<PAGE>
As filed with the Securities and Exchange Commission on July 2, 1999
1933 Act File No. 333-
1940 Act File No. 811-09421
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-2
(Check appropriate box or boxes)
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[_] Pre-Effective Amendment No.____
[_] Post-Effective Amendment No.____
and
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[_] Amendment No.____
SAL Trust Preferred Fund I
Exact Name of Registrant as Specified in Declaration of Trust
1901 Sixth Avenue North, Suite 2100
Birmingham, Alabama 35203
Address of Principal Executive Offices (Number, Street, City, State, Zip Code)
(205) 252-5900
Registrant's Telephone Number, including Area Code
The Corporation Trust Company
1209 Orange Street
Wilmington, Delaware 19801, County of Newcastle
Name and Address (Number, Street, City, State, Zip Code) of Agent for Service
Copies of Communications to:
Thomas S. Harman
Morgan, Lewis & Bockius LLP
1800 M Street, N.W.
Washington, D.C. 20036
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of this Registration Statement
_________________
If any of the securities being registered on this form are offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, other than securities offered in connection with a dividend reinvestment
plan, check the following box. [_]
It is proposed that this filing will become effective (check
appropriate box)
[X] when declared effective pursuant to Section 8(c)
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
========================================================================================================================
Title of Securities Being Amount Being Proposed Proposed Amount of
Registered Registered Maximum Maximum Registration Fee
Offering Price Per Aggregate
Unit Offering
Price(1)
=======================================================================================================================
<S> <C> <C> <C> <C>
Shares, No Par Value 946,000 Shares $25.00 $23,650,000 $6,574.70
=======================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
The registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until the Registration Statement shall become effective on such
dates as the Commission, acting pursuant to said Section 8(a), may determine.
<PAGE>
PART C
SAL TRUST PREFERRED FUND I
_______________________
CROSS REFERENCE SHEET
Part A - Prospectus
<TABLE>
<CAPTION>
Items in Part A of Form N-2 Location in Prospectus
--------------------------- ----------------------
<S> <C>
Item 1. Outside Front Cover...................................... Cover Page
Item 2. Cover Pages; Other Offering Information.................. Cover Page
Item 3. Fee Table and Synopsis................................... Prospectus Summary; Summary of
Fund Expenses
Item 4. Financial Highlights..................................... Not Applicable
Item 5. Plan of Distribution..................................... Cover Page; Prospectus Summary;
Underwriting
Item 6. Selling Shareholders..................................... Not Applicable
Item 7. Use of Proceeds.......................................... Prospectus Summary; Use of
Proceeds; The Fund's Investments
Item 8. General Description of the Registrant.................... Prospectus Summary; The Fund;
The Fund's Investments; Fund
Shares
Item 9. Management............................................... Prospectus Summary;
Management of the Fund; Fund
Custodian
Item 10. Capital Stock, Long-Term Debt, and Other
Securities............................................... Fund Shares; Tax Matters
Item 11. Defaults and Arrears on Senior Securities................ Not Applicable
Item 12. Legal Proceedings........................................ Not Applicable
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Item 13. Table of Contents of the Statement of
Additional Information................................... Back Cover
<CAPTION>
Part B
Items required by Part B of Form N-2 Location in Statement of
- ----------------------------------- ------------------------
Additional Information
----------------------
<S> <C>
Item 14. Cover Page............................................... Cover Page
Item 15. Table of Contents........................................ Back Cover
Item 16. General Information and History.......................... Not Applicable
Item 17. Investment Objectives and Policies....................... Not Applicable
Item 18. Management............................................... Management of the Fund
Item 19. Control Persons and Principal Holders.................... Not Applicable
of Securities
Item 20. Investment Advisory and Other Services................... Management of the Fund
Item 21. Brokerage Allocation and Other Practices................. Not Applicable
Item 22. Tax Status............................................... Additional Tax Discussion
Item 23. Financial Statements..................................... Financial Statements of the Fund
</TABLE>
Part C - Other Information
Items 24-33 have been answered in Part C of this Registration Statement
ii
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. +
+WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH +
+THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN+
+OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT +
+PERMITTED. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS Subject to Completion
________, 1999
SAL TRUST PREFERRED FUND I
860,000 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 THE "RISK FACTORS" BEGINNING ON PAGE 5 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. See "Fund Shares."
PORTFOLIO CONTENTS. The Fund intends 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. The assets of each statutory trust consist solely of
subordinated debentures and payments thereunder. 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>
================================================================================
PROCEEDS TO THE
PRICE TO PUBLIC SALES LOAD(1) FUND(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............ $ 25.00 None $ 25.00
Total(3)............. $21,500,000.00 None $21,500,000.00
================================================================================
</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
($1,075,000). The Fund has granted the Underwriters an option, exercisable
for 30 days from the date of this Prospectus, to purchase up to 86,000
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 $1,182,500. 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 $23,650,000 and, assuming Fund expenses do not
exceed the limitations set forth in footnote (2) above, the Total Proceeds
to the Fund will be $23,650,000. See "Underwriting."
The Underwriters are offering the shares as they receive them and retain the
right to reject any order. The Fund expects to deliver shares to the
Underwriters on or about ________ 1999.
_______________
STERNE AGEE & LEACH, INC.
The date of this Prospectus is __________________, 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_________________,
containing additional information about the Fund, has been filed with the
Securities and Exchange Commission and is hereby incorporated by reference in
its entirety into this Prospectus and is attached to this Prospectus.
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 "_______________".
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 860,000 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 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 $21,500,000. 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 junior subordinated
debentures (the "Subordinated Debentures")
issued by its respective Bank Holding Company
of an equal dollar amount to the Preferred
Securities. Each
- --------------------------------------------------------------------------------
i
<PAGE>
- --------------------------------------------------------------------------------
Bank Holding Company will, in turn, use the
proceeds from the sale of the Subordinated
Debentures to finance additional expansion,
repay existing debt and 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 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). See
"Management of the Fund."
DISTRIBUTIONS.............. The Fund seeks to pay a dividend yield
("Dividend Yield") on the Fund Shares at a
fixed rate of ___% 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.
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 "____." See
"Fund Shares."
FUND CUSTODIAN............. The Trust Company of Sterne Agee & Leach, Inc.
will serve as Custodian of the Fund. See "Fund
Custodian."
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.
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price) None/+/
ANNUAL EXPENSES (AS A PERCENTAGE OF NET ASSETS ATTRIBUTABLE TO FUND
SHARES)
Management Fees 0%/++/
Other Expenses (after reimbursement) 0%/++/
Total Annual Expenses 0%/++/
====================
+ 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 ($1,075,000, or $1,182,500 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.
++ 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 obligation to pay such expenses continues so long as its corresponding
Preferred Securities are held by the Fund. See "Management of the Fund--
Investment Manager" and "Net Asset Value" for a discussion of the Bank Holding
Companies' obligation to pay the Management fees.
EXAMPLE
The following example illustrates the expenses that you would pay on a
$1,000 investment in the Fund, assuming a 5% annual return:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$0 $0 $0 $0
____________
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 1901
Sixth Avenue North, Suite 2100, Birmingham, Alabama 35203, and its telephone
number is (205) 252-5900. 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
$21,500,000 ($23,650,000 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. 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 all of the net proceeds from the sale of the
Subordinated Debentures to finance additional expansion, repay existing debt,
repurchase its own securities and 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 _____%
2
<PAGE>
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. A brief summary description of each of these Bank Holding
Companies and their respective banks (the "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 to the Bank Holding Companies; (iii) investing the gross
proceeds of the sale of the Common and 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 the 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.
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 on each Bank Holding Company's obligations or stock ranking junior to
or on a parity with
3
<PAGE>
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 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.
FUND SHARES
The Fund will issue 860,000 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.
4
<PAGE>
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 in any particular industry or group of
industries, except the Fund intends to invest substantially all of 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.
5
<PAGE>
[FLOW OF FUNDS DIAGRAM]
<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.
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 less concentrated 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 markey 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 "____". 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 investment manager has no previous experience in managing similar
closed-end funds.
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:
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 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 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 Preferred
6
<PAGE>
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 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 Dentures 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.
"Capital Event" means the receipt 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 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
7
<PAGE>
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 of an opinion of counsel
experienced in such matters that the Bank Trusts are or will be considered
"investment companies" that are 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 the 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 the
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, the
distribution of the Subordinated Debentures in exchange for the Preferred
Securities would constitute a taxable event to the Bank Trusts, the Fund and to
you, as a shareholder of the Fund.
SUBORDINATED DEBENTURES, PREFERRED SECURITIES AND GUARANTEE 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 Guarantee are federally insured by the Federal
Deposit Insurance Corporation or any other state or federal governmental agency.
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.
FirstBancorp, Inc. services Naples, Florida which is on the southwest coast
of Florida and the Florida Keys. As of March 31, 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.
8
<PAGE>
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 March
31, 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 March 31, 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 of 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 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, or 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
9
<PAGE>
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 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
March 31, 1999, FirstBancorp, Inc., First Southern Bancorp, Inc. and Central
Community Corporation had one year cumulative gap ratios of 0.77%, 1.02% 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.
10
<PAGE>
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.
11
<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 March 31, 1999, FirstBancorp had total
consolidated assets of approximately $341 million, net loans of approximately
$233 million, deposits of approximately $288 million and shareholders' equity of
approximately $18.4 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 March 31, 1999, the
bank had total assets of $165 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 March 31, 1999, the bank had total assets
of $181 million.
FirstBancorp, through it's 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:
12
<PAGE>
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 Monroe 78,024 9.84%
Bank of the Marathon 2
Florida Keys Key West 2
Islamorada 1
Gulf Coast Collier Naples 4 199,436 3.12%
National Bank
</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
Deposit Report, First National 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.
13
<PAGE>
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 March 31, 1999, the banks' consolidated loan portfolio consisted of
the following types and amounts of loans:
<TABLE>
<CAPTION>
Loan Portfolio as of March 31, 1999
-----------------------------------------
Amount ($) Percentage (%) of
Loan Type (in thousands) Total Portfolio
- ------------ ------------------- -------------------
<S> <C> <C>
Commercial and Industrial 14,226 6.1
Real Estate-Construction and Land Development 37,483 15.9
Real Estate-Residential 106,483 45.3
Real Estate-Farmland - 0
Real Estate-Commercial 68,480 29.1
Agricultural Loans 1,676 0.7
Consumer Loans 6,011 2.6
Other Loans 724 0.3
------- -------
Gross Loans 235,083 100
Plus: Unamortized Loan Costs - Net 306
Less: Allowance for Loan Losses (2,057)
-------
Net Loans 233,332
</TABLE>
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
90.3% of the loan portfolio
14
<PAGE>
as of March 31, 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 March 31, 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 $1.4 million.
FirstBancorp believes that it will not incur any material loss on the loans.
DEPOSITS
The principal source of funds for the banks are core deposits consisting of
demand deposits, interest-bearing transaction accounts (NOW), money market
accounts, savings accounts and certificates of deposit. As of March 31, 1999,
the banks' consolidated deposits consisted of the following type and percentage:
<TABLE>
<CAPTION>
Deposits as of March 31, 1999
----------------------------------------------
Amount ($) Percentage (%) of
Deposit Type (in thousands) Deposits
- ---------------- --------------------- ---------------------
<S> <C> <C>
Non-Interest Bearing Demand
Deposits 54,921 19.1
Interest Bearing Deposits 49,775 17.3
Savings Deposits 83,982 29.1
Certificates of Deposit 99,420 (1) 34.5
-------- --------
Total Deposits 288,099 100
</TABLE>
________________________________
(1) Includes $58.1 million of certificates of
deposit over $100 thousand.
As of March 31, 1999, the banks had no brokered deposits.
Deposit rates can be changed daily by senior management. Management
believes the rates the banks offer are competitive with but typically lower than
those offered by certain other institutions in the banks' market areas.
FirstBancorp focuses on customer service, rather than high rates, to attract and
retain deposits.
INVESTMENT PORTFOLIO
As of March 31, 1999, the banks' consolidated investment portfolio
consisted of the following types and amounts of securities:
15
<PAGE>
<TABLE>
<CAPTION>
Investments as of March 31, 1999
------------------------------------------
Amount ($)(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 23,645 57.6
U.S. Agency Mortgage-Backed Securities 5,793 14.1
Collateralized Mortgage Obligations 7,910 19.3
State and Political Subdivision Obligations 90 0.2
Equity Securities 1,618 3.9
------------------- -------------------
Total Investments 41,059 100
</TABLE>
______________________________
(1) Excludes net unrealized
appreciation of $26 thousand.
As of March 31, 1999, $3.1 million had a remaining maturity less than one
year, $8.6 million had a remaining maturity of one to five years, and $27.7
million had a remaining maturity of over five years. The $1.6 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.
16
<PAGE>
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 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 March 31, 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 three months ended March 31, 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.
17
<PAGE>
FIRSTBANCORP, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED DECEMBER 31,
MARCH 31, 1999(1) 1998(2) 1997(2) 1996(2)
------------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
SELECTED RESULTS OF OPERATIONS:
Interest income........................................ $ 5,931 $ 20,592 $ 17,524 $ 13,385
Interest expense....................................... 2,550 9,544 8,437 5,946
Net interest income............................... 3,381 11,048 9,087 7,439
Provision for loan losses.............................. 135 585 474 432
Noninterest income..................................... 833 3,707 2,903 2,007
Noninterest expenses................................... 3,078 10,194 8,595 7,366
Income before income taxes............................. 1,001 3,976 2,922 1,648
Net income........................................ 696 2,492 1,832 904
PER COMMON SHARE:
Earnings per common share-basic........................ $ 0.42 $ 1.53 $ 1.12 $ 0.57
Earnings per common share-diluted...................... $ 0.40 $ 1.44 $ 1.08 $ 0.56
Cash Dividends declared................................ $ 0 $ 0 $ 0 $ 0
Book value per share................................... $ 11.15 $ 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........................................... $ 341,072 $ 310,527 $ 254,312 $ 199,609
Securities available for sale.......................... 41,085 22,303 23,201 18,331
Investment securities held to maturity................. 0 0 0 0
Loans held for sale.................................... 934 1,970 1,669 606
Loans receivable, net.................................. 233,332 225,563 179,121 144,602
Reserve for loan losses................................ 2,057 1,896 1,415 1,156
Deposits............................................... 288,099 260,999 216,434 174,878
FHLB advances and other borrowings..................... 26,802 25,922 16,574 5,601
Stockholders' equity................................... 18,364 17,720 15,218 13,031
Loan to deposit ratio.................................. 81.70% 87.15% 83.41% 83.34%
PERFORMANCE RATIOS:(3)
Return on average assets............................... 0.84% 0.90% 0.80% 0.57%
Return on average equity............................... 15.54% 15.10% 13.09% 6.96%
Net interest margin-taxable equivalent................. 4.86% 4.88% 4.69% 4.65%
Equity to assets....................................... 5.38% 5.70% 5.98% 6.53%
Efficiency ratio....................................... 73.04% 70.73% 72.91% 77.83%
ASSET QUALITY DATA:
Nonperforming loans.................................... $ 1,869 $ 239 $ 506 $ 424
Other real estate owned (OREO)......................... 331 331 835 375
Nonperforming assets................................... 2,200 570 1,341 799
Nonperforming loans/total loans........................ 0.79% 0.11% 0.28% 0.29%
Nonperforming assets/total loans + OREO................ 0.93% 0.25% 0.74% 0.55%
Reserve for loan losses/total loans.................... 0.87% 0.83% 0.78% 0.79%
Reserve for loan losses/nonperforming loans............ 110.06% 793.31% 279.64% 272.64%
Reserve for loan losses/nonperforming assets........... 93.50% 332.63% 105.51% 144.68%
Ratio of net charge-offs to average loans.............. 0.00% 0.05% 0.13% 0.09%
EARNINGS TO FIXED CHARGE COVERAGE RATIOS: (4)
Excluding interest on deposits......................... 3.58X 4.49X 5.66X 4.59X
Including interest on deposits......................... 1.41X 1.42X 1.35X 1.28X
CAPITAL RATIOS:
Leverage ratio......................................... 5.49% 5.86% 6.22% 6.91%
Tier 1 capital (to risk-weighted assets)............... 8.38% 8.41% 9.04% 9.76%
Total capital (to risk-weighted assets)................ 9.32% 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.
18
<PAGE>
[MAP REPRESENTING LOCATIONS OF BANKING OFFICES FOR GULF COAST NATIONAL BANK AND
FIRST NATIONAL BANK OF THE FLORIDA KEYS]
19
<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 March 31, 1999, First Southern Bank had total assets of approximately
$149.7 million, net loans of approximately $95.2 million, deposits of
approximately $128.6 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:
<TABLE>
<CAPTION>
First Southern Bank Banking Locations/Market Share
--------------------------------------------------
County City No. of Offices County Population (1) Deposit Market 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.
20
<PAGE>
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.
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 March 31, 1999, First Southern Bank's loan portfolio consisted of the
following types and amounts of loans:
21
<PAGE>
<TABLE>
<CAPTION>
Loan Portfolio as of March 31, 1999
-----------------------------------
Amount ($) Percent (%) of Total Portfolio
Loan Type (in thousands)
- --------- -------------- ------------------------------
<S> <C> <C>
Commercial and Industrial 19,952 20.7
Real Estate -- Construction and Development 3,358 3.5
Real Estate -- Residential 12,834 13.3
Real Estate -- Farmland 0 0.0
Real Estate -- Commercial 53,803 55.7
Agricultural Loans 0 0.0
Consumer 6,454 6.7
Other 105 0.1
-------------- --------------
Gross Loans 96,506 100
Less: Unearned Income (41)
Less: Allowance for Loan Losses (1,291)
--------------
Net Loans 95,174
</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.
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.
22
<PAGE>
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 $100,000. As of March 31, 1999, First
Southern Bank had no brokered deposits.
As of March 31, 1999, First Southern Bank's deposits consisted of the
following types and amounts:
<TABLE>
<CAPTION>
Deposits as of March 31, 1999
-----------------------------
Amount ($)
Deposit Type (in thousands) Percent (%) of Deposits
- ------------ -------------- -----------------------
<S> <C> <C>
Non-interest Bearing Demand Deposits 36,392 28.3
Interest Bearing Deposits 40,808 31.7
Savings Deposits 2,542 2.0
Certificates of Deposit 48,878 (1) 38.0
--------- -----
Total Deposits $ 128,620 100%
</TABLE>
______________________________
(1) Includes $11.7 million of
certificates of deposit over $100 thousand.
Deposit rates are set monthly by senior management and the ALCO committee.
Management believes that the rates offered by First Southern Bank are generally
competitive with rates offered by other institutions in the bank's market areas.
First Southern Bank focuses on customer service to attract and retain deposits.
INVESTMENT PORTFOLIO
As of March 31, 1999, First Southern Bank's investment portfolio consisted
of the following types and amounts:
23
<PAGE>
<TABLE>
<CAPTION>
Investments as of March 31, 1999
--------------------------------
Amount ($)
Investment Type (in thousands) Percent (%) of Investments
- --------------- -------------- --------------------------
<S> <C> <C>
U.S. Treasury Obligations 101 0.4
U.S. Government Corporations and Agencies 16,858 62.7
Mortgage-backed Securities 8,810 32.8
Other Securities 1,112 4.1
-------------- --------------
Total Investments $26,881 100%
</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, 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 owns its Lighthouse Point branch 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 the FSB Holding Company 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, the Realty Corp. is under contract to acquire a
tract of land in Boynton Beach 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.
24
<PAGE>
EMPLOYEES
As of March 31, 1999, the FSB Holding Company and First Southern Bank had
55 full-time and 11 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 three months ended March 31,
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.
25
<PAGE>
FIRST SOUTHERN BANCORP, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED DECEMBER 31,
MARCH 31, 1999 (1) 1998 (2) 1997 (2) 1996 (2)
------------------ --------- --------- ---------
<S> <C> <C> <C> <C>
SELECTED RESULTS OF OPERATIONS:
Interest income.................................. $ 2,428 $ 8,904 $ 7,686 $ 6,175
Interest expense................................. 945 3,448 2,899 2,656
Net interest income......................... 1,483 5,456 4,787 3,519
Provision for loan losses........................ 86 255 110 -
Noninterest income............................... 327 1,392 740 681
Noninterest expenses............................. 1,384 4,825 4,082 3,242
Income before income taxes....................... 340 1,768 1,335 958
Net income.................................. 211 1,093 848 586
PER COMMON SHARE:
Earnings per common share-basic.................. $ 0.32 $ 1.71 $ 1.29 $ 0.90
Earnings per common share-diluted................ $ 0.30 $ 1.60 $ 1.23 $ 0.87
Cash Dividends declared.......................... $ 0 $ 0 $ 0 $ 0
Book value per share............................. $ 11.70 $ 11.69 $ 10.02 $ 8.72
Average common share outstanding-basic........... 650,009 640,233 655,029 648,756
Average common shares outstanding-diluted........ 687,909 684,181 688,701 677,268
SELECTED BALANCE SHEET DATA:
Total assets..................................... $150,376 $ 129,502 $ 101,664 $ 94,462
Securities available for sale.................... 25,929 21,904 17,627 20,549
Investment securities held to maturity........... - - - -
Loans held for sale.............................. - - - -
Loans receivable, net............................ 95,174 81,775 66,138 52,658
Reserve for loan losses.......................... 1,291 1,245 1,066 961
Deposits......................................... 128,464 108,021 88,614 82,741
FHLB advances and other borrowings............... 12,990 13,061 5,690 5,172
Stockholders' equity............................. 8,086 7,504 6,347 5,689
Loan to deposit ratio............................ 74.99% 76.85% 75.83% 64.80%
PERFORMANCE RATIOS: (3)
Return on average assets......................... 0.64% 0.98% 0.89% 0.79%
Return on average equity......................... 10.42% 14.62% 13.68% 11.33%
Net interest margin-taxable equivalent........... 4.59% 4.88% 5.06% 4.46%
Equity to assets................................. 5.38% 5.79% 6.24% 6.02%
Efficiency ratio................................. 77.22% 71.69% 74.54% 77.06%
ASSET QUALITY DATA:
Nonperforming loans.............................. $ 403 $ 405 $ 603 $ 417
Other real estate owned (OREO)................... 218 243 0 283
Nonperforming assets............................. 621 648 603 700
Nonperforming loans/total loans.................. 0.42% 0.58% 0.90% 0.78%
Nonperforming assets/total loans + OREO.......... 0.64% 0.92% 0.90% 1.30%
Reserve for loan losses/total loans.............. 1.34% 1.78% 1.59% 1.79%
Reserve for loan losses/nonperforming loans...... 320.35% 307.41% 176.78% 230.46%
Reserve for loan losses/nonperforming assets..... 207.89% 192.13% 176.78% 137.28%
Ratio of net charge-offs to average loans........ 0.07% 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................................... 6.08% 5.84% 6.62% 6.50%
Tier 1 capital (to risk-weighted assets)......... 7.84% 8.32% 9.12% 10.05%
Total capital (to risk-weighted assets).......... 9.09% 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.
26
<PAGE>
[MAP REPRESENTING LOCATIONS OF BANKING OFFICES FOR FIRST SOUTHERN BANK]
27
<PAGE>
CENTRAL COMMUNITY CORPORATION AND FIRST STATE BANK
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 ("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 March 31, 1999, CCC had
total consolidated assets of approximately $207.8 million, net loans of
approximately $135.5 million, deposits of approximately $178.0 million, and
shareholders' equity of approximately $17.5 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 banks
do 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.
28
<PAGE>
MARKET
First State maintains the following 12 banking offices in central Texas:
First State Bank 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%.
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,
29
<PAGE>
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
March 31, 1999, the agricultural loan portfolio consisted primarily of cattle
loans, and the portfolio had fewer than 0.85% 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 March 31, 1999, First State's loan portfolio consisted of the following
types and amounts of loans:
<TABLE>
<CAPTION>
Loan Portfolio as of March 31, 1999
------------------------------------
Amount ($) Percentage (%) of
Loan Type (in thousands) Total Portfolio
- --------- -------------- -----------------
<S> <C> <C>
Commercial and Industrial 30,464 22.1
Real Estate - Construction
and Land Development 33,819 24.5
Real Estate - Residential 13,472 9.8
Real Estate - Farmland 4,727 3.4
Real Estate - Commercial 18,833 13.6
Agricultural 18,870 13.7
Consumer 14,594 10.6
Other 3,152 2.3
---------- -------
Gross Loans 137,933 100
Less: Unearned Income (867)
Less: Allowance for Loan Losse (1,558)
----------
Net Loans 135,508
</TABLE>
Construction and development loans were $33.8 million at March 31, 1999,
which was an increase of $20.4 million or 152% from $13.4 million at March 31,
1998. This increase is primarily due to First State's opening in 1998 of banking
offices in Austin and Georgetown.
LENDING POLICY
First State seeks to make loans that meet the needs of the communities
served while maintaining appropriate asset quality and earnings. Targeted
markets include commercial and consumer loans, emphasizing commercial loans to
small and medium sized businesses.
30
<PAGE>
First State regularly monitors its loan portfolio to identify areas of
concern and to enable management to take corrective action when necessary.
Lending officers and the Board of Directors meet periodically to review all past
due loans, the status of large loans and certain other matters. Individual
lending officers are responsible for reviewing collection of past due amounts
and monitoring any changes in the financial status of borrowers.
There are credit risks associated with the making of any loan. First State
attempts to minimize this risk through various means including the use of
standardized underwriting criteria, lending authority limits for officers and a
centralized administration of lending activity. This centralized department
provides loan review, quality control, compliance and monitoring services to the
branch offices. Additional loan review and compliance reviews are contracted
from third party vendors.
DEPOSITS
The principal source of funds for First State is core deposits consisting
of transaction, savings and time deposits. First State has a broad base of
commercial and retail deposit customers with no single customer providing more
than 2% of total deposits. At March 31, 1999, First State's deposit base
consisted of the following:
<TABLE>
<CAPTION>
Deposits as of March 31, 1999
-------------------------------
Amount ($) Percent (%)
Deposit Type (in thousands) of Deposits
------------ -------------- ------------
<S> <C> <C>
Non-Interest Bearing Demand Deposits 36,006 20.3
Interest Bearing Deposits 26,966 15.1
Savings Deposits 20,007 11.2
Certificates of Deposits(1) 95,014 53.3
---------- --------
Total Deposits 177,993 100
</TABLE>
___________________________________________
(1) Includes $36.5 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 March 31, 1999, the balance of FHLB advances
was $2,518,000. These advances are used primarily to provide longer term fixed
rate funds for mortgage lending activities.
As of March 31, 1999, First State had no brokered deposits.
INVESTMENT PORTFOLIO
As of March 31, 1999, First State's investment security portfolio consisted
of:
31
<PAGE>
<TABLE>
<CAPTION>
Investments as of March 31, 1999
---------------------------------
Amount ($) Percent (%)
Investment Type (in thousands) of Investments
--------------- -------------- --------------
<S> <C> <C>
U.S. Treasury Obligations 10,681 19.9
U.S. Government Agency Debt 10,434 19.5
Mortgage-Backed Securities 1,617 3.0
Collateralized Mortgage Obligations 12,675 23.7
Obligations of State & Political Subdiv. 12,279 22.9
Corporate Debt Obligations 4,887 9.1
Equity Securities 687 1.3
Mutual Fund Balances 315 0.6
-------- --------
Total Securities 53,575 100
</TABLE>
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 March 31, 1999, CCC and First State had approximately 76 full-time
and 8 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.
32
<PAGE>
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 three months ended March 31, 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.
33
<PAGE>
CENTRAL COMMUNITY CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA
------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED DECEMBER 31,
MARCH 31, 1999 (1) 1998 (2) 1997 (2) 1996 (1)
------------------ -------- --------- --------
<S> <C> <C> <C> <C>
SELECTED RESULTS OF OPERATIONS:
Interest income...................................... $ 3,931 $ 15,127 $ 13,475 $ 9,610
Interest expense..................................... 1,675 6,595 5,527 3,714
Net interest income................................ 2,256 8,532 7,948 5,896
Provision for loan losses............................ 155 480 420 260
Noninterest income................................... 517 2,316 1,893 1,347
Noninterest expenses................................. 1,581 6,114 5,205 3,937
Income before income taxes........................... 1,037 4,254 4,216 3,046
Net income......................................... 718 3,108 2,792 3,061
PER COMMON SHARE:
Earnings per common share-basic.................... $ 23.64 $ 102.80 $ 92.83 $ 102.44
Earnings per common share-diluted.................. $ 21.93 $ 95.33 $ 86.05 $ 94.91
Cash Dividends declared............................ $ 0 $ 10 $ 10 $ 0
Book value per share............................... $ 575 $ 569 $ 472 $ 377
Average common share outstanding-basic............. 30,366 30,233 30,076 29,881
Average common shares outstanding-diluted.......... 32,736 32,603 32,446 32,251
SELECTED BALANCE SHEET DATA:
Total assets....................................... $ 207,803 $214,126$ $ 190,217 $129,601
Securities available for sale...................... 53,575 60,752 60,950 25,301
Investment securities held to maturity............. 0 0 0 0
Loans held for sale................................ 289 120 0 218
Loans receivable, net.............................. 135,508 130,744 107,261 89,870
Reserve for loan losses............................ 1,558 1,743 1,178 908
Deposits........................................... 177,993 187,547 169,560 111,559
FHLB advances and other borrowings................. 10,268 7,460 4,344 5,880
Stockholders' equity............................... 17,455 17,206 14,197 11,265
Loan to deposit ratio.............................. 76.13% 69.71% 63.26% 80.56%
PERFORMANCE RATIOS: (3)
Return on average assets........................... 1.40% 1.52% 1.56% 2.76%
Return on average equity........................... 16.53% 18.57% 20.76% 31.03%
Net interest margin-taxable equivalent............. 4.87% 4.94% 5.08% 5.23%
Equity to assets................................... 8.40% 8.04% 7.46% 8.69%
Efficiency ratio................................... 57.01% 56.36% 52.89% 54.36%
ASSET QUALITY DATA:
Nonperforming loans................................ $ 488 $ 1,550 $ 247 $ 850
Other real estate owned (OREO)..................... 816 101 175 840
Nonperforming assets............................... 1,304 1,651 422 1,690
Nonperforming loans/total loans.................... 0.36% 1.19% 0.23% 0.95%
Nonperforming assets/total loans + OREO............ 0.96% 1.26% 0.39% 1.86%
Reserve for loan losses/total loans................ 1.15% 1.33% 1.10% 1.01%
Reserve for loan losses/nonperforming loans........ 319.26% 112.45% 476.92% 106.82%
Reserve for loan losses/nonperforming assets....... 119.48% 105.57% 279.15% 53.73%
Ratio of net charge-offs to average loans.......... 0.25% (0.07)% 0.24% 0.24%
EARNINGS TO FIXED CHARGE COVERAGE RATIOS: (4)
Excluding interest on deposits..................... 8.35x 11.23x 14.60x 9.83x
Including interest on deposits..................... 1.62x 1.65x 1.76x 1.82x
CAPITAL RATIOS:
Leverage ratio..................................... 7.48% 7.16% 6.39% 8.40%
Tier 1 capital (to risk-weighted assets)........... 9.94% 9.90% 9.09% 12.22%
Total capital (to risk-weighted assets)............ 10.95% 11.08% 10.03% 11.61%
</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.
34
<PAGE>
[MAP REPRESENTING LOCATIONS OF BANKING OFFICES FOR FIRST STATE BANK]
35
<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 is an affiliate of Sterne, Agee & Leach, Inc., which is one of
the Underwriters of the Fund Shares. Founded in 1916, Sterne, Agee & Leach,
Inc. and its affiliates have approximately $4.9 billion of assets under
management as of March 31, 1999. The Manager and Sterne, Agee & Leach, Inc. are
each wholly-owned subsidiaries of Sterne, Agee & Leach Group, Inc., a Delaware
holding company.
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., __________ and _________. Mr.
Holbrook is an "interested person" (as the term "interested person" is defined
in the 1940 Act) and ________ and ________ 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 issuer, market conditions and values ascribed to
comparable securities issued by comparable companies.
36
<PAGE>
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 regularly monitor
procedures which are used 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 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.
DISTRIBUTIONS
The Fund expects to pay a Dividend Yield at a fixed rate of ____%.
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, 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
37
<PAGE>
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, 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.
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 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
38
<PAGE>
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:
Name of Underwriter Number of
------------------- ---------
Fund Shares Percentage
----------- ----------
Sterne, Agee & Leach, Inc............. 430,000 50%
[OTHER UNDERWRITERS]..................
Total 860,000 100%
======= ====
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 marketing-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 ($1,075,000 in total, or $1,182,500 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 $26,046.51.
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 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.
39
<PAGE>
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:
Registration fee......................................... $___________
Printing costs .......................................... $___________
Legal fees and expenses.................................. $___________
Accounting fees and expenses ............................ $___________
NASD fees................................................ $___________
AMEX fees................................................ $___________
Miscellaneous............................................ $___________
Total $
============
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.
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 86,000 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 860,000 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 860,000 Fund Shares.
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 "_______________"; 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 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
86,000 Fund Shares, by exercising their over-allotment option described above
and
40
<PAGE>
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
The Trust Company of Sterne, Agee & Leach, Inc., 800 Shades Creek Parkway,
Suite 125, Birmingham, AL 35209, serves 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.
EXPERTS
______________________ 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.
41
<PAGE>
Ritchie & Rediker, L.L.C., Birmingham Alabama, serves as legal counsel to the
Underwriters.
42
<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-5
Additional Description of the Subordinated Debentures................... S-12
Additional Description of the Guarantee................................. S-19
Relationship Among the Preferred Securities, the Subordinated
Debentures and the Guarantee........................................... S-22
Management of the Fund.................................................. S-24
Supervision and Regulation of the Bank Holding Companies................ S-26
Additional Tax Discussion............................................... S-34
Financial Statements of the Fund........................................ F-1
Financial Statements of FirstBancorp, Inc............................... F-
Financial Statements of First Southern Bancorp, Inc..................... F-
Financial Statements of Central Community Corporation................... F-
</TABLE>
43
<PAGE>
Subject to Completion
______, 1999
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 that have been 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
_______________ (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 _______. 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
__________________, 19______
<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 ___________________________, 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
_____________________. 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 and 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 (the "Common Securities"); (iii) investing the gross proceeds of
the sale of the Common and 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" (as amended and supplemented from time to
time, the "Indenture").
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.
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.
S-2
<PAGE>
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.
ABSENCE OF PUBLIC MARKET FOR PREFERRED SECURITIES, SUBORDINATED DEBENTURE
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
S-3
<PAGE>
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 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.
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
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circumstances with respect to distributions and amounts payable upon redemption
of the Common and Preferred Securities or liquidation of each Bank Trust. See
"Subordination of Common Securities." 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 $21,500,000
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 $23,650,000). The Preferred Securities will
rank equally, and payments will be made thereon pro rata, with the Common
Securities of the 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 _____% 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 ___________, 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 Shareholders are entitled, will accumulate, with interest thereon,
at the annual rate of _______% 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.
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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 Bank and Trust Company,
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
(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 and 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
herein under "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."
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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
___________, 2004), the proceeds from such repayment shall be applied by the
Property Trustee to redeem the Common and 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 and 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 and Preferred Securities as
described above;
(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, the distribution of the 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
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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 and 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 and Preferred Securities will be paid on a pro rata basis, except
that if a Debenture Event of Default has occurred and is continuing, the
Preferred Securities will have a priority over the Common Securities. See
"Additional Description of the Preferred Securities--Subordination of Common
Securities" below.
REDEMPTION PROCEDURES
The Common and Preferred Securities will be redeemed at the Redemption
Price with the proceeds from the contemporaneous repayment of the Subordinated
Debentures. Any redemption of Common and 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 and 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 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.
In the case of any Event of Default, 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
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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
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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.
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 and 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 and
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 this
clause (ii), 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.
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The Trust Agreement may be amended by State Street, the Administrative
Trustees and the Bank Holding Companies:
(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 or 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, State Street and 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 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.
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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, in Subordinated
Debentures issued by each respective Bank Holding Company. The Subordinated
Debentures will bear interest at the annual rate of ____% 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
September 30, 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 ___% 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 _______, 2029
(the "Stated Maturity"), 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
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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 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
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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 ______%, 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."
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 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
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
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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) the Bank Trust is, or will be within 90 days of the
date of such opinion, subject to United States federal income tax with respect
to income received or accrued on the Subordinated Debentures, (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 by the Bank
Holding Company, in whole or in part, 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 Investment Company 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.
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 ____________, 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"):
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(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
or 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 or 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
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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.
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; and
(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
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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).
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.
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
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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
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." The Guarantee does not limit the incurrence or issuance
of other secured or
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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.
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<PAGE>
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 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
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irrevocably guaranteed by the Bank Holding Companies only to the extent set
forth under "Additional Description of the Guarantee." 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 Preferred
Securities and Common 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 Trust 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.
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
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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 and Preferred Securities, using the proceeds
from the sale of the Common and 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." 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.
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
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"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, Principal Occupations and Other Affiliations During the Past Five
Position with the Fund Years
and Business Address
- ----------------------------------------------------------------------------------------------
<S> <C>
James S. Holbrook, Jr., Chairman of the Board and CEO of Sterne, Agee & Leach, Inc.,
7/12/44, Chairman of since 1990 and its holding company, Sterne Agee & Leach Group,
the Board, Trustee and Inc. ("SAL Group"), since SAL Group's formation in 1996. Mr.
President, 1901 Sixth Holbrook serves as the Chairman of the Board for each of SAL
Avenue North, Suite Group's other subsidiaries, which include the Manager of the Fund,
2100, Birmingham, Sterne Agee Asset Management, Inc., and the Custodian of the
Alabama 35203 Fund, The Trust Company of Sterne, Agee & Leach, Inc. Mr.
Holbrook also serves as a director for Bobby Allison Wireless
Corporation.
- ----------------------------------------------------------------------------------------------
Trustee
- ----------------------------------------------------------------------------------------------
Trustee
- ----------------------------------------------------------------------------------------------
Treasurer
- ----------------------------------------------------------------------------------------------
Secretary
- ----------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth compensation to be paid by the Fund
projected through the end of the Fund's first full fiscal year. The Fund has no
retirement or pension plans.
Aggregate Compensation Total Compensation from
Name of Trustee from Fund Fund and Fund Complex
--------------- ---------------------- -----------------------
The Fund pays each of its Trustees who is not a director, officer or
employee of Sterne, Agee & Leach Group, Inc., or any of its affiliates, an
annual retainer of $_____ for serving as a trustee plus $_______ for each in-
person Board meeting and $___ for each telephonic Board meeting attended. 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.
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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. 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
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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 "Supervision and Regulation--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
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.
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<PAGE>
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 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
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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 March 31,
1999, the leverage ratio for each of the Bank Holding Companies was as follows:
First Southern Bancorp, Inc. 6.08%, FirstBancorp, Inc. 5.49% and Central
Community Corporation 7.48%.
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.
S-28
<PAGE>
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 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, 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
S-29
<PAGE>
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, 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." 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.
S-30
<PAGE>
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 March 31, 1999, First Southern Bank's ratio of Tier 1
capital to total risk-weighted assets was 8.30% and its ratio of total capital
to total risk weighted assets was 9.55%. As of March 31, 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 9.18% and 9.68%, respectively, and their ratio
of total capital to total risk weighted assets was 10.32% and 10.39%
respectively. As of March 31, 1999, First State Bank's ratio of Tier 1 capital
to total risk weighted assets was 9.94%, and its ratio of total capital to
total risk weighted assets was 10.95%.
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 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 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.
S-31
<PAGE>
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
S-32
<PAGE>
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 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. 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 original issue discount 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 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 Share income than it receives
in 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
S-33
<PAGE>
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).
Because income on a Share will constitute OID, a corporate holder of a
Share will not be entitled to a dividends-received deduction with respect to any
income recognized with respect to the 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. 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, the
distribution of the 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 (see "Description of the Fund
Shares"), 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
S-34
<PAGE>
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-35
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
FIRSTBANCORP, INC. AND SUBSIDIARIES
DECEMBER 31, 1998
F-1
<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-2
<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-3
<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-4
<PAGE>
FIRSTBANCORP, INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Stock 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-5
<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-6
<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.
F-7
<PAGE>
FIRSTBANCORP, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- ---------------------------------------------------------------
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 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:
Asset Estimated Lives
----- ---------------
Building and improvements 15 - 40 years
Equipment and furnishings 5 - 7 years
Maintenance and repairs to premises and equipment are charged to
operations, and improvements and additions are capitalized.
F-8
<PAGE>
FIRSTBANCORP, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- ---------------------------------------------------------------
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.
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.
F-9
<PAGE>
FIRSTBANCORP, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- ---------------------------------------------------------------
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>
F-10
<PAGE>
FIRSTBANCORP, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - SECURITIES AVAILABLE FOR SALE (CONTINUED)
- --------------------------------------------------
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>
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
C ------------ -----------
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.
F-11
<PAGE>
FIRSTBANCORP, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
F-12
<PAGE>
FIRSTBANCORP, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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-13
<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.
F-14
<PAGE>
FIRSTBANCORP, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
F-15
<PAGE>
FIRSTBANCORP, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - STOCK OPTIONS (CONTINUED)
- -----------------------------------
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-16
<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' capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
F-17
<PAGE>
FIRSTBANCORP, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 - REGULATORY MATTERS (CONTINUED)
- ----------------------------------------
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%
</TABLE>
F-18
<PAGE>
FIRSTBANCORP, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 - REGULATORY MATTERS (CONTINUED)
- ----------------------------------------
<TABLE>
<CAPTION>
Minimum to Remain
Actual Well Capitalized
----------------- -----------------
Amount Ratio Amount Ratio
-------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
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>
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.
F-19
<PAGE>
FIRSTBANCORP, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
- ---------------------------------------------------
Financial Instruments With Off-Balance-Sheet Risk (Continued)
-------------------------------------------------------------
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-20
<PAGE>
FIRSTBANCORP, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 - COMMITMENTS AND CONTINGENCIES (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:
1999 $87,180
2000 67,180
2001 57,180
2002 52,170
2003 12,380
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.
F-21
<PAGE>
FIRSTBANCORP, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
- ---------------------------------------------------------
<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>
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-22
<PAGE>
FIRST SOUTHERN BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1998
F-23
<PAGE>
CONTENTS
<TABLE>
- ------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT 1
- ------------------------------------------------------------------------
<S> <C>
FINANCIAL STATEMENTS
Consolidated balance sheets 2 - 3
Consolidated statements of income 4
Consolidated statements of stockholders' equity 5
Consolidated statements of cash flows 6
Notes to consolidated financial statements 7 - 23
- ------------------------------------------------------------------------
</TABLE>
F-24
<PAGE>
[LOGO] McGLADREY & PULLEN, LLP RSM
----------------------- ---
Certified Public Accountants and Consultants international
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.
Fort Lauderdale, Florida
January 15, 1999
1
F-25
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
============================================
</TABLE>
See Notes to Consolidated Financial Statements.
2
F-26
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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>
3
F-27
<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.
4
F-28
<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.
5
F-29
<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).
6
F-30
<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.
7
F-31
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies (Continued)
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.
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.
8
F-32
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies (Continued)
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:
Years
----------
Building 22
Leasehold improvements 5 - 10
Furniture and equipment 3 - 12
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.
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.
9
F-33
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies (Continued)
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.
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
==============================================================================
</TABLE>
10
F-34
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 3. Securities Available for Sale (Continued)
<TABLE>
<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>
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>
11
F-35
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 3. Securities Available for Sale (Continued)
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
Amount of Total Amount of 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>
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>
12
F-36
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 4. Loans (Continued)
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>
13
F-37
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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>
14
F-38
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 8. Income Taxes (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.
15
F-39
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 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-Average Weighted-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>
16
F-40
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
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.
17
F-41
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 14. Restrictions on Retained Earnings and Regulatory Matters (Continued)
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 Capitalized
For Capital Adequacy Under 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>
18
F-42
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
19
F-43
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 15. Commitments and Contingencies (Continued)
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. 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>
20
F-44
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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>
Per-Share
Amounts
Numerator Denominator Net Income
-------------------------------------------------------
Year Ended December 31, 1998
-------------------------------------------------------
<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
=======================================================
<CAPTION>
Per-Share
Amounts
Numerator Denominator Net Income
-------------------------------------------------------
Year Ended December 31, 1997
-------------------------------------------------------
<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>
21
F-45
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
22
F-46
<PAGE>
FIRST SOUTHERN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 18. Fair Value of Financial Instruments (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 - -
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>
23
F-47
<PAGE>
FIRST SOUTHERN BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1999 1998
<S> <C> <C>
ASSETS
CASH AND DUE FROM BANKS $ 5,912,064 4,754,814
FEDERAL FUNDS SOLD 16,675,000 12,573,000
INVESTMENT SECURITIES 26,881,423 10,722,383
LOANS, NET OF LOAN LOSS RESERVE
AND UNEARNED FEES OF $1,290,820, $1,066,179 AND
$41,547,$84,213 RESPECTIVELY 95,173,653 68,809,907
FIXED ASSETS- NET 2,527,768 2,354,331
OTHER REAL ESTATE OWNED 218,151 -
OTHER ASSETS 2,988,086 1,400,478
------------- -------------
TOTAL ASSETS $ 150,376,145 $ 100,614,913
============= =============
LIABILITIES AND CAPITAL
DEMAND DEPOSITS $ 36,235,391 27,843,059
NOW ACCOUNTS 10,847,647 8,710,384
MONEY MARKET ACCOUNTS 29,960,711 16,321,432
SAVINGS ACCOUNTS 2,541,518 2,478,726
CERTIFICATES OF DEPOSIT 48,878,457 32,160,960
------------- -------------
TOTAL DEPOSITS $ 128,463,724 $ 87,514,561
OTHER LIABILITIES 13,724,219 6,189,224
------------- -------------
TOTAL LIABILITIES $ 142,187,943 $ 93,703,785
MINORITY INTEREST IN FIRST SOUTHERN BANK 101,937 167,768
COMMON STOCK, PAR VALUE $6 PAR VALUE
3,000,000 SHARES AUTHORIZED; ISSUED AND
OUTSTANDING 1999 691,235;1998 639,092 SHARES 4,147,410 3,834,552
CAPITAL SURPLUS 1,440,993 1,295,632
RETAINED EARNINGS (DEFICIT) 2,543,429 1,624,379
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (45,567) (11,203)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY $ 8,086,265 $ 6,743,360
------------- -------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 150,376,145 $ 100,614,913
============= =============
</TABLE>
F-48
<PAGE>
FIRST SOUTHERN BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDING ENDING
MARCH 31,1999 MARCH 31,1998
<S> <C> <C>
INTEREST INCOME
INTEREST & FEES ON LOANS 1,967,038 1,642,279
INVESTMENT SECURITIES 328,330 227,631
FEDERAL FUNDS SOLD 132,864 132,929
---------- ----------
2,428,232 2,002,839
INTEREST EXPENSE ON DEPOSITS 758,524 576,810
INTEREST EXPENSE ON BORROWINGS 186,204 90,778
---------- ----------
NET INTEREST INCOME 1,483,504 1,335,251
PROVISION FOR LOAN LOSSES 86,000 -
---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,397,504 1,335,251
OTHER INCOME 318,549 295,719
GAIN ON ASSETS SOLD 8,452 105,703
OTHER EXPENSES
SALARIES & BENEFITS 787,100 581,164
OCCUPANCY & EQUIPMENT 273,835 241,125
INSURANCE EXPENSE 32,679 27,066
STATIONARY & SUPPLIES 37,210 20,891
TELEPHONE EXPENSE 31,857 27,821
MARKETING, ADVERTISING AND
BUSINESS DEVELOPMENT 58,548 61,545
LEGAL EXPENSE 16,937 20,775
OTHER PROFESSIONAL AND DATA
PROCESSING FEES 30,042 30,846
OTHER EXPENSE 113,163 92,081
---------- ----------
TOTAL OTHER EXPENSES 1,381,372 1,103,314
---------- ----------
NET INCOME BEFORE TAX AND MINORITY INTEREST 343,133 633,359
INCOME TAXES 129,156 238,332
---------- ----------
NET INCOME BEFORE MINORITY INTEREST
IN FIRST SOUTHERN BANK 213,977 395,027
MINORITY INTEREST IN FIRST SOUTHERN BANK (3,293) (10,121)
---------- ----------
NET INCOME 210,684 384,906
========== ==========
NET INCOME PER COMMON SHARE $ $0.32 $ 0.60
========== ==========
</TABLE>
F-49
<PAGE>
Consolidated Financial Statements
Central Community Corporation
and Subsidiaries
Years ended December 31, 1998 and 1997
with Report of Independent Auditors
F-50
<PAGE>
Central Community Corporation and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 1998 and 1997
Contents
Report of Independent Auditors.............................................. 1
Audited Consolidated Financial Statements
Consolidated Balance Sheets................................................. 2
Consolidated Statements of Income........................................... 3
Consolidated Statements of Changes in Stockholders' Equity.................. 4
Consolidated Statements of Cash Flows....................................... 5
Notes to Consolidated Financial Statements.................................. 6
F-51
<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 1
FORT WORTH, TEXAS
May 14, 1999
F-52
<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.
2
F-53
<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.
3
F-54
<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.
4
F-55
<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.
5
F-56
<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).
6
F-57
<PAGE>
Central Community Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
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 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
7
F-58
<PAGE>
Central Community Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
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.
8
F-59
<PAGE>
Central Community Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
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 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.
9
F-60
<PAGE>
Central Community Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Reclassification
Certain reclassifications have been made to the 1997 financial statements to
conform to the 1998 presentation.
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):
Marlin Goldthwaite
----------------------------
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
============================
10
F-61
<PAGE>
Central Community Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Acquisition (continued)
The operating results of Marlin and Goldthwaite have been included in the
consolidated financial statement of income from the date of acquisition.
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
======================================================
</TABLE>
11
F-62
<PAGE>
Central Community Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Investment Securities (continued)
<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 $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.
Fair
Amortized Cost Value
---------------------------------
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
=================================
12
F-63
<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:
1998 1997
---------------------------------
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
=================================
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.
13
F-64
<PAGE>
Central Community Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Loans and Allowance for Loan Losses (continued)
Transactions in the allowance for loan losses at December 31, 1998 and 1997,
were:
1998 1997
----------------------------
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
============================
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.
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.
14
F-65
<PAGE>
Central Community Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Income Taxes (continued)
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:
Current expense $1,748,719 $1,457,153
Deferred expense (benefit) (437,980) (33,830)
--------------------------------
$1,310,739 $1,423,323
================================
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:
1998 1997
--------------------------------
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
================================
15
F-66
<PAGE>
Central Community Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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:
1999 $82,659,115
2000 6,406,448
2001 3,630,906
2002 and thereafter 1,639,478
---------------
$94,335,947
===============
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
December 31
Description 1998 1997
-------------------------
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
16
F-67
<PAGE>
Central Community Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Notes Payable (continued)
December 31
Description 1998 1997
-------------------------
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
=========================
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:
1999 $ 367,828
2000 1,577,013
2001 186,703
2002 196,927
2003 and thereafter 1,831,114
------------
$4,159,585
============
17
F-68
<PAGE>
Central Community Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Notes Payable (continued)
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.
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.
18
F-69
<PAGE>
Central Community Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Restrictions on Cash and Other Regulatory Restrictions (continued)
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 => 8.00% $15,270 => 10.00%
Tier 1 capital (to risk
weighted assets) 15,784 10.34% 6,108 => 4.00% 9,162 => 6.00%
Tier 1 capital (to average
assets) 15,784 8.10% 7,796 => 4.00% 9,745 => 5.00%
As of December 31, 1997:
Total capital (to risk
weighted assets) $13,941 11.11% $10,035 => 8.00% $12,544 => 10.00%
Tier 1 capital (to risk
weighted assets) 12,977 10.35% 5,018 => 4.00% 7,527 => 6.00%
Tier 1 capital (to average
assets) 12,977 7.81% 6,643 => 4.00% 8,304 => 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.
19
F-70
<PAGE>
Central Community Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Financial Instruments With Off-Balance-Sheet Risk (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:
Commitments to extend credit $32,942,170
Standby letters of credit 1,303,459
Commercial letters of credit 37,810
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.
20
F-71
<PAGE>
Central Community Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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):
December 31, 1998
Carrying Fair
Amount Value
--------------------------------
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
In the table above, the carrying amounts are included in the consolidated
balance sheet under the indicated captions.
13. Leases
Future minimum lease payments under operating leases as of December 31, 1998,
are as follows:
1999 $106,600
2000 124,700
2001 110,800
2002 100,900
2003 16,600
----------
Total minimum lease payments $459,600
==========
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.
21
F-72
<PAGE>
Central Community Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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.
22
F-73
<PAGE>
CENTRAL COMMUNITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31
1999 1998
--------------------------------
<S> <C> <C>
Cash and due from banks $ 9,341,825 $ 7,102,042
Interest-bearing deposits in other banks 83,186 164,645
Federal funds sold - 500,000
--------------------------------
9,425,011 7,766,687
Investment securities 53,574,984 59,283,570
Loans, net 135,808,888 111,928,450
Bank premises and equipment, net 3,905,771 3,591,075
Accrued interest receivable and other assets 3,337,510 2,766,457
Goodwill, net 2,052,832 2,318,878
--------------------------------
Total Assets 208,104,996 187,655,117
================================
Deposits
Interest-bearing 141,987,267 132,885,604
Non-interest bearing 36,006,242 31,221,066
--------------------------------
177,993,509 164,106,670
Fed Funds Purchased and Securities Sold Under
Repurchase Agreements 6,350,000 207,722
Accrued interest payable 564,504 545,959
Accrued expenses and other liabilities 1,388,285 1,008,675
Deferred tax liability 434,942 714,684
--------------------------------
2,387,731 2,269,318
Notes payable 3,918,462 6,228,776
Common stock, par 32,252 32,252
Additional paid-in capital 4,220,067 4,220,067
Retained earnings 13,997,606 11,194,154
Unrealized gain on securities AFS 11,225 312,146
Treasury stock (805,856) (915,988)
--------------------------------
Total stockholders equity 17,455,294 14,842,631
--------------------------------
Total liabilities and stockholders equity $208,104,996 $187,655,117
================================
</TABLE>
F-74
<PAGE>
CENTRAL COMMUNITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
3 Months Ending March 31
1999 1998
-------------------------
<S> <C> <C>
Interest income
Interest and fees on loans $3,162,149 $2,712,558
Interest on investment securities
Taxable 627,160 746,719
Tax Exempt 137,801 133,262
Interest on federal funds sold 4,163 26,615
-------------------------
3,931,273 3,619,154
Interest expense
Deposits 1,534,520 1,486,187
Federal funds purchased 72,389 24,814
Notes payable 69,045 72,835
-------------------------
1,675,954 1,583,836
-------------------------
Net interest income 2,255,319 2,035,318
Provision for loan losses 155,000 120,000
-------------------------
Net interest income after provision for loan
losses 2,100,319 1,915,318
Other income
Service charges & fees on deposit accounts 410,114 346,463
Gain on sale of loans 5,301 4,822
Gain on sale of securities 38,786 114,547
Other 63,134 69,818
-------------------------
517,335 535,650
Other expenses
Salaries and benefits 832,737 702,758
Net occupancy expenses 209,746 172,388
Goodwill amortization 68,015 66,010
Professional fees 59,630 120,047
Data processing fees 173,696 156,310
Other 238,083 249,044
-------------------------
1,581,907 1,466,557
Income before income tax expense 1,035,747 984,411
Income tax expense 317,996 263,501
=------------------------
Net income $ 717,751 $ 720,910
=========================
Basic earnings per common share outstanding $ 23.64 $ 23.85
Book value per common share outstanding 574.83 490.94
</TABLE>
unaudited
F-75
<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............................................................. 5
Flow of Funds Diagram............................................................ 5
Risk Factors..................................................................... 6
Forward Looking Statements....................................................... 11
The Bank Holding Companies....................................................... 12
Management of the Fund........................................................... 36
Net Asset Value.................................................................. 36
Distributions.................................................................... 37
Tax Matters...................................................................... 37
Underwriting..................................................................... 39
Fund Custodian................................................................... 41
Experts.......................................................................... 41
Legal Counsel.................................................................... 41
Table of Contents of the Statement of Additional
Information...................................................................... 43
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-12
Additional Description of the Guarantee.......................................... S-18
Relationship Among the Preferred Securities, the
Subordinated Debentures and the Guarantee....................................... S-21
Management of the Fund........................................................... S-23
Supervision and Regulation of the Bank Holding
Companies........................................................................ S-25
Additional Tax Discussion........................................................ S-32
Financial Statements of the Fund................................................. F-1
Financial Statements of FirstBancorp, Inc........................................ F-1
Financial Statements of First Southern Bancorp, Inc.............................. F-23
Financial Statements of Central Community
Corporation...................................................................... F-50
</TABLE>
UNTIL [25 DAYS AFTER THE DATE OF THIS OFFERING], 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.
860,000 SHARES
SAL TRUST PREFERRED FUND I
--------------------------------
PROSPECTUS
--------------------------------
STERNE, AGEE & LEACH, INC.
[DATE]
<PAGE>
SAL TRUST PREFERRED FUND I
PART C: OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
1. Financial Statements:
All other financial statements, schedules and historical financial
information have been omitted as the subject matter is not required, not
present, or not present in amounts sufficient to require submission.
2. Exhibits
<TABLE>
<CAPTION>
Item number Exhibits
- ----------- -------
<S> <C>
a.1 Charter Certificate of Trust as filed with the State of Delaware
on June 24, 1999 is filed herewith.
a.2 Declaration of Trust dated June 24, 1999. *
b. By-Laws By-laws. *
c. Any Voting Trust Agreement Not Applicable.
d. All Instruments Defining Not Applicable.
Rights of Securities' Holders
e. Dividend Reinvestment Plan Not Applicable.
f. Constituent Instruments Not Applicable.
Defining the Rights of the
Holders of Long-Term Debt
g. Investment Advisory Contracts Form of Management Agreement. *
h. Underwriting or Distribution Form of Underwriting Agreement. *
Contract
i. Bonus, Profit Sharing, Pension Not Applicable.
or Other Similar Contracts
j. Custodian Agreements and Form of Custodian Agreement. *
Depositary Contracts
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
Item number Exhibits
----------- --------
<S> <C>
k.1 All other Material Contracts Form of Trust Preferred Purchase Agreement. *
k.2 Form of Guarantee Agreement. *
k.3 Form of Indenture. *
k.4 Form of Bank Trust Agreement. *
l. Opinion and Consent of Opinion and Consent of Counsel to the Fund. *
Counsel
m. Consent to Service of Process Not Applicable.
n. Copies of Any Other Opinions Consent of Independent Public Accountants. *
o. Omitted Financial Statements Not Applicable.
p. Initial Capital Agreements Form of Initial Capital Agreement. *
q. Retirement Plan Not Applicable.
</TABLE>
* To be filed by amendment
Item 25. Marketing Arrangements.
Not Applicable.
Item 26. Other Expenses of Issuance and Distribution.
* To be included by amendment
Item 27. Persons controlled by or under Common Control with Registrant.
Each of the following entities might be deemed to be under common
control with the Registrant:
Entity Basis of Place of
- ------ -------- --------
Common Control Organization
-------------- ------------
* To be included by amendment
Item 28. Number of Holders of Securities.
Not Applicable.
iv
<PAGE>
Item 29. Indemnification.
* To be included by amendment
Item 30. Business and Other Connections of Investment Adviser
<TABLE>
<CAPTION>
Name and Position with the Manager Name of Other Company Connection with Other Company
- ---------------------------------- --------------------- -----------------------------
<S> <C> <C>
James S. Holbrook, Jr. Bobby Allison Wireless director
Chairman of the Board Corporation
A.Fox deFuniak, III Birmingham Recycling director
director Investment Corporation
Cobb Theaters, Inc. former director
</TABLE>
Item 31. Location of Accounts and Records.
The name and address of each person maintaining physical possession of
each account, book or other document required to be maintained by Section 31(a)
of the 1940 Act are as follows:
v
<PAGE>
Sterne Agee Asset Management, Inc. Morgan, Lewis & Bockius LLP
800 Shades Creek Parkway 1800 M Street N.W.
Suite 125 Washington, D.C. 20036
Birmingham, AL 35209
Item 32. Management Service.
Not Applicable.
Item 33. Undertakings.
1. An undertaking to suspend the offering of shares until the prospectus
is amended if : (1) subsequent to the effective date of its registration
statement, the net asset value declines more than 10 percent from its net asset
value as of the effective date of the registration statement; or (2) the net
asset value increases to an amount greater than its net proceeds as stated in
the prospectus.
2. Not Applicable.
3. Not Applicable.
4. Not Applicable.
5. If the registrant is filing a registration statement permitted by
Rule 430A under the Securities Act of 1933, an undertaking that:
a. For the purpose of determining any liability under the 1933 Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant under Rule 497(h) under the 1933 Act shall be
deemed to be part of this registration statement as of the time it was declared
effective; and
b. For the purpose of determining any liability under the 1933 Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of the securities at that time shall be deemed to be the initial
bona fide offering thereof.
6. Not Applicable.
vi
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and/or the
Investment Company Act of 1940, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Birmingham, and State of Alabama, on the 2nd day of
July, 1999.
SAL TRUST PREFERRED FUND I
By /s/ James S. Holbrook, Jr.
-----------------------------------
James S. Holbrook, Jr.
Initial Trustee, CEO, CFO
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed below by the following persons in the capacities and
on the date indicated.
/s/ James S. Holbrook, Jr. Initial Trustee July 2, 1999
- ----------------------------
James S. Holbrook, Jr.
vii
<PAGE>
EXHIBIT INDEX
Exhibit
- -------
EX-99.2A.1 Certificate of Trust as filed with the State of Delaware on June
24, 1999 is filed herewith.
EX-99.2A.2 Declaration of Trust dated June 24, 1999. *
EX-99.2B By-Laws. *
EX-99.2C Not Applicable.
EX-99.2D Not Applicable.
EX-99.2E Not Applicable.
EX-99.2F Not Applicable.
EX-99.2G Form of Management Agreement. *
EX-99.2H Form of Underwriting Agreement. *
EX-99.2I Not Applicable.
EX-99.2J Form of Custodian Agreement. *
EX-99.2K.1 Form of Trust Preferred Purchase Agreement. *
EX-99.2K.2 Form of Guarantee Agreement. *
EX-99.2K.3 Form of Indenture. *
EX-99.2K.4 Form of Bank Trust Agreement. *
EX-99.2L Opinion and Consent of Counsel to the Fund. *
EX-99.2M Not Applicable.
EX-99.2N Consent of Independent Public Accountants. *
viii
<PAGE>
EX-99.2O Not Applicable.
EX-99.2P Form of Initial Capital Agreement. *
EX-99.2Q Not Applicable.
ix
<PAGE>
Exhibit 99.2A.1
CERTIFICATE OF TRUST
of
SAL Trust Preferred Fund I
This Certificate of Trust for SAL Trust Preferred Fund I, a business trust
registered under the Investment Company Act of 1940, is filed in accordance with
the provisions of the Delaware Business Trust Act (Del. Code Ann. tit. 12, (S)
3801 et seq. (1999)) and sets forth the following:
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1. The name of the trust is:
SAL Trust Preferred Fund I
2. The business address of the registered office of SAL Trust Preferred Fund I
and of the registered agent of the Trust for service of process is:
The Corporation Trust Company
1209 Orange Street
Wilmington, Delaware 19801, County of Newcastle
3. This certificate shall be effective upon filing.
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This certificate is executed this 24th day of June 1999 in Birmingham, Alabama,
upon the penalties of perjury and constitutes the oath or affirmation that the
facts stated above are true to the undersigned trustees belief or knowledge.
/s/ James S. Holbrook
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James S. Holbrook, Jr.
Initial Trustee
<PAGE>
EXHIBIT 99.2N.1
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' CONSENT
We consent to the use in this Registration Statement of SAL Trust Preferred Fund
I on Form N-2 of our report dated February 19, 1999 of our audit of the
consolidated financial statements of FirstBancorp, Inc. as of December 31, 1998
and 1997, and for the two years then ended appearing in the Prospectus which is
a part of this Registration Statement, and to the reference to our firm under
the heading "Experts" in such Prospectus.
/s/ Osburn, Henning and Company
OSBURN, HENNING AND COMPANY
July 2, 1999
Orlando, Florida
<PAGE>
Exhibit 99.2N.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement of SAL Trust
Preferred Fund I on Form N-2 of our report, dated January 15, 1999, relating to
the consolidated financial statements of First Southern Bancorp, Inc. and
subsidiaries as of and for the years ended December 31, 1998 and 1997. We also
consent to the reference to our Firm under the caption "Experts" in the
Prospectus.
McGladrey & Pullen, LLP
Fort Lauderdale, Florida
June 30, 1999
<PAGE>
Exhibit 99.2N.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated May 14, 1999, with respect to the 1998 and 1997
consolidated financial statements of Central Community Corporation and
subsidiaries included in the Registration Statement (Form N-2) and related
Prospectus of SAL Trust Preferred Fund I for the registration of 946,000 shares
of beneficial interest.
Ernst & Young LLP
Fort Worth, Texas
June 30, 1999
