<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: AUGUST 12, 1999
FIRST NATIONAL CORPORATION
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
COMMISSION FILE NUMBER: 001-12669
SOUTH CAROLINA 57-0799315
- ------------------------------- ---------------------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
950 JOHN C. CALHOUN DRIVE, S.E.
ORANGEBURG, SOUTH CAROLINA 29115
------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(803) 534-2175
----------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
-------------------------------------------------------------
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
Effective July 31, 1999, First National Corporation, a South Carolina
corporation ("First National"), consummated the merger (the "Merger") of
FirstBancorporation, Inc., a South Carolina corporation ("FirstBancorporation"),
with and into First National pursuant to the terms of the Merger Agreement,
dated as of March 4, 1999, between First National and FirstBancorporation (the
"Merger Agreement"). Under the terms of the Merger Agreement, each shareholder
of FirstBancorporation received 1.222 shares of common stock, par value $2.50
per share, of First National ("FNC Stock") for each share of the common stock,
par value $.01 per share, of FirstBancorporation ("FirstBancorporation Stock")
outstanding immediately prior to the effective time of the Merger. First
National has agreed to pay cash in lieu of fractional shares of FNC Stock that
otherwise would be issued in the Merger. Immediately prior to the effective time
of the Merger, there were 976,666 shares of FirstBancorporation Stock issued and
outstanding. The consideration paid by First National in the Merger was
determined through arms' length negotiations between First National and
FirstBancorporation. The Merger Agreement is incorporation herein by reference
from First National's Registration Statement on Form S-4 (File No. 333-80047)
and is listed herein as Exhibit 2. The foregoing description of the Merger
Agreement is qualified in its entirety by reference to such exhibit.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) The following unaudited interim financial statements of
FirstBancorporation, Inc. are filed as Exhibit 99(a) to this Current
Report on Form 8-K:
Balance Sheets at March 31, 1999 and December 31, 1998 (Unaudited)
Consolidated Statements of Income for the Periods Ended March 31,
1999 and 1998 (Unaudited)
Consolidated Statements of Changes in Stockholders' Equity for
the Three Months Ended March 31, 1999 and March 31, 1998
(Unaudited)
Statements of Cash Flows for the Periods Ended March 31, 1999 and
1998 (Unaudited)
Notes to Consolidated Financial Statements
The following audited annual financial statements of
FirstBancorporation, Inc. are filed as Exhibit 99(b) to this Current
Report on Form 8-K:
Independent Auditors' Report
Consolidated Balance Sheets at December 31, 1998 and 1997
Consolidated Statements of Income for the Years Ended December 31,
1998, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended December
31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
<PAGE> 3
(b) The following unaudited pro forma financial information with regard to
the merger of FirstBancorporation, Inc. with and into First National
Corporation is filed as Exhibit 99(c) to this Current Report on Form
8-K:
Pro Forma Combined Condensed Balance Sheet as of March 31, 1999
(Unaudited)
Pro Forma Combined Condensed Statement of Income for the Three
Months Ended March 31, 1999 (Unaudited)
Pro Forma Combined Condensed Statement of Income for the Year Ended
December 31, 1998 (Unaudited)
Pro Forma Combined Condensed Statement of Income for the Year Ended
December 31, 1997 (Unaudited)
Pro Forma Combined Condensed Statement of Income for the Year Ended
December 31, 1996 (Unaudited)
Notes to the Unaudited Pro Forma Combined Condensed Financial
Information
(c) Exhibits.
The following exhibits are filed as part of this Current Report on Form
8-K:
Exhibit
No. Description
- ------- -----------
2 Merger Agreement, dated as of March 4, 1999, between First
National Corporation and FirstBancorporation, Inc.
(incorporated by reference to Appendix A to the Joint Proxy
Statement/Prospectus included in First National Corporation's
Registration Statement on Form S-4 (file no. 333-80047))
23 Independent Auditors' Consent
99(a) Unaudited Interim Financial Statements of FirstBancorporation,
Inc.
99(b) Audited Annual Financial Statements of FirstBancorporation,
Inc.
99(c) Pro Forma Financial Information
2
<PAGE> 4
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
First National Corporation
Date: August 12, 1999 By: /s/ W. Louis Griffith
--------------------------------
W. Louis Griffith
Chief Financial Officer
3
<PAGE> 5
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
23 Independent Auditors' Consent
99(a) Unaudited Interim Financial Statements of
FirstBancorporation, Inc.
99(b) Audited Annual Financial Statements of
FirstBancorporation, Inc.
99(c) Pro Forma Financial Information
<PAGE> 1
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
BOARD OF DIRECTORS
FIRST NATIONAL CORPORATION
We consent to the incorporation by reference of our report, dated February 10,
1999 (except for Note 23, as to which the date is March 4, 1999), included in
First National Corporation's current report on Form 8-K dated August 12, 1999,
into the Registration Statement on Form S-8 (File No. 333-26029) filed by First
National Corporation with respect to the First National Corporation Employee
Savings Plan, the Registration Statement on Form S-8 (File No. 333-26031) filed
by First National Corporation with respect the First National Corporation
Incentive Stock Option Plan of 1996, and the Registration Statement on Form S-8
(File No. 333-26033) filed by First National Corporation with respect to the
First National Corporation Incentive Stock Option Plan of 1992.
/s/ J. W. Hunt and Company, LLP
----------------------------------------
J. W. Hunt and Company, LLP
Columbia, South Carolina
August 12, 1999
<PAGE> 1
EXHIBIT 99(A)
UNAUDITED QUARTERLY FINANCIAL STATEMENTS OF
FIRSTBANCORPORATION, INC.
AS OF MARCH 31, 1999
BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
1999 1998
------------ ---------------
<S> <C> <C>
ASSETS
Cash and amounts due from banks..................... $ 5,154 $ 4,089
Interest bearing overnight deposits................. 5,570 4,665
Securities available-for-sale....................... 12,133 11,165
Loans available-for-sale............................ 1,464 1,740
Loans............................................... 82,792 83,443
Less allowance for loan losses.................... (901) (860)
-------- --------
Net loans......................................... 81,891 82,583
-------- --------
Premises and equipment.............................. 1,864 1,932
Accrued interest receivable......................... 538 596
Real estate owned-acquired through foreclosure...... 28 40
Deferred tax asset.................................. 337 337
Other assets........................................ 658 346
-------- --------
Total assets...................................... $109,637 $107,494
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits.......................................... $ 89,171 $ 87,753
Federal Home Loan Bank advances................... 4,250 4,250
Other borrowed funds.............................. 2,100 2,100
Amounts due to depository institutions............ 133 490
Advances from borrowers for taxes and insurance... 50 85
Accrued interest payable.......................... 269 280
Expenses payable.................................. 149 166
Other liabilities................................. 791 245
-------- --------
Total liabilities.............................. $ 96,913 $ 95,369
-------- --------
Stockholders' Equity
Preferred stock -- $.01 par value; shares
authorized -- 1,000,000, issued and
outstanding -- none
Common stock -- $.01 par value; shares authorized --
3,000,000, issued and
outstanding -- 963,325 -- 3/31/99;
887,637 -- 12/31/98............................... $ 10 $ 9
Additional paid-in capital.......................... 10,129 9,623
Accumulated other comprehensive loss: Unrealized
loss on securities available-for-sale, net of
applicable deferred income taxes.................. (21) (13)
Retained earnings................................... 2,606 2,506
-------- --------
Total stockholders' equity..................... $ 12,724 $ 12,125
-------- --------
Total liabilities and stockholders' equity..... $109,637 $107,494
======== ========
</TABLE>
1
<PAGE> 2
FIRSTBANCORPORATION, INC.
CONSOLIDATED STATEMENTS OF INCOME FOR THE PERIODS ENDED
MARCH 31, 1999 AND 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE THREE
MONTHS MONTHS
ENDED ENDED
3/31/99 3/31/98
------- -------
<S> <C> <C>
Interest income
Interest on mortgage loans.................................. $ 946 $1,091
Interest on other loans..................................... 842 720
Interest on investments..................................... 233 72
------ ------
Total interest income..................................... 2,021 1,883
Interest expense
Interest on deposits........................................ 764 800
Interest on FHLB advances................................... 99 31
------ ------
Total interest expense.................................... 863 831
Net interest income......................................... 1,158 1,052
------ ------
Provision for loan losses................................... 54 45
------ ------
Net interest income after provision for loan losses......... 1,104 1,007
Noninterest income
Service charges on deposit accounts......................... 155 154
Other noninterest income.................................... 129 96
------ ------
Total noninterest income.................................. 284 250
Noninterest expenses
Compensation and benefits................................... 571 440
Occupancy................................................... 187 137
Data processing............................................. 41 32
Other noninterest expenses.................................. 419 252
------ ------
Total noninterest expenses................................ 1,218 861
Net income before taxes..................................... 170 396
------ ------
Income tax expense.......................................... 71 156
------ ------
Net income................................................ $ 99 $ 240
====== ======
Net income per share -- basic............................... $ 0.11 $ 0.35
====== ======
Net income per share -- diluted............................. $ 0.11 $ 0.33
====== ======
</TABLE>
2
<PAGE> 3
FIRSTBANCORPORATION, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDING MARCH 31, 1999 AND MARCH 31, 1998
(UNAUDITED)(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE TOTAL
COMMON COMMON PAID-IN RETAINED INCOME STOCKHOLDERS'
SHARES STOCK CAPITAL EARNINGS (LOSS) EQUITY
------- ------ ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1997....................... 690,323 $ 7 $ 6,249 $1,740 $(15) $ 7,981
Comprehensive income:
Net income................. 240 240
Other comprehensive income
(loss) net of tax:
Unrealized loss on securities
available for sale......... 6 6
-------
Comprehensive income......... 240 6 246
------ ---- -------
Stock options exercised...... 2,425 26 26
Balances at March 31, 1998... 692,748 $ 7 $ 6,275 $1,980 $( 9) $ 8,253
======= === ======= ====== ==== =======
Balances at December 31,
1997....................... 887,637 $ 9 $ 9,623 $2,506 $(13) $12,125
Comprehensive income:
Net income................. 99 99
Other comprehensive income,
net of tax:
Unrealized gain on securities
available for sale......... (8) (8)
-------
Comprehensive income......... 99 (8) 91
------ ---- -------
Stock options exercised...... 75,688 1 507 508
Balances at March 31, 1999... 963,325 $10 $10,130 $2,605 $(21) $12,724
======= === ======= ====== ==== =======
</TABLE>
3
<PAGE> 4
FIRSTBANCORPORATION, INC.
STATEMENTS OF CASH FLOWS FOR THE PERIODS ENDED
MARCH 31, 1999 AND 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
3/31/99 3/31/98
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 99 $ 240
Adjustments to reconcile net income to cash provided (used)
by operating activities:
Amortization of deferred loan fees.......................... (34) (4)
Provision for loan losses................................... 54 45
Depreciation and amortization............................... 96 71
Deferred income taxes....................................... 0 9
Decrease(increase) in interest receivable................... 57 19
Decrease (increase) in other assets......................... (231) 139
Originations of loans sold to investors..................... (5,972) (4,953)
Proceeds from sales of loans to investors................... 5,972 4,953
Disbursements on loans serviced for others.................. (1,992) (628)
Receipts on loans serviced for others....................... 1,917 547
(Increase) decrease in real estate loans held for sale...... 276 (1,249)
Increase (decrease) in accrued interest payable............. (12) 48
(Increase) decrease in expenses payable..................... 69 (53)
Increase (decrease) in other liabilities.................... 314 (11)
------- -------
Net cash provided (used) by operating activities............ 613 (827)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale................... (5,137) 0
Maturities and repayments of securities
available-for-sale........................................ 4,169 82
Loans originated or acquired, net........................... 771 1,265
Proceeds from the sale of foreclosed real estate............ 12 0
Capital expenditures........................................ (34) (13)
------- -------
Net cash provided (used) for investing activities......... (219) 1,334
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in non interest-bearing demand
accounts.................................................. 2,198 (292)
Increases in Now, Money Market and Savings accounts......... 1,012 4,098
Increase (decrease) in certificates of deposit, net......... (1,805) 450
Repayment of Federal Home Loan Bank advances................ 0 (4,200)
Increase in amounts due to depository institutions.......... (301) (128)
Increase (decrease) in advances from borrowers for taxes and
insurance................................................. (35) 18
Stock issuance costs........................................ 0 (18)
Proceeds from stock options exercised....................... 508 26
------- -------
Net cash provided (used) by financing activities............ 1,577 (46)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 1,971 (461)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 8,754 6,096
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $10,724 $ 6,557
======= =======
CASH PAID DURING THE PERIOD:
Interest paid on deposits and borrowings.................. $ 883 $ 783
======= =======
Income tax paid........................................... $ 131 $ 28
======= =======
</TABLE>
4
<PAGE> 5
FIRSTBANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. On October 31, 1995, FirstBank, N.A. ("Bank"), (formerly The Savings Bank of
Beaufort County, FSB) reorganized as a wholly-owned subsidiary of
FirstBancorporation, Inc. ("Company"). As a result of the reorganization,
each issued and outstanding share of common stock, $5.00 par value per share,
of the Bank was converted into one share of common stock, $.01 par value per
share, of the Company. On September 1, 1998 the Company opened FirstBank of
the Midlands, National Association (FBM) after receiving all regulatory
approvals. The Company's principal business is its investment in the two
banks. On March 4, 1999, the Company entered into a definitive merger
agreement with First National Corporation in which First National will
exchange 1.222 shares of its common stock outstanding for each share of
FirstBancorporation common stock outstanding in a transaction which will be
accounted for as a pooling of interests.
2. The unaudited interim consolidated financial statements reflect all
adjustments which are, in the opinion of management, necessary to a fair
presentation of the results for the reported interim periods. Such
adjustments are of a normal recurring nature. The interim consolidated
financial statements, including related notes, should be read in conjunction
with the consolidated financial statements for the year ended December 31,
1998 appearing in the 1998 Annual Report of FirstBancorporation, Inc. on Form
10-KSB. The results of operations for the period ended March 31, 1999 are not
necessarily indicative of the results of operations for the full year.
3. Earnings Per Share -- Basic earnings per common share are calculated on the
basis of the weighted average number of shares outstanding during the year.
Diluted earnings per common share include stock options which have been
granted but not exercised. Average basic shares outstanding for the three
month periods ending March 31, 1999 and 1998 totaled 911,184 shares and
692,155 shares respectively. Average diluted shares outstanding for the three
month periods ended March 31, 1999 and 1998 totaled 919,467 and 736,716
shares respectively.
4. Loan Commitments -- At March 31, 1999, the Bank had total unused loan
commitments outstanding of $12,748,000 which were comprised of construction
and commercial unfunded lines of $5,550,000, unfunded consumer lines of
credit of $6,888,000 and letters of credit issued totaling $310,000. In the
normal course of business, the Bank issues loan commitments to customers at
market rates of interest. The Company's general practice is to obtain
investor commitments for fixed rate loans at the time of commitment. At March
31, 1999, all fifteen to thirty year fixed rate residential loan commitments
were covered by commitments from investors for purchase.
5. Statement of Cash Flows -- For the purposes of reporting cash flows, cash and
cash equivalents include cash, interest-bearing overnight deposits and other
short-term investments with original maturities of 90 days or less.
6. FirstBank of the Midlands, National Association was granted regulatory
authority to open for business on September 1, 1998. FBM is located at 1900
Assembly Street, Columbia, South Carolina. The Company acquired all of the
common stock of FBM for $5.0 million. The acquisition of FBM's common stock
was funded from the proceeds of the sale of additional common stock of the
Company and a loan from an unaffiliated commercial bank.
5
<PAGE> 1
EXHIBIT 99(B)
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ 2
Consolidated Balance Sheets at December 31, 1998 and 1997... 3
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996.......................... 4
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1998, 1997 and 1996...... 6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996.......................... 7
Notes to Consolidated Financial Statements.................. 9
</TABLE>
1
<PAGE> 2
INDEPENDENT AUDITORS' REPORT
To the Stockholders and the Board of Directors
FirstBancorporation, Inc.
Beaufort, South Carolina
We have audited the accompanying consolidated balance sheets of
FirstBancorporation, Inc., and Subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
FirstBancorporation, Inc. and Subsidiaries at December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
As discussed in Note 23 to the consolidated financial statements, on March
4, 1999, the Company's Board of Directors entered into a merger agreement
whereby the Company will be merged into another company.
J.W. Hunt and Company, LLP
Columbia, South Carolina
February 10, 1999
(except for Note 23, as to which
the date is March 4, 1999)
2
<PAGE> 3
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
Cash and amounts due from banks.......................... $ 4,088,540 $ 4,126,603
Interest-bearing deposits with banks..................... 4,665,410 1,968,995
------------ -----------
Total cash and cash equivalents................... 8,753,950 6,095,598
Interest-bearing time deposits with banks................ 2,099,000 99,000
Securities available-for-sale............................ 9,066,478 2,182,412
Real estate loans held-for-sale.......................... 1,740,365 676,279
Loans receivable -- net of loans in process.............. 83,442,732 80,792,015
Less, allowance for loan losses........................ (859,456) (728,043)
------------ -----------
Loans receivable, net............................. 82,583,276 80,063,972
------------ -----------
Accrued interest receivable.............................. 595,812 555,537
Premises and equipment, net.............................. 1,932,254 1,288,233
Foreclosed real estate................................... 39,559 126,500
Deferred organization costs.............................. -- 123,233
Deferred tax asset....................................... 337,050 263,987
Prepaid expenses and other assets........................ 346,396 224,064
------------ -----------
Total assets...................................... $107,494,140 $91,698,815
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Demand deposits:
Non interest-bearing................................ $ 6,955,291 $ 7,129,011
------------ -----------
Interest-bearing.................................... 38,717,943 27,479,190
Total demand deposits............................. 45,673,234 34,608,201
Savings deposits......................................... 4,565,381 5,176,093
Time deposits............................................ 37,514,044 37,677,994
------------ -----------
Total deposits.................................... 87,752,659 77,462,288
Federal Home Loan Bank advances.......................... 4,250,000 5,050,000
Note payable............................................. 2,100,000 --
Amounts due to depository institutions (non
interest-bearing)...................................... 489,573 305,315
Advance payments by borrowers for taxes and insurance.... 84,872 54,630
Accrued liabilities:
Interest payable....................................... 280,129 208,410
Expenses payable....................................... 166,252 173,025
Other.................................................. 246,002 464,146
------------ -----------
Total liabilities................................. 95,369,487 83,717,814
------------ -----------
Stockholders' Equity:
Preferred stock -- $0.01 par value, shares
authorized -- 1,000,000, issued and
outstanding -- none
Common stock -- $0.01 par value, shares authorized --
2,000,000, issued and
outstanding -- 887,637 -- 1998; issued and
outstanding -- 690,323 -- 1997...................... 8,876 6,903
Additional paid-in capital............................. 9,622,883 6,248,777
Accumulated other comprehensive income (loss).......... (12,948) (14,497)
Retained earnings...................................... 2,505,842 1,739,818
------------ -----------
Total stockholders' equity........................ 12,124,653 7,981,001
------------ -----------
Total liabilities and stockholders' equity........ $107,494,140 $91,698,815
============ ===========
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements
3
<PAGE> 4
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Interest and Dividend income:
Interest on loans.......................... $7,156,521 $7,281,594 $6,634,443
Interest on securities
available-for-sale...................... 92,956 104,175 119,322
Other interest income...................... 545,781 108,765 120,362
Dividends -- Federal Reserve Bank and
Federal Home Loan Bank.................. 52,630 47,555 45,931
---------- ---------- ----------
Total interest and dividend
income.......................... 7,847,888 7,542,089 6,920,058
---------- ---------- ----------
Interest expense:
Deposits................................... 3,340,727 3,215,938 3,125,187
Federal Home Loan Bank advances............ 171,154 206,747 155,460
Note payable............................... 53,375 -- --
---------- ---------- ----------
Total interest expense............. 3,565,256 3,422,685 3,280,647
---------- ---------- ----------
Net interest income.......................... 4,282,632 4,119,404 3,639,411
Provision for loan losses.................... 200,000 165,000 162,000
---------- ---------- ----------
Net interest income after provision for loan
losses..................................... 4,082,632 3,954,404 3,477,411
---------- ---------- ----------
Noninterest income:
Loan related fees.......................... 519,797 210,522 116,180
Other service charges and fees............. 908,462 700,468 577,077
Rental income.............................. 54,898 40,915 43,603
---------- ---------- ----------
Total noninterest income........... 1,483,157 951,905 736,860
---------- ---------- ----------
Noninterest expenses:
Compensation and benefits.................. 2,108,575 1,755,139 1,553,094
Occupancy.................................. 400,294 291,413 275,314
Insurance.................................. 99,817 93,910 617,948
Furniture and equipment.................... 307,801 259,928 234,915
Data processing............................ 145,397 152,042 156,330
Item processing and bank charges........... 209,866 187,135 119,380
Professional fees.......................... 102,472 107,791 115,973
Supplies and printing...................... 129,624 103,144 70,275
Marketing.................................. 143,686 87,393 61,942
Telephone and postage...................... 139,600 119,477 101,552
Automobile................................. 8,525 7,598 8,787
Regulatory fees............................ 37,558 36,158 34,532
Automated teller system.................... 49,336 43,232 13,667
Other expenses............................. 295,904 133,952 27,253
---------- ---------- ----------
Total noninterest expenses......... 4,178,455 3,378,312 3,390,962
---------- ---------- ----------
Income before provision for income taxes and
cumulative effect of a change in accounting
principle.................................. 1,387,334 1,527,997 823,309
Provision for income taxes................... 531,071 580,639 322,498
---------- ---------- ----------
</TABLE>
4
<PAGE> 5
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 -- (CONTINUED)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Income before cumulative effect of a change
in accounting principle.................... 856,263 947,358 500,811
---------- ---------- ----------
Cumulative effect of a change in accounting
principle, net of tax...................... 90,239 -- --
---------- ---------- ----------
Net income................................... $ 766,024 $ 947,358 $ 500,811
========== ========== ==========
Average number of common shares
outstanding................................ 758,052 690,285 686,042
Average number of common shares outstanding,
assuming dilution.......................... 815,898 735,507 725,813
Earnings per common share:
Income per share before cumulative effect
of a change in accounting principle..... $ 1.13 $ 1.37 $ 0.73
Per share for cumulative effect of a change
in accounting principle, net of tax..... (0.12)
---------- ---------- ----------
Net income per share....................... $ 1.01 $ 1.37 $ 0.73
========== ========== ==========
Earnings per common share, assuming dilution:
Income per share before cumulative effect
of a change in accounting principle..... $ 1.05 $ 1.29 $ 0.69
Per share for cumulative effect of a change
in accounting principle, net of tax..... (0.11)
---------- ---------- ----------
Net income per share....................... $ 0.94 $ 1.29 $ 0.69
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE> 6
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
------------------ ADDITIONAL COMPREHENSIVE TOTAL
NUMBER PAID-IN RETAINED INCOME STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL EARNINGS (LOSS) EQUITY
--------- ------ ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995.............. 595,848 $5,958 $5,037,021 $1,493,810 $(19,325) $ 6,517,464
Issuance of 29,738 shares of stock for
5% stock dividend..................... 29,738 298 386,295 (386,593) -- --
Stock options exercised................. 2,001 20 17,990 -- -- 18,010
-----------
Comprehensive income:
Net income............................ -- -- -- 500,811 -- 500,811
Change in unrealized loss on
securities available-for-sale, net
of applicable deferred income
taxes............................... -- -- -- -- 8,394 8,394
-----------
Total comprehensive income...... -- -- -- -- -- 509,205
------- ------ ---------- ---------- -------- -----------
Balance, December 31, 1996.............. 627,587 6,276 5,441,306 1,608,028 (10,931) 7,044,679
Stock issuance cost..................... -- -- (7,470) -- -- (7,470)
Issuance of 62,736 shares of stock for
10% stock dividend.................... 62,736 627 814,941 (815,568) -- --
-----------
Comprehensive income:
Net income............................ -- -- -- 947,358 -- 947,358
Change in unrealized loss on
securities available-for-sale, net
of applicable deferred income
taxes............................... -- -- -- -- (3,566) (3,566)
-----------
Total comprehensive income.......... -- -- -- -- -- 943,792
------- ------ ---------- ---------- -------- -----------
Balance, December 31, 1997.............. 690,323 6,903 6,248,777 1,739,818 (14,497) 7,981,001
Sale of shares.......................... 193,422 1,934 3,450,684 -- -- 3,452,618
Stock options exercised................. 3,892 39 38,042 -- -- 38,081
Stock issuance cost..................... -- -- (114,620) -- -- (114,620)
-----------
Comprehensive income:
Net income............................ -- -- -- 766,024 -- 766,024
Change in unrealized loss on
securities available-for-sale, net
of applicable deferred income
taxes............................... -- -- -- -- 1,549 1,549
-----------
Total comprehensive income.......... -- -- -- -- -- 767,573
------- ------ ---------- ---------- -------- -----------
Balance, December 31, 1998.............. 887,637 $8,876 $9,622,883 $2,505,842 $(12,948) $12,124,653
======= ====== ========== ========== ======== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
6
<PAGE> 7
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................... $ 766,024 $ 947,358 $ 500,811
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Amortization of deferred loan fees
and discounts................... (63,854) (27,018) (3,654)
Provision for loan losses......... 200,000 165,000 162,000
Depreciation and amortization..... 469,506 266,762 202,949
Deferred income taxes............. (73,063) (78,815) (43,992)
Gain on sales of loans to
investors....................... (326,073) (146,632) (101,573)
Originations of loans sold to
investors....................... (26,139,168) (14,164,921) (7,521,386)
Proceeds from sales of loans to
investors....................... 26,465,241 14,311,553 7,622,959
Disbursements on loans serviced
for others...................... (7,514,304) (1,611,484) (1,227,215)
Receipts on loans serviced for
others.......................... 3,232,079 1,710,947 1,226,719
Gain on sale of foreclosed real
estate.......................... (6,859) (4,573) (50,393)
Net change in:
Interest receivable............. 40,275 (53,125) (5,967)
Prepaid expenses and other
assets....................... (307,794) (56,888) (65,965)
Real estate loans held for
sale......................... (1,064,086) (12,963) (411,966)
Accrued interest payable........ 71,719 89,351 14,398
Accrued expenses................ (6,773) (40,543) 162,695
Other liabilities............... (218,144) 284,913 56,585
------------ ------------ ------------
Net cash provided (used) by
operating activities......... (4,475,274) 1,578,922 517,005
------------ ------------ ------------
Cash flows from investing activities:
Purchases of securities
available-for-sale................ (12,284,468) (98,602) (97,315)
Purchases of interest-bearing time
deposits with banks............... (2,000,000) -- --
Maturities of interest-bearing time
deposits with banks............... -- 100,177 --
Proceeds from sales and maturities of
securities available-for-sale..... 7,700,927 387,060 350,613
Purchases of Federal Home Loan Bank
stock and dividends received...... (18,400) -- (103,800)
Purchases of Federal Reserve Bank
stock............................. (198,450) -- --
Loans originations and principal
collections, net.................. (480,751) (2,193,574) (6,546,392)
</TABLE>
7
<PAGE> 8
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Proceeds from sales of foreclosed
real estate....................... $ 161,887 $ 149,534 $ 530,500
Additions to premises and
equipment......................... (928,065) (387,101) (293,894)
------------ ------------ ------------
Net cash used by investing
activities...................... (8,047,320) (2,042,506) (6,160,288)
------------ ------------ ------------
Cash flows from financing activities:
Net increase in demand deposit
accounts.......................... 11,065,033 1,566,985 3,631,534
Net decrease in savings deposit
accounts.......................... (610,712) (793,429) (1,329,939)
Net increase (decrease) in time
deposits.......................... (163,954) (1,611,287) 1,093,499
Proceeds from Federal Home Loan Bank
advances.......................... 5,000,000 16,450,000 15,150,000
Repayment of Federal Home Loan Bank
advances.......................... (5,800,000) (17,000,000) (10,550,000)
Proceeds from note payable........... 2,100,000 -- --
Increase (decrease) in amounts due to
depository institutions........... 184,258 105,198 (37,973)
Increase (decrease) in advance
payments by borrowers for taxes
and insurance..................... 30,242 (21,843) (7,188)
Proceeds from issuance of common
stock............................. 3,452,618 -- --
Stock issuance costs................. (114,620) (7,470) --
Proceeds from stock options
exercised......................... 38,081 -- 18,010
------------ ------------ ------------
Net cash provided (used) by
financing activities............ 15,180,946 (1,311,846) 7,967,943
Net increase (decrease) in cash and
cash equivalents..................... 2,658,352 (1,775,430) 2,324,660
Cash and cash equivalents at beginning
of year.............................. 6,095,598 7,871,028 5,546,368
------------ ------------ ------------
Cash and cash equivalents at end of
year................................. $ 8,753,950 $ 6,095,598 $ 7,871,028
============ ============ ============
Supplemental disclosure of cash flow
information:
Cash paid for:
Interest on deposits and
borrowings........................ $ 3,493,537 $ 3,333,334 $ 3,110,789
============ ============ ============
Income taxes......................... $ 611,921 $ 637,505 $ 400,160
============ ============ ============
Supplemental disclosures of noncash
investing activities:
Non-cash transfers during the year
for transfer of loans receivable
to foreclosed real estate......... $ 58,387 $ 43,951 $ 264,752
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
8
<PAGE> 9
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION:
FirstBancorporation, Inc. (the Company) was organized under the laws of the
State of South Carolina on February 28, 1995, for the purpose of becoming a bank
holding company for FirstBank, N.A. (FirstBank).
In 1996, First Securities Corporation (FSC) was incorporated in South
Carolina. FSC was organized to provide alternative investment services in
FirstBank's service area. FSC began operations in the second quarter of 1997 and
is a wholly-owned subsidiary of FirstBank.
In September 1998, FirstBank of the Midlands (FBM) commenced operations in
Columbia, South Carolina, following approval by the Comptroller of the Currency
and other regulators. Upon completion of its organization, the common stock of
FBM was acquired by the Company.
FirstBank and FBM (the Banks) operate as wholly-owned subsidiaries of the
Company. The Banks provide a variety of financial services to individuals and
small to middle-market businesses located within Beaufort County and Richland
County, South Carolina and surrounding areas. The Banks' primary deposit
products are savings and term certificate accounts and their primary lending
products are consumer and residential and commercial mortgage loans.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of the Company and its subsidiaries
conform with generally accepted accounting principles and with the prevailing
practices within the banking industry.
PRINCIPLES OF CONSOLIDATION:
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, FirstBank and FBM. All
significant intercompany balances and transactions have been eliminated in
consolidation.
USE OF ESTIMATES:
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the balance sheet and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses and
the valuation of deferred tax assets.
9
<PAGE> 10
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK:
Most of the Company's activities are with customers located within Beaufort
and Richland Counties and surrounding areas in South Carolina. Note 4 discusses
the types of securities in which the Company invests. The types of lending that
the Company engages in is discussed in Note 5. The Company does not have any
significant concentrations to any one industry or customer.
CASH AND CASH EQUIVALENTS:
For purposes of presentation in the consolidated statements of cash flows,
cash and cash equivalents include cash and amounts due from banks, time deposits
and federal funds sold, all of which mature within ninety days.
SECURITIES AVAILABLE-FOR-SALE:
Securities that may be sold prior to maturity for asset/liability
management purposes, or that may be sold in response to changes in interest
rates, changes in prepayment risk, to increase regulatory capital or other
similar factors, are classified as available-for-sale and are carried at fair
value. Unrealized gains and losses on securities available-for-sale are excluded
from earnings and reported in other comprehensive income. Gains and losses on
the sale of securities available-for-sale are recorded on the trade date and are
determined using the specific identification method. Federal Home Loan Bank
(FHLB) and Federal Reserve Bank (FRB) stock are carried at cost.
Premiums and discounts are recognized in interest income using methods
approximating the interest method over the terms of the securities.
LOANS HELD FOR SALE:
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value in the aggregate. Net
unrealized losses, if any, are recognized through a valuation allowance by
charges to income.
FirstBank originates loans for sale in the secondary market generally
without recourse under commitments or other arrangements in place prior to loan
origination. Sales are completed at or near the loan origination date. All fees
and other income from these activities are recognized in income when loan sales
are completed.
LOANS RECEIVABLE:
The Banks grant mortgage, commercial and consumer loans to customers. A
substantial portion of the loan portfolio is represented by mortgage loans in
Beaufort County. The ability of the Banks' debtors to honor their contracts is
dependent upon the real estate and general economic conditions in the Banks'
service areas.
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off generally are reported at their
outstanding
10
<PAGE> 11
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
unpaid principal balances adjusted for charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans and unamortized
premiums or discounts on purchased loans. Loan origination fees and certain
direct origination costs are capitalized and recognized as an adjustment of the
yield of the related loan.
The accrual of interest on mortgage and commercial loans is discontinued at
the time the loan is 90 days delinquent unless the credit is well-secured and in
process of collection. Credit card loans and other personal loans are typically
charged off no later than 180 days past due. In all cases, loans are placed on
nonaccrual or charged-off at an earlier date if collection of principal or
interest is considered doubtful.
All interest accrued but not collected for loans that are placed on
nonaccrual or charged off is reversed against interest income. The interest on
these loans is accounted for on the cash-basis or cost-recovery method, until
qualifying for return to accrual. Loans are returned to accrual status when all
the principal and interest amounts contractually due are brought current and
future payments are reasonably assured.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings. Loan
losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any,
are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management
and is based upon management's periodic review of the collectibility of the
loans in light of historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral and prevailing economic conditions.
This evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
A loan is considered impaired when, based on current information and
events, it is probable that a creditor will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement. Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified
as impaired. Management determines the significance of payment delays and
payment shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for commercial and construction
loans by either the present value of expected future cash flows discounted at
the loan's effective interest rate, the loan's obtainable market price, or the
fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Banks do not separately identify
individual consumer and residential loans for impairment disclosures.
11
<PAGE> 12
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MORTGAGE SERVICING:
Mortgage servicing assets are recognized as separate assets when rights are
acquired through purchase or through sale of mortgage loans. Capitalized
servicing rights are reported in other assets and are amortized into noninterest
income in proportion to, and over the period of, the estimated future net
servicing income of the underlying mortgage loans. Mortgage servicing assets are
evaluated for impairment based upon the fair value of the rights as compared to
amortized cost. Impairment is determined by stratifying rights by predominant
characteristics, such as interest rates and terms. Fair value is determined
using prices for similar assets with similar characteristics, when available, or
based upon discounted cash flows using market-based assumptions. Mortgage
servicing rights were not impaired at December 31, 1998 and 1997.
FORECLOSED REAL ESTATE:
Real estate properties acquired through foreclosure or in full or partial
satisfaction of the related loan are to be sold and are initially recorded at
fair value, at the date of foreclosure, establishing a new cost basis.
Subsequent to foreclosure, valuations are periodically performed by management
and the real estate is carried at the lower of carrying amount or fair value
less estimated cost to sell. Revenue and expenses from operations and changes in
the valuation allowance (if any) are included in other expenses.
PREMISES AND EQUIPMENT:
Land is stated at cost. Office equipment, furnishings, and buildings are
stated at cost less accumulated depreciation and amortization computed using the
straight-line method over the estimated useful lives of the assets. Estimated
useful lives are 31 1/2 years for buildings and three to five years for
furniture and equipment.
TRANSFERS OF FINANCIAL ASSETS:
Transfers of financial assets are accounted for as sales, when control over
the assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Company, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Company does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
MARKETING EXPENSES:
The costs of marketing are expensed as incurred.
DEFERRED ORGANIZATION COSTS, PREOPENING COSTS AND STOCK OFFERING COSTS:
The Company adopted Statement of Position (SOP) 98-5, "Reporting on the
Costs of Start-Up Activities" in 1998. This SOP provides guidance on the
financial reporting of start-up costs and organization costs. It requires costs
of start-up activities and organization
12
<PAGE> 13
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
costs to be expensed as incurred. The adoption of this SOP is reported as the
cumulative effect of a change in accounting principle. Adopting this SOP
resulted in net income decreasing $90,239 and basic earnings per common share
and diluted earnings per common share declining $0.12 and $0.11, respectively,
in 1998.
Prior to adopting this SOP, deferred organization costs were amortized
using the straight-line method. Preopening costs associated with the
organization of FBM were expensed as incurred.
Stock offering costs have been charged to additional paid-in capital.
AMOUNTS DUE TO DEPOSITORY INSTITUTIONS:
The Banks invest excess funds on deposit at other depository institutions
(including amounts intended for payment of issued and outstanding checks) on a
daily basis in overnight interest-bearing accounts. Accordingly, issued and
outstanding checks are recorded as a liability.
INCOME TAXES:
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes. The provision for income taxes of each entity is
recorded as if the entity filed a separate return.
RETIREMENT PLAN:
FirstBank has a contributory 401(k) plan covering substantially all
employees. Contributions to the plan are made on a matching basis of 75% up to a
maximum of 6% of employees' plan contributions. Contributions to the plan
totaled approximately $40,000, $31,000 and $18,000 for 1998, 1997 and 1996,
respectively.
LEASE COMMITMENTS:
FirstBank has entered into operating lease agreements for land, buildings,
and equipment used in operations. The agreements expire over various terms with
the longest such term extending to the year 2013. Certain of the leases are
subject to rent escalation provisions. In addition, FirstBank pays maintenance,
property taxes and insurance on the leased properties.
STOCK COMPENSATION PLANS:
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," encourages all entities to adopt a fair value
based method of accounting for employee stock compensation plans, whereby
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period, which is usually the vesting period.
However, it also allows an entity to
13
<PAGE> 14
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
continue to measure compensation cost for those plans using the intrinsic value
based method of accounting prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," whereby compensation cost is the
excess, if any, of the quoted market price of the stock at the grant date (or
other measurement date) over the amount an employee must pay to acquire the
stock. Stock options issued under the Company's stock option plans have no
intrinsic value at the grant date, and under Opinion No. 25 no compensation cost
is recognized for them. The Company has elected to continue with the accounting
methodology in Opinion No. 25 and, as a result, has provided pro forma
disclosures of net income and earnings per share and other disclosures, as if
the fair value based method of accounting had been applied.
EARNINGS PER COMMON SHARE:
Basic earnings per common share represent income available to common
stockholders divided by the weighted average number of shares outstanding during
the year. Diluted earnings per common share reflects additional common shares
that would have been outstanding if dilutive potential common shares had been
issued, as well as any adjustment to income that would result from the assumed
issuance. Potential common shares that may be issued by the Company relate
solely to outstanding stock options, and are determined using the treasury stock
method. All common share and per share amounts have been restated to reflect
stock dividends.
The computation of basic and diluted earnings per common share is shown as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Earnings per Common Share:
Net income applicable to common stock......... $766,024 $947,358 $500,811
======== ======== ========
Weighted average shares outstanding........... 758,052 690,285 686,042
Basic earnings per common share............... $ 1.01 $ 1.37 $ 0.73
======== ======== ========
Earnings per Common Share, assuming dilution:
Net income applicable to common stock......... $766,024 $947,358 $500,811
======== ======== ========
Weighted average shares outstanding........... 758,052 690,285 686,042
Common stock equivalents -- stock options..... 57,846 45,222(a) 39,771
-------- -------- --------
Total...................................... 815,898 735,507 725,813
======== ======== ========
Earnings per common share, assuming
dilution................................... $ 0.94 $ 1.29 $ 0.69
======== ======== ========
</TABLE>
- -------------------------
(a) Options to purchase 3,500 shares of common stock were not included in the
computation of diluted earnings per common share because the options'
exercise prices were greater than the average market price of the common
shares for 1997.
14
<PAGE> 15
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMPREHENSIVE INCOME:
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," as of
January 1, 1998. Accounting principles generally require that recognized
revenue, expenses, gains and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses on
securities available-for-sale, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income. The adoption of SFAS No. 130 had no effect
on the Company's net income or stockholders' equity. Currently, the Company's
only component of Other Comprehensive Income is its unrealized losses on
securities available-for-sale.
FINANCIAL INSTRUMENTS:
Credit-related financial instruments -- In the ordinary course of business,
the Company has entered into commitments to extend credit, including commitments
under stand-by letters of credit. Such financial instruments are recorded in the
financial statements when they are funded.
SEGMENTS:
FirstBancorporation, Inc. through its banking subsidiaries, FirstBank and
FMB, provides a broad range of financial services to individuals and companies
in South Carolina. These services include demand, time, and savings deposits;
lending services; ATM processing; and similar financial services. While the
Company's decision makers monitor the revenue streams of the various financial
products and services, operations are managed and financial performance is
evaluated on a company-wide basis. Accordingly, all of the Company's banking
operations are considered by management to be aggregated in one reportable
operating segment.
FAIR VALUES OF FINANCIAL INSTRUMENTS:
The fair value of a financial instrument is the current amount that would
be exchanged between willing parties, other than in a forced liquidation. Fair
value is best determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for the Company's various financial
instruments. In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. Accordingly, the fair value
estimates may not be realized in an immediate settlement of the instrument.
Statement No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented may not necessarily represent the underlying fair value
of the Company.
15
<PAGE> 16
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following methods and assumptions were used in estimating fair values
of financial instruments as disclosed herein:
CASH AND SHORT-TERM INSTRUMENTS. The carrying amounts of cash and
short-term instruments approximate their fair value.
SECURITIES AVAILABLE-FOR-SALE. Fair values for securities, excluding
Federal Home Loan Bank and Federal Reserve Bank stock, are based on quoted
market prices.
REAL ESTATE LOANS HELD-FOR-SALE. Fair values of real estate loans
held-for-sale are based on carrying values.
LOANS RECEIVABLE. For variable-rate loans that reprice frequently and
have no significant change in credit risk, fair values are based on
carrying values. Fair values for certain mortgage loans (for example,
one-to-four family residential) and other consumer loans are based on
quoted market prices of similar loans sold, adjusted for differences in
loan characteristics. Fair values for commercial real estate and commercial
loans are estimated using discounted cash flow analyses, using interest
rates currently being offered for loans with similar terms to borrowers of
similar credit quality. Fair values for nonperforming loans are estimated
using discounted cash flow analyses or underlying collateral values, where
applicable.
DEPOSIT LIABILITIES. The fair values disclosed for demand deposits
are, by definition, equal to the amount payable on demand at the reporting
date (that is, their carrying amounts). Fair values for certificates of
deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits.
FEDERAL HOME LOAN BANK ADVANCES AND NOTE PAYABLE. Fair value of the
advances are estimated using discounted cash flow analyses based on the
Company's current incremental borrowing rate for similar types of borrowing
arrangements.
ACCRUED INTEREST AND AMOUNTS DUE TO DEPOSITORY INSTITUTIONS. The
carrying amounts approximate their fair values.
OFF-BALANCE-SHEET INSTRUMENTS. Fair values for off-balance-sheet,
credit-related financial instruments, are based on fees currently charged
to enter into similar agreements, taking into account the remaining terms
of the agreements and the counterparties' credit standings.
ACCOUNTING PRONOUNCEMENTS:
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" is effective for 2000. This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statements of financial
position and measure those instruments at fair value. The accounting for changes
in the fair value of a derivative, that is gains and losses, depends on the
intended use of the
16
<PAGE> 17
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
derivative and the resulting designation. The adoption of this Statement in 2000
is not expected to have a material effect on the Company's consolidated
financial statements.
Statements of Financial Accounting Standards No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise," conforms the subsequent
accounting for securities retained after the securitization of mortgage loans by
a mortgage banking enterprise with the subsequent accounting for securities
retained after the securitization of other types of assets by a nonmortgage
banking enterprise. This Statement is effective in 1999 and is not expected to
have a material effect on the Company's consolidated financial statements.
OTHER:
Certain amounts previously reported have been restated in order to conform
with current year presentation. Such reclassifications had no effect on net
income.
NOTE 3. RESTRICTIONS ON CASH AND DUE FROM BANKS:
As a member of the Federal Reserve System, the Banks are required by
regulation to maintain an average cash reserve balance with the FRB or in vault
cash. The average daily reserve balance requirement for December 31, 1998 and
1997, was met by vault cash held by the Banks.
At December 31, 1998, the Banks had due from bank balances in excess of
federally insured limits of approximately $608,000. Management believes the risk
associated with exceeding these limits is balanced by the stability of the
depository institutions involved.
NOTE 4. SECURITIES AVAILABLE-FOR-SALE:
Securities available-for-sale consist of the following:
<TABLE>
<CAPTION>
1998
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Mortgage-backed securities.......... $4,121,368 $ -- $(20,884) $4,100,484
U.S. Government securities.......... 4,070,744 -- -- 4,070,744
Federal Home Loan Bank stock........ 566,500 -- -- 566,500
Federal Reserve Bank stock.......... 328,750 -- -- 328,750
---------- -------- -------- ----------
Total............................. $9,087,362 -- $(20,884) $9,066,478
========== ======== ======== ==========
</TABLE>
17
<PAGE> 18
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1997
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Mortgage-backed securities.......... $1,428,793 $ -- $(23,383) $1,405,410
U.S. Government securities.......... 98,602 -- -- 98,602
Federal Home Loan Bank stock........ 548,100 -- -- 548,100
Federal Reserve Bank stock.......... 130,300 -- -- 130,300
---------- -------- -------- ----------
Total............................. $2,205,795 -- $(23,383) $2,182,412
========== ======== ======== ==========
</TABLE>
The mortgage-backed securities held at December 31, 1998, consist of GNMA
Adjustable Rate Mortgage Securities (ARMS) and mature generally between 10 and
24 years and FNMA fixed rate loans with maturities of 10 years. Such securities
held at December 31, 1997 consist solely of GNMA ARMS. The actual lives of these
securities may be shorter as a result of prepayments. The U.S. Government
securities mature in 1999. Other securities consist of the required capital
stock of the FHLB and the FRB and have no contractual maturity.
There were no realized gains or losses on sales of investment securities
during the three-year period ending December 31, 1998.
At December 31, 1998 and 1997, the FHLB stock was pledged as collateral on
the FHLB advances and securities with carrying values of approximately $873,000
and $1,154,000, respectively, were pledged to secure public deposits and for
other purposes as required and permitted by law.
The amortized cost and fair value of debt securities by contractual
maturity at December 31, 1998 follows:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
-----------------------
AMORTIZED
COST FAIR VALUE
---------- ----------
<S> <C> <C>
Within 1 year........................................... $4,070,744 $4,070,744
Over 1 year through 5 years............................. -- --
After 5 years through 10 years.......................... -- --
Over 10 years........................................... 895,250 895,250
---------- ----------
4,965,994 4,965,994
Mortgage-backed securities.............................. 4,121,368 4,100,484
---------- ----------
Total................................................. $9,087,362 $9,066,478
========== ==========
</TABLE>
18
<PAGE> 19
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. LOANS RECEIVABLE:
Loans receivable at December 31, 1998 and 1997, consisted of the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Mortgage loans:
Permanent........................................... $57,817,138 $60,522,713
Construction........................................ 8,656,783 5,949,087
----------- -----------
Total mortgage loans............................. 66,473,921 66,471,800
----------- -----------
Other loans:
Consumer loans...................................... 7,436,023 9,527,554
Commercial loans.................................... 9,532,788 4,792,661
----------- -----------
Total other loans................................ 16,968,811 14,320,215
----------- -----------
Loans receivable................................. $83,442,732 $80,792,015
=========== ===========
</TABLE>
Loans receivable above are net of approximately $116,000 and $97,000,
representing deferred loan origination fees net of related costs at December 31,
1998 and 1997, respectively. These deferred fees are primarily attributable to
permanent mortgage loans.
Loans receivable consists principally of adjustable rate residential first
mortgage loans to individuals for single family homes in the northern two-thirds
of Beaufort County. At December 31, 1998, the total loan portfolio included
adjustable rate loans totaling approximately $17.5 million, having interest rate
adjustments indexed to prime, and approximately $31.3 million of adjustable rate
loans, having interest rate adjustments indexed to the one or three year U.S.
Treasury bill adjusted to a constant maturity. Future market factors may, in
certain instances, affect the correlation of the interest rate adjustment with
the rates the Banks pay on the short-term deposits and FHLB advances that have
been primarily utilized to fund these loans.
Transactions in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Beginning balance................................. $728,043 $630,557 $470,198
Provision (charged to income)..................... 200,000 165,000 162,000
Recoveries of charge-offs......................... 3,262 5,000 26,993
Charge-offs....................................... (71,849) (72,514) (28,634)
-------- -------- --------
Ending balance.................................... $859,456 $728,043 $630,557
======== ======== ========
</TABLE>
Real estate mortgage loans include investments of approximately $544,000
and $663,000 in participating interests on loans originated and serviced by
other financial institutions as of December 31, 1998 and 1997, respectively.
19
<PAGE> 20
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of information pertaining to impaired loans:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Impaired loans without a valuation allowance............... $170,151 $ 73,081
Impaired loans with a valuation allowance.................. 26,264 213,662
-------- --------
Total impaired loans..................................... $196,415 $286,743
======== ========
Valuation allowance related to impaired loans.............. $ 2,626 $ 55,970
======== ========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Average investment in impaired loans.............. $207,373 $392,316 $261,613
======== ======== ========
Interest income recognized on impaired loans...... $ 13,928 $ 32,359 $ 26,263
======== ======== ========
Interest income recognized on a cash basis on
impaired loans.................................. $ 13,928 $ 32,359 $ 26,263
======== ======== ========
</TABLE>
No additional funds are committed to be advanced in connection with impaired
loans.
NOTE 6. SERVICING:
Loans serviced for others are not included in the accompanying consolidated
balance sheets. The unpaid principal balances of mortgage loans serviced for
others totaled approximately $14,456,000 and $10,798,000 at December 31, 1998
and 1997, respectively.
The balance of capitalized servicing rights included in other assets at
December 31, 1998 and 1997, was $72,452 and $41,152, respectively. The fair
values of these rights were approximately $72,300 and $41,100, respectively. The
fair value of servicing rights was determined using a discount rate of 8% and a
prepayment speed of 14.3%. No valuation allowances were required.
The following summarizes mortgage servicing rights capitalized and
amortized:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------
1998 1997
------- -------
<S> <C> <C>
Mortgage servicing rights capitalized....................... $50,402 $42,776
======= =======
Mortgage servicing rights amortized......................... $19,102 $ 1,624
======= =======
</TABLE>
20
<PAGE> 21
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. PREMISES AND EQUIPMENT:
Premises and equipment at December 31, 1998 and 1997, consists of the
following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cost:
Land................................................ $ 497,656 $ 251,000
Buildings and leasehold improvements................ 646,965 461,576
Equipment and furnishings........................... 2,319,965 1,820,046
----------- -----------
Total cost....................................... 3,464,586 2,532,622
Less, accumulated depreciation and amortization....... (1,532,332) (1,244,389)
----------- -----------
Premises and equipment -- net.................... $ 1,932,254 $ 1,288,233
=========== ===========
</TABLE>
Depreciation expense charged to operations was $284,044, $245,995 and
$182,662 in 1998, 1997, and 1996, respectively.
NOTE 8. LEASES:
FirstBank leases its main office facility and additional office space and
parking under a noncancelable operating lease from a partnership in which
certain of FirstBank's directors are partners. FirstBank has also entered into a
lease with a director of FirstBank for a branch facility on Lady's Island, South
Carolina. The leases require FirstBank to pay for all utilities, property taxes
and hazard insurance related to the leased properties.
The main office facility lease provides for a lease term of 20 years,
expiring in 2013. The lease is subject to rent escalation provisions which are
computed every five years during the life of the lease. The Lady's Island branch
facility lease provides for a five-year lease expiring in 2003.
FBM leases office space under a noncancellable operating lease with an
initial term of 5 years beginning on September 1, 1998. The lease terms provide
for three, three-year renewal options. The landlord is responsible for
improvements and property taxes on the leased property up to the amount paid for
1997 taxes. FBM is required to pay any property tax increases over 1997 taxes.
Annual base rent in lease years one through five is $90,750. Subsequent lease
renewals will increase lease payments by the greater of 12.5% or the increase in
the Consumer Price Index.
Aggregate future minimum lease payments under all operating leases are as
follows:
<TABLE>
<S> <C>
Year ending December 31:
1999................................................... $ 262,011
2000................................................... 262,011
2001................................................... 262,011
2002................................................... 262,011
2003................................................... 229,172
Thereafter............................................. 1,137,532
----------
Total minimum payments............................... $2,414,748
==========
</TABLE>
21
<PAGE> 22
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total rental expense for the years ended December 31, 1998, 1997 and 1996,
was approximately $193,000, $161,000 and $161,000, respectively.
NOTE 9. DEPOSITS:
Certificates of deposits, each with a minimum denomination of $100,000,
totaled approximately $10.3 million and $8.8 million at December 31, 1998 and
1997, respectively.
At December 31, 1998, the scheduled maturities of certificates of deposit
are as follows (in thousands of dollars):
<TABLE>
<S> <C>
1999........................................................ $32,219
2000........................................................ 5,008
2001........................................................ 287
-------
$37,514
=======
</TABLE>
As a former federal savings bank, FirstBank's deposits are insured by the
Savings Association Insurance Fund (SAIF) of the FDIC. To recapitalize the
reserves of SAIF, a special assessment on institutions with SAIF-insured
deposits was approved by the U.S. Congress. FirstBank expensed approximately
$445,000 for the special assessment during 1996.
NOTE 10. FEDERAL HOME LOAN BANK ADVANCES:
FirstBank has an $11 million line-of-credit with the FHLB of Atlanta. At
December 31, 1998 and 1997, advances from the FHLB of Atlanta totaled $4.25
million and $5.05 million, respectively.
At December 31, 1998, the maturity dates and interest rates on the advances
were as follows (in thousands of dollars):
<TABLE>
<CAPTION>
MATURITY DATE INTEREST RATE AND TYPE ADVANCE AMOUNT
- ------------- ---------------------- --------------
<S> <C> <C>
June 2001.................................... 6.92% fixed $ 250,000
June 2003 (callable June 2000)............... 5.40% fixed 1,000,000
June 2008 (callable June 2003)............... 5.51% fixed 3,000,000
----------
$4,250,000
==========
</TABLE>
As security for advances, FirstBank, under a blanket floating lien, is
required to maintain qualifying mortgages with unpaid principal balances, when
discounted at 75% of the unpaid principal balances, at least equal to 100% of
its outstanding advances. All stock in the FHLB is also pledged to secure these
advances. Advance agreements contain penalty provisions for early repayment if
current advance rates are lower than the interest rates on the advances being
repaid.
22
<PAGE> 23
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Such advances during 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Maximum amount of advances at any month end............ $4,300,000 $6,300,000
========== ==========
Average borrowings during the year..................... $2,954,000 $3,428,000
========== ==========
Weighted average interest rate during the year......... 5.79% 6.03%
========== ==========
</TABLE>
NOTE 11. NOTE PAYABLE:
In connection with the organization of FBM, the Company borrowed $2,100,000
from a bank in August 1998. The loan principal is scheduled for repayment
monthly over five years, beginning October 1, 2003, and is subject to repayment
prior to consummation of the merger (see Note 23). Interest is due monthly
beginning October 1, 1998, through maturity in September 2008, at a variable
rate of prime less one percent (7.5% at December 31, 1998). The common stock of
each Bank serves as collateral.
The loan agreement contains certain loan covenants that, among other
things, place limits on additional borrowings and capital expenditures and,
require the Company and each subsidiary Bank to maintain their status as "well
capitalized" as defined by the regulations. The Company was in compliance with
these loan covenants.
NOTE 12. INCOME TAXES:
The Company files consolidated federal income tax returns on a
calendar-year basis.
The provision for income taxes for the three years ended December 31, 1998
consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Currently payable:
Federal....................................... $549,589 $589,579 $336,524
State......................................... 55,494 67,690 29,967
-------- -------- --------
Total...................................... 605,083 657,269 366,491
-------- -------- --------
Deferred tax benefit:
Federal....................................... (44,523) (70,061) (40,046)
State......................................... (29,489) (6,569) (3,947)
-------- -------- --------
Total...................................... (74,012) (76,630) (43,993)
-------- -------- --------
Total income taxes......................... $531,071 $580,639 $322,498
======== ======== ========
Effective tax rate......................... 38.3% 38.0% 39.2%
======== ======== ========
</TABLE>
23
<PAGE> 24
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes for 1998, 1997, and 1996 differed from
amounts computed by applying the statutory federal rate to income before income
taxes as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Income taxes at statutory rate on pre-tax
income.......................................... $471,694 $519,519 $279,925
State income taxes, net of federal tax
benefit...................................... 36,626 40,339 17,173
Other, net...................................... 22,751 20,781 25,400
-------- -------- --------
Total provision.............................. $531,071 $580,639 $322,498
======== ======== ========
</TABLE>
The sources of deferred tax assets and liabilities at December 31, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses................................ $288,611 $254,739
Start-up costs........................................... 74,849 --
State tax net operating loss carryforward................ 27,503 --
Deferred loan fees....................................... -- 34,896
Unrealized losses on securities available-for-sale....... 7,936 8,885
Other.................................................... 5,981 9,018
-------- --------
Total................................................. 404,880 307,538
-------- --------
Deferred tax liabilities:
Federal Home Loan Bank stock dividends................... (43,551) (43,551)
-------- --------
Net deferred tax asset before valuation allowance..... 364,329 263,987
Less, valuation allowance............................. (24,279) --
-------- --------
Net deferred tax asset................................ $337,050 $263,987
======== ========
</TABLE>
At December 31, 1998, the Company had net operating loss (NOL)
carryforwards for state income tax purposes of approximately $586,000 available
to offset future state taxable income. The NOL carryforwards expire in the years
2010 through 2013. The valuation allowance represents management's estimate of
the allowance for the NOL deferred tax asset and specifically relates to
FirstBancorporation and FMB.
NOTE 13. STOCK OPTIONS:
Options to purchase shares of the Company's common stock have been granted
to its directors and officers. Under the 1996 Stock Option Plan up to 17,325
shares of common stock were authorized to be granted to selected key employees
and nonemployee directors in the form of incentive and nonqualified stock
options. A committee of the Board of Directors determines the dates options
shall be granted and exercised, the period of vesting schedule and the term of
the exercise period (not to exceed 10 years). Under the 1987 Non-Qualified Stock
Option Plan and 1986 Incentive Stock Option Plan, 112,386 shares of common stock
were authorized and granted to outside directors and officers. These options
expire in 2006.
24
<PAGE> 25
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company applies APB Opinion 25 and related Interpretations in
accounting for the stock option plans. Accordingly, no compensation cost has
been recognized. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant dates for awards under the plans
consistent with the method prescribed by SFAS No. 123, the Company's net income
and earnings per share would have been adjusted to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net income
As reported..................................... $766,024 $947,358 $500,811
Pro forma....................................... $754,441 $912,968 $476,352
Earnings per share -- basic
As reported..................................... $ 1.01 $ 1.37 $ 0.73
Pro forma....................................... $ 1.00 $ 1.32 $ 0.69
Earnings per share -- assuming dilution
As reported..................................... $ 0.94 $ 1.29 $ 0.69
Pro forma....................................... $ 0.92 $ 1.24 $ 0.66
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Dividend yield............................... 0.00% 0.00% 0.00%
Expected life................................ 5 - 6 years 6 - 7 years 6 - 7 years
Expected volatility.......................... 27% 20% 20%
Risk-free interest rate...................... 5.28% 6.0% 6.0%
</TABLE>
A summary of the status of the Company's stock option plans is presented
below:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Fixed Options:
Outstanding at beginning
of year.............. 108,464 $ 8.06 105,885 $ 7.85 97,315 $7.76
Granted................. 4,491 16.71 5,700 13.61 10,571 9.60
Exercised............... (3,892) 11.08 -- -- (2,001) 8.18
Forfeited............... (4,459) 6.73 (3,121) 10.44 -- --
------- ------- -------
Outstanding at end of
year................. 104,604 $ 7.79 108,464 $ 8.06 105,885 $7.85
======= ======= =======
</TABLE>
25
<PAGE> 26
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Options exercisable at
year end................ 81,073 $ 7.04 85,739 $ 7.05 76,893 $6.68
Weighted-average fair
value of options granted
during the year......... $16.71 $13.61 $9.60
</TABLE>
Information pertaining to options outstanding at December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 6.41 -- $ 6.73............ 70,230 5.7 years $ 6.43 74,689 $ 6.43
$10.30 -- $11.82............ 28,874 6.7 years 10.83 10,443 10.99
$14.00 -- $18.00............ 5,500 8.9 years 15.73 400 14.00
------- --------- ------ ------ ------
Outstanding at end of
year...................... 104,604 6.1 years $ 8.06 85,532 $ 7.02
======= ========= ====== ====== ======
</TABLE>
NOTE 14. RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES:
The Banks, as national banks, are subject to certain restrictions regarding
the transfer of funds to the Company in the form of cash dividends, loans, or
advances. The approval of the OCC is required to pay dividends in excess of the
Banks' net profits for the current year plus retained net profits (net profits
less dividends paid) for the preceding two years, less any required transfers to
surplus. As of December 31, 1998, approximately $1,283,000 of the Banks'
retained earnings are available for distribution to the Company as dividends
without prior regulatory approval.
Under FRB regulations, the Banks are also limited as to the amount it may
loan to the Company unless such loans are collateralized by specified
obligations. The maximum amount available for transfer from the Banks to the
Company in the form of loans or advances totaled approximately $2,845,000 at
December 3l, 1998.
NOTE 15. RELATED PARTY TRANSACTIONS:
During 1998 and 1997, FirstBank and in 1998, FBM had loan relationships
with certain related parties; principally, directors and executive officers,
their immediate families and their business interests. All of these
relationships were in the ordinary course of business. Total loans outstanding
to this group (including immediate families and business interests) amounted to
$1,462,900 at December 31, 1998, and $1,203,791 at December 31, 1997. During
1998, $1,110,593 of new loans were originated to this group. Repayments of
$851,484 were made during 1998.
26
<PAGE> 27
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Related party deposits totaled approximately $3,188,000 and $2,451,000 at
December 31, 1998 and 1997, respectively.
NOTE 16. COMMITMENTS AND CONTINGENT LIABILITIES:
The Company is involved at times in various litigation arising out of the
normal course of business. In the opinion of the Company's legal counsel, there
is no pending or threatened litigation that will have a material effect on the
Company's consolidated financial statements.
The Company has entered into contracts that provide certain officers salary
continuation plans for up to three years in the event of a change in control of
the Company.
YEAR 2000 CONSIDERATIONS
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If uncorrected, many
applications could fail or create erroneous results by or at the year 2000. The
year 2000 issue affects virtually all organizations.
The Company uses the services of outside software vendors for certain of
its data processing applications. Based on discussions with software vendors and
the execution of its year 2000 plan to date, management does not expect the cost
of addressing any year 2000 issue will be a material event or uncertainty that
would cause its reported financial information not to be necessarily indicative
of future operating results or future financial condition, or that the costs or
consequences of incomplete or untimely resolution of any year 2000 issue
represent a known material event or uncertainty that is reasonably likely to
affect its future financial results, or cause its reported financial information
not to be necessarily indicative of future operating results or future financial
condition. Costs to address the year 2000 issue are estimated to total
approximately $100,000, of which approximately $65,000 was incurred in 1998.
NOTE 17. OFF-BALANCE-SHEET ACTIVITIES:
The Company is a party to credit related financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit. Such commitments involve, to
varying degrees, elements of credit and interest-rate risk in excess of the
amount recognized in the consolidated balance sheets.
The Company's exposure to credit loss is represented by the contractual
amount of the commitments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
27
<PAGE> 28
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1998 and 1997, the following financial instruments were
outstanding whose contract amounts represent credit risk:
<TABLE>
<CAPTION>
CONTRACT AMOUNT
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Commitments to grant loans............................ $ 3,060,000 $ 3,371,000
Unfunded commitments under lines of credit............ 12,696,000 10,327,000
Commercial and standby letters of credit.............. 493,000 288,000
</TABLE>
Commitments to grant loans are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. These
commitments generally have fixed expiration dates and are generally
collateralized by real estate.
Unfunded commitments under lines of credit are generally unfunded balances
on loans closed and include unfunded lines on home equity loans, other open
ended loans, overdraft protection lines and construction loans. Construction
loans are generally for a fixed term and may require a fee to be paid. Lines of
credit are generally collateralized by real estate.
Unfunded commitments under commercial lines of credit, revolving credit
lines and overdraft protection agreements are commitments for possible future
extensions of credit to existing customers. These lines of credit are
uncollateralized and usually do not contain a specified maturity date and may
not be drawn upon to the total extent to which the Company is committed.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. Those letters of
credit are primarily issued to support public and private borrowing
arrangements. Essentially standby letters of credit have expiration dates within
one year. The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending loan facilities to customers. The Company
generally holds collateral supporting those commitments if deemed necessary.
NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair value of the Company's financial instruments at December
31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents... $ 8,753,950 $ 8,753,950 $ 6,095,598 $ 6,095,598
Time deposits with banks.... 2,099,000 2,099,000 99,000 99,000
Securities
available-for-sale....... 9,066,478 9,066,478 2,182,412 2,182,412
Real estate loans held for
sale..................... 1,740,365 1,740,365 676,279 676,279
Loans receivable -- net..... 82,583,276 82,643,199 80,063,972 80,250,247
Accrued interest
receivable............... 595,812 595,812 555,537 555,537
</TABLE>
28
<PAGE> 29
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1998 1997
------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial liabilities:
Deposits.................... $87,752,659 $87,909,255 $77,462,288 $77,529,026
Federal Home Loan Bank
advances................. 4,250,000 4,318,856 5,050,000 5,059,257
Note payable................ 2,100,000 2,100,000 -- --
Amounts due to depository
institutions............. 489,573 489,573 305,315 305,315
Accrued interest payable.... 280,129 280,129 208,410 208,410
Unrecognized financial
instruments:
Commitments to grant
loans.................... 3,060,000 3,060,000 3,371,000 3,371,000
Lines-of-credit............. 12,696,000 12,696,000 10,327,000 10,327,000
Standby letters of credit... 493,000 493,000 288,000 288,000
</TABLE>
NOTE 19. MINIMUM REGULATORY CAPITAL REQUIREMENTS:
The Company (on a consolidated basis) and the Banks are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company's and Banks' financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Banks must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors. Prompt corrective action provisions are not applicable to bank
holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Banks to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1998 and 1997, that the Company and the Banks meet all capital adequacy
requirements to which they are subject.
As of September 22, 1997, the most recent notifications from the OCC
categorized FirstBank as well capitalized under the regulatory framework for
prompt corrective action. FBM has not received any notification from the OCC,
but was required to be well capitalized. To be categorized as well capitalized,
an institution must maintain minimum total risk-based, Tier I risk-based, and
Tier I leverage ratios as set forth in the following tables. There are no
conditions or events since that notification that management believes have
changed the Banks' categories.
29
<PAGE> 30
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's and the Banks' actual capital amounts and ratios are also
presented in the table as follows (in thousands of dollars):
<TABLE>
<CAPTION>
MINIMUM
REQUIRED
TO BE WELL
MINIMUM CAPITALIZED
REQUIRED UNDER PROMPT
FOR CAPITAL CORRECTIVE
ADEQUACY ACTION
ACTUAL PURPOSES PROVISIONS
--------------- -------------- --------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
At December 31, 1998:
Tier I Capital (to Average Assets):
Consolidated............................ $12,131 11.1% $4,359 4.0% $5,449 5.0%
FirstBank............................... 8,165 8.2% 4,007 4.0% 5,009 5.0%
FBM..................................... 4,673 63.1% 296 4.0% 444 5.0%
Tier I Capital (to Risk Weighted Assets):
Consolidated............................ $12,131 17.6% $2,752 4.0% $4,129 6.0%
FirstBank............................... 8,165 12.8% 2,554 4.0% 3,831 6.0%
FBM..................................... 4,673 111.4% 168 4.0% 252 6.0%
Total Capital (to Risk Weighted Assets):
Consolidated............................ $12,943 18.8% $5,504 8.0% $6,881 10.0%
FirstBank............................... 8,964 14.0% 5,108 8.0% 6,386 10.0%
FBM..................................... 4,686 111.7% 335 8.0% 419 10.0%
At December 31, 1997:
Tier I Capital (to Average Assets):
Consolidated............................ $ 7,854 8.7% $3,608 4.0% $4,509 5.0%
FirstBank............................... 7,737 8.6% 3,607 4.0% 4,508 5.0%
Tier I Capital (to Risk Weighted Assets):
Consolidated............................ 7,854 12.1% 2,587 4.0% 3,880 6.0%
FirstBank............................... 7,737 12.0% 2,587 4.0% 3,880 6.0%
Total Capital (to Risk Weighted Assets):
Consolidated............................ 8,582 13.3% 5,173 8.0% 6,470 10.0%
FirstBank............................... 8,465 13.1% 5,173 8.0% 6,467 10.0%
</TABLE>
NOTE 20. FIRST SECURITIES CORPORATION:
FSC completed its first year of operations in 1997. Financial information
pertaining only to FSC is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997
------- -------
<S> <C> <C>
Total assets................................................ $61,007 $73,000
======= =======
</TABLE>
30
<PAGE> 31
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------
1998 1997
-------- -------
<S> <C> <C>
Gross commission income..................................... $137,797 $40,400
======== =======
Net loss.................................................... $ 16,446 $24,350
======== =======
</TABLE>
NOTE 21. CONDENSED FINANCIAL STATEMENTS:
Presented below are the condensed financial statements for
FirstBancorporation, Inc. (parent company only):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Balance Sheets:
Assets:
Cash............................................. $ 1,169,835 $ 15,586
Investment in banking subsidiaries............... 12,832,257 7,864,255
Other assets..................................... 222,561 109,847
----------- ----------
Total assets..................................... $14,224,653 $7,989,688
=========== ==========
Liabilities:
Amounts due to banking subsidiaries.............. $ -- $ 7,241
Other liabilities................................ -- 1,446
Long-term debt................................... 2,100,000 --
Stockholders' equity............................. 12,124,653 7,981,001
----------- ----------
Total liabilities and stockholders' equity....... $14,224,653 $7,989,688
=========== ==========
Statements of Income:
Dividends from banking subsidiaries................. $ 860,000 $ 100,000
Interest............................................ 1,281 --
----------- ----------
Total income..................................... $ 861,281 $ 100,000
=========== ==========
Expenses:
Interest............................................ $ 53,375 $ --
Compensation........................................ -- 16,915
Amortization........................................ 8,076 7,887
Other............................................... 21,027 31,275
----------- ----------
Income before equity in undistributed earnings of
subsidiaries........................................ 778,803 43,923
Applicable income tax benefit......................... 20,769 21,310
Equity in undistributed earnings of subsidiaries...... (33,548) 882,125
----------- ----------
Net income.......................................... $ 766,024 $ 947,358
=========== ==========
Statements of Cash Flows:
Cash flows from operating activities:
Net income....................................... $ 766,024 $ 947,358
</TABLE>
31
<PAGE> 32
FIRSTBANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization expense........................... $ 23,090 $ 7,887
Increase in other assets....................... (27,913) (78,145)
Increase (decrease) in other liabilities....... (8,687) 8,687
Equity in undistributed earnings of
subsidiaries................................ 33,548 (882,125)
----------- ----------
Net cash provided by operating activities... 786,062 3,662
Cash flows from investing activities:
Investment in FBM................................... (5,107,892) --
----------- ----------
Net cash used in investing activities................. (5,107,892) --
Cash flows from financing activities:
Proceeds from issuance of long-term debt............ 2,100,000 --
Common stock issued................................. 3,490,699 --
Stock issuance cost................................. (114,620) (7,470)
----------- ----------
Net cash provided (used) by financing activities...... 5,476,079 (7,470)
----------- ----------
Net increase (decrease) in cash and cash
equivalents......................................... 1,154,249 (3,808)
Cash at beginning of year............................. 15,586 19,394
----------- ----------
Cash at end of year................................... $ 1,169,835 $ 15,586
=========== ==========
</TABLE>
NOTE 22. OTHER COMPREHENSIVE INCOME:
The components of other comprehensive income and related tax effects are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Unrealized holding losses on available-for-sale
securities......................................... $20,846 $23,383 $17,631
Less: Reclassification adjustment for gains (losses)
realized in income (expense)....................... -- -- --
------- ------- -------
Net unrealized losses................................ 20,846 23,383 17,631
Tax effect........................................... (7,898) (8,886) (6,700)
------- ------- -------
Net-of-tax amount.................................... $12,948 $14,497 $10,931
======= ======= =======
</TABLE>
NOTE 23. SUBSEQUENT EVENTS:
The Boards of Directors of the Company and First National Corporation (FNC)
approved on March 4, 1999, a merger of the two companies. In the merger, the
Company's stockholders will receive 1.222 shares of FNC common stock for each
share of the Company's common stock. The merger is anticipated to be accounted
for as a pooling-of-interests and a tax-free reorganization. Consummation of the
merger is subject to several conditions, including the receipt of applicable
regulatory approvals and approval by the stockholders of both companies.
32
<PAGE> 1
EXHIBIT 99(C)
FIRST NATIONAL CORPORATION
PRO FORMA COMBINED CONDENSED BALANCE SHEET (UNAUDITED)
MARCH 31, 1999
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FIRST PRO FORMA PRO FORMA
NATIONAL FIRSTBANCORPORATION ADJUSTMENTS COMBINED
-------- ------------------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks........ $ 27,131 $ 10,724 $ -- $ 37,855
Investment securities.......... 219,663 12,133 (100) 231,696
Loans, net..................... 424,324 81,891 -- 506,215
Premises and equipment, net.... 11,114 1,864 -- 12,978
Other assets................... 11,038 3,025 -- 14,063
-------- -------- ------- --------
Total assets............ $693,270 $109,637 $ (100) $802,807
======== ======== ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand.................... $ 81,722 $ 9,420 $ -- $ 91,142
Interest-bearing
transaction accounts.... 70,976 39,424 -- 110,400
Savings................... 51,857 4,597 -- 56,454
Time...................... 334,897 35,730 -- 370,627
-------- -------- ------- --------
Total deposits.......... 539,452 89,171 -- 628,623
Other liabilities.............. 91,052 7,742 600 99,394
-------- -------- ------- --------
Total liabilities....... 630,504 96,913 600 728,017
-------- -------- ------- --------
Shareholders' equity:
Common stock................. 14,589 10 2,933 17,532
Surplus...................... 40,305 10,129 (3,033) 47,401
Retained earnings............ 7,603 2,606 (600) 9,609
Accumulated other
comprehensive income
(loss).................... 269 (21) -- 248
-------- -------- ------- --------
Total shareholders'
equity............... 62,766 12,724 (700) 74,790
-------- -------- ------- --------
Total liabilities and
shareholders'
equity............... $693,270 $109,637 $ (100) $802,807
======== ======== ======= ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Statements
1
<PAGE> 2
FIRST NATIONAL CORPORATION
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FIRST PRO FORMA PRO FORMA
NATIONAL FIRSTBANCORPORATION ADJUSTMENTS COMBINED
---------- ------------------- ----------- ----------
<S> <C> <C> <C> <C>
Interest income............. $ 12,241 $ 2,092 $ -- $ 14,333
Interest expense............ 4,854 863 $ -- 5,717
---------- -------- ---- ----------
Net interest income....... 7,387 1,229 -- 8,616
Provision for loan losses... 293 54 -- 347
---------- -------- ---- ----------
Net interest income after
provision for loan
losses................. 7,094 1,175 -- 8,269
Noninterest income.......... 2,246 213 -- 2,459
Noninterest expense......... 6,222 1,218 -- 7,440
---------- -------- ---- ----------
Income before provision
for income taxes....... 3,118 170 -- 3,288
Provision for income
taxes..................... 995 71 -- 1,066
---------- -------- ---- ----------
Net income............. $ 2,123 $ 99 $ -- $ 2,222
========== ======== ==== ==========
Net income per
share -- basic............ $ 0.36 $ 0.11 $ 0.32
Net income per
share -- diluted.......... $ 0.36 $ 0.11 $ 0.32
Weighted average shares
outstanding -- basic...... 5,824,881 911,184 6,938,348
Weighted average shares
outstanding -- diluted.... 5,880,136 919,467 7,003,725
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Statements
2
<PAGE> 3
FIRST NATIONAL CORPORATION
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME (UNAUDITED)
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FIRST FIRSTBANCOR- PRO FORMA PRO FORMA
NATIONAL PORATION ADJUSTMENTS COMBINED
---------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Interest income................... $ 46,120 $ 7,848 $ -- $ 53,968
Interest expense.................. 19,557 3,565 -- 23,122
---------- -------- ----- ----------
Net interest income............. 26,563 4,283 -- 30,846
Provision for loan losses......... 1,013 200 -- 1,213
---------- -------- ----- ----------
Net interest income after
provision for loan losses.... 25,550 4,083 -- 29,633
Noninterest income................ 7,893 1,483 -- 9,376
Noninterest expense............... 22,549 4,179 -- 26,728
---------- -------- ----- ----------
Income before provision for
income taxes................. 10,894 1,387 -- 12,281
Provision for income taxes........ 3,389 531 -- 3,920
---------- -------- ----- ----------
Income before cumulative effect
of a change in accounting
principle (see Note 6)....... $ 7,505 $ 856 $ -- $ 8,361
========== ======== ===== ==========
Income before cumulative effect of
a change in accounting principle
per share -- basic.............. $ 1.30 $ 1.13 $ 1.25
Income before cumulative effect of
a change in accounting principle
per share -- diluted............ $ 1.29 $ 1.05 $ 1.22
Weighted average shares
outstanding -- basic............ 5,778,189 758,052 6,704,529
Weighted average shares
outstanding -- diluted.......... 5,832,640 815,898 6,829,668
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Statements
3
<PAGE> 4
FIRST NATIONAL CORPORATION
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME (UNAUDITED)
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FIRST FIRSTBANCOR- PRO FORMA PRO FORMA
NATIONAL PORATION ADJUSTMENTS COMBINED
---------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Interest income................... $ 41,144 $ 7,542 $ -- $ 48,686
Interest expense.................. 17,365 3,423 -- 20,788
---------- -------- ------- ----------
Net interest income............. 23,779 4,119 -- 27,898
Provision for loan losses......... 1,251 165 -- 1,416
---------- -------- ------- ----------
Net interest income after
provision for loan losses.... 22,528 3,954 -- 26,482
Noninterest income................ 6,259 952 -- 7,211
Noninterest expense............... 19,454 3,378 -- 22,832
---------- -------- ------- ----------
Income before provision for
income taxes................. 9,333 1,528 -- 10,861
Provision for income taxes........ 2,867 581 -- 3,448
---------- -------- ------- ----------
Net income................... $ 6,466 $ 947 $ -- $ 7,413
========== ======== ======= ==========
Net income per share -- basic..... $ 1.26 $ 1.37 $ 1.24
Net income per share -- diluted... $ 1.25 $ 1.29 $ 1.22
Weighted average shares
outstanding -- basic............ 5,146,699 690,285 5,990,227
Weighted average shares
outstanding -- diluted.......... 5,189,811 735,507 6,088,600
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Statements
4
<PAGE> 5
FIRST NATIONAL CORPORATION
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME (UNAUDITED)
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FIRST FIRSTBANCOR- PRO FORMA PRO FORMA
NATIONAL PORATION ADJUSTMENTS COMBINED
---------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Interest income................... $ 34,263 $ 6,920 $ -- $ 41,183
Interest expense.................. 13,986 3,281 -- 17,267
---------- -------- ------- ----------
Net interest income............. 20,277 3,639 -- 23,916
Provision for loan losses......... 1,319 162 -- 1,481
---------- -------- ------- ----------
Net interest income after
provision for loan losses.... 18,958 3,477 -- 22,435
Noninterest income................ 5,344 737 -- 6,081
Noninterest expense............... 16,352 3,391 -- 19,743
---------- -------- ------- ----------
Income before provision for
income taxes................. 7,950 823 -- 8,773
Provision for income taxes........ 2,422 322 -- 2,744
---------- -------- ------- ----------
Net income................... $ 5,528 $ 501 $ -- $ 6,029
========== ======== ======= ==========
Net income per share -- basic..... $ 1.14 $ 0.73 $ 1.06
Net income per share -- diluted... $ 1.13 $ 0.69 $ 1.04
Weighted average shares
outstanding -- basic............ 4,869,699 686,042 5,708,042
Weighted average shares
outstanding -- diluted.......... 4,902,067 725,813 5,789,010
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Statements
5
<PAGE> 6
NOTES TO THE UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL INFORMATION
NOTE 1. BASIS OF PRESENTATION
On March 4, 1999, First National Corporation entered into a definitive
agreement and plan of merger with FirstBancorporation, Inc. The agreement calls
for a tax-free exchange of 1.222 shares of First National common stock for each
outstanding share of FirstBancorporation common stock.
The unaudited pro forma combined condensed financial statements have been
prepared assuming that the merger will be accounted for under the
pooling-of-interests method of accounting for business combinations and is based
on the historical consolidated financial statements of First National and
FirstBancorporation. Certain amounts in the historical consolidated financial
statements of FirstBancorporation have been reclassified to conform to First
National's historical financial presentation.
The pro forma adjustments represent management's best estimates based on
available information at this time. Actual adjustments will differ from those
reflected in the unaudited pro forma combined condensed financial statements.
First National and FirstBancorporation are still in the process of reviewing
their respective accounting policies relative to those followed by the other
entity. As a result of this review, it may be necessary to restate certain
amounts in First National's or FirstBancorporation's financial statements to
conform to those accounting policies that are most appropriate. In management's
opinion, any such restatements will not be material.
The unaudited pro forma combined condensed financial statements presented
are not necessarily indicative of the results of operations or the combined
financial position that would have resulted had the merger been consummated at
the beginning of the periods indicated, nor are they necessarily indicative of
the results of operations in future periods or the future financial position of
the combined entities.
The unaudited pro forma combined condensed financial statements should be
read in conjunction with the historical consolidated financial statements and
the related notes thereto of each of First National and FirstBancorporation.
First National's historical financial statements are in the First National
annual report on Form 10-K for the year ended December 31, 1998 as filed with
the Securities and Exchange Commission on March 31, 1999. FirstBancorporation's
historical financial statements are in the FirstBancorporation annual report on
Form 10-KSB for the year ended December 31, 1998, as filed with the Securities
and Exchange Commission on March 30, 1999.
NOTE 2. SHAREHOLDERS' EQUITY
In conjunction with the merger, First National will exchange 1.222 shares
of its common stock for each share of FirstBancorporation common stock.
The pro forma adjustments herein reflect, where applicable, the 1.222
exchange ratio for each of the 963,325 shares of FirstBancorporation common
stock which were issued and outstanding at March 31, 1999. The capital accounts
have been adjusted to reflect the issuance of 1,177,183 shares of First National
common stock in exchange for all of the
6
<PAGE> 7
NOTES TO THE UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL INFORMATION -- (CONTINUED)
outstanding shares of FirstBancorporation stock based on the exchange ratio. The
excess ($2,933,000) of the par value of the First National common stock issued
over the par value of FirstBancorporation stock received in exchange has been
charged to surplus.
At March 31, 1999, First National owned 5,555 shares of FirstBancorporation
common stock with a recorded value of $100,000. Consequently, the investment
balance and the related shares of common stock were eliminated.
NOTE 3. PER SHARE DATA
Basic earnings per common share has been computed by dividing the pro forma
combined net income by the weighted average number of common shares outstanding
of First National common stock plus the weighted average number of common shares
of FirstBancorporation adjusted by the exchange ratio of 1.222 as of the
earliest period presented.
Diluted earnings per common share has been computed by dividing the pro
forma combined net income by the weighted average number of common shares
outstanding and dilutive common share equivalents of First National common stock
plus the weighted average number of common shares outstanding and dilutive
common share equivalents of FirstBancorporation adjusted by the exchange ratio
of 1.222 as of the earliest period presented, using the treasury stock method.
Dilutive common share equivalents include common shares issuable upon exercise
of stock options outstanding.
NOTE 4. MERGER-RELATED EXPENSES
In connection with the merger, First National expects to incur
merger-related expenses of approximately $600,000, after tax. These expenses
relate primarily to severance, change in control, and other employee-related
items, as well as legal, investment banking and other professional fees. The
impact of these expenses, net of the related tax effect, has been reflected in
the pro forma combined condensed balance sheet as of March 31, 1999.
NOTE 5. OPERATING COST SAVINGS
First National expects to achieve a certain level of cost savings after the
merger through the optimization of delivery systems, reduction of corporate
overhead, elimination of redundant staff functions, consolidation of business
lines, data processing and back office operations, infrastructure and vendor
leverage, and the elimination of certain duplicate or excess facilities.
However, the unaudited pro forma combined condensed financial statements do not
reflect any direct costs or potential savings which are expected to result from
the consolidation of operations of the combining companies, and, therefore, do
not purport to be indicative of future operations.
NOTE 6. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLES
In 1998, FirstBancorporation adopted AICPA Statement of Position (SOP)
98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5 provides
guidance on the
7
<PAGE> 8
NOTES TO THE UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL INFORMATION -- (CONTINUED)
financial reporting of start-up costs and organization costs and requires such
costs to be expensed as incurred. The adoption of SOP 98-5 is reported as the
cumulative effect of a change in accounting principle in FirstBancorporation's
1998 financial statements included in its annual report on Form 10-KSB. Adoption
of SOP 98-5 reduced FirstBancorporation's net income for 1998 by $90,000 and
basic and diluted earnings per common share by $0.12 and $0.11, respectively.
Prior to adopting SOP 98-5, deferred organization costs were amortized using the
straight-line method. In accordance with Instruction 1 to Article 11 of
Regulation S-X, pro forma net income and basic and diluted earnings per share
for First National for 1998 excludes such cumulative effect adjustment.
8
