 290,148
Interest on long-term debt........................ 147,787 152,037
------------- ------------
Total Interest Expense.......................... 5,257,495 4,587,461
------------- ------------
Net Interest Income............................. 6,227,143 5,280,735
Provision for Loan Losses........................... 255,000 330,000
------------- ------------
Net Interest Income After Provision For Loan
Losses......................................... 5,972,143 4,950,735
------------- ------------
Noninterest Income
Service charges and fees.......................... 653,226 639,800
Securities gains.................................. 526 1,849
Gain on sale of loans............................. 690,906 582,977
Other............................................. 1,031,727 1,079,683
------------- ------------
Total Noninterest Income........................ 2,376,385 2,304,309
------------- ------------
Noninterest Expense
Salaries and benefits............................. 2,930,160 2,221,947
Occupancy expense................................. 490,153 427,336
Equipment expense................................. 628,977 506,426
Other operating expense........................... 2,047,256 2,209,808
------------- ------------
Total Noninterest Expense....................... 6,096,546 5,365,517
------------- ------------
Income Before Income Taxes...................... 2,251,982 1,889,527
Income Taxes........................................ 701,578 703,903
------------- ------------
NET INCOME...................................... $ 1,550,404 $ 1,185,624
============= ============
Earnings Per Share:
Basic............................................. $ .94 $ .73
============= ============
Diluted........................................... $ .89 $ .69
============= ============
</TABLE>
F-27
<PAGE>
[THIS PAGE LEFT BLANK INTENTIONALLY.]
F-28
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1998
F-29
<PAGE>
CONTENTS
<TABLE>
<S> <C>
Independent Auditor's Report .............................................. F-31
Consolidated Balance Sheets................................................ F-32
Consolidated Statements of Income.......................................... F-33
Consolidated Statements of Stockholders' Equity............................ F-34
Consolidated Statements of Cash Flows...................................... F-35
Notes to Consolidated Financial Statements................................. F-36
</TABLE>
F-30
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
First Southern Bancorp, Inc. and Subsidiaries
Boca Raton, Florida
We have audited the accompanying consolidated balance sheets of First
Southern Bancorp, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of income, stockholders' equity, and cash
flows for the years 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 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Southern Bancorp, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for the years then ended
in conformity with generally accepted accounting principles.
McGladrey & Pullen, LLP
Fort Lauderdale, Florida
January 15, 1999
F-31
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks (Note 2)..................... $ 7,819,221 $ 7,545,745
Federal funds sold................................... 11,540,000 5,483,000
------------ ------------
Total cash and cash equivalents.................. 19,359,221 13,028,745
Securities available for sale (Note 3)............... 21,903,523 17,626,673
Federal Reserve and Federal Home Loan Bank stock, at
cost................................................ 952,400 1,199,550
Loans, net (Notes 4, 10, 12 and 15).................. 81,775,038 66,138,477
Other real estate owned.............................. 218,151 --
Premises and equipment (Note 5)...................... 2,350,121 2,308,407
Accrued interest receivable.......................... 674,582 689,312
Deferred tax asset (Note 8).......................... 423,060 329,389
Other assets (Note 7)................................ 1,845,681 343,810
------------ ------------
$129,501,777 $101,664,363
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Noninterest-bearing demand deposits................. $ 29,952,023 $ 31,427,958
Interest-bearing deposits:
NOW accounts....................................... 12,667,681 12,224,073
Savings............................................ 2,780,276 2,039,078
Money market accounts.............................. 30,108,760 16,132,819
Time (Note 6)...................................... 32,512,724 26,789,994
------------ ------------
Total deposits................................... 108,021,464 88,613,922
Notes payable (Note 10).............................. 13,061,486 5,689,753
Other liabilities (Note 7)........................... 759,694 855,006
------------ ------------
Total liabilities................................ 121,842,644 95,158,681
------------ ------------
Commitments and contingencies (Note 15)
Minority interest in First Southern Bank (Note 2).... 154,645 158,713
------------ ------------
Stockholders' equity (Notes 3, 11, and 14):
Common stock, $6 par value; 3,000,000 shares
authorized; issued and outstanding 1998 641,750
shares 1997 633,686 shares......................... 3,850,500 3,802,116
Additional paid-in capital.......................... 1,308,206 1,275,849
Retained earnings................................... 2,332,745 1,239,473
Accumulated other comprehensive income.............. 13,037 29,531
------------ ------------
7,504,488 6,346,969
------------ ------------
$129,501,777 $101,664,363
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-32
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Interest income:
Interest and fees on loans........................... $7,107,248 $5,852,028
Investment securities................................ 927,882 1,643,100
Other................................................ 868,789 190,679
---------- ----------
8,903,919 7,685,807
---------- ----------
Interest expense:
Deposits............................................. 2,851,625 2,484,213
Other................................................ 596,753 414,468
---------- ----------
3,448,378 2,898,681
---------- ----------
Net interest income.................................... 5,455,541 4,787,126
Provision for loan losses (Note 4)..................... 255,000 110,000
---------- ----------
Net interest income after provision for loan
losses............................................ 5,200,541 4,677,126
---------- ----------
Other income:
Service charges on deposit accounts.................. 1,008,880 515,492
Securities gains, net (Note 3)....................... 105,703 33,955
Other................................................ 278,145 190,315
---------- ----------
1,392,728 739,762
---------- ----------
Other expenses:
Salaries and employee benefits....................... 2,955,153 2,350,607
Occupancy and equipment.............................. 1,013,227 856,759
Office expenses and insurance........................ 322,615 308,959
Marketing, advertising, and business development..... 122,299 159,159
Professional and data processing fees................ 230,808 177,490
Other................................................ 154,189 190,182
---------- ----------
4,798,291 4,043,156
---------- ----------
Income before income taxes and minority interest....... 1,794,978 1,373,732
Provision for income taxes (Note 8).................... 675,450 487,146
---------- ----------
Net income before minority interest................ 1,119,528 886,586
Minority interest in net income of First Southern
Bank.............................................. (26,256) (38,927)
---------- ----------
Net income....................................... $1,093,272 $ 847,659
========== ==========
Basic earnings per share (Note 17)..................... $ 1.71 $ 1.29
========== ==========
Diluted earnings per share (Note 17)................... $ 1.60 $ 1.23
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-33
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Additional Other
Comprehensive Common Paid-In Retained Comprehensive
Income Stock Capital Earnings Income Total
------------- ---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996................... -- $3,913,380 $1,530,196 $ 391,814 $(146,589) $5,688,801
Comprehensive income:
Net income............. $ 847,659 -- -- 847,659 -- 847,659
Other comprehensive
income, net of tax:
Change in unrealized
gain (loss) on
securities available
for sale (Note 3)..... 176,120 -- -- -- 176,120 176,120
----------
Comprehensive income.... $1,023,779 -- -- -- -- --
----------
Issuance of 20,109
shares of common
stock.................. 120,654 93,530 -- -- 214,184
Redemption of 38,653
shares of common
stock.................. (231,918) (347,877) -- -- (579,795)
---------- ---------- ---------- --------- ----------
Balance, December 31,
1997................... 3,802,116 1,275,849 1,239,473 29,531 6,346,969
Comprehensive income:
Net income............. $1,093,272 -- -- 1,093,272 -- 1,093,272
Other comprehensive
income, net of tax:
Change in unrealized
gain (loss) on
securities available
for sale (Note 3)..... (16,494) -- -- -- (16,494) (16,494)
----------
Comprehensive income.... $1,076,778
----------
Issuance of 8,151 shares
of common stock........ 48,906 33,140 -- -- 82,046
Redemption of 87 shares
of common stock........ (522) (783) -- -- (1,305)
---------- ---------- ---------- --------- ----------
Balance, December 31,
1998................... $3,850,500 $1,308,206 $2,332,745 $ 13,037 $7,504,488
========== ========== ========== ========= ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-34
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities
Net income........................................... $ 1,093,272 $ 847,659
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization/(accretion) on securities.......... 114,679 74,559
Provision for loan losses........................... 255,000 110,000
Depreciation and amortization....................... 368,951 287,925
Deferred taxes...................................... (86,000) (70,000)
Securities gains, net............................... (105,703) (33,955)
Gain on sale of loans and other real estate......... -- (20,630)
Minority interest in net income of First Southern
Bank............................................... 26,256 38,927
Decrease (increase) in:
Accrued interest receivable........................ 14,730 (157,316)
Other assets....................................... (26,871) (181,783)
Increase (decrease) in other liabilities............ (43,093) 301,256
----------- -----------
Net cash provided by operating activities......... 1,611,221 1,196,642
----------- -----------
Cash Flows From Investing Activities
Net cash flows from securities (Note 16)............. (4,063,338) 2,998,515
Loan originations and principal collections on loans,
net................................................. (16,109,712) (13,362,720)
Purchase of cash value of life insurance............. (1,475,000) --
Purchase of premises and equipment................... (410,665) (655,260)
Proceeds from sale of other real estate owned........ -- 75,968
----------- -----------
Net cash used in investing activities............. (22,058,715) (10,943,497)
----------- -----------
Cash Flows From Financing Activities
Funds received from notes payable.................... 7,500,000 579,795
Principal payments on notes payable.................. (128,267) (61,884)
Common stock issued upon exercise of options......... -- 19,640
Redemption of common stock........................... (1,305) (579,795)
Net increase in deposits............................. 19,407,542 5,872,569
----------- -----------
Net cash provided by financing activities......... 26,777,970 5,830,325
----------- -----------
Increase (decrease) in cash and cash equivalents.. 6,330,476 (3,916,530)
Cash and cash equivalents
Beginning............................................ 13,028,745 16,945,275
----------- -----------
Ending............................................... $19,359,221 $13,028,745
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements (Additional cash flow
information--Note 16).
F-35
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Description of business: First Southern Bancorp, Inc. (the "Company")
provides a full range of banking services to individual and corporate
customers in Palm Beach and Broward counties in Florida through its subsidiary
bank.
Basis of presentation: The financial statements of First Southern Bancorp,
Inc. and its subsidiaries have been prepared in conformity with generally
accepted accounting principles and conform to predominate practice within the
banking industry. In preparing the financial statements, the Company's
management is required to make estimates and assumptions which significantly
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.
Significant estimates which are particularly susceptible to change in a short
period of time include the determination of the allowance for loan losses and
the fair value of financial instruments. Actual results could differ from
those estimates.
Effective January 1, 1998, the Company adopted FASB Statement No. 130, which
was issued in June 1997. Statement No. 130 establishes new rules for the
reporting and display of comprehensive income and its components, but has no
effect on the Company's net income or total stockholders' equity. Statement
No. 130 requires unrealized gains and losses on the Bank's available-for-sale
securities, which prior to adoption were reported separately in stockholders'
equity, to be included in comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of Statement
No. 130.
Principles of consolidation: The accompanying consolidated financial
statements include the accounts of First Southern Bancorp, Inc. and its
majority-owned subsidiaries, First Southern Bank (the "Bank") and First
Southern Bank Realty Corporation. All significant intercompany balances and
transactions have been eliminated in consolidation.
Cash and cash flows: Cash and cash equivalents includes cash and due from
banks, and federal funds sold. For purposes of reporting cash flows, loans and
deposits are reported net. The Bank maintains deposits with financial
institutions which are in excess of federally insured amounts.
Securities available for sale: Securities classified as available-for-sale
are those debt securities that the Bank intends to hold for an indefinite
period of time, but not necessarily to maturity. Any decision to sell a
security classified as available-for-sale would be based on various factors,
including significant movements in interest rates, changes in the maturity mix
of the Bank's assets and liabilities, liquidity needs, regulatory capital
considerations, and other similar factors.
Securities available for sale are reported at fair value with unrealized
gains or losses reported as a separate component of other comprehensive
income, net of the related deferred tax effect. The amortization of premiums
and accretion of discounts, computed by the interest method over their
contractual lives, are recognized in interest income. Realized gains or
losses, determined on the basis of the cost of specific securities sold, are
included in earnings.
Declines in the fair value of individual securities classified as either
held to maturity or available for sale below their amortized cost that are
determined to be other than temporary result in write-downs of the individual
securities to their fair value with the resulting write-downs included in
current earnings as realized losses.
Loans: Loans receivable that management has the intent and ability to hold
for the foreseeable future or until maturity or payoff are stated at the
amount of unpaid principal, net of unearned discount, net loan origination
fees and costs, and an allowance for loan losses.
F-36
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Loan origination and commitment fees and certain direct loan origination
costs are being deferred and recognized over the expected life of the related
loan as an adjustment of yield. The Bank is generally amortizing these amounts
over the contractual life using the interest method. Commitment fees based
upon a percentage of a customer's unused line of credit and fees related to
standby letters of credit are recognized over the commitment period.
Interest on loans is calculated by using the simple interest method on daily
balances of the principal amount outstanding. For impaired loans, accrual of
interest is discontinued on a loan when management believes, after considering
collection efforts and other factors, that the borrower's financial condition
is such that collection of interest is doubtful. Interest income is recognized
on those loans only upon receipt.
A loan is impaired when it is probable the Bank will be unable to collect
all contractual principal and interest payments due in accordance with the
terms of the loan agreement. Impaired loans are measured based on the present
value of expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral dependent.
The amount of impairment, if any, and any subsequent changes are included in
the allowance for loan losses.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes that collectibility of the principal is
unlikely. The allowance is an amount that management believes will be adequate
to absorb estimated losses on existing loans, based on an evaluation of the
collectibility of loans and prior loss experience. This evaluation also takes
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.
While management uses the best information available to make its evaluation,
future adjustments to the allowance may be necessary if there are significant
changes in economic conditions.
Other real estate owned: Other real estate owned ("OREO") represents
properties acquired through foreclosure or other proceedings and is initially
recorded at fair value at the date of foreclosure less estimated costs of
disposal, which establishes a new cost. After foreclosure, OREO is held for
sale and is carried at the lower of cost or fair value less estimated costs of
disposal. Any write-down to fair value at the time of transfer to OREO is
charged to the allowance for loan and lease losses. Property is evaluated
regularly to ensure the recorded amount is supported by its current fair value
and valuation allowances to reduce the carrying amount to fair value less
estimated costs to dispose are recorded as necessary.
Premises and equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed principally by the
straight-line method over the following estimated useful lives:
<TABLE>
<CAPTION>
Years
------
<S> <C>
Building.............................................................. 22
Leasehold improvements................................................ 5 - 10
Furniture and equipment............................................... 3 - 12
</TABLE>
Income taxes: Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences, and
operating loss or tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their
tax bases. Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on
the date of enactment.
F-37
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Earnings per share: Basic earnings per-share amounts are computed by
dividing net income (the numerator) by the weighted-average number of common
shares outstanding (the denominator). Diluted earnings per-share amounts
assume the conversion, exercise or issuance of all potential common stock
instruments unless the effect is to reduce the loss or increase the income per
common share from continuing operations.
Fair value of financial instruments: SFAS No. 107, Disclosures about Fair
Value of Financial Instruments requires disclosure of fair value information
about financial instruments, whether or not recognized in the statement of
financial condition, for which it is practicable to estimate that value. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. 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. SFAS No. 107 excludes certain financial instruments and all
nonfinancial assets and liabilities from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Bank.
The fair value estimates presented are based on pertinent information
available to management as of December 31, 1998 and 1997. Although management
is not aware of any factors that would significantly affect the estimated fair
value amount, such amounts have not been comprehensively revalued for purposes
of these financial statements since these dates and therefore, current
estimates of fair value may differ significantly from the amounts presented in
these financial statements.
Emerging accounting standards: In June 1998, the Financial Accounting
Standards Board issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is required to be adopted in years
beginning after June 15, 1999. The Statement permits early adoption as of the
beginning of any fiscal quarter after its issuance. The Bank expects to adopt
the new Statement effective January 1, 2000. The Statement will require the
Bank to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities, or firm commitments through earnings
or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in
fair value will be immediately recognized in earnings.
Because of the Bank has not used derivatives in the past, management does
not anticipate that the adoption of the new Statement will have a significant
effect on the Bank's earnings or financial position.
Note 2. Restrictions on Cash and Due From Banks
The Bank is required to maintain reserve balances in cash or on deposit with
the Federal Reserve Bank, based on a percentage of deposits. The total of
those reserve balances was approximately $900,000 at December 31, 1998 and
1997.
F-38
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3. Securities Available for Sale
Carrying amounts and fair values of securities available for sale as of
December 31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U. S. Treasury securities.... $ 100,989 $ 1,152 $ -- $ 102,141
U. S. Government corporations
and agencies................ 12,090,976 44,062 (6,338) 12,128,700
Other securities............. 160,000 -- -- 160,000
Mortgage-backed securities... 9,530,305 16,981 (34,604) 9,512,682
----------- ------- -------- -----------
$21,882,270 $62,195 $(40,942) $21,903,523
=========== ======= ======== ===========
<CAPTION>
December 31, 1997
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U. S. Treasury securities.... $ 4,006,230 $ 6,250 $ -- $ 4,012,480
U. S. Government corporations
and agencies................ 4,980,262 19,737 (1,570) 4,998,429
Municipal securities......... 2,547,957 65,638 -- 2,613,595
Other securities............. 150,000 -- -- 150,000
Mortgage-backed securities... 5,896,309 1,633 (45,773) 5,852,169
----------- ------- -------- -----------
$17,580,758 $93,258 $(47,343) $17,626,673
=========== ======= ======== ===========
</TABLE>
The amortized cost and fair values of securities available for sale as of
December 31, 1998, 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 repaid without any
penalties. Therefore, these securities are not included in the maturity
categories in the following maturity summary.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
----------- -----------
<S> <C> <C>
Due after one year through five years............... $ 4,225,669 $ 4,250,261
Due after five years through ten years.............. 8,126,296 8,140,580
Mortgage-backed securities.......................... 9,530,305 9,512,682
----------- -----------
$21,882,270 $21,903,523
=========== ===========
</TABLE>
F-39
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unrealized gains (losses) on available-for-sale securities for the years
ended December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Unrealized holding gains (losses) arising during the
period................................................ $ 81,041 $314,749
Less reclassification adjustment for gains (losses)
realized in net income................................ 105,703 33,955
-------- --------
Net unrealized gains (losses), before tax (expense)
benefit............................................... (24,662) 280,794
Tax (expense) benefit.................................. 7,671 (96,445)
-------- --------
Other comprehensive income before minority interest.... (16,991) 184,349
Minority interest in other comprehensive income of
subsidiary............................................ 497 (8,229)
-------- --------
Other comprehensive income............................. $(16,494) $176,120
======== ========
</TABLE>
Gross realized gains and losses from the sale of securities available for
sale for the years ended December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Realized gains............................................. $105,703 $52,139
Realized (losses).......................................... -- (18,184)
</TABLE>
Securities available for sale with a carrying amount of approximately
$4,650,000 and $630,415 at December 31, 1998 and 1997, respectively, were
pledged as collateral on public deposits and for other purposes as required or
permitted by law.
Note 4. Loans
The composition of loans as of December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
Percent Percent
of of
Amount Total Amount Total
----------- ------- ----------- -------
<S> <C> <C> <C> <C>
Commercial......................... $17,661,573 21.3% $20,736,385 30.9%
Real estate, commercial............ 48,797,536 58.8 31,360,471 46.6
Real estate, residential........... 12,637,943 15.2 12,228,922 18.2
Consumer........................... 3,749,396 4.5 2,820,827 4.2
Other.............................. 174,360 0.2 58,051 0.1
----------- ----- ----------- -----
83,020,808 100.0% 67,204,656 100.0%
===== =====
Allowance for loan losses.......... (1,245,770) (1,066,179)
----------- -----------
Loans, net......................... $81,775,038 $66,138,477
=========== ===========
</TABLE>
F-40
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Activity in the allowance for loan losses for the years ended December 31,
1998 and 1997 was as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Balance, beginning................................... $1,066,179 $ 960,853
Provision charged to operating expense............... 255,000 110,000
Recoveries of amounts charged off.................... 3,591 17,000
---------- ----------
1,324,770 1,087,853
Amounts charged off.................................. (79,000) (21,674)
---------- ----------
Balance, ending...................................... $1,245,770 $1,066,179
========== ==========
</TABLE>
There are no impaired loans as of December 31, 1998 or 1997 for which a
specific allowance has been recognized. Recorded investments in other impaired
loans were $219,684 and $414,762 at December 31, 1998 and 1997, respectively.
The average recorded investment in impaired loans during 1998 and 1997 was
$415,031 and $315,000, respectively. Interest income on impaired loans,
recognized for cash payments received in 1998 and 1997, was not significant.
Note 5. Premises and Equipment
The major classes of premises and equipment and the total accumulated
depreciation as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and building..................................... $ 650,000 $ 650,000
Leasehold improvements................................ 937,439 772,290
Furniture and equipment............................... 2,155,105 1,889,914
Construction in progress.............................. 78,284 129,654
---------- ----------
3,820,828 3,441,858
Less accumulated depreciation and amortization........ 1,470,707 1,133,451
---------- ----------
$2,350,121 $2,308,407
========== ==========
</TABLE>
Note 6. Deposits
The composition of time deposits at December 31, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Time deposits, $100,000 or more..................... $ 8,988,015 $ 9,350,876
Other time deposits................................. 23,524,709 17,439,118
----------- -----------
Total............................................... $32,512,724 $26,789,994
=========== ===========
</TABLE>
At December 31, 1998, the scheduled maturities of time deposits are as
follows:
<TABLE>
<CAPTION>
Years Ending
December 31, Amount
------------ -----------
<S> <C>
1999............................................................. $22,886,063
2000............................................................. 9,158,589
2001............................................................. 146,119
2002............................................................. 7,925
2003............................................................. 314,028
-----------
$32,512,724
===========
</TABLE>
F-41
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7. Deferred Compensation and Life Insurance
During 1998, the Bank adopted Directors Phantom Stock Agreements for the
directors. The agreements provide for monthly benefits to be paid over a
period of 15 years following the retirement of the directors. Under each
agreement the amount of benefits to be paid will be determined based on the
number of phantom shares granted to the director and the fair value of the
Company common stock at the date of retirement. The Bank records periodic
accruals for the cost of providing such benefits by charges to income. The
Bank has recognized expenses of $35,000 in the year ended December 31, 1998.
The Bank is the owner and beneficiary of life insurance policies on the
lives of certain directors with aggregate death benefits of approximately
$3,000,000. All of the policies were acquired in 1998. The cash surrender
value of the policy in the amount of $1,500,000 is included in other assets at
December 31, 1998.
Note 8. Income Taxes
The net cumulative tax effects of the primary temporary differences are
shown in the following table:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses.............................. $402,000 $289,000
Deferred income........................................ 28,000 22,000
Accrued expenses....................................... 30,000 15,000
Other.................................................. 10,000 28,000
-------- --------
Total deferred tax assets............................ 470,000 354,000
-------- --------
Deferred tax liabilities:
Unrealized gain on securities available for sale....... (7,940) (15,611)
Premises and equipment................................. (18,000) --
Other.................................................. (21,000) (9,000)
-------- --------
Total deferred tax liabilities....................... (46,940) (24,611)
-------- --------
Net deferred tax assets.................................. $423,060 $329,389
======== ========
</TABLE>
The provision for income taxes charged to operations for the years ended
December 31, 1998 and 1997 consists of the following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Current tax expense...................................... $761,450 $557,146
Deferred tax expense..................................... (86,000) (70,000)
-------- --------
$675,450 $487,146
======== ========
</TABLE>
F-42
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The provision for income taxes for the years ended December 31, 1998 and
1997 differs from the amount of income tax determined by applying the U. S.
federal income tax rate to pretax income as follows:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
Amount Percent Amount Percent
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Computed "expected" federal tax
expense............................... $610,293 34.0% $467,066 34.0%
Increase (decrease) resulting from:
State income taxes, net of federal
tax benefit......................... 39,049 2.2 30,177 2.2
Tax-exempt income.................... (3,611) (0.2) (31,954) (2.3)
Other................................ 29,719 1.6 21,857 1.6
-------- ---- -------- ----
Provision for income taxes............. $675,450 37.6% $487,146 35.5%
======== ==== ======== ====
</TABLE>
Note 9. Lines of Credit
The Bank has unsecured Federal Funds lines of credit with correspondent
banks totaling $4,500,000. As of December 31, 1998, the Bank had no
outstanding balance due on the available lines of credit.
Note 10. Notes Payable
The Bank has a line of credit in the amount of $17,000,000 with the Federal
Home Loan Bank ("FHLB"). The Bank had advances payable of $12,000,000 and
$4,500,000 as of December 31, 1998 and 1997, respectively, under this line of
credit. The balance at December 31, 1998 is due June 2003, with a one time
call option in June 2000, and interest is payable quarterly at 5.55%. The
advance is collateralized by qualifying residential mortgage loans totaling
approximately $12,500,000, securities with a carrying value of approximately
$4,000,000 and FHLB stock in the amount of $782,500 at December 31, 1998.
First Southern Bank Realty Corp. has a note payable to a bank with a balance
due of $539,670 and $609,958 at December 31, 1998 and 1997, respectively. The
note payable requires monthly payments of $6,576, including interest at 8.32%
through December 2001, at which time the remaining balance is due. The note is
collateralized by land and a building with a book value of approximately
$625,000 at December 31, 1998.
The Company has a note payable to a bank in the amount of $521,816 and
$579,795 at December 31, 1998 and 1997, respectively. The note requires
semiannual principal payments of $57,980 beginning July 1, 1998 with the final
payment due December 31, 2002. Interest is payable quarterly at a rate 2.5% in
excess of the LIBOR Index Rate, resulting in an effective rate of
approximately 8.13% at December 31, 1998. The note is secured by all of the
Company's shares of First Southern Bank common stock.
Scheduled maturities of the notes payable for the years ending December 31,
1999 through 2003 are as follows: 1999 $151,649; 2000 $154,735; 2001 $581,167;
2002 $173,935; 2003 $12,000,000.
Note 11. Stock Options
Under the Incentive Stock Option Plan (the "Plan") adopted in 1989, 40,000
shares of Company common stock are authorized for option. The Bank has granted
options under the Plan to the President for the purchase of 20,000 shares at
an exercise price of $6.45 per share which expire in October 2004 and for the
purchase of 3,000 shares at an exercise price of $6.00 per share which also
expire in October 2004.
The Company has adopted a Directors Stock Option Plan (the "Directors Plan")
for directors and certain individuals. Under the Directors Plan, 50,000 shares
of Company common stock are authorized for option. The
F-43
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company has granted options to various directors for the purchase of 35,500
shares which expire from April 2005 through April 2008. All options granted
were immediately exercisable.
In addition to the plans discussed above, the Bank has granted stock options
for the purchase of 20,000 shares of Company common stock to the Chairman
Emeritus of the Board at an exercise price of approximately $6.61 per share
which expire in October 2004. The Bank has also granted options for the
purchase of 2,000 shares of Company common stock at an exercise price of $6.26
per share to the Executive Vice-President which expire in October 2004.
The Company applies APB Opinion 25 and related Interpretations in accounting
for its plans. Accordingly, no compensation cost has been recognized for the
stock options discussed above. Had compensation cost for the Company's stock
options been determined based on the fair value at the grant dates for awards
under those plans, the Company's net income for the years ended December 31,
1998 and 1997 would not have been significantly impacted.
A summary of the options outstanding as of December 31, 1998 and 1997, and
changes during the years then ended is presented below. The fair value of each
option grant is estimated on the date of grant using the present value with
the following weighted-average assumptions used for grants in 1998 and 1997:
risk-free interest rates of 5.5 percent and 6.0 percent, respectively and
expected lives of 8 and 7 years, respectively.
<TABLE>
<CAPTION>
1998 1997
--------------------- ----------------------
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of
year......................... 75,000 $6.94 74,000 $6.88
Granted....................... 3,000 9.97 3,500 8.97
Exercised..................... -- (2,500) 7.86
Forfeited..................... -- --
------ ------
Outstanding at end of year.... 78,000 7.06 75,000 6.94
====== ======
Options exercisable at year-
end.......................... 78,000 7.06 75,000 6.94
====== ======
Weighted-average fair value of
options granted during the
year......................... $ 8.57 $ 6.10
====== ======
</TABLE>
Note 12. Related-Party Transactions
The Bank has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with directors, significant
stockholders, principal officers, their immediate families and affiliated
companies in which they are principal stockholders (commonly referred to as
related parties). Aggregate loans to, or guaranteed by, these related parties
totaled $471,430 and $770,036 at December 31, 1998 and 1997, respectively.
There were no commitments to extend additional credit to these related parties
at December 31, 1998.
Note 13. Leases
The Bank leases five office facilities under various noncancelable leases
which expire between August 2002 and December 2003. The leases also have
options to renew for various periods of time. Total rent expense for the years
ended December 31, 1998 and 1997 approximated $380,000 and $368,000,
respectively, and is included in occupancy and equipment expense in the
accompanying consolidated statements of income.
F-44
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table is a schedule by year of the approximate future minimum
lease payments of the Bank's noncancelable operating leases as of December 31,
1998:
<TABLE>
<CAPTION>
Years Ending
December 31, Amount
------------ ----------
<S> <C>
1999.............................................................. $ 296,600
2000.............................................................. 296,600
2001.............................................................. 296,600
2002.............................................................. 259,209
2003.............................................................. 127,581
----------
$1,276,590
==========
</TABLE>
Note 14. Restrictions on Retained Earnings and 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, 1998,
approximately $250,000 of retained earnings were available for dividend
declaration without regulatory approval.
The Bank is subject to various capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory--and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital to risk-weighted assets, and of Tier
I capital to average assets (all defined in the regulations). Management
believes the Bank meets all capital adequacy requirements to which it is
subject as of December 31, 1998.
As of December 31, 1998, the most recent notification from the Federal
Reserve categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table below. 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 also presented in the table
below:
<TABLE>
<CAPTION>
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
--------------- -------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital (to Risk-
Weighted Assets)...... $9,183,183 10.3% $7,152,960 8.0% $ 8,941,200 10.0%
Tier I Capital (to
Risk-Weighted
Assets)............... $8,065,533 9.0% $3,376,480 4.0% $ 5,364,720 6.0%
Tier I Capital (to
Average Assets)....... $8,065,533 6.3% $5,107,320 4.0% $ 6,384,150 5.0%
As of December 31, 1997:
Total Capital (to Risk-
Weighted Assets)...... $7,809,292 11.4% $5,489,120 8.0% $ 6,861,400 10.0%
Tier I Capital (to
Risk-Weighted
Assets)............... $6,951,617 10.1% $2,744,560 4.0% $ 4,116,840 6.0%
Tier I Capital (to
Average Assets)....... $6,951,617 7.3% $3,789,720 4.0% $ 4,737,150 5.0%
</TABLE>
F-45
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 15. Commitments and Contingencies
Financial instruments with off-balance-sheet risk: The Bank, in the normal
course of business, is a party to financial instruments with off-balance-sheet
risk to meet the financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of credit. These
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amounts recognized on the consolidated balance sheet.
The contractual amounts of these instruments reflect the Bank's involvement in
particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
counterparty to the financial instruments for commitments to extend credit and
standby letters of credit is represented by the contractual amounts of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
These commitments were as follows at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Commitments to extend credit............................ $12,071,700 $8,704,900
Standby letters of credit............................... 705,600 500,700
----------- ----------
$12,777,300 $9,205,600
=========== ==========
</TABLE>
Commitments to extend credit are commitments 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 any, is based on management's credit evaluation of the
counterparty. Collateral held varies, but may include cash, accounts
receivable, inventory, property, plant and equipment, and residential and
commercial real estate.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers.
Contingencies: In the normal course of business, the bank is involved in
various legal proceedings. In the opinion of management, any liability
resulting from such proceedings would not have a material adverse effect on
the Bank's financial statements.
Financial instruments with concentration of credit risk: The Bank makes
commercial, residential and consumer loans to customers primarily in Palm
Beach and Broward counties in Florida. Included in the Bank's loan portfolio
(see Note 4) is a concentration of commercial loans to professionals in the
medical field and commercial real estate loans. A substantial portion of its
debtors' abilities to honor their contracts is dependent upon the local
economy. The economy of the Bank's primary market area is not heavily
dependent on any individual economic sector.
Interest rate risk: The Bank assumes interest rate risk as a result of its
normal operations. As a result, the fair values of the Bank's financial
instruments will change when interest rate levels change, and that change may
be either favorable or unfavorable to the Bank. Management attempts to match
maturities of assets and liabilities to the extent believed necessary to
manage interest rate risk. However, borrowers with fixed-rate obligations are
more likely to prepay in a falling rate environment and less likely to prepay
in a rising rate environment.
F-46
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Conversely, depositors who are receiving fixed rates are more likely to
withdraw funds before maturity in a rising rate environment and less likely to
do so in a falling rate environment. Management monitors rates and maturities
of assets and liabilities and attempts to manage interest rate risk by
adjusting terms of new loans and deposits and by investing in securities with
terms that mitigate the Bank's overall interest rate risk.
Note 16. Additional Cash Flow Information
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash Flows From Securities
Securities available for sale:
Sales........................................... $ 2,634,072 $ 17,571,926
Maturities and paydowns......................... 10,416,360 1,167,434
Purchases....................................... (17,360,920) (15,577,245)
Federal Home Loan Bank and Federal Reserve Bank
stock:
Redemptions..................................... 253,300 --
Purchases....................................... (6,150) (163,600)
------------ ------------
$ (4,063,338) $ 2,998,515
============ ============
Supplemental Disclosures of Cash Flow Information
Cash payments for income taxes.................. $ 1,046,946 $ 336,423
============ ============
Cash payments for interest...................... $ 3,380,544 $ 2,907,856
============ ============
Supplemental Schedule of Noncash Investing and
Financing Activities
Issuance of common stock as officer compensation,
1998 5,427 shares; 1997 2,101 shares............. $ 50,914 $ 18,863
============ ============
Acquisition of other real estate upon foreclosure
of loans......................................... $ 218,151 $ --
============ ============
Sale of other real estate financed by the Bank.... $ -- $ 227,500
============ ============
Issuance of common stock in exchange for common
stock of the Bank, 1998 2,724 shares; 1997 15,508
shares........................................... $ 29,827 $ 175,681
============ ============
</TABLE>
Note 17. Earnings Per Share
Following is information about the computation of the earnings per share
data for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Year Ended December 31, 1998
---------------------------------
Per-Share
Amounts
Numerator Denominator Net Income
---------- ----------- ----------
<S> <C> <C> <C>
Basic earnings per share.................... $1,093,272 $640,233 $1.71
=====
Effect of dilutive securities:
Shares to be issued to officers as
compensation............................. -- 2,917
Options................................... -- 41,031
---------- --------
Diluted earnings per share, assumed exercise
of options................................. $1,093,272 $684,181 $1.60
========== ======== =====
</TABLE>
F-47
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Year Ended December 31, 1997
--------------------------------
Per-Share
Amounts
Numerator Denominator Net Income
--------- ----------- ----------
<S> <C> <C> <C>
Basic earnings per share..................... $847,659 $655,029 $1.29
=====
Effect of dilutive securities:
Shares to be issued to officers as
compensation.............................. -- 1,433
Options.................................... -- 32,239
-------- --------
Diluted earnings per share, assumed exercise
of options.................................. $847,659 $688,701 $1.23
======== ======== =====
</TABLE>
Note 18. Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in estimating
the fair value of its financial instruments:
Cash and cash equivalents: The carrying amounts reported in the statement of
financial condition for cash and short-term instruments approximated their
fair values.
Investment securities (including mortgage-backed securities): Fair values
for investment securities are based on quoted market prices, where available.
If quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
Loans receivable: For variable-rate loans that reprice frequently and with
no significant change in credit risk, values are based on carrying values.
Fair values for other loans are estimated based on discounted cash flows,
using interest rates currently being offered for loans with similar terms to
borrowers with similar credit quality. Management believes that the allowance
for loan losses is an appropriate indication of the applicable credit risk
associated with determining the fair value of its loan portfolio and the
allowance has been deducted from the estimate fair value of loans.
Accrued interest receivable: The carrying amount of accrued interest
receivable approximates its fair value.
Off-balance-sheet instruments: Fair values for the Bank's off-balance-sheet
instruments, primarily lending commitments, are based on fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements. The fair value for such commitments are nominal.
Deposit liabilities: The fair values of demand deposits and passbook savings
equal their carrying amounts which represents the amount payable on demand.
The carrying amounts for variable-rate, fixed-term money market accounts and
certificates of deposit approximate their fair value at the reporting date.
Fair values for fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly
maturities on time deposits.
Other liabilities: The carrying amount of other liabilities approximates
their fair value.
F-48
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Following is a summary of the carrying amounts and approximate fair values of
the Bank's financial instruments at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998
-----------------------
Carrying Fair
Amount Value
----------- -----------
<S> <C> <C>
Cash and cash equivalents............................. $19,359,221 $19,359,221
Investment securities (including Federal Reserve Bank
and Federal Home Loan Bank stock).................... 22,855,923 22,855,923
Loans receivable...................................... 81,750,038 82,027,552
Accrued interest receivable........................... 674,582 674,582
Deposits.............................................. 108,021,464 108,167,399
Other liabilities..................................... 13,759,202 13,759,202
Commitments to extend credit.......................... -- --
<CAPTION>
1997
-----------------------
Carrying Fair
Amount Value
----------- -----------
<S> <C> <C>
Cash and cash equivalents............................. $13,028,745 $13,028,745
Investment securities (including Federal Reserve Bank
and Federal Home Loan Bank stock).................... 18,826,223 18,826,223
Loans receivable...................................... 66,138,477 66,519,896
Accrued interest receivable........................... 689,312 689,312
Deposits.............................................. 88,613,922 88,616,656
Other liabilities..................................... 6,544,759 6,544,759
Commitments to extend credit.......................... -- --
</TABLE>
F-49
<PAGE>
FIRST SOUTHERN BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
------------ ------------
<S> <C> <C>
Assets
Cash and due from banks............................. $ 6,904,803 $ 5,810,556
Federal funds sold.................................. 800,000 19,972,000
Investment securities............................... 28,778,630 16,596,921
Loans, net.......................................... 107,307,007 73,600,221
Fixed assets--net................................... 3,419,681 2,333,547
Other real estate owned............................. 163,592 --
Other assets........................................ 3,729,398 1,613,967
------------ ------------
Total assets...................................... $151,103,112 $119,927,212
============ ============
Liabilities and capital
Demand deposits..................................... $ 31,402,813 $ 29,735,167
Now accounts........................................ 12,760,269 10,588,075
Money market accounts............................... 28,529,623 19,807,817
Savings accounts.................................... 3,486,322 2,258,246
Certificates of deposit............................. 47,249,535 36,616,381
------------ ------------
Total deposits.................................... $123,428,561 $ 99,005,686
Other liabilities................................... 19,477,836 13,740,021
------------ ------------
Total liabilities................................. $142,906,397 $112,745,707
Minority interest in First Southern Bank............ 118,952 149,982
Common stock........................................ 4,183,440 3,847,974
Capital surplus..................................... 1,455,696 1,306,258
Retained earnings (deficit)......................... 2,930,157 1,894,927
Accumulated other comprehensive income (loss)....... (491,530) (17,636)
------------ ------------
Total shareholders' equity.......................... $ 8,077,763 $ 7,031,523
------------ ------------
Total liabilities & shareholders' equity............ $151,103,112 $119,927,212
============ ============
</TABLE>
F-50
<PAGE>
FIRST SOUTHERN BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Six Months
Ending Ending
June 30, June 30,
1999 1998
----------- ----------
<S> <C> <C>
INTEREST INCOME
INTEREST & FEES ON LOANS............................. $ 4,328,015 $3,345,345
INVESTMENT SECURITIES................................ 745,087 414,497
FEDERAL FUNDS SOLD................................... 209,616 363,377
----------- ----------
5,282,719 4,123,219
INTEREST EXPENSE ON DEPOSITS......................... 16,505,505 1,407,264
INTEREST EXPENSE ON BORROWINGS....................... 384,244 48,891
----------- ----------
NET INTEREST INCOME.............................. 3,247,970 2,667,064
PROVISION FOR LOAN LOSSES............................ 86,000 60,000
----------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES............................................ 3,161,970 2,607,064
OTHER INCOME......................................... 682,384 681,294
GAIN ON ASSETS SOLD.................................. 8,452 105,703
OTHER EXPENSES
SALARIES & BENEFITS.................................. 1,598,239 1,204,161
OCCUPANCY & EQUIPMENT................................ 556,855 532,773
INSURANCE EXPENSE.................................... 64,991 60,770
STATIONARY & SUPPLIES................................ 63,050 49,657
TELEPHONE EXPENSE.................................... 69,046 54,328
MARKETING, ADVERTISING AND BUSINESS DEVELOPMENT...... 147,982 123,456
LEGAL EXPENSE........................................ 34,937 35,775
OTHER PROFESSIONAL AND DATA PROCESSING FEES.......... 63,153 59,832
OTHER EXPENSE........................................ 254,478 195,889
----------- ----------
TOTAL OTHER EXPENSES............................... 2,852,731 2,316,641
----------- ----------
NET INCOME BEFORE TAX AND MINORITY INTEREST........ 1,000,075 1,077,420
INCOME TAXES......................................... 375,865 405,433
----------- ----------
NET INCOME BEFORE MINORITY INTEREST IN FIRST SOUTHERN
BANK................................................ 6,241,210 671,987
MINORITY INTEREST IN FIRST SOUTHERN BANK............. (26,790) (16,532)
----------- ----------
NET INCOME........................................... 597,412 655,455
=========== ==========
NET INCOME PER COMMON SHARE.......................... $ 0.88 $ 1.02
=========== ==========
</TABLE>
F-51
<PAGE>
[THIS PAGE LEFT BLANK INTENTIONALLY.]
F-52
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
CENTRAL COMMUNITY CORPORATION AND SUBSIDIARIES
Years ended December 31, 1998 and 1997
with Report of Independent Auditors
F-53
<PAGE>
CENTRAL COMMUNITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1998 and 1997
Contents
<TABLE>
<S> <C>
Report of Independent Auditors............................................. F-55
Consolidated Balance Sheets................................................ F-56
Consolidated Statements of Income.......................................... F-57
Consolidated Statements of Changes in Stockholders' Equity................. F-58
Consolidated Statements of Cash Flows...................................... F-59
Notes to Consolidated Financial Statements................................. F-60
</TABLE>
F-54
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Central Community Corporation
We have audited the accompanying consolidated balance sheets of Central
Community Corporation and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of income, changes in stockholders'
equity, and cash flows for the years then ended. These financial statements
are the responsibility of the Corporation's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Central
Community Corporation and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
FORT WORTH, TEXAS
May 14, 1999
F-55
<PAGE>
CENTRAL COMMUNITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Assets
Cash and due from banks............................ $ 11,908,679 $ 9,825,133
Interest-bearing deposits in other banks........... 44,324 277,921
Federal funds sold................................. 2,000,000 3,250,000
------------ ------------
13,953,003 13,353,054
Investment securities.............................. 60,752,392 60,950,052
Loans, net......................................... 130,744,098 107,261,017
Bank premises and equipment, net................... 3,957,694 3,641,735
Accrued interest receivable and other assets....... 2,597,939 2,645,754
Goodwill, net...................................... 2,120,847 2,365,734
------------ ------------
Total assets................................... $214,125,973 $190,217,346
============ ============
Liabilities and Stockholders' Equity
Deposits:
Interest-bearing................................... $145,152,168 $135,301,541
Non-interest-bearing............................... 42,394,512 34,258,270
------------ ------------
187,546,680 169,559,811
Securities sold under agreements to repurchase..... 3,300,000 1,702,427
Accrued interest payable........................... 654,203 577,741
Accrued expenses and other liabilities............. 583,083 748,132
Deferred tax liability............................. 676,320 790,859
------------ ------------
5,213,606 3,819,159
Notes payable...................................... 4,159,585 2,641,589
Stockholders' equity:
Common stock, $1 par:
Authorized shares--40,000 Issued and outstanding
shares--32,252.................................. 32,252 32,252
Additional paid-in capital....................... 4,220,067 4,220,067
Retained earnings................................ 13,279,855 10,472,974
Accumulated other comprehensive income........... 479,784 374,333
Treasury stock at cost, 1,886 and 2,019 shares
for 1998 and 1997, respectively................. (805,856) (902,839)
------------ ------------
Total stockholders' equity..................... 17,206,102 14,196,787
------------ ------------
Total liabilities and stockholders' equity..... $214,125,973 $190,217,346
============ ============
</TABLE>
See accompanying notes.
F-56
<PAGE>
CENTRAL COMMUNITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
Interest income:
Interest and fees on loans........................... $11,661,654 $10,545,870
Interest on investment securities:
Taxable............................................ 2,773,328 2,255,226
Tax-exempt......................................... 536,493 391,600
Federal funds sold................................. 155,665 282,387
----------- -----------
Total interest income.................................. 15,127,140 13,475,083
Interest expense:
Deposits............................................. 6,178,985 5,217,657
Federal funds purchased and securities sold under
agreement to repurchase............................. 113,502 118,300
Note payable......................................... 302,337 191,135
----------- -----------
Total interest expense................................. 6,594,824 5,527,092
----------- -----------
Net interest income.................................... 8,532,316 7,947,991
Provision for loan losses.............................. 480,000 420,000
----------- -----------
Net interest income after provision for loan losses.... 8,052,316 7,527,991
Other income:
Service charges and fees on deposit accounts......... 1,467,512 1,504,243
Gain on sale of loans................................ 18,767 15,560
Gain on sale of securities........................... 501,524 108,005
Other................................................ 328,567 265,242
----------- -----------
2,316,370 1,893,050
Other expenses:
Salaries and benefits................................ 2,993,893 2,562,931
Net occupancy expenses............................... 883,114 730,602
Goodwill amortization................................ 264,040 244,016
Professional fees.................................... 516,162 206,681
Data processing fees................................. 663,098 639,866
Other................................................ 629,198 821,382
----------- -----------
5,949,505 5,205,478
----------- -----------
Income before income tax expense....................... 4,419,181 4,215,563
Income tax expense..................................... 1,310,739 1,423,323
----------- -----------
Net income............................................. $ 3,108,442 $ 2,792,240
=========== ===========
</TABLE>
See accompanying notes.
F-57
<PAGE>
CENTRAL COMMUNITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
$1 Par Value,
Authorized Unrealized
40,000 Shares Gain on
------------------- Additional Securities
Outstanding Paid-In Retained Available Treasury
Shares Amount Capital Earnings for Sale Stock Total
----------- ------- ---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1997................... 32,252 $32,252 $4,220,067 $ 7,981,494 $ 34,091 $(1,003,005) $11,264,899
Comprehensive income:
Net income............. -- -- -- 2,792,240 -- -- 2,792,240
Other comprehensive
income:
Change in unrealized
gain on securities
available for sale,
net of deferred
income taxes of
$175,275............ -- -- -- -- 340,242 -- 340,242
-----------
Comprehensive income... 3,132,482
Sale of treasury
stock................. -- -- -- -- -- 100,166 100,166
Cash dividends paid.... -- -- -- (300,760) -- -- (300,760)
------ ------- ---------- ----------- -------- ----------- -----------
Balance at December 31,
1997................... 32,252 32,252 4,220,067 10,472,974 374,333 (902,839) 14,196,787
Comprehensive income: -- -- -- -- -- -- --
Net income............. 3,108,442 3,108,442
Other comprehensive
income:
Change in unrealized
gain on securities
available for sale,
net of deferred
income taxes of
$54,323............. -- -- -- -- 105,451 -- 105,451
-----------
Comprehensive income... -- -- -- -- -- -- 3,213,893
Sale of treasury
stock................. -- -- -- -- -- 96,983 96,983
Cash dividends paid.... -- -- -- (301,830) -- -- (301,561)
------ ------- ---------- ----------- -------- ----------- -----------
Balance at December 31,
1998................... 32,252 $32,252 $4,220,067 $13,279,855 $479,784 $ (805,856) $17,206,102
====== ======= ========== =========== ======== =========== ===========
</TABLE>
See accompanying notes.
F-58
<PAGE>
CENTRAL COMMUNITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Operating Activities
Net income........................................ $ 3,108,442 $ 2,792,240
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses....................... 480,000 420,000
Depreciation and amortization................... 703,534 667,713
Gain on sale of securities...................... (501,524) (108,005)
Net gain on sale of repossessed assets.......... (10,128) (6,407)
Gain on sale of loans........................... (18,767) (15,560)
Loss (gain) on sale of fixed assets............. (2,201) 6,546
Net amortization (accretion) of investment
security premiums/discounts.................... 88,016 (15,429)
Changes in operating assets and liabilities:
Accrued interest receivable and other assets.. 54,103 529,867
Accrued interest payable...................... 76,462 (1,114)
Accrued expenses and other liabilities........ (333,911) 417,882
------------ ------------
Net cash provided by operating activities......... 3,644,026 4,687,733
Investing Activities
Acquisition of bank, less cash and cash
equivalents acquired............................. -- 22,718,038
Proceeds from maturities/sales of investment
securities available for sale.................... 82,107,428 23,742,332
Purchases of investment securities available for
sale............................................. (81,336,486) (56,209,927)
Net increase in loans............................. (23,944,314) (7,302,558)
Purchases of bank premises and equipment, net..... (768,565) (184,079)
------------ ------------
Net cash used in investing activities............. (23,941,937) (17,236,194)
Financing Activities
Net increase in deposits.......................... 17,986,869 19,377,255
Net increase (decrease) in securities sold under
agreements to repurchase......................... 1,597,573 (97,574)
Cash dividends on common stock.................... (301,561) (300,760)
Net proceeds (payments) on notes payable.......... 1,517,996 (1,438,327)
Sale of treasury stock............................ 96,983 100,166
------------ ------------
Net cash provided by financing activities......... 20,897,860 17,640,760
------------ ------------
Increase in cash and cash equivalents............. 599,949 5,092,299
Cash and cash equivalents at beginning of year.... 13,353,054 8,260,755
------------ ------------
Cash and cash equivalents at end of year.......... $ 13,953,003 $ 13,353,054
============ ============
</TABLE>
See accompanying notes.
F-59
<PAGE>
CENTRAL COMMUNITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
1. Summary of Significant Accounting Policies
Organization
The consolidated financial statements include the accounts of Central
Community Corporation and its subsidiaries (the Company); the 100% owned
subsidiary, FSBT, Inc. (FSBT); and FSBT's 100% owned subsidiary, First State
Bank, Temple (the Bank). All material intercompany accounts and transactions
have been eliminated in consolidation. The Bank conducts full service banking.
The Bank's principal market for these services is Bell, Falls, Lampasas,
Mills, Travis and Williamson counties.
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.
Impact of New Accounting Standards
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130). SFAS No.
130 establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption of this statement had no
impact on the Company's net income or stockholders' equity. SFAS No. 130
required unrealized gains or losses on the Company's available-for-sale
securities, which prior to adoption were reported separately in stockholders'
equity, to be included in other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of SFAS No.
130.
Investment Securities
The Company has determined all securities to be available-for-sale (AFS).
AFS securities are stated at estimated fair value with unrealized gains and
losses, net of deferred income taxes, reported as a separate component of
stockholders' equity. The Bank has no trading securities. The amortized cost
of AFS securities is adjusted for amortization of premium and accretion of
discount. The cost of securities sold is based on the specific identification
method. Realized gains and losses and declines in value judged to be other-
than-temporary are included in securities gains (losses).
Loans
Loans are stated at the principal amount outstanding, net of unearned
discount and the allowance for loan losses. Interest income on loans generally
is recognized based on the principal amounts outstanding.
Loans are placed on nonaccruing status when management believes that
interest on such loans may not be collected in the ordinary course of
business. Interest income on nonaccruing loans is normally reported on a cash
basis as it is collected.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed adequate by
management 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, and composition of the loan portfolio; and other relevant factors. The
allowance is increased by provisions for loan
F-60
<PAGE>
CENTRAL COMMUNITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
losses charged against income. The allowance is based on estimates, and
ultimate losses may differ from current estimates if future events vary
substantially from the assumptions used in making the assessments.
Bank Premises and Equipment
Bank premises and equipment are generally stated at cost, less accumulated
depreciation. Depreciation is computed using straight-line and accelerated
methods over the estimated useful lives of the related assets.
Income Taxes
Deferred income taxes are recorded by the Company using the liability method
in accordance with FASB Statement No. 109, "Accounting for Income Taxes."
Under the liability method, deferred tax assets and liabilities are
recognized for the expected future tax consequences of existing differences
between financial reporting and tax reporting bases of assets and liabilities,
as well as for operating losses net of valuation allowances, if any, using
enacted tax laws and rates. Deferred tax expense represents the net change in
the net deferred tax asset or liability balance during the year. This amount,
together with income taxes currently payable or refundable for the current
year, represents the total income tax expense for the year.
Fair Values of Financial Instruments
Statement of Financial Accounting Standards No 107, "Disclosures about Fair
Value of Financial Instruments" (SFAS 107), requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. 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. SFAS 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value
of the Company. The following methods and assumptions were used by the Company
in estimating its fair value disclosures for financial instruments:
Cash and cash equivalents--The carrying amounts reported in the
consolidated balance sheets for cash and short-term instruments approximate
those assets' fair values.
Investment securities--Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans--For variable-rate loans that reprice frequently with no
significant change in credit risk, fair values are based on carrying
values. The fair values for all other loans are estimated by using
discounted cash flow analyses, using interest rates currently being offered
for loans with similar terms to borrowers of similar credit quality.
Management has made an adjustment to the fair values to reflect significant
collectibility concerns. The carrying amount of interest earned not
collected approximates its fair value.
Deposit liabilities--The fair values disclosed for demand deposits (e.g.,
interest and noninterest checking, passbook savings and certain types of
money market accounts) are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). The carrying
amounts for variable-rate, fixed-term money market accounts and
certificates of deposits approximate their fair values at the reporting
date. Fair values for fixed-rate certificates of deposit are estimated
using a discounted cash
F-61
<PAGE>
CENTRAL COMMUNITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities and
interest payments on time deposits.
Term borrowings--The carrying amounts of securities sold under agreement
to repurchase approximate their fair values. Fair values of other
borrowings are estimated using discounted cash flow analyses based on the
Bank's current incremental borrowing rates for similar types of borrowing
arrangements.
Loan commitments and standby letters of credit--The fair values of these
off-balance-sheet instruments are based on fees currently charged to enter
into similar agreements, taking into account the remaining term of the
agreements and the counterparties' credit standing. Management believes
that the fair values of these off-balance-sheet instruments are not
material.
Goodwill
Goodwill relates primarily to the acquisition of certain assets and
liabilities of First Bank Texas, Marlin (Marlin), and First National
Goldthwaite (Goldthwaite) and is being amortized over periods of 8 to 11 years
using the straight-line method. Accumulated amortization totaled approximately
$625,175 and $361,135 at December 31, 1998 and 1997.
Cash Equivalents
Cash equivalents include amounts due from banks and interest-bearing
deposits in other banks and federal funds sold with initial maturities of
three months or less.
Reclassification
Certain reclassifications have been made to the 1997 financial statements to
conform to the 1998 presentation.
F-62
<PAGE>
CENTRAL COMMUNITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Acquisition
On January 17, 1997, the Company assumed the deposit liabilities of Marlin
and received approximately $19,500,000 net cash, including costs of
acquisition. On February 1, 1997, the Company acquired the outstanding common
stock of Goldthwaite for approximately $3,324,000, including costs of
acquisition. The operations of Goldthwaite were merged into the Bank. These
transactions were accounted for under the purchase method of accounting and,
accordingly, the assets acquired and liabilities assumed were recorded at
their estimated fair values. In acquisitions of Marlin and Goldthwaite, the
excess purchase price over fair value of the net tangible assets was
approximately $669,000 and $1,569,000, respectively, and has been recorded as
goodwill, which is being amortized on a straight-line basis over 8 and 11
years, respectively.
The purchase price for Marlin and Goldthwaite has been allocated to the
tangible assets purchased and the liabilities assumed based upon the estimated
fair values on the date of acquisition, as follows (dollars in thousands):
<TABLE>
<CAPTION>
Marlin Goldthwaite
-------- -----------
<S> <C> <C>
Cash and cash equivalents.............................. $ 20,776 $ 6,359
Investment securities.................................. -- 2,543
Loans, net............................................. 565 10,071
Other assets........................................... 543 410
Deposits............................................... (21,374) (17,250)
Other liabilities...................................... (110) (378)
-------- --------
Net tangible assets.................................... 400 1,755
Purchase Price......................................... (1,069) (3,324)
-------- --------
Goodwill............................................... $ 669 $ 1,569
======== ========
</TABLE>
The operating results of Marlin and Goldthwaite have been included in the
consolidated financial statement of income from the date of acquisition.
F-63
<PAGE>
CENTRAL COMMUNITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Investment Securities
Investment securities with a market value aggregating approximately
$18,103,000 and $16,347,000 were pledged to secure deposits at December 31,
1998 and 1997. Investment securities segregated as sold under agreement to
repurchase totaled $3,300,000 and $1,702,427 at December 31, 1998 and 1997.
The amortized cost and fair values of investment securities available for
sale at December 31, 1998 and 1997, were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Debt securities:
United States Treasury and
federal agencies......... $40,449,011 $306,015 $(158,881) $40,596,145
State and political sub-
divisions................ 11,879,486 455,281 (4,281) 12,330,486
Corporate debt............ 6,777,232 134,582 (5,770) 6,906,044
----------- -------- --------- -----------
Total debt securities... 59,105,729 895,878 (168,932) 59,832,675
----------- -------- --------- -----------
Equity securities:
Non-marketable (primarily
Federal Home Loan Bank
stock)................... 919,717 -- -- 919,717
----------- -------- --------- -----------
$60,025,446 $895,878 $(168,932) $60,752,392
=========== ======== ========= ===========
Debt securities:
United States Treasury and
federal agencies......... $44,512,207 $324,863 $ (37,211) $44,799,859
State and political sub-
divisions................ 11,416,310 260,136 (36,903) 11,639,543
Corporate debt............ 3,768,531 56,450 (165) 3,824,816
----------- -------- --------- -----------
Total debt securities... 59,697,048 641,449 (74,279) 60,264,218
----------- -------- --------- -----------
Equity securities:
Non-marketable (primarily
Federal Home Loan Bank
stock)................... 644,400 -- -- 644,400
Marketable................ 41,434 -- -- 41,434
----------- -------- --------- -----------
$60,382,882 $641,449 $ (74,279) $60,950,052
=========== ======== ========= ===========
</TABLE>
The amortized cost and fair value of available for sale debt securities at
December 31, 1998, by contractual maturity, are shown below. Actual 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>
Fair
Amortized Cost Value
-------------- -----------
<S> <C> <C>
Due in one year or less.......................... $ 1,444,469 $ 1,454,903
Due after one year through five years............ 8,585,914 8,672,193
Due after five years through ten years........... 25,324,634 25,818,520
Due after ten years.............................. 3,391,091 3,445,703
Mortgage backed securities....................... 20,359,621 20,441,356
----------- -----------
$59,105,729 $59,832,675
=========== ===========
</TABLE>
F-64
<PAGE>
CENTRAL COMMUNITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Loans and Allowance for Loan Losses
The Bank grants commercial, real estate, and installment loans to customers
throughout its local lending area. The Bank has a diversified loan portfolio.
Loans by category at December 31, 1998 and 1997, were:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Commercial....................................... $ 35,909,208 $ 30,352,739
Real estate...................................... 64,565,252 48,620,834
Agricultural..................................... 18,586,151 17,547,173
Consumer......................................... 14,447,784 12,873,581
Unearned discount................................ (747,288) (812,363)
Loan origination fees............................ (274,177) (142,514)
------------ ------------
132,486,930 108,439,450
Allowance for loan losses........................ (1,742,832) (1,178,433)
------------ ------------
$130,744,098 $107,261,017
============ ============
</TABLE>
As of January 1, 1995, the Company adopted Financial Accounting Standards
Board Statement No. 114 (as amended by Statement No. 118), "Accounting by
Creditors for Impairment of a Loan." These new accounting standards require
that certain impaired loans (loans in which substantial doubt exists about the
recovery of interest and principal pursuant to the original terms of the
loans) be reported at the present value of expected future cash flows using
the loans' effective interest rates, or, as a practical expedient, at the
loans' observable market prices or the fair value of the collateral if the
loans are collateral dependent. Impaired loans have an outstanding principal
balance of $1,772,120 as of December 31, 1998 with a related allowance for
loan losses of $97,080. There were no impaired loans at December 31, 1997.
Loans on which the accrual of interest has been discontinued amounted to
approximately $1,508,000 and $142,000 at December 31, 1998 and 1997.
Transactions in the allowance for loan losses at December 31, 1998 and 1997,
were:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Balance at beginning of year......................... $1,178,433 $ 907,885
Allowance relating to Goldthwaite acquisition........ -- 101,729
Provision charged to expense......................... 480,000 420,000
Loans charged off.................................... (122,301) (422,057)
Recoveries of loans previously charged off........... 206,700 170,876
---------- ----------
$1,742,832 $1,178,433
========== ==========
</TABLE>
The Bank has granted loans to its officers, directors, and their affiliates.
Related party loans are made on substantially the same terms as those
prevailing at the time for comparable transactions with unrelated persons. The
aggregate dollar amounts of these loans were $1,910,000 and $1,120,000 at
December 31, 1998 and 1997.
In 1998, the Bank began servicing single family mortgage loans for an
affiliate. At December 31, 1998, the amount of loans being serviced by the
Bank approximated $300,000.
F-65
<PAGE>
CENTRAL COMMUNITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Income Taxes
The Company has a net deferred tax liability of approximately $407,000 and
$791,000 at December 31, 1998 and 1997. Deferred income taxes reflect the net
tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for
income tax purposes. Significant components of deferred taxes are mainly
differences between the financial reporting and tax basis of loan loss
reserves, fair value adjustments to certain assets and liabilities for
financial reporting purposes associated with certain stock acquisitions,
accounting for repossessed assets, and the tax effect of net operating loss
carryforwards, net of any valuation allowance.
Income tax expense computed for 1998 using the federal statutory tax rate of
34% is different from the recorded income tax expense of mainly due to tax-
exempt interest.
Income tax expense at December 31, 1998 and 1997, consists of:
<TABLE>
<S> <C> <C>
Current expense...................................... $1,748,719 $1,457,153
Deferred expense (benefit)........................... (437,980) (33,830)
---------- ----------
$1,310,739 $1,423,323
========== ==========
</TABLE>
The Company made federal income tax payments of $1,840,900 and $1,000,000
during 1998 and 1997. The Company has a net operating loss carryforward of
approximately $932,000 which expires in 2010. A valuation allowance of
approximately $200,000 has been established in 1997 and 1998 as a reduction of
the estimated future tax benefits available from the utilization of the net
operating loss carryforward.
6. Bank Premises and Equipment
Bank premises and equipment consisted of the following at December 31, 1998
and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land.................................................. $ 941,120 $ 934,204
Buildings and improvements............................ 3,017,419 2,578,679
Leaseholds............................................ 25,684 --
Furniture and equipment............................... 1,755,093 1,517,238
---------- ----------
5,739,316 5,030,121
Accumulated depreciation.............................. 1,781,622 1,388,386
---------- ----------
$3,957,694 $3,641,735
========== ==========
</TABLE>
7. Interest-Bearing Deposits
At December 31, 1998 and 1997, interest-bearing deposits of $100,000 or more
were approximately $53,654,000 and $46,015,000.
At December 31, 1998, the scheduled maturities of interest-bearing time
deposits are as follows:
<TABLE>
<S> <C>
1999............................................................. $82,659,115
2000............................................................. 6,406,448
2001............................................................. 3,630,906
2002 and thereafter.............................................. 1,639,478
-----------
$94,335,947
===========
</TABLE>
F-66
<PAGE>
CENTRAL COMMUNITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Employee Benefit Plan
The Company has an employee stock ownership plan and 401(k) retirement plan
for all eligible employees. Employee contributions to the 401(k) are voluntary
and limited to 6% of each employee's gross earnings. Employer contributions
are made at the discretion of management. Company plan expense was $174,000
and $159,000 for 1998 and 1997.
9. Notes Payable
<TABLE>
<CAPTION>
December 31
---------------------
Description 1998 1997
----------- ---------- ----------
<S> <C> <C>
Note payable, unaffiliated Bank, bears interest at
prime less 1/2% (7 1/4% at December 31, 1998 and 8%
at December 31, 1997), due July 2000, secured by all
outstanding common stock of the Bank................. $1,600,000 $1,600,000
Note payable Federal Home Loan Bank, bears interest at
6.29%, due 2012, secured by general blanket lien on
all single (1-4) family mortgages.................... 401,271 419,253
Note payable Federal Home Loan Bank, bears interest at
5.40%, due 2008, secured by general blanket lien on
all single (1-4) family mortgages.................... $ 462,953 $ 497,336
Note payable Federal Home Loan Bank, bears interest at
5.86%, due 2013, secured by general blanket lien on
all single (1-4) family mortgages.................... 701,846 --
Note payable Federal Home Loan Bank, bears interest at
4.87%, due 2008, secured by general blanket lien on
all single (1-4) family mortgages.................... 993,515 --
Note payable, third-party commercial company, bears
interest at 10%, due 1998............................ -- 125,000
---------- ----------
$4,159,585 $2,641,589
========== ==========
</TABLE>
The Bank has eight repurchase agreements secured by securities outstanding
at December 31, 1998 and 1997, in the amount of $3,300,000 and $1,702,427,
respectively. All repurchase agreements mature in 1999. The transactions were
accounted for as financing transactions.
Scheduled maturities of debt are as follows:
<TABLE>
<S> <C>
1999.............................................................. $ 367,828
2000.............................................................. 1,577,013
2001.............................................................. 186,703
2002.............................................................. 196,927
2003 and thereafter............................................... 1,831,114
----------
$4,159,585
==========
</TABLE>
In addition to the above, the Company had unsecured federal fund lines of
credit for $10 million at December 31, 1998 and 1997. At December 31, 1998 and
1997, the outstanding balance on these unused federal fund lines was zero.
The Company paid approximately $6,595,000 and $5,527,000 in interest on
deposits and other borrowings during 1998 and 1997.
F-67
<PAGE>
CENTRAL COMMUNITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has certain financial data covenants on the note payable to the
unaffiliated Bank and was in compliance with these covenants, as of, and
during the years ended December 31, 1998 and 1997.
10. Restrictions on Cash and Other Regulatory Restrictions
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank. The amount of those reserve balances at December 31, 1998 and
1997, approximated $1,895,000 and $1,594,000.
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory (and possibly additional discretionary) actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications 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 1 capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier 1 capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1998 and
1997, that the Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 1998, 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 1 risk-based, Tier 1 leverage ratios
as set forth in the table below (dollars in thousands). There are no
conditions or events since the notification that management believes have
changed the institution's category.
<TABLE>
<CAPTION>
To Be
Well Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
------------- -------------------------------- ---------------------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ------------------------ ------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total capital (to risk
weighted assets)...... $16,966 11.11% $12,216 (greater than or =) 8.00% $15,270 (greater than or =) 10.00%
Tier 1 capital (to risk
weighted assets)...... 15,784 10.34% 6,108 (greater than or =) 4.00% 9,162 (greater than or =) 6.00%
Tier 1 capital (to
average assets)....... 15,784 8.10% 7,796 (greater than or =) 4.00% 9,745 (greater than or =) 5.00%
As of December 31, 1997:
Total capital (to risk
weighted assets)...... $13,941 11.11% $10,035 (greater than or =) 8.00% $12,544 (greater than or =) 10.00%
Tier 1 capital (to risk
weighted assets)...... 12,977 10.35% 5,018 (greater than or =) 4.00% 7,527 (greater than or =) 6.00%
Tier 1 capital (to
average assets)....... 12,977 7.81% 6,643 (greater than or =) 4.00% 8,304 (greater than or =) 5.00%
</TABLE>
11. Financial Instruments With Off-Balance-Sheet Risk
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 and
commercial standby letters of credit. Those instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
accompanying financial statements.
F-68
<PAGE>
CENTRAL COMMUNITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
Financial instruments whose contract amounts represent credit risk:
<TABLE>
<S> <C>
Commitments to extend credit.................................... $32,942,170
Standby letters of credit....................................... 1,303,459
Commercial letters of credit.................................... 37,810
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments may expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
The Bank enters into covered call transactions using U.S. Treasury Bonds as
collateral. These transactions usually expire within 30 days. As of December
31, 1998, the Company had no covered call options outstanding. Covered call
options backed by $8,000,000 in U.S. Treasury Bond collateral were outstanding
as of December 31, 1997. The Bank defers income recognition until the options
are exercised or expire. As of December 31, 1998, the Company had no deferred
income related to covered call options. At December 31,1997, deferred income
was $31,250 and the unrealized gain on the collateral was approximately
$45,000 before tax effect.
Stock options outstanding to an officer of the Company for 2,370 shares at
$465 per share expire on October 16, 2001.
12. Fair Values of Financial Instruments
A summary of the carrying amounts and estimated fair values of financial
instruments at December 31, 1998, as disclosed separately in previous
footnotes, is as follows (carrying amounts of cash and cash equivalents and
securities sold under agreement to repurchase approximate fair value at
December 31, 1998):
<TABLE>
<CAPTION>
December 31, 1998
-------------------------
Carrying Fair
Amount Value
------------ ------------
<S> <C> <C>
Investment securities............................. $ 60,752,392 $ 60,752,392
Loans, net........................................ 130,744,098 132,404,849
Interest-bearing deposits......................... 145,152,168 145,901,322
Notes payable..................................... 4,159,585 4,209,808
</TABLE>
In the table above, the carrying amounts are included in the consolidated
balance sheet under the indicated captions.
F-69
<PAGE>
CENTRAL COMMUNITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Leases
Future minimum lease payments under operating leases as of December 31,
1998, are as follows:
<TABLE>
<S> <C>
1999............................................................... $106,600
2000............................................................... 124,700
2001............................................................... 110,800
2002............................................................... 100,900
2003............................................................... 16,600
--------
Total minimum lease payments....................................... $459,600
========
</TABLE>
Rent expense during 1998 was $57,700. There was no rent expense during 1997.
14. Litigation
The Bank has been named in a claim alleging the Bank improperly accepted and
presented for payment certain checks. The Bank has engaged counsel to defend
the litigation and an accrual has been recorded in the financial statements
for estimated settlement and defense costs.
15. Impact of Year 2000 (Unaudited)
Many existing computer software programs use only two digits to identify the
year in date fields and, as such, could create erroneous results in the year
2000. The Bank utilizes a limited number of software systems in its daily
operations. The Bank and its primary third-party software provider have made
and will continue to make the necessary changes in its software systems to
ensure that the Bank is Year 2000 compliant. In addition, the Bank has taken
steps to ensure that the institutions it interfaces with as well as the
vendors it utilizes in various capacities are also taking the necessary steps
to become Year 2000 compliant. Testing will be completed by the first quarter
of 1999. The financial impact of becoming Year 2000 compliant has not been and
is not expected to be material to the Bank or the results of its operations.
16. Subsequent Event
Preferred Stock
The Company entered into a letter of intent in March 1999, to participate
with two other banks in the issuance of $21,500,000 Trust Preferred
Securities. The Company's share of the issue will be $7,500,000 and the
transaction is expected to be completed in August. The proceeds will be
utilized for various business purposes including paying off existing company
debt and contributed as additional capital to the Bank.
F-70
<PAGE>
CENTRAL COMMUNITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash and due from banks........................... $ 9,019,235 $ 9,868,607
Interest-bearing deposits in other banks.......... 89,541 2,151,092
Federal funds sold................................ 500,000 2,000,000
------------ ------------
9,608,776 14,019,699
Investment securities............................. 59,743,831 53,293,751
Loans, net........................................ 132,357,547 116,131,808
Bank premises and equipment, net.................. 3,856,931 3,872,309
Accrued interest receivable and other assets...... 3,332,597 2,878,474
Goodwill, net..................................... 1,984,817 2,252,868
------------ ------------
Total Assets.................................... 210,884,499 192,448,909
============ ============
Deposits
Interest-bearing................................ 141,555,899 133,868,282
Non-interest bearing............................ 37,846,339 32,677,581
------------ ------------
179,402,238 166,545,863
Fed Funds Purchased and Securities Sold Under
Repurchase Agreements............................ 3,400,000 1,500,000
Accrued interest payable.......................... 563,194 579,093
Accrued expenses and other liabilities............ 957,067 884,199
Deferred tax liability............................ -- 595,032
------------ ------------
1,520,261 2,058,324
Notes payable..................................... 9,376,788 6,790,730
Common stock, par................................. 32,252 32,252
Additional paid-in capital........................ 4,220,067 4,220,067
Retained earnings................................. 14,842,841 11,910,347
Unrealized gain on securities AFS................. (1,089,770) 321,988
Treasury stock.................................... (820,178) (930,662)
------------ ------------
Total stockholders equity....................... 17,185,212 15,553,992
------------ ------------
Total liabilities and stockholders equity....... $210,884,499 $192,448,909
============ ============
</TABLE>
F-71
<PAGE>
CENTRAL COMMUNITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ending
June 30
---------------------
1999 1998
---------- ----------
<S> <C> <C>
Interest income
Interest and fees on loans............................. $6,371,558 $5,618,843
Interest on investment securities
Taxable.............................................. 1,330,803 1,455,350
Tax Exempt........................................... 277,269 264,289
Interest on federal funds sold......................... 14,370 51,249
---------- ----------
7,994,000 7,389,731
Interest expense
Deposits............................................... 3,038,035 2,997,121
Federal funds purchased................................ 140,524 41,997
Notes payable.......................................... 184,496 178,185
---------- ----------
3,363,055 3,217,303
---------- ----------
Net interest income...................................... 4,630,945 4,172,428
Provision for loan losses................................ 475,000 240,000
---------- ----------
Net interest income after provision for loan losses...... 4,155,945 3,932,428
Other income
Service charges & fees on deposit accounts............. 873,361 700,530
Gain on sale of loans.................................. 18,446 8,545
Gain on sale of securities............................. 60,182 198,654
Other.................................................. 344,612 131,790
---------- ----------
1,296,601 1,039,519
Other expenses
Salaries and benefits.................................. 1,683,838 1,439,164
Net occupancy expenses................................. 422,169 356,918
Goodwill amortization.................................. 136,031 132,020
Professional fees...................................... 91,735 222,689
Data processing fees................................... 361,986 309,918
Other.................................................. 492,418 476,612
---------- ----------
3,188,177 2,937,321
Income before income tax expense......................... 2,264,369 2,034,626
Income tax expense....................................... 701,383 597,523
---------- ----------
Net income............................................... $1,562,986 $1,437,103
========== ==========
Basic earnings per common share outstanding............ $ 51.51 $ 47.53
Book value per common share outstanding................ 566.35 514.47
</TABLE>
F-72
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION PROVIDED IN THIS PROSPECTUS AND
STATEMENT OF ADDITIONAL INFORMATION OR ANY SUPPLEMENT. THE FUND HAS NOT
AUTHORIZED ANYONE ELSE TO PROVIDE YOU WITH DIFFERENT INFORMATION. THE FUND 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 AND
STATEMENT OF ADDITIONAL INFORMATION 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
Prospectus Summary....................................................... i
Summary of Fund Expenses................................................. 1
The Fund................................................................. 2
Additional Information................................................... 2
Use of Proceeds.......................................................... 2
The Fund's Investments................................................... 2
Fund Shares.............................................................. 4
Fundamental Policies..................................................... 4
Flow of Funds Diagram.................................................... 5
Risk Factors............................................................. 6
Forward Looking Statements............................................... 10
The Bank Holding Companies............................................... 11
Management of the Fund................................................... 30
Net Asset Value.......................................................... 30
Distributions............................................................ 31
Tax Matters.............................................................. 31
Underwriting............................................................. 32
Fund Custodian and Transfer Agent........................................ 35
Experts.................................................................. 35
Legal Counsel............................................................ 35
Table of Contents of the Statement of Additional Information............. 36
STATEMENT OF ADDITIONAL INFORMATION
Additional Description of the Bank Trusts................................ S-2
Additional Risk Factors.................................................. S-2
Additional Description of the Preferred Securities....................... S-4
Additional Description of the Subordinated Debentures.................... S-9
Additional Description of the Guarantee.................................. S-14
Relationship Among the Preferred Securities, the Subordinated Debentures
and the Guarantee....................................................... S-16
Management of the Fund................................................... S-18
Supervision and Regulation of the Bank Holding Companies................. S-19
Additional Tax Discussion................................................ S-24
Index to Financial Statements............................................ F-1
Balance Sheet of the Fund................................................ F-3
Financial Statements of FirstBancorp, Inc................................ F-7
Financial Statements of First Southern Bancorp, Inc. .................... F-29
Financial Statements of Central Community Corporation.................... F-53
</TABLE>
UNTIL OCTOBER 22, 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.
725,000 Shares of
Beneficial Interest
SAL Trust Preferred Fund I
----------------
PROSPECTUS
----------------
STERNE, AGEE & LEACH, INC.
September 27, 1999
