-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KlhpGRLOM5TQNxjvD6hCDhPz4WZXim3kjWoCTeytVGyoMSiBdzQEm4XsiI/M4q4s 6yXiFfmHf4+lPzSifX3WFg== 0000950144-00-000472.txt : 20000202 0000950144-00-000472.hdr.sgml : 20000202 ACCESSION NUMBER: 0000950144-00-000472 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 20 FILED AS OF DATE: 20000120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTERSTATE BANKS OF FLORIDA INC CENTRAL INDEX KEY: 0001102266 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 593606741 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-95087 FILM NUMBER: 510456 BUSINESS ADDRESS: STREET 1: 7722 SR 544 EAST CITY: WINTER HAVEN STATE: FL ZIP: 33881 BUSINESS PHONE: 8634228990 MAIL ADDRESS: STREET 1: 7722 SR 544 EAST CITY: WINTER HAVEN STATE: FL ZIP: 33881 S-4 1 CENTERSTATE BANKS OF FLORIDA, INC. 1 As filed with the Securities and Exchange Commission on January 20, 2000. Registration No. 333-________ =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ----------------- CENTERSTATE BANKS OF FLORIDA, INC. (Name of Small Business Issuer as specified in its charter)
FLORIDA 6711 59-3606741 ------- ---- ---------- (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Identification Number) 7722 SR 544 EAST, WINTER HAVEN, FLORIDA 33881 (941) 422-8990 (Address and telephone number of principal executive offices) JAMES H. WHITE CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER CENTERSTATE BANKS OF FLORIDA, INC. 7722 SR 544 EAST, WINTER HAVEN, FLORIDA 33881 (941) 422-8990 (Name, address and telephone number of agent for service) ---------- Copy to: JOHN P. GREELEY, ESQUIRE SMITH, MACKINNON, GREELEY, BOWDOIN, EDWARDS, BROWNLEE & MARKS, P.A. 255 SOUTH ORANGE AVENUE SUITE 800 ORLANDO, FLORIDA 32801 (407) 843-7300 FACSIMILE (407) 843-2448 ----------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: The date of mailing the Proxy Statement-Prospectus included herein to the shareholders of First National Bank of Osceola County. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
CALCULATION OF REGISTRATION FEE - ------------------------------ -------------------- ---------------- ------------------ ------------ PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE OFFERING REGISTRATION SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT (2) PRICE (1) FEE (2) - ------------------------------ -------------------- ---------------- ------------------ ------------ Common Stock, $.01 par value 1,027,650 shares (1) $8.174 $8,400,000 $2,217.60 ============================== ==================== ================ ================== =============
(1) The maximum number of full shares issuable upon consummation of the transaction described herein. (2) Computed in accordance with Rule 457(f)(2) solely for the purpose of calculating the registration fee based upon the book value at September 30, 1999, of the securities to be received by the Registrant if the proposed merger described herein is consummated. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. =============================================================================== 2 --------------------------------- PROXY STATEMENT FOR FIRST NATIONAL BANK OF OSCEOLA COUNTY --------------------------------- PROSPECTUS OF CENTERSTATE BANKS OF FLORIDA, INC. --------------------------------- Dear First National Bank of Osceola County shareholder: This proxy statement/prospectus is being furnished to you because you own common stock of First National Bank of Osceola County. The board of directors of First National/Osceola has approved a merger whereby First National/Osceola will become a subsidiary of Centerstate Banks of Florida, Inc. In the merger, you will receive 2.0 shares of Centerstate Banks of Florida common stock for each share of First National/Osceola common stock you own. Centerstate Banks of Florida has not yet commenced any business. It has, however, entered into similar merger agreements with First National Bank of Polk County, headquartered in Winter Haven, Florida, and Community National Bank of Pasco County, headquartered in Zephyrhills, Florida. The closing of the First National/Osceola merger is conditioned upon the simultaneous closing by Centerstate Banks of Florida of the First National Bank of Polk County and Community National Bank of Pasco County mergers. Upon the consummation of these mergers, First National/Osceola, First National Bank of Polk County, and Community National Bank of Pasco County will operate as separate subsidiaries of Centerstate Banks of Florida. Centerstate Banks of Florida common stock is not listed for quotation on any stock exchange and is not actively traded. The special meeting at which you will consider approval of the merger will be held at ______, p.m. on ___________, 2000, at First National/Osceola's principal executive offices, 920 North Bermuda Avenue, Kissimmee, Florida 34741. We cannot complete the merger unless holders of at least two-thirds of First National/Osceola common stock approve it. Whether or not you plan to attend the special meeting, please take the time to vote by completing and mailing the enclosed proxy card to us. If you sign, date and mail your proxy card without indicating how you wish to vote, your proxy will be counted as a vote in favor of the merger. If you fail to return your card, the effect will be a vote against the merger. YOUR VOTE IS VERY IMPORTANT. On behalf of the board of directors of First National/Osceola, we urge you to vote "FOR" approval and adoption of the merger. James H. White Thomas E. White Chairman of the Board President and Chief Executive Officer --------------------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. --------------------------------- The date of this proxy statement/prospectus is __________, 2000 and it is first being mailed to shareholders of First National/Osceola on or about ________, 2000. 3 TABLE OF CONTENTS
Page ---- QUESTIONS AND ANSWERS ABOUT THE MERGER ........................................ 1 SUMMARY ....................................................................... 2 Parties to the merger ............................................... 2 Meeting to be held on ___________, 2000 ............................. 2 Voting at a special meeting ......................................... 2 The merger .......................................................... 2 Recommendation of the First National/Osceola board of directors ..... 3 The merger agreement ................................................ 3 Federal income tax consequences ..................................... 3 Rights of dissenting shareholders ................................... 3 Regulatory approvals ................................................ 3 Conditions to the merger ............................................ 3 Termination of the merger agreement ................................. 3 Centerstate Banks of Florida to use pooling of interests accounting treatment ..................................................... 4 COMMUNITY NATIONAL BANK OF PASCO COUNTY AND FIRST NATIONAL BANK OF POLK COUNTY MERGERS .......................... 5 THE SPECIAL MEETING ........................................................... 15 General ............................................................. 15 Date, time and place of the special meeting ......................... 15 Shares outstanding and entitled to vote; record date ................ 15 Vote required to approve merger ..................................... 15 Voting and solicitation of proxies .................................. 15 THE MERGER .................................................................... 17 General information about the merger ................................ 17 Background of the merger ............................................ 17 Recommendation of the First National/Osceola board .................. 20 Opinion of financial advisor ........................................ 21 Conversion ratio .................................................... 26 Interest of certain persons in the merger ........................... 27 Effectiveness of the merger ......................................... 27 Regulatory approvals for the merger ................................. 27 Rights of dissenting shareholders ................................... 28 Resales of Centerstate Banks of Florida common stock to be received by affiliates of First National/Osceola ........ 29 Accounting treatment of the merger .................................. 29 Federal income tax consequences of the merger ....................... 29 How to exchange First National/Osceola stock certificates for Centerstate Banks of Florida stock ........................ 30 Conduct of business pending the merger .............................. 31 Conditions for the merger ........................................... 32 Expenses and fees related to the merger ............................. 33 Amendment, waiver and termination ................................... 33
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Page ---- DIFFERENCE IN RIGHTS OF CENTERSTATE BANKS OF FLORIDA AND FIRST NATIONAL/OSCEOLA SHAREHOLDERS ............................. 34 Authorized capital stock ............................................ 34 Voting .............................................................. 35 Shareholders' meetings .............................................. 35 Dividend rights ..................................................... 35 Appraisal rights .................................................... 36 Control share and fair price laws ................................... 37 MARKET AND DIVIDEND INFORMATION ............................................... 37 Stock trading information ........................................... 37 Dividends ........................................................... 38 DESCRIPTION OF CENTERSTATE BANKS OF FLORIDA ................................... 38 Conduct of business prior to the merger ............................. 38 Conduct of business following the merger ............................ 39 Directors ........................................................... 39 Executive officers .................................................. 40 Property ............................................................ 41 Employees ........................................................... 41 Legal proceedings ................................................... 41 BUSINESS OF FIRST NATIONAL/OSCEOLA ............................................ 41 FIRST NATIONAL/OSCEOLA MANAGEMENT'S DISCUSSION AND ANALYSIS .............................................. 48 SUPERVISION AND REGULATION .................................................... 69 DESCRIPTION OF CAPITAL STOCK .................................................. 75 General .............................................................. 75 Common shares ........................................................ 75 Preferred shares ..................................................... 75 Indemnification provisions ........................................... 76 LEGAL OPINION ................................................................. 76 EXPERTS ....................................................................... 76 ADDITIONAL INFORMATION ........................................................ 77 INDEX TO FINANCIAL STATEMENTS ................................................. F-1
ii 5 Appendices Appendix A: Agreement to Merge Among First National Bank of Osceola County, Centerstate Banks of Florida, Inc. and First Interim National Bank of Osceola County Appendix B: Opinion of Allen C. Ewing & Co. Appendix C: Excerpts from Section 215a of the National Bank Act Appendix D: Information on Community National Bank of Pasco County Appendix E: Information on First National Bank of Polk County iii 6 QUESTIONS AND ANSWERS ABOUT THE MERGER Q: WHAT WILL HAPPEN IN THE MERGER? A: First National/Osceola will continue to conduct its business and operations as it currently conducts it, but as a subsidiary bank of Centerstate Banks of Florida. Q: HOW WILL I BE AFFECTED BY THE MERGER? A: After the merger, you will own shares in Centerstate Banks of Florida. Centerstate Bank of Florida will have three subsidiary banks, which will consist of First National/Osceola, First National Bank of Polk County and Community National Bank of Pasco County. There are certain differences in owning shares of Centerstate Banks of Florida compared to First National/Osceola. You should carefully review these differences, which are discussed beginning on page 34. Q: WHAT DO I NEED TO DO NOW? A: Just indicate on your proxy card how you want to vote, and sign and mail the proxy card in the enclosed envelope as soon as possible so that your shares of First National/Osceola common stock will be represented at the special meeting even if you cannot attend. Q: WHAT AM I BEING ASKED TO VOTE ON? A: You are being asked to vote on the merger. Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE? A: You may send in a later-dated proxy card or you may attend the special meeting and vote your shares in person. If you have already mailed your proxy card and want to vote in person, before the meeting you should notify the president of First National/Osceola. Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW? A: No. If the merger is completed, we will send you written instructions for exchanging your First National/Osceola common stock for Centerstate Banks of Florida common stock. Q: WHEN WILL THE MERGER BE COMPLETED? A: Assuming we receive the required approvals, we expect the merger to be completed during the second quarter of 2000. Q: WHO CAN HELP ANSWER MY QUESTIONS? A: If you want additional copies of this document or if you want to ask any questions about the merger, you should contact: First National/Osceola Thomas E. White President and Chief Executive Officer 920 North Bermuda Avenue Kissimmee, Florida 34741 (407) 847-3800 Please rely only on the information in this proxy statement/prospectus or information that we have referred you to review. We have not authorized anyone to provide you with different information. 1 7 SUMMARY This summary section may not contain all information that is important to you. You are urged to read the entire proxy statement/prospectus before deciding how to vote your shares. In this proxy statement/prospectus the words "we" and "us" refer to Centerstate Banks of Florida and First National/Osceola together. PARTIES TO THE MERGER First National/Osceola is located in Osceola County, Florida, and provides general banking services, including personal lines of credit, commercial, agricultural, real estate and installment loans, checking, savings, NOW and money market accounts, certificates of deposit and individual retirement accounts. The principal office of First National/Osceola is located at 920 North Bermuda Avenue, Kissimmee, Florida 34741. Its telephone number is (407) 847-3800. Centerstate Banks of Florida has not yet conducted any business. It is being organized to serve as a bank holding company for First National/Osceola, First National Bank of Polk County, and Community National Bank of Pasco County. The principal office of Centerstate Banks of Florida is located at 7722 SR 544 East, Winter Haven, Florida 33881. Its telephone number is (941) 422-8990. MEETING TO BE HELD ON ___________, 2000 The special meeting will be held on __________, ___________, 2000 at ____ p.m., local time, at the offices of First National/Osceola at 920 North Bermuda Avenue, Kissimmee, Florida 34741. See "The Special Meeting," on page ____. VOTING AT A SPECIAL MEETING You may vote at the special meeting only if you owned shares of First National/Osceola common stock at the close of business on __________, ___________, 2000. You may cast one vote for each share of First National/Osceola common stock owned at that date. In order to approve the merger, the holders of at least two-thirds of the outstanding shares of First National/Osceola common stock must vote in favor of the merger. As of __________, 2000, the First National/Osceola directors, executive officers and their affiliates held a total of 26.7 % of the outstanding shares of First National/Osceola. Management of First National/Osceola expects that these persons will vote in favor of the merger. THE MERGER We propose a merger between First National/Osceola and a subsidiary to be formed by Centerstate Banks of Florida. After the merger, First National/Osceola will retain its name, officers and directors and continue its operations from its same banking offices. In the merger, for each share of First National/Osceola common stock you own, you will receive 2.0 shares of Centerstate Banks of Florida common stock. You will not receive any fractional shares. Instead, you will receive a check in payment for any fractional shares based on the book value of a share of First National/Osceola common stock at the end of the month prior to effectiveness of the merger. 2 8 RECOMMENDATION OF THE FIRST NATIONAL/OSCEOLA BOARD OF DIRECTORS The board of directors of First National/Osceola believes that the merger is in the best interest of First National/Osceola shareholders, and unanimously recommends a vote FOR approval of the merger. See "The Merger Recommendation of the First National/Osceola Board," page 20. THE MERGER AGREEMENT We have attached the merger agreement as Appendix A to this proxy statement/prospectus. We encourage you to read the merger agreement, as it is the legal document that governs the merger. FEDERAL INCOME TAX CONSEQUENCES We expect that the exchange of shares by First National/Osceola shareholders generally to be tax free to First National/Osceola, Centerstate Banks of Florida and First National/Osceola shareholders for U.S. federal income tax purposes. You will have to pay taxes on a portion of any cash you receive instead of fractional shares or if you dissent and receive cash payment for your First National/Osceola shares. Your tax consequences depend on your personal situation. You are encouraged to consult your tax advisor. See "The Merger - Federal income tax consequences of the merger," page 29. RIGHTS OF DISSENTING SHAREHOLDERS In the merger, you may be entitled to dissenters' rights under the national banking laws. If you properly exercise your dissenters' rights, you will be entitled to receive in cash the value of the shares determined as of the day the merger becomes effective. See "The Merger - Rights of dissenting shareholders," page 28. REGULATORY APPROVALS The merger must be approved by the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency. Applications for the required approvals have been filed and are pending at this time. We cannot guarantee that these approvals will be received or whether conditions will be attached to these approvals. CONDITIONS TO THE MERGER Several conditions must be satisfied or waived before the merger can be completed, including approval by the shareholders of First National/Osceola. Please see "The Merger Agreement - Conditions for the merger" beginning on page 32 for a list of the conditions that must be satisfied. TERMINATION OF THE MERGER AGREEMENT We may terminate the merger agreement at any time without completing the merger, even after you have approved it. In addition, either of us may decide, without the consent of the other, to terminate the merger agreement if the merger has not occurred by December 31, 2000, or if the shareholders of First National/Osceola fail to approve the merger. For a description of other circumstances in which either of 3 9 us may terminate the merger agreement, see "The Merger Agreement - Amendment, waiver and termination," page 33. CENTERSTATE BANKS OF FLORIDA TO USE POOLING OF INTERESTS ACCOUNTING TREATMENT We intend to treat the merger as a pooling of interests for accounting purposes. 4 10 COMMUNITY NATIONAL BANK OF PASCO COUNTY AND FIRST NATIONAL BANK OF POLK COUNTY MERGERS On December 10, 1999, Centerstate Banks of Florida entered into separate merger agreements with Community National Bank of Pasco County and First National Bank of Polk County. These merger agreements provide for the two banks to become subsidiaries of Centerstate Banks of Florida, along with First National/Osceola. The closings of the Community National Bank of Pasco County and First National Bank of Polk County transactions are subject to a number of conditions, including prior approval of the transactions by the bank regulatory agencies and by each of the bank's shareholders. Similar to the First National/Osceola transaction, these two bank mergers are expected to be accounted for as a pooling-of-interest. The terms of the merger agreements between Centerstate Banks of Florida and each of the three banks are similar, with the exception of the conversion ratio applicable to the particular bank. The merger agreement between Centerstate Banks of Florida and Community National Bank of Pasco County provides for shareholders of Community National Bank of Pasco County to receive 2.02 shares of Centerstate Banks of Florida common stock for each outstanding share of Community National Bank of Pasco County. The merger agreement between Centerstate Banks of Florida and First National Bank of Polk County provides for shareholders of First National Bank of Polk County to receive 1.62 shares of Centerstate Banks of Florida common stock for each outstanding share of First National Bank of Polk County. Assuming the conversion of all First National/Osceola common stock, and the conversion of all First National Bank of Polk County and Community National Bank of Pasco County common stock in their mergers, the consummation of the First National/Osceola, First National Bank of Polk County and Community National Bank of Pasco County mergers would result in 36.2%, 29.2%, and 34.6% of the outstanding Centerstate Banks of Florida common stock being owned by First National/Osceola shareholders, First National Bank of Polk County shareholders, and Community National Bank of Pasco County shareholders, respectively. The merger transactions involving First National/Osceola, Community National Bank of Pasco County and First National Bank of Polk County are all conditioned upon each of the three bank merger transactions closing on the same date. Thus, none of the transactions will close unless all of the bank merger transactions close and each of First National/Osceola, Community National Bank of Pasco County and First National Bank of Polk County become subsidiaries of Centerstate Banks of Florida. Since the closing of the First National/Osceola transaction is conditioned upon the simultaneous closing by Centerstate Banks of Florida of the Community National Bank of Pasco County and First National Bank of Polk County transactions, this proxy statement/prospectus also includes information on Community National Bank of Pasco County and First National Bank of Polk County, as well as pro forma financial information which takes into account the closing by Centerstate of all three bank transactions. For additional information regarding Community National Bank of Pasco County and First National Bank of Polk County, see the pro forma financial information of Centerstate Banks of Florida, the financial statements of the banks included under the section entitled "Index to Financial Statements," and the Appendices to this proxy statement/prospectus. 5 11 FIRST NATIONAL BANK OF OSCEOLA COUNTY SELECTED FINANCIAL DATA The information presented below for the years ended December 31, 1994 through 1998 is derived in part from First National / Osceola's audited financial statements. The information for the nine months ended September 30, 1998 and 1999 is derived in part from First National / Osceola's unaudited financial statements and includes, in the opinion of management, all adjustments, consisting only of normal recurring accruals, necessary to present fairly the data for such periods. Operating results for the nine months ended September 30, 1999 are not necessarily indicative of the results that may be expected for any other interim period or for the entire year ending December 31, 1999. This information does not purport to be complete and should be read in conjunction with the Bank's Financial Statements appearing elsewhere in this proxy statement/prospectus.
Nine Months Ended Sept 30 Years Ended December 31, ----------------------- ----------------------------------------------------------------- (Dollars in thousands except 1999 1998 1998 1997 1996 1995 1994 for per share data) - ---------------------------- --------- --------- --------- --------- --------- --------- --------- SUMMARY OF OPERATIONS Total Interest Income $ 5,581 $ 5,391 $ 7,266 $ 6,255 $ 5,241 $ 4,673 $ 3,285 Total Interest Expense (2,457) (2,535) (3,454) (2,818) (2,457) (2,223) (1,208) --------- --------- --------- --------- --------- --------- --------- $ 3,124 $ 2,856 $ 3,812 $ 3,437 $ 2,784 $ 2,450 $ 2,077 Provision for Loan Losses (99) (96) (38) (212) (299) (126) (92) --------- --------- --------- --------- --------- --------- --------- Net Interest Income After Provision for Loan Losses $ 3,025 $ 2,760 $ 3,774 $ 3,225 $ 2,485 $ 2,324 $ 1,985 Noninterest Income 651 502 707 524 337 269 255 Noninterest Expense (2,836) (2,216) (3,075) (2,742) (2,151) (1,710) (1,567) --------- --------- --------- --------- --------- --------- --------- Income before Income Taxes $ 840 $ 1,046 $ 1,406 $ 1,007 $ 671 $ 883 $ 673 Income Taxes (308) (387) (512) (405) (253) (323) (253) --------- --------- --------- --------- --------- --------- --------- Net Income $ 532 $ 659 $ 894 $ 602 $ 418 $ 560 $ 420 ========= ========= ========= ========= ========= ========= ========= PER COMMON SHARE DATA: Basic Earnings Per Share $ 1.13 $ 1.48 $ 2.00 $ 1.41 $ 0.98 $ 1.32 $ 0.99 Diluted Earnings Per Share $ 1.07 $ 1.38 $ 1.86 $ 1.32 $ 0.93 $ 1.27 $ 0.99 Book Value Per Share $ 16.70 $ 16.04 $ 16.53 $ 14.60 $ 13.41 $ 12.65 $ 11.03 Tangible Book Value Per Share $ 16.54 $ 15.65 $ 16.16 $ 14.55 $ 13.38 $ 12.52 $ 11.32 Dividends $ 0.00 $ 0.25 $ 0.25 $ 0.17 $ 0.14 $ 0.12 $ 0.10 Actual Shares Outstanding 511,175 451,109 451,109 435,500 425,500 425,500 425,500 Weighted Average Shares 471,008 445,264 446,737 425,836 425,500 425,500 425,500 Outstanding Diluted Weighted Average 495,739 479,113 481,677 456,159 448,999 440,016 425,500 Shares Outstanding
6 12 BALANCE SHEET DATA: Assets $ 107,479 $ 106,305 $ 109,325 $ 86,286 $ 74,193 $ 62,628 $ 51,489 Total Loans, net 65,814 56,348 56,591 52,313 45,685 34,756 30,471 Total Deposits 95,957 97,532 97,558 78,508 67,339 52,200 46,480 Long-Term Debt 0 0 0 0 0 0 0 Short-Term Borrowings 2,791 1,166 3,978 1,044 1,003 4,809 0 Shareholders' Equity 8,539 7,236 7,457 6,358 5,704 5,381 4,691 Tangible Capital 8,453 7,059 7,289 6,335 5,686 5,327 4,818 Average Total Assets 108,986 99,133 101,350 79,954 67,385 58,967 46,427 Average Loans (net) 61,443 54,012 54,609 48,921 39,243 32,318 28,305 Average Interest Earning Assets 99,104 90,402 92,601 72,660 61,810 54,934 42,394 Average Deposits 97,263 88,857 90,556 72,028 58,049 48,959 39,676 Average Interest Bearing Deposits 78,179 71,891 73,343 59,361 48,148 41,692 31,844 Average Interest Bearing Liabilities 81,719 73,502 75,659 61,093 51,708 46,421 33,886 Average Shareholders' Equity 7,816 6,800 6,941 5,984 5,580 5,058 4,537
Nine Months Ended Sept 30 Years Ended December 31, ----------------------- ----------------------------------------------------------------- (Dollars in thousands except 1999 1998 1998 1997 1996 1995 1994 for per share data) --------- --------- --------- --------- --------- --------- --------- SELECTED FINANCIAL RATIOS: Return on Average Assets 0.65% 0.89% 0.88% 0.75% 0.62% 0.95% 0.90% Return on Average Equity 9.08% 12.92% 12.88% 10.06% 7.49% 11.07% 9.26% Dividend Payout 0.00% 16.89% 12.49% 12.02% 14.25% 9.12% 10.13% Efficiency (2) 75.13% 65.99% 68.05% 69.22% 68.92% 62.89% 67.20% Net Interest Margin (3) 4.21% 4.22% 4.12% 4.73% 4.50% 4.46% 4.90% Net Interest Spread (4) 3.51% 3.36% 3.28% 4.00% 3.73% 3.71% 4.19% CAPITAL RATIOS: Tier 1 Leverage Ratio 7.90% 6.94% 6.68% 7.46% 7.70% 8.61% 9.35% Risk-Based Capital Tier 1 12.74% 12.06% 12.49% 11.86% 12.17% 14.56% 15.51% Total 13.94% 13.31% 13.74% 13.12% 13.43% 16.81% 16.76% Average Equity to Average Assets 7.17% 6.86% 6.85% 7.48% 8.28% 8.58% 9.77% ASSET QUALITY RATIOS: Net Charge-Offs to Average Loans 0.18% 0.05% 0.07% 0.10% 0.93% 0.39% 0.36% Allowance to Period End Loans 1.20% 1.50% 1.36% 1.47% 1.37% 1.47% 1.56% Allowance for Loan Losses to Nonperforming Loans 315% 311% 457% 1859% 1044% 536% 96% Nonperforming Assets to Total 0.24% 0.26% 0.16% 0.04% 0.08% 0.15% 1.05% Assets OTHER DATA: Banking Locations 5 4 4 4 4 2 2 Full-Time Equivalent Employees 54 41 44 39 37 23 23
1. Ratios, where appropriate, are presented on an annualized basis. 2. Efficiency ratio is non interest expense divided by the sum of net interest income before the provision for loan loss plus non interest income. 3. Net interest margin is net interest income divided by total average earning assets. 4. Net interest spread is the difference between the average yield on average earning assets and the average yield on average interest bearing liabilities. 7 13 UNAUDITED CONDENSED PRO FORMA FINANCIAL STATEMENTS The following pro forma condensed financial statements reflect the balance sheets as of September 30, 1999 and December 31, 1998 and the income statements for the years ended December 31, 1998 and 1997 and the nine months ended September 30, 1999 and 1998 after giving effect to the merger whereby First National Bank of Osceola County, Community National Bank of Pasco County and First National Bank of Polk County will become subsidiaries of Centerstate Banks of Florida, Inc. The merger is expected to be accounted for as a pooling of interests. The conversion ratio recommended is 2.0 shares of Centerstate Banks of Florida common stock for each share of First National Bank of Osceola County, 2.02 shares of Centerstate Banks of Florida common stock for each outstanding share of Community National Bank of Pasco County and 1.62 shares of Centerstate Banks of Florida common stock for each outstanding share of First National Bank of Polk County. 8 14 CENTERSTATE BANKS OF FLORIDA, INC. Pro Forma Balance Sheet September 30, 1999
FIRST NATIONAL/ COMMUNITY FIRST NATIONAL/ CENTERSTATE OSCEOLA NAT'L/PASCO POLK ADJUSTMENTS COMBINED ---------- -------------- ------------- ------------ ----------- ------------- ASSETS Cash and due from banks $ 1 $ 4,545,343 $ 6,174,798 $ 2,468,087 $ 13,188,229 Federal funds sold 2,150,000 4,207,000 2,673,000 9,030,000 Investment securities available for sale 25,883,187 22,236,228 23,182,047 71,301,462 Investment securities held to maturity 3,537,952 3,537,952 Loans, net 65,813,796 56,033,412 40,180,058 162,027,266 Accrued interest receivable 742,807 711,989 516,071 1,970,867 Premises and equipment, net 4,456,821 5,954,581 2,596,466 13,007,868 Other real estate owned 208,295 208,295 Deferred income taxes 200,677 315,852 250,543 767,072 Prepaids and other assets 147,947 86,491 138,515 372,953 ---------- -------------- ------------- ------------ ------------- Total assets $ 1 $ 107,478,530 $ 95,720,351 $ 72,213,082 $ 275,411,964 ========== ============== ============= ============ ============= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Interest bearing $ $ 74,344,697 $ 74,430,885 $ 54,282,199 $ 203,057,781 Noninterest bearing 21,611,724 10,789,505 10,816,226 43,217,455 ---------- -------------- ------------- ------------ ------------- Total deposits 95,956,421 85,220,390 65,098,425 246,275,236 Securities sold under agreements to repurchase 2,790,990 2,211,244 365,000 5,367,234 Accrued interest payable 111,410 124,546 66,821 302,777 Accounts payable and other accrued expenses 80,738 322,298 123,526 526,562 ---------- -------------- ------------- ------------ ------------- Total liabilities 98,939,559 87,878,478 65,653,772 252,471,809 ========== ============== ============= ============ ============= Stockholders' equity: Common stock 1 2,555,875 2,434,175 2,378,125 7,368,176 Additional paid-in capital 2,763,787 2,559,580 2,500,034 7,823,401 Retained earnings 3,273,315 2,883,095 1,727,480 7,883,890 Accumulated other comprehensive income (54,006) (34,977) (46,329) (135,312) ---------- -------------- ------------- ------------ ------------- Total stockholders' equity 1 8,538,971 7,841,873 6,559,310 22,940,155 ---------- -------------- ------------- ------------ ------------- Total liabilities and stockholders' equity $ 1 $ 107,478,530 $ 95,720,351 $ 72,213,082 $ 275,411,964 ========== ============== ============= ============ =============
9 15 CENTERSTATE BANKS OF FLORIDA, INC. Pro Forma Balance Sheet December 31, 1998
FIRST NATIONAL/ COMMUNITY FIRST NATIONAL/ ASSETS OSCEOLA NAT'L/PASCO POLK ADJUSTMENTS COMBINED --------------- ------------- ------------ ----------- ------------- Cash and due from banks $ 4,687,944 $ 3,787,574 $ 3,106,304 $ 11,581,823 Federal funds sold 5,017,000 5,175,000 3,752,000 13,944,000 Investment securities available for sale 35,818,706 21,955,703 23,809,823 81,584,232 Investment securities held to maturity 2,555,226 2,555,226 Loans, net 56,591,397 55,783,943 39,414,516 151,789,856 Accrued interest receivable 753,990 666,606 533,345 1,953,941 Premises and equipment, net 3,714,825 5,294,524 2,701,899 11,711,248 Other real estate owned 34,672 203,179 237,851 Deferred income taxes 91,869 235,942 184,117 511,928 Prepaids and other assets 93,959 46,960 72,493 213,412 -------------- ------------- ------------ ------------- Total assets $ 109,324,916 $ 92,980,924 $ 73,777,676 $ 276,083,517 ============== ============= ============ ============= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Interest bearing $ 78,886,965 $ 73,322,182 $ 57,359,893 $ 209,569,040 Noninterest bearing 18,670,815 11,324,586 10,066,213 40,061,614 -------------- ------------- ------------ ------------- Total deposits 97,557,780 84,646,768 67,426,106 249,630,654 Securities sold under agreements to repurchase 3,978,073 652,948 255,000 4,886,021 Accrued interest payable 143,246 144,862 91,057 379,165 Accounts payable and other accrued expenses 189,294 89,694 115,617 394,605 -------------- ------------- ------------ ------------- Total liabilities 101,868,393 85,534,272 67,887,780 255,290,445 ============== ============= ============ ============= Stockholders' equity: Common stock 2,255,545 2,307,925 2,206,250 6,769,721 Additional paid-in capital 2,334,249 2,430,696 2,250,547 7,015,492 Retained earnings 2,741,285 2,591,424 1,364,345 6,697,054 Accumulated other comprehensive income 125,444 116,607 68,754 310,805 -------------- ------------- ------------ ------------- Total stockholders' equity 7,456,523 7,446,652 5,889,896 20,793,072 -------------- ------------- ------------ ------------- Total liabilities and stockholders' equity $ 109,324,916 $ 92,980,924 $ 73,777,676 $ 276,083,517 ============== ============= ============ =============
10 16 CENTERSTATE BANKS OF FLORIDA, INC. Pro Forma Statement of Operations For the Nine Month Period Ended September 30, 1999
FIRST NATIONAL/ COMMUNITY FIRST NATIONAL/ CENTERSTATE OSCEOLA NAT'L/PASCO POLK ADJUSTMENTS COMBINED ----------- -------------- ------------- -------------- ----------- ------------- INTEREST INCOME Loans $ 4,086,715 3,756,223 2,610,461 $ 10,453,399 Investment securities 1,364,759 928,884 1,003,904 3,297,547 Federal funds sold 129,945 206,698 119,377 456,020 ---------- ------------ ----------- ------------ ------------ TOTAL INTEREST INCOME 0 5,581,419 4,891,805 3,733,742 14,206,966 ---------- ------------ ----------- ------------ ------------ INTEREST EXPENSE Deposits 2,357,005 2,256,364 1,507,428 6,120,797 Securities sold under agreements to repurchase 99,592 25,874 12,315 137,781 ---------- ------------ ----------- ------------ ------------ TOTAL INTEREST EXPENSE 0 2,456,597 2,282,238 1,519,743 6,258,578 ---------- ------------ ----------- ------------ ------------ NET INTEREST INCOME 0 3,124,822 2,609,567 2,213,999 7,948,388 Provision for loan losses 99,000 9,000 63,000 171,000 ---------- ------------ ----------- ------------ ------------ NET INTEREST INCOME AFTER LOAN LOSS PROVISION 0 3,025,822 2,600,567 2,150,999 7,777,388 ---------- ------------ ----------- ------------ ------------ NON INTEREST INCOME Service charges on deposit accounts 519,922 431,091 173,351 1,124,364 Other service charges and fees 130,550 45,688 93,003 269,241 ---------- ------------ ----------- ------------ ------------ TOTAL NON INTEREST INCOME 0 650,472 476,779 266,354 1,393,605 ---------- ------------ ----------- ------------ ------------ NON INTEREST EXPENSE Salaries, wages and employee benefits 1,215,246 1,079,930 769,828 3,065,004 Occupancy expense 366,930 302,497 189,567 858,994 Depreciation of premises and equipment 243,949 231,857 164,150 639,956 Stationery and printing supplies 118,527 58,175 67,121 243,823 Advertising and public relations 64,884 59,331 37,591 161,806 Data processing expense 211,133 180,091 168,900 560,124 Legal and professional fees 70,245 77,196 49,354 196,795 Other expenses 545,174 395,353 266,439 1,206,966 ---------- ------------ ----------- ------------ ------------ NON INTEREST EXPENSE 0 2,836,088 2,384,430 1,712,950 6,933,468 ---------- ------------ ----------- ------------ ------------ INCOME BEFORE INCOME TAXES 840,206 692,916 704,403 2,237,525 Provision for income taxes 308,176 255,194 255,656 819,026 ---------- ------------ ----------- ------------ ------------ NET INCOME $ 0 $ 532,030 $ 437,722 $ 448,747 $ 1,418,499 ========== ============ =========== ============ ============ Earnings per share of common stock: Basic $ 0.56 $ 0.47 $ 0.59 $ 0.54 Diluted $ 0.54 $ 0.45 $ 0.57 $ 0.51 Average number of common shares outstanding: Basic 1 942,016 940,142 762,398 2,644,557 Diluted 1 991,478 976,613 791,736 2,759,828
11 17 CENTERSTATE BANKS OF FLORIDA, INC. Pro Forma Statement of Operations For the year ended December 31, 1998
FIRST NATIONAL/ COMMUNITY FIRST NATIONAL/ OSCEOLA NAT'L/PASCO POLK ADJUSTMENTS COMBINED -------------- ------------- -------------- ----------- ------------- INTEREST INCOME Loans $ 5,160,699 $ 4,868,419 $ 3,452,295 $ 13,481,413 Investment securities 1,468,988 1,108,953 1,254,071 3,832,012 Federal funds sold 636,830 296,312 291,839 1,224,981 ------------ ----------- ------------ ------------ TOTAL INTEREST INCOME 7,266,517 6,273,684 4,998,205 18,538,406 ------------ ----------- ------------ ------------ INTEREST EXPENSE Deposits 3,349,948 3,039,598 2,198,379 8,587,925 Securities sold under agreements to repurchase 103,563 58,853 33,975 196,391 ------------ ----------- ------------ ------------ TOTAL INTEREST EXPENSE 3,453,511 3,098,451 2,232,354 8,784,316 ------------ ----------- ------------ ------------ NET INTEREST INCOME 3,813,006 3,175,233 2,765,851 9,754,090 Provision for loan losses 38,473 150,000 39,000 227,473 ------------ ----------- ------------ ------------ NET INTEREST INCOME AFTER LOAN LOSS PROVISION 3,774,533 3,025,233 2,726,851 9,526,617 ------------ ----------- ------------ ------------ NON INTEREST INCOME Service charges on deposit accounts 584,789 423,759 195,016 1,203,564 Other service charges and fees 122,114 41,098 79,701 242,913 Gain on sale of real estate owned 99,659 ------------ ----------- ------------ ------------ TOTAL NON INTEREST INCOME 706,903 564,516 274,717 1,546,136 ------------ ----------- ------------ ------------ NON INTEREST EXPENSE Salaries, wages and employee benefits 1,373,971 1,131,682 887,138 3,392,791 Occupancy expense 422,940 272,603 215,842 911,385 Depreciation of premises and equipment 217,172 215,412 212,826 645,410 Stationery and printing supplies 99,530 83,034 77,193 259,757 Advertising and public relations 75,266 47,772 56,837 179,875 Data processing expense 232,530 208,688 185,072 626,290 Legal and professional fees 97,544 114,735 52,288 264,567 Other expenses 556,196 420,755 326,910 1,303,861 ------------ ----------- ------------ ------------ NON INTEREST EXPENSE 3,075,149 2,494,681 2,014,106 7,583,936 ------------ ----------- ------------ ------------ INCOME BEFORE INCOME TAXES 1,406,287 1,095,068 987,462 3,488,817 Provision for income taxes 512,396 393,405 296,171 1,201,972 ------------ ----------- ------------ ------------ NET INCOME $ 893,891 $ 701,663 $ 691,291 $ 2,286,845 ============ =========== ============ ============ Earnings per share of common stock: Basic $ 1.00 $ 0.76 $ 0.98 $ 0.90 Diluted $ 0.93 $ 0.72 $ 0.92 $ 0.85 Average number of common shares outstanding: Basic 893,474 925,259 708,523 2,527,256 Diluted 963,354 976,834 749,417 2,689,605
12 18 CENTERSTATE BANKS OF FLORIDA, INC. Pro Forma Statement of Operations For the year ended December 31, 1997
FIRST NATIONAL/ COMMUNITY FIRST NATIONAL/ OSCEOLA NAT'L/PASCO POLK ADJUSTMENTS COMBINED -------------- ------------- -------------- ----------- ------------- INTEREST INCOME Loans $ 4,860,932 $ 4,546,805 $ 3,145,803 $ 12,553,540 Investment securities 1,031,926 998,874 1,097,001 3,127,801 Federal funds sold 362,596 261,436 196,637 820,669 ------------ ----------- ------------ ------------ TOTAL INTEREST INCOME 6,255,454 5,807,115 4,439,441 16,502,010 ------------ ----------- ------------ ------------ INTEREST EXPENSE Deposits 2,735,645 2,916,542 1,939,256 7,591,443 Securities sold under agreements to repurchase 81,883 40,090 20,189 142,162 ------------ ----------- ------------ ------------ TOTAL INTEREST EXPENSE 2,817,528 2,956,632 1,959,445 7,733,605 ------------ ----------- ------------ ------------ NET INTEREST INCOME 3,437,926 2,850,483 2,479,996 8,768,405 Provision for loan losses 212,400 150,000 73,000 435,400 ------------ ----------- ------------ ------------ NET INTEREST INCOME AFTER LOAN LOSS PROVISION 3,225,526 2,700,483 2,406,996 8,333,005 ------------ ----------- ------------ ------------ NON INTEREST INCOME Service charges on deposit accounts 439,390 336,680 140,569 916,639 Other service charges and fees 90,309 36,849 68,822 195,980 Gain on sale of other real estate owned 148,985 Loss on sale of available for sale securities (5,874) ------------ ----------- ------------ ------------ TOTAL NON INTEREST INCOME 523,825 522,514 209,391 1,255,730 ------------ ----------- ------------ ------------ NON INTEREST EXPENSE Salaries, wages and employee benefits 1,205,179 893,967 802,415 2,901,561 Occupancy expense 427,171 195,728 214,413 837,312 Depreciation of premises and equipment 206,238 172,896 167,278 546,412 Stationery and printing supplies 109,984 64,677 83,164 257,825 Advertising and public relations 70,633 53,209 45,518 169,360 Data processing expense 198,819 109,566 132,931 441,316 Legal and professional fees 66,728 136,945 36,223 239,896 Other expenses 457,454 287,041 284,001 1,028,496 ------------ ----------- ------------ ------------ TOTAL NON INTEREST EXPENSE 2,742,206 1,914,029 1,765,943 6,422,178 ------------ ----------- ------------ ------------ NET INCOME BEFORE INCOME TAXES 1,007,145 1,308,968 850,444 3,166,557 Provision for income taxes 405,413 484,235 302,751 1,192,399 ------------ ----------- ------------ ------------ NET INCOME $ 601,732 $ 824,733 $ 547,693 $ 1,974,158 ============ =========== ============ ============ Earnings per share of common stock: Basic $ 0.71 $ 0.98 $ 0.83 $ 0.78 Diluted $ 0.66 $ 0.91 $ 0.78 $ 0.45 Average number of common shares outstanding: Basic 851,644 844,621 658,885 2,355,150 Diluted 912,318 911,214 698,546 2,522,078
13 19 CENTERSTATE BANKS OF FLORIDA, INC. Pro Forma Statement of Operations For the nine month period ended September 30, 1998
FIRST NATIONAL/ COMMUNITY FIRST NATIONAL/ OSCEOLA NAT'L/PASCO POLK ADJUSTMENTS COMBINED -------------- ------------- -------------- ----------- ------------- INTEREST INCOME Loans $ 3,864,760 $ 3,587,471 $ 2,577,351 $ 10,029,582 Investment securities 1,010,700 817,155 943,084 2,770,939 Federal funds sold 515,654 233,372 240,937 989,963 ------------ ----------- ------------ ------------ TOTAL INTEREST INCOME 5,391,114 4,637,998 3,761,372 13,790,484 ------------ ----------- ------------ ------------ INTEREST EXPENSE Deposits 2,481,065 2,250,329 1,648,927 6,380,321 Securities sold under agreements to repurchase 54,146 50,533 30,578 135,257 ------------ ----------- ------------ ------------ TOTAL INTEREST EXPENSE 2,535,211 2,300,862 1,679,505 6,515,578 ------------ ----------- ------------ ------------ NET INTEREST INCOME 2,855,903 2,337,136 2,081,867 7,274,906 Provision for loan losses 96,000 150,000 39,000 285,000 ------------ ----------- ------------ ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,759,903 2,187,136 2,042,867 6,989,906 ------------ ----------- ------------ ------------ NON INTEREST INCOME Service charges on deposit accounts 409,657 301,865 141,944 853,466 Other service charges and fees 92,910 29,901 56,951 179,762 ------------ ----------- ------------ ------------ TOTAL NON INTEREST INCOME 502,567 331,766 198,895 1,033,228 ------------ ----------- ------------ ------------ NON INTEREST EXPENSE Salaries, wages and employee benefits 972,001 839,014 660,931 2,471,946 Occupancy expense 279,080 194,473 165,960 639,513 Depreciation of premises and equipment 196,600 157,069 166,300 519,969 Stationery and printing supplies 70,809 55,454 64,096 190,359 Advertising and public relations 54,515 30,641 41,770 126,926 Data processing expense 168,532 152,866 132,029 453,427 Legal and professional fees 71,385 74,713 55,853 201,951 Other expenses 403,469 285,205 249,672 938,346 ------------ ----------- ------------ ------------ TOTAL NON INTEREST EXPENSE 2,216,391 1,789,435 1,536,611 5,542,437 ------------ ----------- ------------ ------------ NET INCOME BEFORE INCOME TAXES 1,046,079 729,467 705,151 2,480,697 Provision for income taxes 387,096 295,538 220,587 903,221 ------------ ----------- ------------ ------------ NET INCOME $ 658,983 $ 433,929 $ 484,564 $ 1,577,476 ============ =========== ============ ============ Earnings per share of common stock: Basic $ 0.74 $ 0.47 $ 0.69 $ 0.63 Diluted $ 0.69 $ 0.45 $ 0.65 $ 0.59 Average number of common shares outstanding: Basic 892,528 922,746 706,599 2,521,673 Diluted 958,226 973,103 747,290 2,679,119
14 20 THE SPECIAL MEETING GENERAL This proxy statement/prospectus and the accompanying proxy card are being mailed to you on or about _________, 2000. The First National/Osceola board of directors will be soliciting proxies from the holders of First National/Osceola common stock to be voted at the special meeting. The special meeting has been called to consider and vote upon the merger agreement providing for the merger of First National/Osceola with a national banking subsidiary to be organized by Centerstate Banks of Florida. The First National/Osceola board of directors unanimously has approved the merger agreement and recommends that you vote FOR approval of it. DATE, TIME AND PLACE OF THE SPECIAL MEETING This special meeting will be held on _________, 2000 at ______ p.m., local time, in the principal executive officers of First National/Osceola, at 920 North Bermuda Avenue, Kissimmee, Florida 34741. SHARES OUTSTANDING AND ENTITLED TO VOTE; RECORD DATE Only holders of record of First National/Osceola common stock on _________, 2000, will be entitled to notice of and to vote at the special meeting and any adjournments or postponements of the special meeting. On that date, there were 511,175 shares of First National/Osceola common stock outstanding and entitled to vote at the special meeting. Each share is entitled to one vote. As of ___________, 2000, there were approximately ____ holders of record of First National/Osceola common stock. VOTE REQUIRED TO APPROVE MERGER The approval of the merger requires the approval from the holders of at least two-thirds of all the shares of First National/Osceola common stock outstanding. As of __________, 2000, the First National/Osceola directors, executive officers and their affiliates owned 26.7% of the outstanding stock of First National/Osceola. First National/Osceola management anticipates that these persons will vote in favor of the merger. VOTING AND SOLICITATION OF PROXIES All shares of First National/Osceola represented at the special meeting by properly executed proxies received prior to or at the special meeting, and not revoked, will be voted at the special meeting in accordance with the instructions on the proxies. If you properly execute a proxy but include no voting instructions, your shares will be voted to approve the merger and authorize the merger. The First National/Osceola board of directors does not know of any matters, other than as described in the notice of special meeting, which are to come before the special meeting. If any other matters are properly presented at the special meeting for action, the persons named in the enclosed form of proxy will have the authority to vote on those matters in their discretion. If you give a proxy, you have the right to revoke it at any time before it is voted. You may revoke 15 21 your proxy by (1) filing with the Secretary of First National/Osceola a written notice of revocation bearing a later date than the proxy, (2) duly executing a later dated proxy relating to the same shares and delivering it to the Secretary of First National/Osceola before the taking of the vote at the special meeting, or (3) attending the special meeting and voting in person. Any written notice of revocation or subsequent proxy should be sent so as to be delivered to First National/Osceola, 920 North Bermuda Avenue, Kissimmee, Florida 34741, Attention: Thomas E. White, or hand delivered to Mr. White at or before the taking of the vote at the special meeting. First National/Osceola will pay for the cost of the solicitation of proxies. In addition to solicitation by use of the mails, proxies may be solicited by directors, officers and employees of First National/Osceola in person or by telephone, or by other means of communication. These individuals will not be additionally compensated but may be reimbursed for out-of-pocket expenses they incur in connection with the solicitation. Arrangements also will be made with custodians, nominees and fiduciaries for the forwarding of solicitation materials to the beneficial owners of First National/Osceola common stock held of record by such persons. First National/Osceola may reimburse these custodians, nominees and fiduciaries for reasonable out-of-pocket expenses they incur in connection with the solicitation. 16 22 THE MERGER This section of the proxy statement/prospectus describes some aspects of the merger. The following descriptions are not complete and are qualified in their entirety by reference to the merger agreement, which is attached as Appendix A to this document and is incorporated by reference into this document. We urge you to read all of the merger agreement carefully. GENERAL INFORMATION ABOUT THE MERGER On December 10, 1999, Centerstate Banks of Florida and First National/Osceola signed a merger agreement. The merger agreement provides that First National/Osceola will merge into an interim national banking subsidiary to be formed by Centerstate Banks of Florida. After the merger, First National/Osceola will continue to conduct its business as it did prior to the merger, and with the same name, directors, employees and banking offices, except that it will be a subsidiary of Centerstate Banks of Florida. Shareholders of First National/Osceola will become shareholders of Centerstate Banks of Florida, except to the extent that they exercise dissenters' rights in the merger. Centerstate Banks of Florida has entered into similar merger agreements with First National Bank of Polk County and Community National Bank of Pasco County. The merger involving First National/Osceola will not be completed unless Centerstate Banks of Florida at the same time completes its mergers with First National Bank of Polk County and Community National Bank of Pasco County. Thus, if the merger is completed, Centerstate Banks of Florida will have three separate subsidiary banks consisting of First National/Osceola, First National Bank of Polk County, and Community National Bank of Pasco County. For additional information regarding Community National Bank of Pasco County, see the information beginning at Appendix D to this proxy statement/prospectus. For additional information regarding First National Bank of Polk County, see the information beginning at Appendix E to this proxy statement/prospectus. Also, additional financial information regarding First National Bank of Polk County and Community National Bank of Pasco County is included under the section entitled "Index to Financial Statements," beginning on page F-1. Assuming the conversion of all First National/Osceola common stock, and the conversion of all First National Bank of Polk County and Community National Bank of Pasco County common stock in their mergers, the consummation of the First National/Osceola, First National Bank of Polk County and Community National Bank of Pasco County mergers would result in 36.2%, 29.2%, and 34.6% of the outstanding Centerstate Banks of Florida common stock being owned by First National/Osceola shareholders, First National Bank of Polk County shareholders, and Community National Bank of Pasco County shareholders, respectively. BACKGROUND OF THE MERGER In 1989, James H. White and other individuals worked together to form First National/Osceola and Community National Bank of Pasco County as separate community banks in Central Florida. Mr. White currently serves as Chairman of the Board of First National/Osceola and Community National Bank of Pasco County, positions he has held with each of the banks since they opened in 1989. In forming the banks, there was some discussion among the directors of the two banks about the possibility in the future of combining the two banks under a holding company structure if the circumstances and value were deemed appropriate by each of the banks at that time. In 1992, Mr. White and other individuals from Winter Haven, Florida and 17 23 surrounding communities worked to organize First National Bank of Polk County. Mr. White has served as Chairman of the Board of First National Bank of Polk County since its opening in 1992. The Organizers of First National Bank of Polk County were aware of the interest by First National/Osceola and Community National Bank of Pasco County in possibly forming under a bank holding company structure, and the directors of the three banks discussed this possibility from time to time. In 1993 and 1994, First National/Osceola, Community National Bank of Pasco County and First National Bank of Polk County held meetings and discussions with several other Florida community banks, regarding the possibility of the three banks and other Florida banks combining as separate subsidiary banks under a holding company. The discussions with the several Florida community banks terminated in late 1994 with no agreements signed by any of the banks. From time to time thereafter, First National/Osceola, Community National Bank of Pasco County and First National Bank of Polk County continued their discussions regarding the possibility of the three banks reorganizing under a bank holding company structure. These discussions became more frequent in the early part of 1998. The three banks explored the advisability of building a multi-bank holding company which would have the potential of offering publicly traded stock and opportunities for share liquidity, thereby potentially enhancing the value to the shareholders of each of the three banks. In the second quarter of 1998, representatives of the three banks asked representatives of Allen C. Ewing to meet with the directors of the three banks regarding the consideration of forming a holding company. On May 7, 1998, representatives of Allen C. Ewing met with the directors of the three banks to discuss how peer mergers, or combination of equals transactions, are effected, and various related issues including procedures for listing shares of publicly traded companies, and information on publicly-traded Florida banks. In August 1998, the Presidents of the three banks, along with Mr. White and representatives of Allen C. Ewing, met to discuss the possible bank holding company formation. In September 1998, the three banks retained Allen C. Ewing to provide assistance in assessing the basis on which the three banks could reorganize under a bank holding company and the amount that each bank's shareholders might own as a result of the transaction. As a part of this process, the three banks exchanged and reviewed financial and other information on their organizations. Also in September 1998, the three banks sent letters to their shareholders advising that their directors were in the process of assessing the formation of a holding company for the three banks, but cautioning that the process may take an extended period of time to complete, if at all, and that factors including the performance of bank stocks generally and economic and market conditions could cause the banks to delay or cancel the process. The three banks continued to hold informal discussions during the remainder of 1998 and the first half of 1999, and also continued to exchange and review financial and other information on their organizations. In August 1999, the presidents of the three banks met with Mr. White and legal counsel to develop a more formal process for forming a bank holding company and bringing the three banks underneath the holding company as separate subsidiaries. On September 20, 1999, the three banks caused Centerstate Banks of Florida to be incorporated under Florida law. On September 29, 1999, representatives of the three banks met with representatives of Allen C. Ewing, legal counsel, and accountants to discuss the organization of Centerstate Banks of Florida and the process for the reorganization of the three banks under the bank holding company. At the meeting, each of the banks appointed Mr. White and two directors from each of the banks to serve as the seven member board of directors of Centerstate Banks of Florida. Mr. White also was elected to serve as Chairman, President and Chief Executive Officer of Centerstate Banks of Florida. 18 24 During October 1999, the banks had several discussions with each other as well as with Allen C. Ewing for purposes of Allen C. Ewing developing a report for presentation to the three banks as well as to Centerstate Banks of Florida of a possible conversion ratio for the three banks. On October 28, 1999, Allen C. Ewing representatives met with representatives of the three banks and Centerstate Banks of Florida for an overview of Allen C. Ewing's analysis of the three banks and its calculation of possible conversion ratios. Without taking any action on the report, the representatives of the three banks asked Allen C. Ewing to continue its analysis and review of the banks' information and to report back to the banks on Allen C. Ewing's recommended conversion ratio. Also during October 1999, legal counsel prepared drafts of a form of merger agreement for consideration by the directors of Centerstate Banks of Florida, and each of the three banks. Allen C. Ewing continued its discussions with representatives of the three banks during the first portion of November 1999 and, on November 11, 1999, advised Centerstate Banks of Florida and the three banks on a recommended conversion ratio in connection with the proposed merger transaction. Based upon its analysis, Allen C. Ewing indicated that it would be in a position to issue a fairness opinion to each of the three banks based upon a recommended conversion ratio of 2.0 shares of Centerstate Banks of Florida common stock for each outstanding share of First National/Osceola, 2.02 shares of Centerstate Banks of Florida common stock for each outstanding share of Community National Bank of Pasco County, and 1.62 shares of Centerstate Banks of Florida common stock for each outstanding share of First National Bank of Polk County. On November 15, 1999, the Board of Directors of First National/Osceola met to review the Allen C. Ewing report, information regarding the banks, and the terms of the merger agreement. At this meeting, legal counsel reviewed generally the fiduciary obligations of directors in sales of financial institutions and commented on the form of definitive agreement and affiliate agreements to be entered into between First National/Osceola directors and Centerstate Banks of Florida. In connection with the meeting, Allen C. Ewing had advised First National/Osceola that the conversion ratio is fair, from a financial point of view, to the shareholders of First National/Osceola. First National/Osceola's board then unanimously approved the merger agreement. First National/Osceola management also was authorized to execute the merger agreement. On November 17, 1999, the Board of Directors of Community National Bank of Pasco County met to review the Allen C. Ewing report, information regarding the banks, and the terms of the merger agreement. At this meeting, legal counsel reviewed generally the fiduciary obligations of directors in sales of financial institutions and commented on the form of definitive agreement and affiliate agreements to be entered into between Community National Bank of Pasco County directors and Centerstate Banks of Florida. In connection with the meeting, Allen C. Ewing had advised Community National Bank of Pasco County that the conversion ratio is fair, from a financial point of view, to the shareholders of Community National Bank of Pasco County. Community National Bank of Pasco County's board then unanimously approved the merger agreement. Community National Bank of Pasco County management also was authorized to execute the merger agreement. On November 18, 1999, the Board of Directors of First National Bank of Polk County met to review the Allen C. Ewing report, information regarding the banks, and the terms of the merger agreement. At this meeting, legal counsel reviewed generally the fiduciary obligations of directors in sales of financial institutions and commented on the form of definitive agreement and affiliate agreements to be entered into between First National Bank of Polk County directors and Centerstate Banks of Florida. In connection with 19 25 the meeting, Allen C. Ewing had advised First National Bank of Polk County that the conversion ratio is fair, from a financial point of view, to the shareholders of First National Bank of Polk County. First National Bank of Polk County's board then unanimously approved the merger agreement. First National Bank of Polk County management also was authorized to execute the merger agreement. On December 10, 1999, Centerstate Banks of Florida approved and entered into the separate merger agreements with First National/Osceola, Community National Bank of Pasco County, and First National Bank of Polk County. The terms of the merger agreements between Centerstate Banks of Florida and each of the three banks are similar, with the exception of the conversion ratio applicable to the particular bank. RECOMMENDATION OF THE FIRST NATIONAL/OSCEOLA BOARD The First National/Osceola board of directors has unanimously approved the merger agreement and recommends that you vote FOR approval and adoption of the merger agreement. The First National/Osceola board of directors has determined that the merger is in your best interest and in the best interest of First National/Osceola. Without assigning any relative or specific weights to the factors, the board of directors of First National/Osceola considered the following material factors: o The terms of the merger agreement, including the conversion ratio; o The overall compatibility of operations and management of First National/Osceola, First National Bank of Polk County, and Community National Bank of Pasco County; o The tax-free nature of the merger to First National/Osceola and the treatment of the merger as a pooling of interest for accounting purposes; o The likelihood of receiving requisite regulatory approvals; o Economic and other conditions affecting the banking industry; o That the merger will afford First National/Osceola the opportunity to participate in the ownership of a bank holding company which, after the closing of the First National Bank of Polk County and Community National Bank of Pasco County mergers, would have greater financial resources than First National/Osceola; o That after the merger, First National/Osceola will be able to use the collective resources and capital of the entire Centerstate Banks of Florida organization to serve more and larger customers through a branching network not available to any of the three banks and larger lending limits reflecting the combined organization;. o That the merger would increase the ability to compete with other banks and financial service institutions not only through a more expansion branch network and lending capacity, but also through pricing reflecting the economies and cost reductions afforded by a combination 20 26 of the three organizations; and o That upon completion of the merger, Centerstate Banks of Florida intends to qualify its shares to be eligible for trading on the NASDAQ system. First National/Osceola also entered into the merger agreement conditioned upon it receiving from its financial advisor an opinion as to the fairness of the conversion ratio from a financial point of view to the First National/Osceola shareholders. See "Opinion of financial advisor" below. THE BOARD OF DIRECTORS OF FIRST NATIONAL/OSCEOLA UNANIMOUSLY RECOMMENDS THAT FIRST NATIONAL/OSCEOLA SHAREHOLDERS VOTE FOR APPROVAL OF THE MERGER AGREEMENT. OPINION OF FINANCIAL ADVISOR GENERAL First National/Osceola retained Allen C. Ewing as financial advisor in connection with the merger. Allen C. Ewing was also retained by First National Bank of Polk County and Community National Bank of Pasco County to serve as financial advisor in connection with the merger. Allen C. Ewing delivered to First National/Osceola a written opinion, dated December 22, 1999 as to the fairness, from a financial point of view, of the conversion ratio to the shareholders of First National/Osceola. Allen C. Ewing is regularly engaged in the valuation of securities in connection with mergers and acquisitions, underwritings, private placements, trading and market making activities, and valuations for various other purposes for commercial banks. The board of directors of First National/Osceola engaged Allen C. Ewing based on its experience as a financial advisor in mergers and acquisitions of financial institutions, particularly transactions in Florida, and its general investment banking experience in the financial services industry. You should consider the following as you read this discussion of Allen C. Ewing's opinion: o The text of Allen C. Ewing's written opinion is located in Appendix B to this proxy statement/prospectus and should be read carefully and in its entirety by the shareholders of First National/Osceola. o Allen C. Ewing's opinion is directed to the board of directors of First National/Osceola and addresses only the fairness, from a financial point of view, of the conversion ratio to the shareholders of First National/Osceola. o Allen C. Ewing's opinion was based on information provided by First National/Osceola, First National Bank of Polk County, and Community National Bank of Pasco County, as well as general economic, market, and financial conditions as they existed on the date of the opinion. o Allen C. Ewing's opinion is subject to Centerstate Banks of Florida completing its mergers with First National Bank of Polk County and Community National Bank of Pasco County at the same time it completes its merger with First National/Osceola. o Allen C. Ewing was not engaged to make any recommendations to the board of directors of First National/Osceola regarding strategies other than the merger with Centerstate Banks 21 27 of Florida and Allen C. Ewing's opinion does not address the underlying business decision by the board of directors of First National/Osceola to enter into the merger. o Allen C. Ewing's opinion does not constitute a recommendation to any First National/Osceola shareholder as to how he or she should vote on the merger. In connection with its opinion, Allen C. Ewing reviewed, analyzed and relied upon the following information provided by the management of First National/Osceola, First National Bank of Polk County, and Community National Bank of Pasco County: o the merger agreement; o audited financial statements for the three banks for the three years ended December 31, 1998; o unaudited interim financial information for the three banks for various periods for the year 1999; o forecasted results for the three banks, prepared by management of each respective bank, for various periods for the years 1999, 2000, and 2001; and o normalized income for the three banks, prepared by management of each respective bank, for various historical and future periods. In connection with its opinion, Allen C. Ewing also considered: o publicly available information concerning the trading of publicly-traded common stocks of Florida financial institutions, as well as publicly available information regarding mergers and acquisitions of Florida financial institutions; o the business prospects of the three banks, and the general economies of their respective markets; and o other financial, economic, and regulatory factors deemed relevant by Allen C. Ewing. In conducting its review and arriving at its opinions, Allen C. Ewing relied upon and assumed the accuracy and completeness of all of the financial and other information provided to it or publicly available, and Allen C. Ewing did not attempt to verify such information independently. Allen C. Ewing relied upon the management of each bank as to the reasonableness and achievability of all forecasts and adjustments for normalized income provided to Allen C. Ewing. Allen C. Ewing assumed that such forecasts and adjustments reflected the best available estimates and judgments of management and that such forecasts and adjustments will be realized in the amounts and in the time periods estimated by management. Allen C. Ewing assumed, without independent verification, that the aggregate allowances for loan and other losses for First National/Osceola, First National Bank of Polk County, and Community National Bank of Pasco County are adequate to cover such losses. Allen C. Ewing did not make or obtain any inspections, evaluations, or appraisals of the assets or liabilities of the three banks, nor did Allen C. Ewing examine any individual loan, property, or securities files. Allen C. Ewing also assumed that First National/Osceola, First National Bank of Polk County, and Community National Bank of Pasco County have taken necessary steps to address Year 2000 issues and Allen C. Ewing makes no representations with respect to the Year 2000 readiness of the three banks. Allen C. Ewing assumed for purposes of its opinion that the merger will qualify as a pooling of 22 28 interests transaction under generally accepted accounting principles and that the transaction will qualify as a tax-free reorganization for income tax purposes. Allen C. Ewing also assumed that the conditions to the merger as set forth in the merger agreement, including receipt of any required governmental, regulatory, or other consents and approvals, would be satisfied and that the merger would be consummated on a timely basis as contemplated by the merger agreement. Allen C. Ewing met with the boards of directors and management of First National/Osceola, First National Bank of Polk County, Community National Bank of Pasco County, and Centerstate Banks of Florida on several occasions for the purposes of developing conversion ratios for the three banks. See "The Merger - Background of the Merger." Based on such meetings and the information provided to Allen C. Ewing and other considerations as outlined under "The Merger - Opinion of the Financial Advisor-General," Allen C. Ewing recommended to each of the three banks a conversion ratio that, in Allen C. Ewing's judgment, was fair, from a financial point of view, to the respective shareholders of each of the three banks. On November 11, 1999, Allen C. Ewing recommended conversion ratios of 2.00 shares of Centerstate Banks of Florida common stock for each outstanding share of First National/Osceola common stock, 1.62 shares of Centerstate Banks of Florida common stock for each outstanding share of First National Bank of Polk County common stock, and 2.02 shares of Centerstate Banks of Florida common stock for each outstanding share of Community National Bank of Pasco County common stock. The recommended conversion ratios for each of the three banks were subsequently approved by the boards of directors of each of the three banks at meetings taking place during the week of November 15, 1999. See "The Merger - Background of the Merger." VALUATION METHODOLOGIES In connection with its opinions, Allen C. Ewing performed various analyses, a brief summary of which follows: ANALYSIS OF TERMS OF THE MERGER. In the merger, each share of First National/Osceola common stock outstanding will be converted into the right to receive 2.00 shares of Centerstate Banks of Florida common stock. See "Conversion of Shares." ANALYSIS OF COMPARABLE TRANSACTIONS. Because of the relatively few transactions involving peer mergers of three community banks with total assets less than $100 million each, analysis of comparable transactions was not utilized by Allen C. Ewing. DISCOUNTED CASH FLOW ANALYSIS. Discounted cash flow analysis is based on management's forecasted earnings and dividends for a period of years and a projected value at the end of the period. The cash flow streams are then discounted at various discount rates reflecting required rates of return and the inherent risks in the cash flow projections. Because of the volatility in earnings resulting from recent branch openings, the hiring of additional officers and personnel, and other costs for First National/Osceola, First National Bank of Polk County, and Community National Bank of Pasco County, discounted cash flow analysis was not utilized by Allen C. Ewing. CONTRIBUTION ANALYSIS. Allen C. Ewing calculated the contributions by First National/Osceola, First National Bank of Polk County, and Community National Bank of Pasco County to the pro forma balance sheet 23 29 and income statement of Centerstate Banks of Florida for various periods. The following table presents various balance sheet and income statement contributions to be made to Centerstate Banks of Florida by each of the three banks, compared to the pro forma ownership in Centerstate Banks of Florida by the shareholders from each of the three banks after the merger.
First National Community National First National/ Bank of Polk Bank of Pasco Osceola County County Contribution to Contribution to Contribution to Centerstate Centerstate Centerstate ------------------- --------------------- ----------------------- AT OR FOR THE TRAILING TWELVE MONTHS ENDED SEPTEMBER 30, 1999: Fully Diluted Equity Capital 36.3% 29.6% 34.0% Total Loans 40.3% 25.0% 34.8% Total Deposits 38.7% 26.6% 34.8% Total Assets 38.9% 26.3% 34.8% Actual Net Income 34.8% 32.0% 33.2% Normalized Net Income 36.1% 26.2% 37.7% AT OR FOR THE YEAR ENDING DECEMBER 31, 1999: Forecasted Fully Diluted Equity Capital 36.3% 29.8% 33.8% Forecasted Total Loans 40.3% 24.4% 35.4% Forecasted Total Deposits 38.4% 26.7% 34.8% Forecasted Total Assets 39.1% 26.2% 34.7% Forecasted Net Income 35.8% 33.0% 31.2% Forecasted Normalized Net Income 36.2% 27.4% 36.4% AT OR FOR THE YEAR ENDING DECEMBER 31, 2000: Forecasted Fully Diluted Equity Capital 36.7% 29.7% 33.6% Forecasted Total Loans 38.4% 24.3% 37.3% Forecasted Total Deposits 37.3% 26.4% 36.3% Forecasted Total Assets 38.3% 26.1% 35.6% Forecasted Net Income 37.1% 29.7% 33.2% Forecasted Normalized Net Income 37.6% 26.8% 35.6%
First National Community First National/ Bank of National Bank of Osceola Polk County Pasco County ------------------- --------------------- ----------------------- Conversion Ratio 2.00 1.62 2.02 Pro Forma Fully Diluted Percentage Ownership of Centerstate Banks of Florida to be Owned by the Shareholders of Each of the Three Banks 36.0% 29.1% 34.9%
24 30 ACCRETION AND DILUTION ANALYSIS. Allen C. Ewing analyzed the pro forma impact of the merger on fully diluted earnings per share and book value per share of First National/Osceola, First National Bank of Polk County, and Community National Bank of Pasco County. Allen C. Ewing's analysis showed that the merger, compared to the continued operation of First National/Osceola on a stand-alone basis, would be: o accretive to earnings per share and dilutive to fully diluted book value per share for the trailing twelve months ended September 30, 1999; o accretive to forecasted earnings per share and dilutive to fully diluted forecasted book value per share for the year ending December 31, 1999; and o dilutive to forecasted earnings per share and dilutive to fully diluted forecasted book value per share for the year ending December 31, 2000. Allen C. Ewing's analysis showed that the merger, compared to the continued operation of First National Bank of Polk County on a stand-alone basis, would be: o dilutive to earnings per share and dilutive to fully diluted book value per share for the trailing twelve months ended September 30, 1999; o dilutive to forecasted earnings per share and dilutive to fully diluted forecasted book value per share for the year ending December 31, 1999; and o dilutive to forecasted earnings per share and dilutive to fully diluted forecasted book value per share for the year ending December 31, 2000. Allen C. Ewing's analysis showed that the merger, compared to the continued operation of Community National Bank of Pasco County on a stand-alone basis, would be: o accretive to earnings per share and accretive to fully diluted book value per share for the trailing twelve months ended September 30, 1999; o accretive to forecasted earnings per share and accretive to fully diluted forecasted book value per share for the year ending December 31, 1999; and o accretive to forecasted earnings per share and accretive to fully diluted forecasted book value per share for the year ending December 31, 2000. STOCK TRADING HISTORY. Allen C. Ewing reviewed the prior stock trading history for First National/Osceola common stock and concluded that no active trading market exists for First National/Osceola common stock. After the merger, Centerstate Banks of Florida intends to list its shares of common stock for trading on the Nasdaq system, which may provide the opportunity for share liquidity if an active trading market develops. While the summary set forth above describes the material analyses performed by Allen C. Ewing, it does not purport to be a complete description of the analyses. The preparation of a fairness opinion is not necessarily susceptible to partial analysis or summary description. Allen C. Ewing believes that its analyses and the summary set forth above must be considered as a whole and that selecting portions of its analyses without considering all analyses, or selecting part or all of the above summary without considering all factors and analyses, would create an incomplete view of the processes underlying the analyses reflected in Allen C. Ewing's opinions. In addition, Allen C. Ewing may have given various analyses more or less weight than 25 31 other analyses and may have deemed various assumptions more or less probable than other assumptions, so that the ranges of valuations resulting from any particular analysis described above should not be taken to be Allen C. Ewing's view of the actual value of First National/Osceola, First National Bank of Polk County, or Community National Bank of Pasco County. The fact that any specific analysis has been referred to in the summary above is not intended to indicate that such analysis was given greater weight than any other analysis. In performing its analyses, Allen C. Ewing made numerous assumptions with respect to industry performance, general business, and economic conditions and other matters, many of which are beyond the control of First National/Osceola, First National Bank of Polk County, and Community National Bank of Pasco County. The analyses performed by Allen C. Ewing are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than suggested by such analyses. Such analyses were prepared solely as part of Allen C. Ewing's analysis of the fairness, from a financial point of view, of the conversion ratio to the shareholders of First National/Osceola. The analyses do not purport to be appraisals or to reflect the prices at which a company actually might be sold or the prices at which any securities may trade at the present time or at any time in the future. In addition, as described above, Allen C. Ewing's opinion is just one of many factors taken into consideration by the board of directors of First National/Osceola in determining to enter into the merger agreement. In the ordinary course of its business as a broker/dealer, Allen C. Ewing may, from time to time, purchase securities from, and sell securities to, banking and thrift companies and as a market maker in securities may, from time to time, have a long or short position in, and buy or sell, debt or equity securities of banking and thrift companies for its own account and for the account of its customers. As of the date of this proxy statement/prospectus, Allen C. Ewing had no such position in the securities of First National/Osceola, First National Bank of Polk County, Community National Bank of Pasco County, or Centerstate Banks of Florida. COMPENSATION OF ALLEN C. EWING First National/Osceola, First National Bank of Polk County, and Community National Bank of Pasco County have agreed to pay Allen C. Ewing a total fee equal to $25,000 ($8,333 each) for financial advisory services rendered in connection with the merger. Further, each of the three banks has agreed to reimburse Allen C. Ewing for reasonable out-of-pocket expenses incurred in connection with acting as financial advisor to each. Each of the three banks has also agreed to indemnify and hold harmless Allen C. Ewing and its directors, officers, and employees against certain liabilities, including liabilities under the federal securities laws, in connection with its services. CONVERSION RATIO As a result of the merger, each share of First National/Osceola common stock outstanding immediately prior to effectiveness of the merger, other than shares as to which dissenters' rights have been perfected under the national banking laws, will be converted into the right to receive 2.0 shares of Centerstate Banks of Florida common stock. This is referred to as the conversion ratio. Centerstate Banks of Florida will not issue fractional shares of its common stock. A holder of First National/Osceola common stock otherwise entitled to a fractional share will be paid cash in lieu of such fractional share based on the book value of First National/Osceola common stock on the last day of the month prior to or on the date the merger becomes effective. 26 32 INTEREST OF CERTAIN PERSONS IN THE MERGER All of First National/Osceola's directors and officers will obtain an equity interest in Centerstate Banks of Florida in exchange for their shares of First National/Osceola common stock in the merger. Each of them will receive the same number of shares of Centerstate Banks of Florida common stock for each share of First National/Osceola common stock owned by him or her as every other First National/Osceola shareholder. Directors and officers of First National/Osceola will be treated the same as other First National/Osceola shareholders, except that they may be subject to certain restrictions on any resale of Centerstate Banks of Florida common stock received by them in the merger. See "Resales of Centerstate Banks of Florida common stock to be received by affiliates of First National/Osceola" below. First National/Osceola has outstanding stock options covering 5,506 shares of First National/Osceola common stock. These options will be assumed by Centerstate Banks of Florida and will continue as outstanding options exercisable for shares of Centerstate Banks of Florida common stock. Each holder of an option will have the right to acquire after effectiveness of the merger a number of shares of Centerstate Banks of Florida common stock equal to the product, rounded up to the next whole number, of (1) the number of shares of First National/Osceola common stock covered by the option and (2) the conversion ratio. The exercise price at which the option will be exercisable will be an amount, rounded up to the next whole cent, computed by dividing (1) the exercise price per share of the option, by (2) the conversion ratio. Option holders who exercise their options prior to effectiveness of the merger and receive First National/Osceola common stock will receive Centerstate Banks of Florida common stock in the merger in the same manner as any other First National/Osceola shareholder. The merger agreement also provides that after effectiveness of the merger, Centerstate Banks of Florida will indemnify the present and former officers, directors and employees of First National/Osceola against losses incurred by them prior to effectiveness of the merger to the full extent allowed under Florida law and by the articles of incorporation of First National/Osceola. EFFECTIVENESS OF THE MERGER The merger will become effective on the date and time set forth in the certificate of merger relating to the merger issued by the Comptroller of the Currency. Unless otherwise agreed to by First National/Osceola and Centerstate Banks of Florida, the effectiveness of the merger will occur on the tenth business day following the later to occur of (1) the effective date of the last required regulatory approval to consummate the merger, (2) the date on which First National/Osceola shareholders approved the merger agreement, and (3) the date on which all other conditions required for consummation of the merger are completed. REGULATORY APPROVALS FOR THE MERGER The merger is subject to prior approval by the appropriate banking regulatory authorities. An application was filed for approval of the merger with the Board of Governors of the Federal Reserve System on December 17, 1999. An application for approval of the merger also was filed with the Office of the Comptroller of the Currency on December 17, 1999. The merger cannot be closed in the absence of these regulatory approvals. Although there can be no assurance, we believe that the required regulatory approvals will be obtained. 27 33 RIGHTS OF DISSENTING SHAREHOLDERS The national banking laws afford you the right to dissent from the merger and receive cash for the value of your shares. The following is a brief summary of the steps you must take to perfect your dissenters' rights under the national banking laws. This summary does not purport to be complete and is subject in all respects to the provisions of the national banking laws which are reproduced as Appendix C to this proxy statement/prospectus. A shareholder of First National/Osceola who wishes to exercise his or her dissenters' rights: o must either give written notice to the President of First National/Osceola, at or prior to the special meeting, of the holder's dissent from the merger or must vote against the merger at the special meeting; o within 30 days after the effectiveness of the merger, must make a written request to First National/Osceola for appraisal; and o must send his or her First National/Osceola stock certificates with the written request for appraisal. The written notices and written requests to First National/Osceola should be addressed to: Thomas E. White, President and Chief Executive Officer, First National Bank/Osceola, 920 North Bermuda Avenue, Kissimmee, Florida 34741. If you perfect your dissenters' rights, the value of your shares will be determined as of the effectiveness of the merger by an appraisal made by a committee of three persons. One person will be selected by a vote of the holders of a majority of the stock, the owners of which are exercising their dissenters' rights. The second member will be selected by the board of directors of First National/Osceola. The third member will be selected by the two persons so selected. The value agreed upon by any two of the three appraisers governs. If the value so fixed is not satisfactory to a dissenting shareholder who has requested payment, that shareholder may within five days after being notified of the appraised value of the shares, appeal to the Comptroller of the Currency. The Comptroller of the Currency will cause a reappraisal to be made which will be final and binding as to the value of the shares. If within 90 days after effectiveness of the merger, one or more of the appraisers is not selected for any reason, or the appraisers fail to determine the value of the shares, the Comptroller of the Currency will, upon request of any interested party, cause an appraisal to be made. This appraisal will be final and binding on all parties. The expenses of the Comptroller of the Currency in making the reappraisal or the appraisal will be paid by First National/Osceola. To exercise your dissenters' rights, strict adherence to the provisions of the national banking laws is required. If you think you may desire to exercise your dissenters' rights, you should carefully review the statutory provisions attached to this proxy statement/prospectus as Appendix C. As in all legal matters, you would be well advised to seek the guidance of an attorney. If you receive cash for the fair value of your shares of First National/Osceola common stock, that cash will be subject to federal income taxes. The amount of gain or loss and its character as ordinary or capital gain or loss will be determined in accordance with the Internal Revenue Code. If you are 28 34 contemplating the possible exercise of dissenters' rights, you are urged to consult a tax advisor as to the federal and any applicable state and local income tax consequences resulting from such an election. RESALES OF CENTERSTATE BANKS OF FLORIDA COMMON STOCK TO BE RECEIVED BY AFFILIATES OF FIRST NATIONAL/OSCEOLA The shares of Centerstate Banks of Florida common stock that you will receive in the merger will be registered under the Securities Act of 1933. Under current law, if you are not an affiliate of First National/Osceola or Centerstate Banks of Florida within the meaning of Rule 144 under the Securities Act, you may sell or transfer any shares of Centerstate Banks of Florida common stock that you receive in the merger without need of further registration under the Securities Act. If you are an affiliate of First National/Osceola before the merger or an affiliate of Centerstate Banks of Florida after the merger, you may resell the shares of Centerstate Banks of Florida common stock issued to you in the merger only: o in transactions permitted by Rule 144 and 145 under the Securities Act; o pursuant to an effective registration statement; or o in transactions exempt from registration. Generally, if you are an executive officer, director or principal shareholder or other control person of First National/Osceola or Centerstate Banks of Florida, you may be deemed to be an affiliate for these purposes. Other shareholders would not be deemed to be affiliates. Rule 144 and 145, insofar as relevant to the merger, impose restrictions on the manner in which affiliates may make resales and also on the quantity of resales that such affiliates, and others with whom they may act in concert, may make within any three-month period. ACCOUNTING TREATMENT OF THE MERGER Centerstate Banks of Florida intends to treat the merger as a pooling of interests for accounting purposes. The unaudited pro forma financial information included in this proxy statement/prospectus reflects the merger using the pooling of interests method of accounting. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER The merger is conditioned upon receipt of an opinion as to the principal federal income tax consequences expected to result from the merger. KPMG LLP will provide this opinion. The following summary of the material federal income tax consequences expected to result from the merger is qualified in its entirety by reference to the full text of the opinion of KPMG LLP, including the assumptions upon which that opinion is based. The opinion is filed as Exhibit 8 to the registration statement of which this proxy statement/prospectus is a part. Neither the opinion nor this summary addresses any tax considerations under foreign, state or local laws, or the tax considerations to shareholders other than individual United States citizens who hold their shares of First National/Osceola common stock or 29 35 Centerstate Banks of Florida common stock as capital assets within the meaning of the Internal Revenue Code. No rulings have been requested from the Internal Revenue Service as to the federal income tax consequences of the merger. You should be aware that the opinion of KPMG LLP is not binding on the Internal Revenue Service and the Internal Revenue Service is not precluded from taking a different position. You should also be aware that some of the federal income tax consequences of the merger are governed by provisions of the Internal Revenue Code as to which there are no final regulations and little or no judicial or administrative guidance. KPMG LLP's opinion is based upon the federal income tax laws as in effect on the date of the opinion and as those laws are currently interpreted. There can be no assurance that future legislation, regulations, administrative rulings or court decisions will not adversely affect the accuracy of the statements contained in this proxy statement/prospectus or in the opinion. Subject to the limitations and assumptions described above, KPMG LLP will render an opinion to Centerstate Banks of Florida and First National/Osceola that the merger will have the following federal income tax consequences: o No gain or loss will be recognized by Centerstate Banks of Florida or First National/Osceola as a result of the transactions contemplated in the merger agreement; o No gain or loss will be recognized by the shareholders of First National/Osceola as a result of their exchange of First National/Osceola common stock for Centerstate Banks of Florida common stock, except to the extent that any shareholder receives cash in lieu of a fractional share or as a dissenting shareholder; o The holding period of the Centerstate Banks of Florida common stock received in the merger will include the period during which the stock of First National/Osceola exchanged therefor was held, provided such stock was a capital asset in the hands of the holder on the date of the exchange; and o The federal income tax basis of the Centerstate Banks of Florida common stock received in the merger will be the same as the basis of the First National/Osceola common stock exchanged therefor. The tax consequences of the merger may vary depending upon your particular circumstances. You are urged to consult your own tax advisor to determine the particular tax consequences of the merger to you, including the applicability and effect of any state, local or foreign income, property, transfer or other tax laws. HOW TO EXCHANGE FIRST NATIONAL/OSCEOLA STOCK CERTIFICATES FOR CENTERSTATE BANKS OF FLORIDA STOCK Promptly after the merger becomes effective, Centerstate Banks of Florida will mail transmittal and exchange instructions to each holder of record of First National/Osceola common stock to be used to exchange shares of First National/Osceola common stock for shares of Centerstate Banks of Florida common stock. These transmittal letters will be accompanied by instructions specifying other details of the exchange. You should not send in your certificates until you receive a transmittal form and instructions. 30 36 After the merger becomes effective, each certificate for shares of First National/Osceola common stock will be deemed to represent only the right to receive: o the number of shares of Centerstate Banks of Florida common stock that the holder is entitled to receive in the merger; and o the cash payment for any fractional share of First National/Osceola common stock. The holder of an unexchanged certificate will not be entitled to receive any dividend or other distribution payable by Centerstate Banks of Florida until the certificate has been exchanged. CONDUCT OF BUSINESS PENDING THE MERGER In the merger agreement, First National/Osceola and Centerstate Banks of Florida have agreed that until the merger becomes effective or the merger agreement is terminated, each will, with some exceptions: o use its best efforts to take all actions necessary for all regulatory applications to be approved and use reasonable efforts to remove any condition unduly restricting the operations or materially adversely affecting the condition of Centerstate Banks of Florida or First National/Osceola or rendering consummation of the merger unduly burdensome; o use its best efforts to obtain any consents and approvals required to consummate the merger; o refrain from taking any action which would cause any representations and warranties to become untrue in any material respect or any condition set forth in the merger agreement to not be satisfied; o continue to file all reports and documents required with appropriate regulatory authorities; o refrain from taking any action which would disqualify the merger as a tax-free reorganization under the Internal Revenue Code; o permit representatives of the other party to have full access to information and documents pertaining to it; o notify the other of any material adverse development affecting its business; o conduct its business in the ordinary course consistent with past practices; o use reasonable efforts to maintain its business organization, employees and business relationships; and o take no action which would adversely affect or delay the ability of any party to obtain any consent or approval required for the merger. In addition, until the merger becomes effective, First National/Osceola and Centerstate Banks of Florida have each agreed that it will not 31 37 o incur any debt other than the ordinary course of business; o make any change in its capital structure, except for the payment of dividends consistent with past practices and the issuance of shares upon the exercise of stock options; o sell any of its material properties or assets or cancel any material indebtedness, except in the ordinary course of business; o make any material investment in any other entity, except in the ordinary course of business; o enter into or terminate, or make any changes to, any material leases or contracts, other than renewals, and except in the ordinary course of business; o increase in any material manner the compensation of its employees or implement or change any benefit plans, except in the ordinary course of business; o amend its articles of association or bylaws; o enter into any new material line of business; o change its lending, investment, liability management and other material banking policies in any respect which is material; o incur or commit to any capital expenditure other than the ordinary course of business; o change its method of accounting; or o issue or sell any additional shares, except upon the conversion of outstanding options. The merger agreement also provides that neither Centerstate Banks of Florida nor First National/Osceola may solicit or encourage or consider or participate in the negotiation or the submission of a proposal or offer from any person relating to any recapitalization, merger, acquisition of 25% or more of its stock or assets, or similar transaction. This excludes the agreements that Centerstate Banks of Florida has entered into to similarly acquire First National Bank of Polk County and Community National Bank of Pasco County. However, either party can consider and negotiate regarding any prohibited proposal to the extent its board of directors determines in good faith that the failure to do so would be inconsistent with its fiduciary obligations. If a party makes this determination, it must promptly notify the other party. CONDITIONS FOR THE MERGER The obligations of First National/Osceola and Centerstate Banks of Florida to affect the merger are subject to conditions, including: o the approval of the merger agreement by the holders of at least two-thirds of the outstanding shares of First National/Osceola common stock; 32 38 o receipt of the approval of the merger by all bank regulatory agencies, without inclusion of any condition which would unduly restrict the operations, or would materially adversely affect the condition, of Centerstate Banks of Florida or First National/Osceola or make consummation of the merger unduly burdensome; o the accuracy in all material respects of the representations and warranties of the parties set forth in the merger agreement; o the absence of any pending or threatened action or proceeding which would prevent consummation of the merger or would adversely affect the rights of a party after effectiveness of the merger to own, operate or control its assets; o the shareholders equity of First National/Osceola on the last day of the calendar month immediately preceding effectiveness of the merger shall not be less than the amount at September 30, 1999; o the holders of no more than 5% of the outstanding First National/Osceola common stock shall have elected to exercise their dissenters' rights in the merger. The closing of the merger is also conditioned upon the simultaneous closing by Centerstate Banks of Florida of the First National Bank of Polk County and Community National Bank of Pasco County mergers. EXPENSES AND FEES RELATED TO THE MERGER Each party to the merger agreement will bear its own expenses incurred in connection with the merger. AMENDMENT, WAIVER AND TERMINATION The merger may be terminated at any time prior to the merger, either before or after the special meeting by mutual consent of Centerstate Banks of Florida and First National/Osceola. In addition, the merger agreement may be terminated at any time by either Centerstate Banks of Florida or First National/Osceola if: o the effectiveness of the merger has not occurred by December 31, 2000; o there is a material breach of a representation, warranty or covenant by the other party, which has not been cured within 15 days after written notice of the breach has been given; o if a material adverse development occurs affecting the condition of the other party; o if the merger fails to receive approval of the First National/Osceola shareholders; or o if any approval from a bank regulatory agency required for effectiveness of the merger is not received, or includes conditions which in the reasonable judgment of a party would 33 39 unduly impair or restrict the operations or materially adversely affect the condition of either party, or render consummation of the merger unduly burdensome. If the merger agreement is terminated, no party will have any further liability to the other party, except for any liability of a party which breaches the merger agreement. Substantially all of the conditions to consummating the merger may be waived to the extent permissible under law by the party for whose benefit the condition has been imposed, without the approval of shareholders of First National/Osceola. DIFFERENCE IN RIGHTS OF CENTERSTATE BANKS OF FLORIDA AND FIRST NATIONAL/OSCEOLA SHAREHOLDERS As a result of the merger, shareholders of First National/Osceola will exchange their shares of common stock in First National/Osceola for shares of common stock in Centerstate Banks of Florida and will become shareholders of Centerstate Banks of Florida. First National/Osceola is a national banking association and subject to the national banking laws. Centerstate Banks of Florida is a Florida corporation and subject to Florida law. As discussed below, there are certain differences between the national banking laws and the laws of the State of Florida that will change the rights of First National/Osceola shareholders as a result of their becoming shareholders of Centerstate Banks of Florida. In addition, the following also summarizes certain differences between Centerstate Banks of Florida's articles of incorporation and bylaws and the articles of association of First National/Osceola. AUTHORIZED CAPITAL STOCK Centerstate Banks of Florida is authorized to issue up to 20,000,000 shares of common stock. As of the date of this proxy statement/prospectus, only one share of common stock was outstanding which was held by James H. White solely to facilitate the organization of Centerstate Banks of Florida. First National/Osceola articles authorize the issuance of up to 550,000 shares of First National/Osceola common stock. The Centerstate Banks of Florida articles also authorize Centerstate Banks of Florida to issue up to 5,000,000 shares of preferred stock, none of which were issued or outstanding as of the date of this Proxy Statement. The First National/Osceola articles do not authorize the issuance of any shares of First National/Osceola preferred stock. The shares of Centerstate Banks of Florida preferred stock may be issued by the Centerstate Banks of Florida board from time to time without further shareholder action, in one or more series, and with such relative rights and preferences as the board may determine. As to any series this may include the dividend rate, the terms and conditions of redemption, liquidation value, voting rights, conversion rights, and such other relative, participating, optional, or special rights, qualifications, limitations, or restrictions as the Centerstate Banks of Florida board may determine. The Centerstate Banks of Florida board of directors may authorize the issuance of additional shares of Centerstate Banks of Florida common stock or preferred stock without further action by the Centerstate Banks of Florida shareholders, unless such action is required in a particular case by applicable law. The authority to issue additional shares of Centerstate Banks of Florida common stock or preferred stock provides Centerstate Banks of Florida with the flexibility necessary to meet its future needs without the delay resulting 34 40 from seeking shareholder approval. The unissued shares of Centerstate Banks of Florida common stock and preferred stock may be issued from time to time for any corporate purposes, including stock splits, stock dividends, employee benefit and compensation plans, acquisitions, and public or private sales for cash as a means of raising capital. Such shares could be used to dilute the stock ownership of persons seeking to obtain control of Centerstate Banks of Florida. In addition, the sale of a substantial number of shares of Centerstate Banks of Florida common stock or the sale of preferred stock to persons who have an understanding with Centerstate Banks of Florida concerning the voting of such shares, or the distribution or dividend of such shares, may have the effect of discouraging or increasing the cost of unsolicited attempts to acquire control of Centerstate Banks of Florida. Further, because the Centerstate Banks of Florida board has the power to determine the voting, conversion or other rights of Centerstate Banks of Florida preferred stock, the issuance of a series of preferred stock to persons friendly to management could effectively discourage or preclude consummation of a change in control transaction or have the effect of maintaining the position of Centerstate Banks of Florida incumbent management. Centerstate Banks of Florida does not currently have any plans or commitments to effect any such issuance, but reserves the right to take any action that the board of directors deems to be in the best interests of Centerstate Banks of Florida and its shareholders. VOTING Each holder of First National/Osceola common stock is entitled to one vote for each share of First National/Osceola common stock held, except in the election of directors. In all elections of directors, each First National/Osceola shareholder has the right to vote the number of shares of First National/Osceola common stock owned by such shareholder for as many persons as there are directors to be elected, or to use cumulative voting, which permits the shareholder to cumulate such shares and give one candidate as many votes as will equal the number of directors multiplied by the number of shares of such shareholder's stock, or to distribute such shareholder's votes on the same principle among as many candidates as the shareholder shall think fit. Shareholders of Centerstate Banks of Florida do not have cumulative voting rights. Each share of Centerstate Banks of Florida common stock entitles the holder thereof to one vote on all matters, including the election of directors. First National/Osceola may effect mergers or consolidations if the holders of at least two-thirds of the outstanding shares of First National/Osceola common stock cast their votes in favor of such a proposal. Centerstate Banks of Florida may effect mergers or consolidations if the holders of a majority of the outstanding shares of Centerstate Banks of Florida common stock cast their votes in favor of such a proposal. SHAREHOLDERS' MEETINGS Special meetings of First National/Osceola shareholders may be called by the Board or any 20 or more shareholders owning, in the aggregate, not less than 20% of the outstanding First National/Osceola shares. Centerstate Banks of Florida's Bylaws provide that special meetings of Centerstate Banks of Florida shareholders may be called by the Chairman, the President, the board of directors or by the holders of not less than one-third of the outstanding Centerstate Banks of Florida shares. DIVIDEND RIGHTS The holders of First National/Osceola common stock are entitled to dividends when, as and if declared by First National/Osceola's board of directors out of funds legally available therefor. However, 35 41 national banks are subject to the provisions of the national banking laws which limit the payment of dividends by national banks if (1) such dividends would impair the bank's capital structure, (2) the bank's surplus fund is not equal to its common capital, or (3) dividends declared in any year would exceed the total of net profits in that year combined with retained net profits for the preceding two years, less any required transfer to surplus. Holders of Centerstate Banks of Florida common stock are entitled to dividends when, as and if declared by Centerstate Banks of Florida's board of directors out of funds legally available therefor. Under Florida law, a dividend may not be paid if, after giving effect to the dividend, the corporation would not be able to pay its debts as they become due in the usual course of business or the corporation's total assets would be less than the sum of its total liabilities plus the amount that would be needed if the corporation were to dissolve to satisfy the preferential rights of those shareholders whose rights are superior to those receiving the distribution. APPRAISAL RIGHTS Both the national banking laws and Florida corporate law provide that dissenting shareholders have appraisal rights with respect to mergers and consolidations. These appraisal rights differ primarily in the procedures employed to determine the value of the shares. Under the national banking laws, the value of shares of dissenting shareholders is determined by an appraisal made by a committee of three persons composed of one selected by the vote of the holders of a majority of the shares as to which dissenters' rights are exercised, one selected by the directors and one selected by the two so selected. Any shareholder may within five days after being notified of the appraised value of the shares, as determined by two of the three appraisers, appeal to the OCC, who must reappraise the shares. The OCC's determination is final and binding. Under Florida law, a corporation is entitled to make a written offer to each dissenting shareholder to pay an amount the corporation estimates to be the fair value of the shares to which dissenters' rights have been exercised. If the corporation fails to make such an offer or a dissenting shareholder fails to accept it, then the corporation, at its own election or upon demand from any dissenting shareholder given within certain time periods, may file an action in state court requesting that the fair value of the shares be determined. The court has the option of appointing one or more persons to act as appraisers to receive evidence and recommend a decision on the question of fair value. The court also has the discretion of including a fair rate of interest. Florida law provides that holders of shares which are traded on the NASDAQ national market system or an exchange, or held of record by not fewer than 2,000 shareholders, do not have dissenters' rights with respect to a plan of merger or share exchange, or a proposed sale or exchange of property. After the First National/Osceola, First National Bank of Polk County and Community National Bank of Pasco County mergers, Centerstate Banks of Florida intends to make application to qualify the shares of Centerstate Banks of Florida common stock for trading under the NASDAQ system. If such shares are designated a NASDAQ national market system security, then holders of Centerstate Banks of Florida common stock will not have dissenters' rights in connection with a plan of merger or share exchange, or a proposed sale or exchange of property, submitted by Centerstate Banks of Florida to a vote of the Centerstate Banks of Florida shareholders. 36 42 CONTROL SHARE AND FAIR PRICE LAWS Centerstate Banks of Florida is subject to several provisions under Florida law which may deter or frustrate unsolicited attempts to acquire certain Florida corporations. These statutes, commonly referred to as the "Control Share Act" and the "Fair Price Act," apply to most public corporations organized in Florida unless the corporation has specifically elected to opt out of such provisions. Centerstate Banks of Florida has not elected to opt out of these provisions. The Fair Price Act generally requires that certain transactions between a public corporation and an affiliate must be approved by two-thirds of the disinterested directors or shareholders, not including those shares beneficially owned by an "interested shareholder". The Control Share Act generally provides that shares of a public corporation acquired in excess of certain specified thresholds will not posses any voting rights unless such voting rights are approved by a majority vote of the corporation's disinterested shareholders. These anti-takeover provisions of Florida law could result in Centerstate Banks of Florida being less attractive to a potential acquiror and/or result in shareholders receiving less for their shares than otherwise might be available in the event of an unsolicited takeover attempt. MARKET AND DIVIDEND INFORMATION STOCK TRADING INFORMATION Centerstate Banks of Florida has only one share outstanding, which is held by James H. White solely to facilitate the organization of Centerstate Banks of Florida. Thus, no shares of Centerstate Banks of Florida common stock have been traded and there is no established public trading market for the shares. After the First National/Osceola, First National Bank of Polk County and Community National Bank of Pasco County mergers, Centerstate Banks of Florida intends to make application to qualify the shares of Centerstate Banks of Florida common stock for trading under the NASDAQ System. Although Centerstate Banks of Florida believes that the shares of Centerstate Banks of Florida common stock will meet the qualification for trading under the NASDAQ System, including the qualifications for the NASDAQ national market system, there is no assurances as to whether or when the shares will be accepted for trading under the NASDAQ System. First National/Osceola common stock is not actively traded, and such trading activity, as it occurs, takes place in privately negotiated transactions. There is no established public trading market for the shares of First National/Osceola common stock. Management of First National/Osceola is aware of certain transactions in its shares that have occurred since January 1, 1998, although the actual trading prices of all stock transactions are not known. The following sets forth the high and low trading prices for certain trades of First National/Osceola common stock that occurred in transactions known to First National/Osceola since January 1, 1998: 37 43
1998 1999 ---- ---- HIGH LOW SHARES HIGH LOW SHARES ---- --- ------ ---- --- ------ 1st Quarter $23.00 $21.00 992 $25.00 $25.00 925 2nd Quarter 25.00 22.00 10,667 26.00 26.00 4,000 3rd Quarter - - -0- 26.00 26.00 850 4th Quarter 25.00 25.00 500 - - -
The last sale of First National/Osceola common stock of which First National/Osceola management had knowledge occurred on August 10, 1999 at a price of $26.00 per share. This also was the last sale prior to the December 10, 1999 date of the merger agreement. As noted above, there is no established public trading market for the shares of First National/Osceola common stock or Centerstate Banks of Florida common stock. First National/Osceola had approximately 329 shareholders of record as of December 31, 1999. DIVIDENDS Since Centerstate Banks of Florida has not commenced any business, it has not paid any dividends. First National/Osceola paid cash dividends of $.25 per share in 1998, and $.31 per share in 1999, respectively. The Centerstate Banks of Florida board may consider the payment of regular quarterly dividends following completion of the First National/Osceola, First National Bank of Polk County and Community National Bank of Pasco County mergers. If at any time the Centerstate Banks of Florida board determines to pay dividends on the Centerstate Banks of Florida common stock, the timing and the extent to which dividends are paid by Centerstate Banks of Florida will be determined by such board in light of then-existing circumstances, including Centerstate Banks of Florida's rate of growth, profitability, financial condition, existing and anticipated capital requirements, the amount of funds legally available for the payment of cash dividends, regulatory constraints and such other factors as the board determines relevant. The primary source of funds for payment of dividends by Centerstate Banks of Florida is dividends paid to Centerstate Banks of Florida by First National/Osceola, First National Bank of Polk County and Community National Bank of Pasco County. There are various statutory limitations on the dividends paid by such banks. For additional information regarding the restrictions on the payment of dividends by national banks and Florida corporations, see "Difference in Rights of Centerstate Banks of Florida and First National/Osceola Shareholders - Dividend Rights" and "Supervision and Regulation -- Dividends." DESCRIPTION OF CENTERSTATE BANKS OF FLORIDA CONDUCT OF BUSINESS PRIOR TO THE MERGER Centerstate Banks of Florida was formed as a Florida corporation on September 20, 1999 to serve as a bank holding company for First National/Osceola, First National Bank of Polk County and Community National Bank of Pasco County. The outstanding capital stock of Centerstate Banks of Florida consists of one share of common stock, which is owned by James H. White solely to facilitate the organization of the company. Mr. White is chairman of the board of each of First National/Osceola, First National Bank of Polk County and Community National Bank of Pasco County. The merger agreement provides that prior to effectiveness of the merger Centerstate Banks of Florida will not conduct any business operations or enter 38 44 into any contract or agreement of any kind, acquire any asset, or incur any liability, except as contemplated by the merger agreement. CONDUCT OF BUSINESS FOLLOWING THE MERGER Following the merger, Centerstate Banks of Florida will own all of the outstanding shares of First National/Osceola, First National Bank of Polk County and Community National Bank of Pasco County. Each of the three banks will continue to operate as separate subsidiary banks of Centerstate Banks of Florida. They will continue with their same name, directors, officers, employees and banking offices that they had prior to effectiveness of the merger. Although no plans have been made as of the date of this proxy statement/prospectus, Centerstate Banks of Florida in the future may decide to establish new subsidiaries for the purposes of carrying on businesses not now conducted by the Banks. Centerstate Banks of Florida also could assess opportunities for possible growth through additional business combinations with other community banks located in Florida. DIRECTORS The board of directors of Centerstate Banks of Florida consists of seven persons, two of whom have been designated by each of First National/Osceola, First National Bank of Polk County, and Community National Bank of Pasco County. The seventh director is Mr. James H. White, who serves as a director of each of the three banks. The following sets forth certain information regarding each of the directors: PRINCIPAL OCCUPATION AND BUSINESS NAME AND AGE EXPERIENCE DURING PAST FIVE YEARS James H. White, 73 Chairman of the Board of Community National Bank of Pasco County, First National Bank of Osceola County and First National Bank of Polk County G. Robert Blanchard, Sr., 72 President and CEO of WRB Enterprises, Inc. (diversified holding company) James H. Bingham, 51 President of Bingham Realty, Inc. (commercial real estate company) Terry W. Donley, 51 President of Donley Citrus, Inc. (citrus harvesting and production) Bryan W. Judge, 72 Self-employed, farming (1994-present); Chief Executive Officer of Judge Farms (1965-1994) Samuel L. Lupfer, IV, 44 President of Lupfer-Frakes, Inc. (insurance) J. Thomas Rocker, 57 Director - Arctic Services, Inc. (commercial insulation) 39 45 EXECUTIVE OFFICERS The table below lists the executive officers of Centerstate Banks of Florida. Each officer is elected by the board of directors for a term of office extending until the meeting of the board of directors following the next annual meeting of shareholders and until his successor has been elected and qualified.
POSITION WITH CENTERSTATE NAME AND AGE BANKS OF FLORIDA PRINCIPAL OCCUPATION - ------------ ------------------------- -------------------- James H. White, 73 Chairman of Board, President Chairman of Board, President and Chief Executive Officer and Chief Executive Officer of Centerstate; Chairman of the Board of First National Bank of Osceola County, Community National Bank of Pasco County and First National Bank of Polk County G. Robert Blanchard, Sr., 72 Vice Chairman of the Board Vice Chairman of the Board of Centerstate; President and Chief Executive Officer of WRB Enterprises, Inc. (diversified holding company) James J. Antal, 48 Senior Vice President and Chief Senior Vice President and Chief Financial Officer Financial Officer of Centerstate (November 1999 to present); self-employed certified public accountant (November 1998 to November 1999); Senior Vice President, Chief Financial Officer and Treasurer of Trumbull Savings and Loan Company (August 1992 to November 1998)
Each officer holds office until the next annual meeting of the directors and until such officer's successor is duly elected and qualified. Centerstate Banks of Florida has not compensated any of its officers or directors. There are no plans at the present time to provide compensation to any officers or directors of Centerstate Banks of Florida. However, the board of directors may provide for such compensation at a future date without shareholder approval. 40 46 PROPERTY Centerstate Banks of Florida owns no real property. In the event that its business requires office space, it is anticipated that the space will be minimal and will be located in the main office of First National/Osceola at 920 North Bermuda Avenue, Kissimmee, Florida 34741. EMPLOYEES Centerstate Banks of Florida does not currently intend to employ any persons other than its executive officers, who will be compensated by the respective Bank for which the officer is employed. LEGAL PROCEEDINGS Centerstate Banks of Florida is not a party to any legal proceeding. BUSINESS OF FIRST NATIONAL/OSCEOLA GENERAL First National/Osceola was organized as a national banking association on September 13, 1989. First National/Osceola provides a range of consumer and commercial banking services to individuals, businesses and industries. The basic services offered by First National/Osceola include: demand interest bearing and noninterest bearing accounts, money market deposit accounts, NOW accounts, time deposits, safe deposit services, credit cards, cash management, direct deposits, notary services, money orders, night depository, travelers' checks, cashier's checks, domestic collections, savings bonds, bank drafts, drive-in tellers, and banking by mail. In addition, First National/Osceola originates real estate loans, secured and unsecured commercial loans, and issues stand-by letters of credit. First National/Osceola provides automated teller machine ("ATM") cards, as a part of the HONOR ATM network, thereby permitting customers to utilize the convenience of larger ATM networks. First National/Osceola does not have trust powers and, accordingly, no trust services are provided. The revenues of First National/Osceola are primarily derived from interest on, and fees received in connection with, real estate and other loans, and from interest and dividends from investment and mortgage-backed securities, and short-term investments. The principal sources of funds for First National/Osceola's lending activities are its deposits, repayment of loans, and the sale and maturity of investment securities. The principal expenses of First National/Osceola are the interest paid on deposits, and operating and general administrative expenses. As is the case with banking institutions generally, First National/Osceola's operations are materially and significantly influenced by general economic conditions and by related monetary and fiscal policies of financial institution regulatory agencies, including the Federal Reserve and the OCC. Deposit flows and costs of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for financing of real estate and other types of loans, which in turn is affected by the interest rates at which such financing may be offered and other factors affecting local demand and availability of funds. First National/Osceola faces strong competition in the attraction of deposits (its primary source of lendable funds) and in the origination of loans. See "Competition." 41 47 LENDING ACTIVITIES First National/Osceola offers a range of lending services, including real estate, consumer and commercial loans, to individuals and small businesses and other organizations that are located in or conduct a substantial portion of their business in the Bank's market area. First National/Osceola's total loans at September 30, 1999 and December 31, 1998 were $66.6 million, or 62% of total assets, and $57.4 million, or 52.5% of total assets, respectively. The interest rates charged on loans vary with the degree of risk, maturity, and amount of the loan, and are further subject to competitive pressures, money market rates, availability of funds, and government regulations. First National/Osceola has no foreign loans or loans for highly leveraged transactions. First National/Osceola's loans are concentrated in three major areas: real estate loans, commercial loans, and consumer loans. At September 30, 1999, 72%, 16% and 12% and at December 31, 1998, 71%, 19%, and 10% of First National/Osceola's loan portfolio consisted of real estate, commercial and consumer loans, respectively. In excess of 95% of First National/Osceola's loans at September 30, 1999 and December 31, 1998, respectively, were made on a secured basis. As of September 30, 1999 and December 31, 1998, 72% and 71%, respectively of the loan portfolio consisted of loans secured by mortgages on real estate. First National/Osceola's commercial loans include loans to individuals and small-to-medium sized businesses located primarily in Osceola and Orange Counties for working capital, equipment purchases, and various other business purposes. A majority of First National/Osceola's commercial loans are secured by equipment or similar assets, but these loans may also be made on an unsecured basis. Commercial loans may be made at variable- or fixed-interest rates. Commercial lines of credit are typically granted on a one-year basis, with loan covenants and monetary thresholds. Other commercial loans with terms or amortization schedules of longer than one year will normally carry interest rates which vary with the prime lending rate and will become payable in full and are generally refinanced in five to ten years. First National/Osceola's real estate loans are secured by mortgages and consist primarily of loans to individuals and businesses for the purchase, improvement of or investment in real estate and for the construction of single-family residential units or the development of single-family residential building lots. These real estate loans may be made at fixed- or variable-interest rates. First National/Osceola generally does not make fixed-interest rate commercial real estate loans for terms exceeding five years. Loans in excess of five years generally have adjustable interest rates. First National/Osceola's residential real estate loans generally are repayable in monthly installments based on up to a 25-year amortization schedule with variable-interest rates. First National/Osceola's consumer loan portfolio consists primarily of loans to individuals for various consumer purposes, but includes some business purpose loans which are payable on an installment basis. The majority of these loans are for terms of less than five years and are secured by liens on various personal assets of the borrowers, but consumer loans may also be made on an unsecured basis. Consumer loans are made at fixed interest rates, and are often based on up to a five-year amortization schedule. For additional information regarding First National/Osceola's loan portfolio, see "First National/Osceola's Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition." 42 48 DEPOSIT ACTIVITIES Deposits are the major source of First National/Osceola's funds for lending and other investment activities. First National/Osceola considers the majority of its regular savings, demand, NOW and money market deposit accounts to be core deposits. These accounts comprised 49% and 43% of First National/Osceola's total deposits at September 30, 1999 and December 31, 1998, respectively. Approximately 51% and 57% of First National/Osceola's deposits at September 30, 1999 and December 31, 1998 were certificates of deposit. Generally, First National/Osceola attempts to maintain the rates paid on its deposits at a competitive level. Time deposits of $100,000 and over made up 11% and 12% of First National/Osceola's total deposits at September 30, 1999 and December 31, 1998, respectively. The majority of the deposits of First National/Osceola are generated from Osceola and Orange Counties. First National/Osceola does not accept brokered deposits. For additional information regarding First National/Osceola's deposit accounts, see "First National/Osceola's Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition." EMPLOYEES At September 30, 1999, First National/Osceola employed 54 full-time and one part-time employees. The employees are not represented by a collective bargaining unit. First National/Osceola consider relations with its employees to be good. PROPERTIES The main office of First National/Osceola is located at 920 North Bermuda Avenue, Kissimmee, Florida, in a two-story building of approximately 12,000 square feet, which is leased by First National/Osceola under a lease which, with renewal options, expires in 2009. First National/Osceola also has a branch office of approximately 2,800 square feet in a one-story building located at 2801 13th Street, St. Cloud, Florida; a branch office of approximately 3,700 square feet in a one-story building located at 850 Cypress Parkway, Poinciana, Florida; a branch office of approximately 3,700 square feet in a one-story building located at 15 Silver Star Road E., Ocoee, Florida; a branch office located at 12285 South Orange Blossom Trail, Orlando, Florida, in a one-story building of approximately 3,700 square feet; and a drive-in facility at 100 Ruby Avenue, Kissimmee, Florida. All of First National/Osceola's branch offices are owned by it. LITIGATION In the ordinary course of operations, First National/Osceola is a party to various proceedings. Management does not believe there is any proceeding pending against First National/Osceola which, if determined adversely, would have a material adverse effect on the financial condition or results of operations of First National/Osceola. MANAGEMENT Board of Directors. The Board of Directors of First National/Osceola currently consists of 13 directors, each of whom holds office until the next annual meeting of First National/Osceola shareholders. The following table sets forth certain information with respect to the directors of First National/Osceola. 43 49
DIRECTOR OR OFFICER OF FIRST NATIONAL/OSCEOLA PRINCIPAL OCCUPATION AND BUSINESS NAME AND AGE SINCE EXPERIENCE DURING PAST FIVE YEARS - ------------ ------------------------- --------------------------------- O. Sam Ackley, 50 1989 Chief Executive Officer of Ackley Group (credit card processing) James C. Chapman, 49 1998 President of Chapco, Inc. (ranching and fencing) A. Gerald Divers, 64 1989 President of The Bank of Tampa Bryan W. Judge, 72 1989 Self-employed, farming (1994-present); Chief Executive Officer of Judge Farms (1965-1994) Danny L. Lackey, 55 1998 General Manager of Bronson's Partnership (ranching) Sara S. Lewis, 61 1998 Owner of Travel Store (travel) Samuel L. Lupfer, IV, 44 1989 President of Lupfer-Frakes, Inc. (insurance) R. Stephen Miles, Jr., 58 1989 Attorney, Overstreet, Miles, Rich & Cumbie, P.A. (1997-present); Miles & Cumbie (1975-1997) Charles H. Parsons, 69 1989 Architect, Parsons Design & Development, P.A. E. Hampton Sessions, 54 1989 Chief of Radiology, Osceola Regional Medical Center (1996-present); private practice physician Larry L. Walter, 47 1989 President and Chief Executive Officer of Hanson Walter & Associates (engineering) James H. White, 73 1989 Chairman of the Board of First National/Osceola, Community National Bank of Pasco County, and First National Bank of Polk County Thomas E. White, 45 1989 President and Chief Executive Officer of First National/Osceola
44 50 Executive Officers. The following sets forth information regarding the executive officers of First National/Osceola. The officers of First National/Osceola serve at the pleasure of the Board of Directors. PRINCIPAL OCCUPATION AND BUSINESS NAME AND AGE EXPERIENCE DURING PAST FIVE YEARS - ------------ --------------------------------- James W. Burns, 50 Senior Vice President, Branch Administration Linda J. Davidson, 51 Senior Vice President, Cashier Thomas E. White, 45 President and Chief Executive Officer James H. White, 73 Chairman of 3 Central Florida Banks COMPENSATION AND BENEFITS The table below sets forth certain information with respect to compensation paid to Thomas E. White (the President and Chief Executive Officer of First National/Osceola) during the years presented. No other executive officer of First National/Osceola received a total salary and bonus in excess of $100,000 in 1998.
ANNUAL COMPENSATION ------------------- NAME AND OTHER ANNUAL ALL OTHER PRINCIPAL POSITION YEAR SALARY($) BONUS COMPENSATION COMPENSATION(1) - ------------------ ---- --------- ----- ------------ --------------- Thomas E. White, 1998 $114,000 $14,000 - $4,680 President and Chief 1997 $112,000 $ 6,990 - $4,480 Executive Officer 1996 $107,100 $ 9,400 - $4,242
- -------------------- (1) Represents amounts contributed by First National/Osceola to Mr. White's Section 401(k) savings plan account. Non-employee directors of First National/Osceola receive directors fees of $200 for each Board meeting attended and $100 for each Committee meeting attended. Savings Plan First National/Osceola has a 401(k) savings plan covering substantially all employees of First National/Osceola. Under the provisions of the plan, employees may contribute up to 15% of their compensation on a pre-tax basis, subject to limits specified in the Internal Revenue Code. First National/Osceola may make, at the discretion of the Board of Directors, matching contributions up to 3% of the employee's annual compensation and within various limitations specified by the Code. Stock Option Plans First National/Osceola has a Directors' Stock Option Plan and an Officers' and Employees' Stock Option Plan. Under the plans, options for an aggregate of 2,650 shares of First National/Osceola Common Stock were outstanding as of the date of this Proxy Statement. The plans provide that options are granted at prices equal to market value on the date of grant as determined by the Board of Directors, and become exercisable over five years at the rate of 20% each year. The options remain exercisable up to 10 years from the date of grant. The exercise prices for the outstanding options range from $10 to $24 per share. 45 51 MANAGEMENT AND PRINCIPAL STOCK OWNERSHIP Directors and Officers The following table sets forth the beneficial ownership of outstanding shares of First National/Osceola Common Stock as of the date of this Proxy Statement by First National/Osceola's current directors, and by current directors and executive officers as a group. Except as set forth below, management of First National/Osceola is not aware of any individual or group that owns in excess of 5% of the outstanding shares of First National/Osceola.
NAME OF INDIVIDUAL AMOUNT/NATURE OF PERCENT (AND ADDRESS OF 5% OWNER) BENEFICIAL OWNERSHIP(1) OF CLASS - ------------------------- ----------------------- -------- O. Sam Ackley 6,250 1.22% James C. Chapman 125 0.03% A. Gerald Divers 600 0.12% Bryan W. Judge 15,714 3.07% Danny L. Lackey 5,852 1.15% Sara S. Lewis 125 0.03% Samuel L. Lupfer, IV 9,025 1.77% R. Stephen Miles, Jr 4,500 0.88% Charles H. Parsons 6,250 1.22% E. Hampton Sessions 12,203 2.39% Larry L. Walter 11,300 2.21% James H. White 35,000 6.85% 1st National Bank of Polk County P. O. Box 188 Haines City, FL 33845-0188 Thomas E. White 26,000 5.09% 1472 Regal Court Kissimmee, FL 34744 All directors and executive 136,494 26.70% officers as a group (15 persons)
- --------------------- 46 52 (1) Information related to beneficial ownership is based upon the information available to First National/Osceola. (2) Includes 15,514 shares held jointly with his spouse. (3) Includes 5,000 shares owned by a partnership as to which shares he exercises voting and investment power. (4) Includes 8,825 shares held jointly with his spouse. (5) Includes 2,800 shares held jointly with his spouse, and 1,500 shares held by his IRA. (6) Includes 2,353 shares held by a trust as to which shares he exercises voting and investment power. (7) Includes 11,100 shares held jointly with his spouse. (8) Includes 16,000 shares held jointly with his spouse and 11,500 shares held by his spouse. (9) Includes 2,500 shares held by a partnership as to which shares he exercises voting and investment power, and 300 shares held as custodian for minor children. 47 53 FIRST NATIONAL / OSCEOLA MANAGEMENT'S DISCUSSION AND ANALYSIS THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS COVERS IMPORTANT FACTORS AFFECTING THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION OF FIRST NATIONAL / OSCEOLA FOR THE PERIODS SHOWN. FIRST NATIONAL / OSCEOLA'S FINANCIAL STATEMENTS SHOULD BE READ IN CONJUNCTION WITH THIS ANALYSIS. OVERVIEW The First National Bank of Osceola County is a national bank chartered September, 1989. First National / Osceola provides traditional deposit and lending products and services to its commercial and retail customers through five full service branches located within Osceola County in central Florida. First National / Osceola is a national bank and is subject to the supervision of the Office of the Comptroller of the Currency. At September 30, 1999, First National / Osceola had total assets of $107.5 million, total loans of $65.8 million, total deposits of $96.0 million, and total shareholders' equity of $8.5 million. Net income for the nine months ended September 30, 1999, and for the year ended December 31, 1998, was $532,000 and $894,000 respectively, as compared with $659,000 and $602,000 for the nine months ended September 30, 1998 and for the year ended December 31, 1997, respectively. First National/Osceola is located in Osceola County, primarily in the Kissimmee/St. Cloud area, which is contiguous to the southern edge of Orange County. It is also contiguous with the city of Orlando, Florida. First National/Osceola has three full service and one remote facility in Osceola county. The remaining two full service facilities are located within Orange county. First National / Osceola's primary lending focus is small business commercial lending, but also originates residential real estate loans and consumer loans within Osceola and Orange counties. First National/Osceola does not rely on purchased or broker deposits as a source of funds. Instead, the generation of deposits within its market area serves as the fundamental tool in providing a source of funds to be invested, primarily in loans. RESULTS OF OPERATIONS NET INCOME Nine Months Ended September 30, 1999, Compared to Nine Months Ended September 30, 1998 First National / Osceola's net income for the nine month period ended September 30, 1999 was $532,000 compared to net income of $659,000 for the nine month period ended September 30, 1998. The per share net income for the periods ended September 30, 1999 and 1998 were $1.13 ($1.07 diluted) and $1.48 ($1.38 diluted). Net income overall was negatively impacted due to increased operating expenses resulting primarily from opening a new branch early in 1999. The per share income was also negatively impacted due to the issuance of additional shares from the exercise of stock options, primarily in 1999. First National / Osceola has a qualified stock option plan for its employees, as well as a non-qualified stock option plan for its directors. First National / Osceola's return on average assets ("ROA") and return on average equity ("ROE") for the nine month period ended September 30, 1999 (annualized) was 0.65% and 9.08%, as compared to the ROA and ROE of 0.89% and 12.92%, for the nine month period ended September 30, 1998. The efficiency ratios for the two periods ended September 30, 1999 and 1998 approximated 75% and 66% respectively. 48 54 Net income decreased approximately $127,000, or 19%, to $532,000 during the nine month period ended September 30, 1999, compared to $659,000 for the same period during 1998. However, both net interest income and non-interest income increased by a combined amount of approximately $417,000 which was offset by an increase of approximately $620,000 in non interest expenses primarily due to the opening of a new branch early in 1999 as well as investing in future growth by adding additional employees and equipment in other areas of the bank. Income tax expense decreased by approximately $79,000. The improvement in net interest margin was primarily due to an increase in average interest earning assets resulting from a growth in lending activities. The increase in non-interest income was a result of an increase in loan related fees as well as deposit related fees, both due to the overall growth of the loan and deposit portfolios. Year Ended December 31, 1998, Compared to Year Ended December 31, 1997 Net income increased approximately $292,000, or 49%, to $894,000 in 1998, compared to $602,000 in 1997. Earnings per share increased $0.59 ($0.54 diluted), or 42% to $2.00 ($1.86 diluted) in 1998 compared to $1.41 ($1.32 diluted) in 1997. ROA and ROE both increased to 0.88% and 12.88% in 1998, compared to 0.75% and 10.06% in 1997. The increase in earnings per share was negatively impacted due to the issuance of additional shares related to the exercise of stock options, primarily in 1998. The increase in net income was due to an increase in net interest margin $375,000, a decrease in the loan loss provision $174,000, and an increase in non-interest income $183,000. These positive effects on net income were partially offset by an increase in non-interest expense $333,000 and an increase in income tax expense $107,000, primarily due to the continuing growth in activity resulting from two new branches that began operating in June of 1996 and October of 1996. NET INTEREST INCOME/MARGIN Net interest income consists of interest and fee income generated by earning assets, less interest expense. Nine Months Ended September 30, 1999, Compared to Nine Months Ended September 30, 1998 Net interest income increased $268,000, or 9%, to $3,124,000 during the nine month period ended September 30, 1999, compared to $2,856,000 for the nine month period ended September 30, 1998. The $268,000 increase was a combination of a $190,000 increase in interest income and a $78,000 decrease in interest expense. Average interest earning assets increased $8,702,000 to $99,104,000 during the nine month period ending September 30, 1999, compared to $90,402,000 for the nine month period ending September 30, 1998. Comparing these same two periods, yield on average interest earning assets decreased from 7.97% to 7.53%. The increase in volume had a positive effect on the change in interest income (+$666,000 volume variance), however, this was partially offset by the negative impact resulting from the 0.44% decrease in average yields (-$476,000 rate variance). The result was a $190,000 increase in interest income. 49 55 Average interest bearing liabilities increased $8,218,000 to $81,719,000 during the nine month period ending September 30, 1999, compared to $73,501,000 for the nine month period ending September 30, 1998. Comparing these same two periods, the cost of average interest bearing liabilities decreased from 4.61% to 4.02%. The increase in volume resulted in an increase in interest expense (+$195,000 volume variance), which was partially offset by the 0.59% decrease in average yields (-$273,000 rate variance). The result was a $78,000 decrease in interest expense. Refer to the tables Average Balances - Yields & Rates, and Analysis Of Changes In Interest Income And Expenses below. Year Ended December 31, 1998, Compared to Year Ended December 31, 1997 Net interest income increased $375,000 or 11% to $3,812,000 during 1998 compared to $3,437,000 for 1997. The $375,000 increase was a combination of a $1,011,000 increase in interest income and a $636,000 increase in interest expense. Average interest earning assets increased $19,941,000 to $92,600,000 during 1998 compared to $72,659,000 for 1997. Comparing these same two periods, the yield on average interest earning assets decreased from 8.61% to 7.85%. The increase in volume had a positive effect on the change in interest income (+$1,368,000 volume variance), however, this was partially offset by the negative impact resulting from the 0.76% decrease in average yields (-$357,000 rate variance). The result was a $1,011,000 increase in interest income. Average interest bearing liabilities increased $14,566,000 to $75,659,000 during 1998 compared to $61,093,000 for 1997. Comparing these same two periods, the cost of average interest bearing liabilities decreased from 4.61% to 4.57%. The increase in volume had an increasing effect on interest expense (+$649,000 volume variance). The decrease in yield had an increasing effect on interest expense (-$13,000 rate variance). The result was a $636,000 increase in interest expense. 50 56
AVERAGE BALANCES - YIELDS & RATES (Dollars are in Thousands) Nine Months Ended September 30, ----------------------------------------------------------------------- 1999 1998 -------------------------------- -------------------------------- Average Interest Average Average Interest Average Balance Inc / Exp Rate (1) Balance Inc / Exp Rate (1) -------- -------- -------- ------- --------- -------- ASSETS: Federal Funds Sold $ 3,515 $ 130 4.94% $13,868 $ 516 4.97% Securities Available for Sale 31,134 1,230 5.28% 21,000 945 6.02% Securities Held to Maturity 3,012 135 5.99% 1,522 65 5.71% Loans (2) 61,443 4,086 8.89% 54,012 3,865 9.57% -------- ------ ---- ------- ------ ---- TOTAL EARNING ASSETS $ 99,104 $5,581 7.53% $90,402 $5,391 7.97% All Other Assets 9,882 8,731 ======== ======= TOTAL ASSETS $108,986 $99,133 ======== ======= LIABILITIES & SHAREHOLDERS' EQUITY: Deposits: NOW & Money Markets $ 16,196 $ 183 1.51% $13,895 $ 176 1.69% Savings 9,463 177 2.50% 6,379 130 2.72% Time Deposits 52,520 1,997 5.07% 51,617 2,175 5.63% Short Term Borrowings 3,540 100 3.78% 1,610 54 4.48% -------- ----- ---- ------- ------ ---- TOTAL INTEREST BEARING LIABILITIES $ 81,719 $2,457 4.02% $73,501 $2,535 4.61% Demand Deposits 19,084 16,966 Other Liabilities 367 1,866 Shareholders' Equity 7,816 6,800 -------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $108,986 $99,133 ======== ======= NET INTEREST SPREAD (3) 3.51% 3.36% ==== ==== NET INTEREST INCOME $3,124 $2,856 ====== ====== NET INTEREST MARGIN (4) 4.21% 4.22% ==== ====
Years Ended December 31, ----------------------------------------------------------------------- 1998 1997 -------------------------------- -------------------------------- Average Interest Average Average Interest Average Balance Inc / Exp Rate (1) Balance Inc / Exp Rate (1) -------- -------- -------- ------- --------- -------- ASSETS: Federal Funds Sold $ 12,790 $ 637 4.98% $ 6,494 $ 363 5.59% Securities Available for Sale 23,485 1,379 5.87% 14,528 844 5.81% Securities Held to Maturity 1,716 90 5.24% 2,716 188 6.92% Loans (2) 54,609 5,160 9.45% 48,921 4,860 9.93% -------- ------ ---- ------- ------ ---- TOTAL EARNING ASSETS $ 92,600 $7,266 7.85% $72,659 $6,255 8.61% All Other Assets 8,750 7,295 -------- ------- TOTAL ASSETS $101,350 $79,954 ======== ======= LIABILITIES & SHAREHOLDERS' EQUITY: Deposits: NOW & Money Markets $ 14,164 $ 231 1.63% $12,407 $ 223 1.80% Savings 6,722 181 2.69% 3,846 85 2.21% Time Deposits 52,457 2,938 5.60% 43,108 2,428 5.63% Short Term Borrowings 2,316 104 4.49% 1,732 82 4.73% -------- ------ ---- ------- ------ ---- TOTAL INTEREST BEARING LIABILITIES $ 75,659 $3,454 4.57% $61,093 $2,818 4.61% Demand Deposits 17,213 12,667 Other Liabilities 1,537 210 Shareholders' Equity 6,941 5,984 -------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $101,350 $79,954 ======== ======= NET INTEREST SPREAD (3) 3.28% 4.00% ==== ===== NET INTEREST INCOME $3,812 $3,437 ====== ====== NET INTEREST MARGIN (4) 4.12% 4.73% ==== ====
(1) Nine month data presented on an annualized basis. (2) Interest income on average loans includes loan fee recognition of $175,000 and $144,000 for the nine month periods ended September 30, 1999 and 1998 and $208,000 and $182,000 for the years ended December 31, 1998 and 1997. Generally, interest is not accrued on loans past due by more than 90 days. (3) Represents the average rate earned on interest earning assets minus the average rate paid on interest bearing liabilities. (4) Represents net interest income divided by total earning assets. 51 57 ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSES (Dollars are in Thousands)
Net Change Sept 30, 1998 - 1999 Net Change Dec 31, 1997 - 1998 ------------------------------- -------------------------------- Net Net Volume (1) Rate (2) Change Volume (1) Rate (2) Change ------------------------------- -------------------------------- INTEREST INCOME Federal Funds sold ($385) ($ 1) ($386) $ 352 ($ 78) $ 274 Securities Available for Sale 456 (171) 285 520 15 535 Securities Held to Maturity 64 6 70 (69) (29) (98) Loans 532 (311) 221 565 (265) 300 --------------------------- ------------------------------- TOTAL INTEREST INCOME $ 666 ($476) $ 190 $ 1,368 ($357) $1,011 --------------------------- ------------------------------- INTEREST EXPENSE Deposits NOW & Money Market Accounts $ 29 ($ 22) $ 7 $ 32 ($ 24) $ 8 Savings 63 (16) 47 64 32 96 Time Deposits 38 (216) (178) 527 (17) 510 Short-Term Borrowings 65 (19) 46 28 (6) 22 --------------------------- ------------------------------- TOTAL INTEREST EXPENSE $ 195 ($273) ($ 78) $ 649 $ (13) $ 636 --------------------------- ------------------------------- NET INTEREST INCOME $ 471 ($203) $ 268 $ 719 ($344) $ 375 =========================== ===============================
(1) The volume variance reflects the change in the average balance outstanding multiplied by the actual average rate during the prior period. (2) The rate variance reflects the change in the actual average rate multiplied by the average balance outstanding during the current period. PROVISION AND ALLOWANCE FOR LOAN LOSSES Management's policy is to maintain the allowance for loan losses at a level sufficient to absorb inherent losses in the loan portfolio. The allowance is increased by the provision for loan losses which is a charge to current period earnings and decreased by charge-offs net of recoveries on prior period loan charge-offs. In determining the adequacy of the reserve for loan losses, management considers those levels maintained by conditions of individual borrowers, the historical loan loss experience, the general economic environment, and the overall portfolio composition. As these factors change, the level of loan loss provision changes. Nine Months Ended September 30, 1999, Compared to Nine Months Ended September 30, 1998 The provision for loan loss expense increased $3,000, or 3%, to $99,000 during the nine month period ending September 30, 1999, as compared to $96,000 for the comparable period in 1998, due to an increase in general lending activity. At September 30, 1999 the allowance for loan losses totaled $798,000, or 1.20%, of total loans outstanding, compared to $858,000, or 1.50%, of total loans outstanding at September 30, 1998. Year Ended December 31, 1998, Compared to Year Ended December 31, 1997 The provision for loan loss expense decreased $174,000, or 82%, to $38,000 during 1998, as compared to $212,000 for 1997. The decrease was primarily due to a change in management's assessments of conditions of individual borrowers and the overall portfolio composition. At December 31, 1998, the provision for loan losses totaled $781,000, or 1.36%, of total loans outstanding, compared to $781,000, or 1.47%, of total loans outstanding at December 31, 1997. 52 58 Management believes that First National / Osceola's allowance for loan losses was adequate at September 30, 1999. The following sets forth certain information on First National / Osceola's allowance for loan losses for the periods presented. ACTIVITY IN ALLOWANCE FOR LOAN LOSSES (In Thousands of Dollars)
Nine Months Ended Years Ended Sept 30 Dec 31 1999 1998 1998 1997 ------------------ ---------------- Balance at Beginning of Year $781 $781 $781 $616 Loans Charged-Off: Commercial, Financial & Agricultural (56) (3) (20) (48) Real Estate, Mortgage 0 (4) (4) 0 Consumer (52) (25) (31) (24) ----------------- ----------------- Total Loans Charged-Off ($108) ($32) ($55) ($72) ----------------- ----------------- Recoveries on Loans Previously Charged-Off Commercial, Financial & Agricultural $ 8 $ 3 $ 3 $19 Real Estate, Mortgage 4 8 9 0 Consumer 14 2 5 5 ----------------- ----------------- Total Loan Recoveries $ 26 $ 13 $17 $24 ----------------- ----------------- Net Loans Charged-Off ($82) ($19) ($38) ($48) ----------------- ----------------- Provision for Loan Losses Charged to Expense $99 $96 $38 $213 ----------------- ----------------- Ending Balance $798 $858 $781 $781 ================= ================= Total Loans Outstanding $66,612 $57,206 $57,372 $53,094 Average Loans Outstanding $61,443 $54,012 $54,609 $48,921 Allowance for Loan Losses to Loans 1.20% 1.50% 1.36% 1.47% Outstanding Net Charge-offs to Average Loans Outstanding (annualized) 0.18% 0.05% 0.07% 0.10%
NON-INTEREST INCOME Nine Months Ended September 30, 1999, Compared to Nine Months Ended September 30, 1998 Non-interest income for the nine months ended September 30, 1999 increased $148,000 or 29% to $650,000 as compared to $502,000 for the same period in 1998. Most of this increase ($110,000) was due to an increase in service fees from various deposit accounts. The remaining increases related to increases in ATM charges ($27,000), and other miscellaneous fees ($11,000). 53 59 Year Ended December 31, 1998, Compared to Year Ended December 31, 1997 Non-interest income for 1998 increased by $183,000 or 35%, to $707,000 as compared to $524,000 for 1997. The net increase was comprised of a $145,000 increase in service fees on various deposit accounts, a $32,000 increase in ATM related fees, and other miscellaneous fees of $6,000. NON-INTEREST EXPENSE Nine Months Ended September 30, 1999, Compared to Nine Months Ended September 30, 1998 Non-interest expense increased $620,000 (30%) for the nine months ended September 30, 1999, to $2,836,000 compared to $2,216,000 for the same period in 1998. The increase was a result of a $243,000 increase in compensation and related employee benefits, a $135,000 increase in occupancy and related equipment expenses, with the remaining increases in non-interest expense (approximately $241,000) summarized in the table below - Non-Interest Expenses. The primary reasons for the increase in non interest expense was the new branch that began operating early in 1999, as well as an increase in employees and equipment required to sustain the overall growth of First National / Osceola. Year Ended December 31, 1998, Compared to Year Ended December 31, 1997 Non-interest expense increased $333,000 (12%) to $3,075,000 during 1998 compared to $2,742,000 for 1997. The increase was a result of a $169,000 increase in salary, wages and employee benefits and a $164,000 increase in other non-interest expenses as summarized in the table below - Non-Interest Expenses. Much of the increase was associated with the continued operations of the two new branches that began operations in June 1996 and October 1996, as well as funding the continuing growth of First National / Osceola. NON INTEREST EXPENSE (Dollars are in Thousands)
Nine Months Ended Sept 30 Years Ended Dec 31 -------------------------------- -------------------------------- 1999 1998 Incr(Decr) 1998 1997 Incr(Decr) -------------------------------- -------------------------------- Salary, wages and employee benefits $1,215 $972 $243 $1,374 $1,205 $169 Occupancy expense 421 312 109 423 427 (4) Depreciation of premises and equipment 190 164 26 217 206 11 Stationery and printing supplies 119 71 48 100 110 (10) Advertising and public relations 65 55 10 75 71 4 Data processing expense 211 169 42 233 199 34 Legal & professional fees 75 71 4 97 67 30 Other operating expenses 540 402 138 556 457 99 ------ ---- ---- ------ ------ ---- Total other operating expenses $2,836 $2,216 $620 $3,075 $2,742 $333 ====== ====== ==== ====== ====== ====
INCOME TAX PROVISION The income tax provision for the nine month period ended September 30, 1999 was $308,000, an effective tax rate of 36.7% , as compared to $387,000 for the nine month period ended September 30, 54 60 1998, an effective tax rate of 37.0%%. The income tax provision for the year ended December 31, 1998, was $512,000, an effective tax rate of 36.4%, as compared to $405,000 for the year ended December 31, 1997, an effective tax rate of 40.2%. The reduction in the effective tax rate in 1998 compared to 1997 was primarily the result of higher amounts of non deductible items in 1997 compared to 1998. NET INCOME Net income for the years ended December 31, 1998, and 1997 was $894,000 and $602,000, respectively. Net income for the nine month periods ended September 30, 1999 and 1998, was $521,000 and $700,000 respectively. FINANCIAL CONDITION As of September 30, 1999, the Bank had total assets of $107.5 million, compared to $109.3 million and $86.3 million as of December 31, 1998, and 1997, respectively. Net loans outstanding on September 30, 1999, were $65,814,000 compared to $56,591,000 and $52,313,000 as of December 31, 1998, and 1997, respectively. Loans Lending-related income is the most important component of the First National / Osceola's net interest income and is a major contributor to profitability. The loan portfolio is the largest component of earning assets, and it therefore generates the largest portion of revenues. The absolute volume of loans and the volume of loans as a percentage of earning assets is an important determinant of net interest margin as loans are expected to produce higher yields than securities and other earning assets. Average loans during the nine-month period ending September 30, 1999, were $61,443,000, or 62% of earning assets, as compared to $54,609,000, or 59% of earning assets, for December 31, 1998, and $48,921,000, or 67% of earning assets, for December 31, 1997. This represented an average loan to average deposit ratio of 63%, 60%, and 68% for September 30, 1999, December 31, 1998, and December 31, 1997, respectively. As of September 30, 1999, First National / Osceola had total loans of $66,612,000, net of unearned discount, as compared to $57,372,000 at December 31, 1998, an increase of $9,240,000, or 16%. The growth in loans in the nine-month period was mainly due to the general growth in the market and the calling efforts of the loan officers. Commercial, financial and agricultural loans totaled $10,876,000, or 17% of the loan portfolio. Real estate construction loans totaled $3,557,000, or 5% of the loan portfolio. Real estate mortgage loans totaled $44,737,000, or 67% of the loan portfolio. Installment and consumer loans totaled $7,442,000, or 11% of the loan portfolio. As of December 31, 1998, loans totaled $57,372,000 million, net of unearned discount, as compared to $53,094,000 at December 31, 1997, an increase of $4,278,000, or 8%. The growth was mainly due to general growth in the market and the calling efforts of the loan officers. Commercial, financial and agricultural loans totaled $10,828,000 or 19% of the loan portfolio. Real estate construction loans totaled $2,801,000, or 5% of the loan portfolio. Real estate mortgage loans totaled $37,818,000, or 66% of the loan portfolio. Installment and consumer loans totaled $5,925,000, or 10% of the loan portfolio. Loan concentrations are considered to exist where there are amounts loaned to multiple borrowers engaged in similar activities which collectively should be similarly impacted by economic or other conditions and when the total of such amounts would exceed 25% of total capital. Due to the lack of diversified industry and the relative proximity of markets served, the Bank has concentrations in geographic as well as in types of loans funded. The tables below provide a summary of the loan portfolio composition and maturities for the periods provided below. 55 61 LOAN PORTFOLIO COMPOSITION (Dollars are in Thousands)
TYPES OF LOANS September 30, December 31, - ------------------------------------- --------------------- --------------------- 1999 1998 1998 1997 -------- -------- -------- -------- Commercial, Financial & Agricultural $ 10,876 $ 11,070 $ 10,828 $ 11,243 Real Estate - Construction 3,557 3,334 2,801 3,184 Real Estate - Mortgage 44,737 36,548 37,818 32,952 Installment & Consumer Lines 7,442 6,254 5,925 5,715 -------- -------- -------- -------- Total Loans, Net of Unearned Discount $ 66,612 $ 57,206 $ 57,372 $ 53,094 Less: Allowance for Loan Losses (798) (858) (781) (781) ======== ======== ======== ======== Net Loans $ 65,814 $ 56,348 $ 56,591 $ 52,313 ======== ======== ======== ========
LOAN MATURITY SCHEDULE (Dollars are in Thousands) (Based on Contractual Maturities)
September 30, 1999 --------------------------------------- 0 - 12 1 - 5 Over 5 Months Years Years Total ------- ------- ------ ------- All Loans other Than Construction $35,569 $19,701 $7,785 $63,055 Real Estate - Construction 3,557 0 0 3,557 ------- ------- ------ ------- Total $39,126 $19,701 $7,785 $66,612 ======= ======= ====== ======= Fixed Interest Rate $ 4,793 $19,701 $7,785 $32,279 Variable Interest Rate 34,333 0 0 34,333 ------- ------- ------ ------- Total $39,126 $19,701 $7,785 $66,612 ======= ======= ====== =======
December 31, 1998 --------------------------------------- 0 - 12 1 - 5 Over 5 Months Years Years Total ------- ------- ------ ------- All Loans other Than Construction $36,789 $17,121 $ 661 $54,571 Real Estate - Construction 2,801 0 0 2,801 ------- ------- ------ ------- Total $39,590 $17,121 $ 661 $57,372 ======= ======= ====== ======= Fixed Interest Rate $ 5,706 $17,121 $ 661 $23,488 Variable Interest Rate 33,884 0 0 33,884 ------- ------- ------ ------- Total $39,590 $17,121 $ 661 $57,372 ======= ======= ====== =======
Credit Quality First National / Osceola maintains an allowance for loan losses to absorb inherent losses in the loan portfolio. The loans are charged against the allowance when management believes collection of the principal is unlikely. The reserve consists of amounts established for specific loans and is also based on historical loan loss experience. The specific reserve element is the result of a regular analysis of all loans 56 62 and commitments based on credit rating classifications. The historical loan loss element represents a projection of future credit problems and is determined using loan loss experience of each loan type. Management also weighs general economic conditions based on knowledge of specific factors that may affect the collectibility of loans. First National / Osceola is committed to the early recognition of problems and to maintaining a sufficient allowance. At September 30, 1999, the allowance for loan losses was $798,000, or 1.2% of total loans outstanding, net of unearned income, compared to $781,000, or 1.4%, at December 31, 1998, and $781,000, or 1.5%, at December 31, 1997. Non-performing assets consist of non-accrual loans, loans past due 90 days or more and still accruing interest, and other real estate owned. Loans are placed on a non-accrual status when they are past due 90 days and management believes the borrower's financial condition, after giving consideration to economic conditions and collection efforts, is such that collection of interest is doubtful. When a loan is placed on non-accrual status, interest accruals cease and uncollected interest is reversed and charged against current income. Subsequent collections reduce the principal balance of the loan until the loan is returned to accrual status. Total non-performing assets as of September 30, 1999, increased $82,000, or 48%, to $253,000, compared to $171,000 as of December 31, 1998. Non-performing loans, plus other real estate owned, as a percentage of total assets at September 30, 1999, and December 31,1998, was .24% and .16%, respectively. The increase in non-performing assets was mainly attributable to the previous low level. Management believes that the allowance for loan losses on September 30, 1999 was adequate. Total non-performing assets as of December 31, 1998 increased $129,000, or 307%, to $171,000, compared to $42,000 as of December 31, 1997. Non-performing loans, plus other real estate owned, as a percentage of total assets at December 31, 1998, and December 31,1997, was .16% and .04%, respectively. Management is continually analyzing its loan portfolio in an effort to recognize and resolve its problem assets as quickly and efficiently as possible. As of September 30, 1999, management believes that it has identified and adequately reserved for such problem assets. However, management recognizes that many factors can adversely impact various segments of its market. As such management continuously focuses its attention on promptly identifying and providing for potential problem loans, as they arise. The tables below summarize First National/Osceola's non-performing assets and allocation of allowance for loan losses for the periods provided.
NON-PERFORMING ASSETS (Dollars are in Thousands) September 30, December 31, ------------- ------------- 1999 1998 1998 1997 ---- ---- ---- ---- Non-Accrual Loans $ 0 $ 0 $ 0 $ 0 Past Due Loans 90 Days or More and Still Accruing Interest 253 276 171 42 Other Real Estate Owned 0 0 0 0 ---- ---- ---- ---- Total Non-Performing Assets $253 $276 $171 $ 42 ==== ==== ==== ==== Percent of Total Assets 0.24% 0.26% 0.16% 0.04% ==== ==== ==== ==== Allowance for Loan Losses $798 $858 $781 $781 ==== ==== ==== ==== Allowance for Loan Losses to Nonperforming Loans 315% 311% 457% 1859% ==== ==== ==== ====
57 63 ALLOCATION OF ALLOWANCE FOR LOAN LOSSES (Dollars are in Thousands)
September 30, 1999 December 31, 1998 December 31, 1997 ------------------ ------------------- ----------------- Percent Percent Percent of of of Loans Loans Loans in Each in Each in Each Category Category Category to to to Total Total Total Amount Loans Amount Loans Amount Loans ------ -------- ------ -------- ------ -------- Commercial, Financial & Agricultural $592 16% $ 47 19% $117 21% Real Estate Construction 0 5% 9 5% 10 6% Real Estate - Mortgage 70 67% 407 66% 333 62% Consumer 30 12% 26 10% 24 11% Unallocated 106 0% 292 0% 297 0% ---- --- ---- --- ---- --- Total $798 100% $781 100% $781 100% ==== === ==== === ==== ===
Deposits and Funds Purchased Total deposits decreased $1,602,000 (1.6%) to $95,956,000 as of September 30, 1999, compared to $97,558,000 on December 31, 1998. Total deposits increased $19,050,000 (24%) to $97,558,000 as of December 31, 1998, compared to $78,508,000 on December 31, 1997. First National / Osceola does not rely on purchased or brokered deposits as a source of funds. Instead, the generation of deposits within its market area serves as the company's fundamental tool in providing a source of funds to be invested primarily in loans. The tables below summarize selected deposit information for the periods indicated. SELECTED STATISTICAL INFORMATION FOR DEPOSITS (Dollars are in Thousands)
September 30, December 31, ---------------- ------------------------------------- 1999 1998 1997 --------------- ------------------------------------- Average Average Average Balance Rate Balance Rate Balance Rate ------- ---- ------- ---- ------- ---- Noninterest-bearing demand deposits $19,084 0.00% $17,213 0.00% $12,667 0.00% Interest-bearing demand deposits 16,196 1.51% 14,164 1.63% 12,407 1.80% Savings deposits 9,463 2.50% 6,722 2.69% 3,846 2.21% Time deposits 52,520 5.07% 52,457 5.60% 43,108 5.63% ------- ---- ------- ---- ------- ---- Total Average Deposits $97,263 3.24% $90,556 3.70% $72,028 3.80% ======= ==== ======= ==== ======= ====
58 64 MATURITY OF TIME DEPOSITS OF $100,000 OR MORE (Dollars are in Thousands)
Sept 30, 1999 Dec 31, 1998 ------------- ------------ Three Months or Less $2,772 $4,256 Three Through Six Months 3,211 3,410 Six Through Twelve Months 3,509 2,677 Over Twelve Months 1,268 1,218 ------- ------- Total $10,760 $11,561 ======= =======
Repurchase Agreements First National / Osceola enters into agreements to repurchase ("repurchase agreements") under which the company pledges investment securities owned and under its control as collateral against the one-day agreements. The daily average balance of these agreements for the periods ended September 30, 1999 and 1998, was approximately $3,540,000 and $1,610,000 respectively. Interest expense for the same periods was approximately $99,600 and $54,100, respectively, resulting in an average rate paid of 3.76% and 4.50% for the nine-month periods ended September 30, 1999 and 1998, respectively. The daily average balance for the years ended December 31, 1998, and 1997 was approximately $2,316,000 and $1,732,000, respectively. Interest expense for these periods was approximately $104,000 and $82,000, respectively, resulting in an average rate paid of 4.48% and 4.73% for the years ended 1998 and 1997, respectively. SCHEDULE OF SHORT-TERM BORROWINGS (1) (dollars in thousands)
Maximum Average Weighted Outstanding Interest Rate Average at any Average during the Ending Interest Rate Month End Balance Year Balance at Year End --------------- ------------ -------------- ------------ ---------------- NINE MONTHS ENDED September 30, 1999 $5,097 $3,540 3.78% $2,791 4.75% September 30, 1998 1,552 1,610 4.48% 1,166 5.04% YEAR ENDED DECEMBER 31, 1998 4,729 2,316 4.49% 3,978 4.50% 1997 3,285 1,732 4.73% 1,044 5.87%
- -------------------- (1) Consists of Securities sold under agreements to repurchase Securities First National / Osceola accounts for investments at fair value except for those securities which the company has the positive intent and ability to hold to maturity. Investments to be held for indefinite periods of time and not intended to be held to maturity are classified as available for sale and are carried at fair value. Unrealized holding gains and losses are included as a separate component of stockholders' equity net of the effect of income taxes. Realized gains and losses on investment securities available for sale are computed using the specific identification method. Securities that management has the intent and the company has the ability at the time of purchase or origination to hold until maturity are classified as investment securities held to maturity. Securities in 59 65 this category are carried at amortized cost adjusted for accretion of discounts and amortization of premiums using the level yield method over the estimated life of the securities. If a security has a decline in fair value below its amortized cost that is other than temporary, then the security will be written down to its new cost basis by recording a loss in the statement of operations. First National / Osceola does not engage in trading activities as defined in Statement of Financial Accounting Standard Number 115. First National / Osceola's available for sale portfolio totaled $25,883,000 at September 30, 1999, $35,819,000 at December 31, 1998, and $14,667,000 at December 31, 1997, or 24%, 33% and 17%, respectively, of total assets. The held to maturity portfolio totaled $3,538,000 at September 30, 1999, $2,555,000 at December 31, 1998 and $3,003,000 at December 31, 1997, or 3%, 2% and 3%, respectively, of total assets. See the tables below for a summary of security type, maturity and average yield distributions. First National / Osceola uses its securities portfolio primarily as a source of liquidity and a base from which to pledge assets for repurchase agreements and public deposits. When the company's liquidity position exceeds expected loan demand, other investments are considered by management as a secondary earnings alternative. Typically, management remains short-term (under 5 years) in its decision to invest in certain securities. As these investments mature, they will be used to meet cash needs or will be reinvested to maintain a desired liquidity position. The company has designated substantially all of its securities as available for sale to provide flexibility, in case an immediate need for liquidity arises. The composition of the portfolio offers management full flexibility in managing its liquidity position and interest rate sensitivity, without adversely impacting its regulatory capital levels. The available for sale portfolio is carried at fair market value and had a net unrealized loss of approximately $84,000 on September 30, 1999, a net unrealized gain of approximately $201,000 on December 31, 1998 and a net unrealized gain of approximately $31,000 on December 31, 1997. First National / Osceola invests primarily in direct obligations of the United States, obligations guaranteed as to the principal and interest by the United States and obligations of agencies of the United States. In addition, the company enters into federal funds transactions with its principal correspondent banks, and acts as a net seller of such funds. The Federal Reserve Bank also requires equity investments to be maintained by First National / Osceola. The tables below summarize the maturity distribution of investment securities, weighted average yield by range of maturities, and distribution of investment securities for the periods provided. MATURITY DISTRIBUTION OF INVESTMENT SECURITIES (Dollars are in Thousands)
September 30, 1999 December 31, 1998 December 31, 1997 ---------------------- ---------------------- ------------------------- Amortized Estimated Amortized Estimated Amortized Estimated AVAILABLE-FOR-SALE Cost Market Value Cost Market Value Cost Market Value - ------------------ --------- ------------ --------- ------------ --------- ------------ U.S. Treasury and U.S. Government Agencies and Corporations and Obligations of State and Political Subdivisions: One Year or Less $15,535 $15,535 $10,395 $10,440 $7,242 $7,256 Over One Through Five Years 8,298 8,213 23,088 23,244 7,266 7,283 Over Five Through Ten Years 0 0 0 0 0 0 Over Ten Years 2,000 2,000 2,000 2,000 0 0 Federal Reserve Bank Stock 135 135 135 135 128 128 --------- ----------- --------- ----------- ----------- ----------- Total $25,968 $25,883 $35,618 $35,819 $14,636 $14,667 ========= =========== ========= =========== =========== ===========
60 66 HELD-TO-MATURITY U.S. Government Agencies and Treasuries One Year or Less $0 $0 $501 $504 $2,500 $2,504 Over One Through Five Years 3,538 3,485 2,054 2,042 503 508 --------- ----------- --------- ----------- ----------- ----------- Total $3,538 $3,485 $2,555 $2,546 $3,003 $3,012 ========= =========== ========= =========== =========== ===========
WEIGHTED AVERAGE YIELD BY RANGE OF MATURITIES (AVERAGE YIELDS ON SECURITIES AVAILABLE FOR SALE ARE CALCULATED BASED ON AMORTIZED COST)
Sept 30, 1999 Dec 31, 1998 Dec 31, 1997 ------------- ------------ ------------ One Year or Less 5.34% 5.80% 6.14% Over One Through Five Years 5.16% 5.34% 5.94% Over Five Through Ten Years 0.00% 0.00% 0.00% Over Ten Years 5.51% 5.77% 0.00%
DISTRIBUTION OF INVESTMENT SECURITIES (Dollars are in Thousands)
September 30, 1999 December 31, 1998 December 31, 1997 ---------------------- ----------------------- ------------------------ Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value --------- ------- --------- ------- ---------- ------- AVAILABLE FOR SALE: US Treasury Securities $15,567 $15,541 $19,621 $19,775 $10,259 $10,285 US Government Agencies 8,002 7,952 13,502 13,550 4,249 4,254 State, County, & Municipal 2,000 2,000 2,000 2,000 0 0 Mortgage-Backed Securities 264 255 360 359 0 0 Federal Reserve Bank Stock 135 135 135 135 128 128 ------- ------- ------- ------- ------- ------- Total $25,968 $25,883 $35,618 $35,819 $14,636 $14,667 ======= ======= ======= ======= ======= ======= HELD TO MATURITY: US Treasury Securities $ 0 $ 0 $ 2,054 $ 2,042 $ 1,000 $ 1,001 US Government Agencies 3,538 3,485 501 504 2,003 2,011 ------- ------- ------- ------- ------- ------- Total $ 3,538 $ 3,485 $ 2,555 $ 2,546 $ 3,003 $ 3,012 ======= ======= ======= ======= ======= =======
Liquidity and Interest Rate Sensitivity Market and public confidence in the financial strength of First National / Osceola and financial institutions in general will largely determine the company's access to appropriate levels of liquidity. This confidence is significantly dependent on First National / Osceola's ability to maintain sound asset quality and appropriate levels of capital reserves. Liquidity is defined as the ability to meet anticipated customer demands for funds under credit commitments and deposit withdrawals at a reasonable cost and on a timely basis. Management measures the liquidity position by giving consideration to both on- and off-balance sheet sources of and demands for funds on a daily and weekly basis. Sources of liquidity include cash and cash equivalents, net of federal requirements to maintain reserves against deposit liabilities; investment securities eligible for pledging to secure borrowings from dealers and customers pursuant to securities sold under repurchase agreements; loan repayments; loan sales; deposits and certain interest rate-sensitive deposits; and borrowings under overnight federal fund lines available from correspondent banks. In addition to interest rate-sensitive deposits, the primary demand for liquidity is anticipated fundings under credit commitments to customers. 61 67 Interest rate sensitivity refers to the responsiveness of interest-earning assets and interest-bearing liabilities to changes in market interest rates. The rate sensitive position, or gap, is the difference in the volume of rate-sensitive assets and liabilities, at a given time interval, including both floating rate instruments and instruments which are approaching maturity. The measurement of First National / Osceola's interest rate sensitivity, or gap, is one of the principal techniques used in asset and liability management. Management generally attempts to maintain a balance between rate-sensitive assets and liabilities as the exposure period is lengthened to minimize the overall interest rate risks to First National / Osceola. The asset mix of the balance sheet is evaluated continually in terms of several variables: yield, credit quality, appropriate funding sources and liquidity. Management of the liability mix of the balance sheet focuses on expanding the various funding sources. First National / Osceola's gap and liquidity positions are reviewed periodically by management to determine whether or not changes in policies and procedures are necessary to achieve financial goals. At September 30, 1999, approximately 50% of total gross loans were adjustable rate and 69% of total securities either reprice or mature in less than one year. Total financing liabilities consisted of approximately $25,699,000 (27%) in NOW, Money Market Accounts and Savings, $48,645,000 (51%) in time deposits, and $21,612,000 (22%) in non-interest bearing demand accounts. At December 31, 1998, approximately 59% of total gross loans were adjustable rate and 23% of total securities either reprice or mature in less than one year. Total financing liabilities consisted of approximately $24,122,000 (25%) in NOW, Money Market Accounts and Savings, $54,764,000 (56%) in time deposits, and $18,671,000 (19%) in non-interest bearing demand accounts. A rate sensitivity analysis is presented below as of September 30, 1999 and December 31, 1998. First National / Osceola has prepared a table which presents the market risk associated with financial instruments held by the company. In the "Rate Sensitivity Analysis" table, rate sensitive assets and liabilities are shown by maturity or repricing periods, separating fixed and variable interest rates. The estimated fair value of each instrument category is also shown in the table. While these estimates of fair value are based on management's judgment of the most appropriate factors, there is no assurance that, were First National / Osceola to have disposed of such instruments at December 31, 1998, and September 30, 1999, the estimated fair values would necessarily have been achieved at that date, since market values may differ depending on various circumstances. The estimated fair values at December 31, 1998, and September 30, 1999, should not necessarily be considered to apply at subsequent dates. 62 68 RATE SENSITIVITY ANALYSIS September 30, 1999 (Dollars are in Thousands)
Est. Fair 0-1 Yr 1-2 Yrs 2-3 Yrs 3-4 Yrs 4-5 Yrs 5 Ys + TOTAL Value ------- ------- ------- ------- ------- ------ ------- ------- INTEREST EARNING ASSETS Loans Fixed Rate Loans $ 4,793 $3,676 $4,464 $5,781 $5,781 $ 7,778 $32,273 $32,178 Average Interest Rate 8.35% 9.35% 9.01% 8.41% 8.41% 8.10% 8.52% Variable Rate Loans 32,280 0 0 0 0 0 32,280 32,280 Average Interest Rate 8.46% 8.46% Investment Securities (1) Fixed Rate Securities 20,057 5,549 1,764 0 0 2,000 29,370 29,233 Average Interest Rate 5.75% 5.72% 5.77% 5.45% 5.72% Variable Rate Securities 0 0 0 0 0 0 0 Average Interest Rate Federal Funds Sold 2,150 0 0 0 0 0 2,150 2,150 Average Interest Rate 4.31% 4.31% Other Earning Assets (2) 135 0 0 0 0 0 135 135 Average Interest Rate 6.00% 6.00% ------- ------ ------ ------ ------ ------- ------- ------- Total Interest-Earning Assets $59,415 $9,225 $6,228 $5,781 $5,781 $ 9,778 $96,208 $95,976 7.38% 7.17% 8.09% 8.41% 8.41% 7.55% 7.55% ======= ====== ====== ====== ====== ======= ======= INTEREST BEARING LIABILITIES NOW Accounts $ 9,294 $ 0 $ 0 $ 0 $ 0 $ 0 $ 9,294 $ 9,294 Average Interest Rate 1.00% 1.00% Money Market Accounts 6,223 0 0 0 0 0 6,223 6,223 Average Interest Rate 2.00% 2.00% Savings Accounts 10,182 0 0 0 0 10,182 10,182 Average Interest Rate 1.65% 1.65% CDs $100,000 & Over 9,492 1,137 0 131 0 0 10,760 10,828 Average Interest Rate 5.13% 5.63% 5.00% 5.18% CDs Under $100,000 29,064 6,298 225 1,057 710 531 37,885 37,467 Average Interest Rate 4.80% 5.12% 5.95% 5.61% 5.36% 5.05% 4.90% Securities Sold Under Repurchase Agreement 2,791 0 0 0 0 0 2,791 2,791 Average Interest Rate 3.78% 3.78% ------- ------ ------ ------ ------ ------- ------- ------- Total Interest-Bearing Liabilities $67,046 $7,435 $ 225 $1,188 $ 710 $ 531 $77,135 $76,785 3.54% 5.20% 5.95% 5.54% 5.36% 5.05% 3.77% ======= ====== ====== ====== ====== ======= =======
- ------------------------- (1) Securities available for sale are shown at their amortized cost. (2) Represents interest earning Federal Reserve Bank Stock 63 69 RATE SENSITIVITY ANALYSIS December 31, 1999 (Dollars are in Thousands)
Est. Fair 0-1 Yr 1-2 Yrs 2-3 Yrs 3-4 Yrs 4-5 Yrs 5 Ys + TOTAL Value ------- ------- ------- ------- ------- ------ ------- --------- INTEREST EARNING ASSETS Loans Fixed Rate Loans $ 5,706 $2,971 $ 5,015 $4,531 $4,531 $ 656 $ 23,410 $ 23,734 Average Interest Rate 8.45% 9.53% 9.29% 8.70% 8.70% 9.08% 8.88% Variable Rate Loans 33,661 0 0 0 0 0 33,661 33,661 Average Interest Rate 8.12% 8.12% Investment Securities (1) Fixed Rate Securities 8,761 19,373 6,054 1,859 0 2,000 38,047 38,239 Average Interest Rate 6.07% 5.79% 5.69% 5.78% 5.70% 5.83% Variable Rate Securities 0 0 0 0 0 0 0 Average Interest Rate Federal Funds Sold 5,146 0 0 0 0 0 5,146 5146 Average Interest Rate 5.37% 5.37% Other Earning Assets (2) 135 0 0 0 0 0 135 135 Average Interest Rate 6.00% 6.00% ------- ------- ------- ------ ------ ------ -------- -------- Total Interest-Earning Assets $53,409 $22,344 $11,069 $6,390 $4,531 $2,656 $100,399 $100,915 7.55% 6.28% 7.32% 7.85% 8.70% 6.53% 7.29% ======= ======= ======= ====== ====== ====== ======== INTEREST BEARING LIABILITIES NOW Accounts $ 9,196 $ 0 $ 0 $ 0 $ 0 $ 0 $ 9,196 $ 9,196 Average Interest Rate 1.00% 1.00% Money Market Accounts 6,897 0 0 0 0 0 6,897 6,897 Average Interest Rate 2.00% 2.00% Savings Accounts 8,029 0 0 0 0 0 8,029 8,029 Average Interest Rate 1.65% 1.65% CDs $100,000 & Over 10,611 650 300 0 0 0 11,561 11,731 Average Interest Rate 5.57% 5.91% 6.00% 5.60% CDs Under $100,000 36,222 4,734 1,098 766 383 0 43,203 43,784 Average Interest Rate 5.39% 5.61% 5.75% 5.75% 5.30% 5.43% Securities Sold Under Repurchase Agreement 3,978 0 0 0 0 0 3,978 3,978 Average Interest Rate 4.49% 4.49% ------- ------ ------- ------ ------ ------ ------- -------- Total Interest-Bearing Liabilities $74,933 $5,384 $ 1,398 $ 766 $ 383 $ 0 $ 82,864 $83,615 4.12% 5.65% 5.80% 5.75% 5.30% 4.27% ======= ====== ======= ====== ====== ====== ========
- ------------------- (1) Securities available for sale are shown at their amortized cost. (2) Represents interest earning Federal Reserve Bank Stock 64 70 Primary Use of Funds Nine Month period ending September 30, 1999 The primary source of funds during the period included maturity/sale of investments ($1,444,000), decrease in federal funds sold and other cash items ($7,849,000), exercise of stock options net of tax benefit ($713,000), increase in borrowings from repurchase agreements ($1,625,000) and net income ($522,000). The primary uses of funds during the period included a decrease in deposits ($1,463,000), an increase in net loans outstanding ($9,466,000), increase in premises and equipment ($865,000), and other miscellaneous net uses ($246,000). Twelve Month period ending December 31, 1998 The primary source of funds during the period included net growth in deposits ($19,050,000), exercise of stock options net of tax benefit ($212,000), an increase in borrowings from repurchase agreements ($2,934,000), decrease in federal funds sold and other cash items ($2,856,000), and net income ($894,000). The primary uses of funds during the period included an increase in investments outstanding ($20,704,000), an increase in net loans outstanding ($4,278,000), an increase in premises and equipment ($793,000), dividends paid ($113,000), and other miscellaneous net uses ($58,000). CAPITAL RESOURCES Shareholders' equity at September 30, 1999, was $8,511,000 as compared to $7,390,000 at September 30, 1998, and $7,457,000 at December 31, 1998, as compared to $6,358,000 at December 31, 1997. The Comptroller has established risk-based capital requirements for national banks. These guidelines are intended to provide an additional measure of a bank's capital adequacy by assigning weighted levels of risk to asset categories. Banks are also required to systematically maintain capital against such "off- balance sheet" activities as loans sold with recourse, loan commitments, guarantees and standby letters of credit. These guidelines are intended to strengthen the quality of capital by increasing the emphasis on common equity and restricting the amount of loan loss reserves and other forms of equity such as preferred stock that may be included in capital. First National / Osceola's goal is to maintain its current status as a "well-capitalized institution" as that term is defined by its regulators. Under the terms of the guidelines, banks must meet minimum capital adequacy based upon both total assets and risk adjusted assets. All banks are required to maintain a minimum ratio of total capital to risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to risk-weighted assets of 4%. Adherence to these guidelines has not had an adverse impact on First National / Osceola. Selected capital ratios at December 31, 1998, and 1997 compared to September 30, 1999, were as follows: 65 71 CAPITAL RATIOS (Dollars are in Thousands)
Actual Well Capitalized ----------------------- ------------------------ Excess Amount Ratio Amount Ratio Amount ----------------------- ------------------------ ----------- AS OF SEPTEMBER 30, 1999: Total Capital: (to Risk Weighted Assets): $9,251 13.9% $6,636 10.0% $2,615 Tier 1 Capital: (to Risk Weighted Assets): $8,453 12.7% $3,981 6.0% $4,472 Tier 1 Capital: (to Average Assets): $8,453 7.9% $5,350 5.0% $3,103 AS OF DECEMBER 31, 1998: Total Capital: (to Risk Weighted Assets): $8,019 13.7% $5,835 10.0% $2,184 Tier 1 Capital: (to Risk Weighted Assets): $7,289 12.5% $3,501 6.0% $3,788 Tier 1 Capital: (to Average Assets): $7,289 6.7% $5,420 5.0% $1,869 AS OF DECEMBER 31, 1997: Total Capital: (to Risk Weighted Assets): $7,009 13.0% $5,376 10.0% $1,633 Tier 1 Capital: (to Risk Weighted Assets): $6,335 11.8% $3,232 6.0% $3,103 Tier 1 Capital: (to Average Assets): $6,335 7.3% $4,314 5.0% $2,021
EFFECTS OF INFLATION AND CHANGING PRICES The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on the performance of a financial institution than the effects of general levels of inflation. Although interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services, increases in inflation generally have resulted in increased interest rates. In addition, inflation affects financial institutions' increased cost of goods and services purchased, the cost of salaries and benefits, occupancy expense, and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings, and shareholders' equity. Commercial and other loan originations and refinancings tend to slow as interest rates increase, and can reduce First National / Osceola's earnings from such activities. 66 72 ACCOUNTING PRONOUNCEMENTS On January 1, 1998, First National / Osceola adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 provides new accounting and reporting standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements. The adoption of this standard did not have a material impact on reported results of operations of First National / Osceola. In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The statement establishes accounting and reporting standards for derivative instruments (including certain derivative instruments imbedded in other contracts). The statement is effective for fiscal years beginning after June 15, 1999. The financial impact of the adoption of this statement has not been determined. However, the effect of the adoption of the statement is not expected to be material. In June of 1999, the FASB issued SFAS No. 137, which delays implementation of SFAS No. 133 for one year. Quarterly Financial Information The following table sets forth, for the periods indicated, certain consolidated quarterly financial information for First National / Osceola. This information is derived from First National / Osceola's unaudited financial statements which include, in the opinion of management, all normal recurring adjustments which management considers necessary for a fair presentation of the results for such periods. This information should be read in conjunction with First National / Osceola's Financial Statements included elsewhere in this Prospectus. The results for any quarter are not necessarily indicative of results for future periods. SELECTED QUARTERLY DATA (Dollars are in Thousands)
(Dollars in Thousands except 1999 1998 1997 ------------------------ ----------------------------- --------------------------- for per share data) 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q ------------------------ ----------------------------- --------------------------- Net Interest Income $1,085 $1,065 $ 974 $ 956 $ 980 $ 951 $ 925 $ 901 $ 876 $ 847 $ 814 Provision for Loan Losses 24 38 37 (58) 27 27 42 0 58 77 77 ------------------------ ----------------------------- --------------------------- Net Interest Income after provision for loan losses $1,061 $1,027 $ 937 $1,014 $ 953 $ 924 $ 883 $ 901 $ 818 $ 770 $ 737 Non-Interest Income 226 223 202 205 177 168 157 150 125 136 112 Non-Interest Expenses 1,017 944 875 859 769 727 720 715 709 660 658 ------------------------ ----------------------------- --------------------------- Income before income tax expense $ 270 $ 306 $ 264 $ 360 $ 361 $ 365 $ 320 $ 336 $ 234 $ 246 $ 191 Income tax expense 92 116 100 125 166 93 128 154 84 96 71 ------------------------ ----------------------------- --------------------------- Net Income $ 178 $ 190 $ 164 $ 235 $ 195 $ 272 $ 192 $ 182 $ 150 $ 150 $ 120 ======================== ============================= =========================== Basic earnings per common share $ 0.36 $ 0.41 $0.36 $ 0.52 $ 0.43 $0.61 $0.44 $0.43 $0.35 $0.35 $0.28 Diluted earnings per common share $ 0.35 $ 0.38 $0.33 $ 0.49 $ 0.40 $0.57 $0.40 $0.40 $0.33 $0.33 $0.26
67 73 SUPERVISION AND REGULATION Banks and their holding companies, and many of their affiliates, are extensively regulated under both federal and state law. The following is a brief summary of certain statutes, rules, and regulations affecting Centerstate Banks of Florida, First National/Osceola, First National Bank of Polk County and Community National Bank of Pasco County. For purposes of this summary, First National/Osceola, First National Bank of Polk County and Community National Bank of Pasco County are collectively referred to as the "Banks." This summary is qualified in its entirety by reference to the particular statutory and regulatory provisions referred to below and is not intended to be an exhaustive description of the statutes or regulations applicable to the business of Centerstate Banks of Florida and the Banks. Any change in the applicable law or regulation may have a material effect on the business and prospects of Centerstate Banks of Florida and the Banks. Supervision, regulation, and examination of banks by regulatory agencies are intended primarily for the protection of depositors, rather than shareholders. Bank Holding Company Regulation. Centerstate Banks of Florida has not commenced any business but has filed applications with the Federal Reserve Bank of Atlanta to become a bank holding company by acquiring the Banks. If the applications are approved and Centerstate Banks of Florida acquires the Banks, then Centerstate Banks of Florida will be subject to the supervision, examination and reporting requirements of the Bank Holding Company Act and the regulations of the Federal Reserve. The Company is required to furnish to the Federal Reserve an annual report of its operations at the end of each fiscal year, and such additional information as the Federal Reserve may require pursuant to the Act. The Act requires that a bank holding company obtain the prior approval of the Federal Reserve before (1) acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank, (2) taking any action that causes a bank to become a subsidiary of the bank holding company, or (3) merging or consolidating with any other bank holding company. The Act further provides that the Federal Reserve may not approve any transaction that would result in a monopoly of banking in any section of the United States, or substantially lessen competition, unless the anticompetitive effects are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the community to be served. Consideration of financial resources generally focuses on capital adequacy and consideration of convenience and needs issues includes the parties' performance under the Community Reinvestment Act of 1977, both of which are discussed below. Bank holding companies are generally prohibited from engaging in activities other than banking, or managing or controlling banks or other permissible subsidiaries, and from acquiring or retaining control of any company engaged in any activities other than those activities determined by the Federal Reserve to be closely related to banking or managing or controlling banks. In determining whether a particular activity is permissible, the Federal Reserve must consider whether the performance of such an activity can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices. For example, factoring accounts receivable, acquiring or servicing loans, leasing personal property, conducting securities brokerage activities, performing certain data processing services, acting as agent or broker in selling credit life insurance and certain other types of insurance in connection with credit transactions, and certain insurance underwriting activities have all been determined by regulations of the Federal Reserve to be permissible 68 74 activities of bank holding companies. Despite prior approval, the Federal Reserve has the power to order a holding company or its subsidiaries to terminate any activity or terminate its ownership or control of any subsidiary, when it has reasonable cause to believe that such activity or ownership or control constitutes a serious risk to the financial safety, soundness, or stability of any bank subsidiary of that bank holding company. Banks are subject to the provisions of the Community Reinvestment Act. Under the terms of the Community Reinvestment Act, the appropriate federal bank regulatory agency is required, in connection with its examination of a bank, to assess such bank's record in meeting the credit needs of the community served by that bank, including low- and moderate-income neighborhoods. The Community Reinvestment Act does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the Act. The regulatory agency's assessment of the bank's record is made available to the public. Further, such assessment is required of any bank which has applied to o charter a national bank, o obtain deposit insurance coverage for a newly chartered institution, o establish a new branch office that will accept deposits, o relocate an office, or o merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution. In the case of a bank holding company applying for approval to acquire a bank or other bank holding company, the Federal Reserve will assess the record of each subsidiary bank of the applicant bank holding company, and such records may be the basis for denying the application. Gramm-Leach-Bliley Act. On November 12, 1999, President Clinton signed into law the Gramm- Leach-Bliley Act which reforms and modernizes certain areas of financial services regulation. The law permits the creation of new financial services holding companies that can offer a full range of financial products under a regulatory structure based on the principle of functional regulation. The legislation eliminates the legal barriers to affiliations among banks and securities firms, insurance companies, and other financial services companies. The law also provides financial organizations with the opportunity to structure these new financial affiliations through a holding company structure or a financial subsidiary. The new law reserves the role of the Federal Reserve Board as the supervisor for bank holding companies. At the same time, the law also provides a system of functional regulation which is designed to utilize the various existing federal and state regulatory bodies. The law also sets up a process for coordination between the Federal Reserve Board and the Secretary of the Treasury regarding the approval of new financial activities for both bank holding companies and national bank financial subsidiaries. The law also includes a minimum federal standard of financial privacy. Financial institutions are required to have written privacy policies that must be disclosed to customers. The disclosure of a financial institution's privacy policy must take place at the time a customer relationship is established and not less than annually during the continuation of the relationship. The act also provides for the functional regulation 69 75 of bank securities activities. The law repeals the exemption that banks were afforded from the definition of "broker," and replaces it with a set of limited exemptions that allow the continuation of some historical activities performed by banks. In addition, the act amends the securities laws to include banks within the general definition of dealer. Regarding new bank products, the law provides a procedure for handling products sold by banks that have securities elements. In the area of Community Reinvestment Act activities, the law generally requires that financial institutions address the credit needs of low-to-moderate income individuals and neighborhoods in the communities in which they operate. Bank regulators are required to take the Community Reinvestment Act ratings of a bank or of the bank subsidiaries of a holding company into account when acting upon certain branch and bank merger and acquisition applications filed by the institution. Under the law, financial holding companies and banks that desire to engage in new financial activities are required to have satisfactory or better Community Reinvestment Act ratings when they commence the new activity. Most of the provisions of the law take effect on November 12, 1999, with other provisions being phased in over a one to two year period thereafter. It is anticipated that the effects of the law, while providing additional flexibility to bank holding companies and banks, may result in additional affiliation of different financial services providers, as well as increased competition, resulting in lower prices, more convenience, and greater financial products and services available to consumers. Bank Regulation. The Banks are national banks. The deposits of the Banks are insured by the FDIC to the extent provided by law. The Banks are subject to comprehensive regulation, examination and supervision by the Comptroller of the Currency and the FDIC. The Banks also are subject to other laws and regulations applicable to banks. Such regulations include limitations on loans to a single borrower and to its directors, officers and employees; restrictions on the opening and closing of branch offices; the maintenance of required capital and liquidity ratios; the granting of credit under equal and fair conditions; and the disclosure of the costs and terms of such credit. The Banks are examined periodically by the Comptroller of the Currency, to whom the Banks submit periodic reports regarding their financial condition and other matters. The Comptroller of the Currency has a broad range of powers to enforce regulations and to take discretionary actions determined to be for the protection and safety and soundness of banks, including the institution of cease and desist orders and the removal of directors and officers. The Comptroller of the Currency also has the authority to approve or disapprove mergers, consolidations, and similar corporate actions. Under federal law, federally insured banks are subject to certain restrictions on any extension of credit to their parent holding companies or other affiliates, on investment in the stock or other securities of affiliates, and on the taking of such stock or securities as collateral from any borrower. In addition, banks are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or the providing of any property or service. Federal law also contains capital standards and civil and criminal enforcement provisions. Annual full-scope, on-site examinations are required of all insured depository institutions. The cost for conducting an examination of an institution may be assessed to that institution, with special consideration given to affiliates and any penalties imposed for failure to provide information requested. Transactions with Affiliates. There are various legal restrictions on the extent to which Centerstate Banks of Florida and any future nonbank subsidiaries can borrow or otherwise obtain credit from the Banks. There also are legal restrictions on the Banks' purchase of or investments in the securities of and purchases 70 76 of assets from Centerstate Banks of Florida. The Banks also are restricted in loaning to third parties collateralized by the securities or obligations of Centerstate Banks of Florida, issuing guarantees, acceptances, and letters of credit on behalf of Centerstate Banks of Florida and certain bank transactions with Centerstate Banks of Florida. Subject to certain limited exceptions, the Banks may not extend credit to Centerstate Banks of Florida or to any other affiliate in an amount which exceeds 10% of the respective Bank's capital stock and surplus and may not extend credit in the aggregate to such affiliates in an amount which exceeds 20% of its capital stock and surplus. Further, there are legal requirements as to the type, amount and quality of collateral which must secure such extensions of credit transactions between the Banks and Centerstate Banks of Florida or such other affiliates. Such transactions also must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the Banks as those prevailing at the time for comparable transactions with non-affiliated companies. Also, Centerstate Banks of Florida and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. Dividends. Dividends from the Banks constitute the primary source of funds for dividends to be paid by Centerstate Banks of Florida. As national banks, the Banks are subject to certain limitations on their right to pay dividends. See "Difference in Rights of Centerstate Banks of Florida and First National/Osceola Shareholders - Dividend rights." Florida law applicable to companies including Centerstate Banks of Florida provides that dividends may be declared and paid only if, after giving it effect, (1) the company is able to pay its debts as they become due in the usual course of business, and (2) the company's total assets would be greater than the sum of its total liabilities plus the amount that would be needed if the company were to be dissolved at the time of the dividend to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the dividend. Capital Requirements. The federal bank regulatory authorities have adopted risk-based capital guidelines for banks and bank holding companies that are designed to make regulatory capital requirements more sensitive to differences in risk profile among banks and bank holding companies. The resulting capital ratios represent qualifying capital as a percentage of total risk-weighted assets and off-balance sheet items. The guidelines are minimums, and the federal regulators have noted that banks and bank holding companies contemplating significant expansion programs should not allow expansion to diminish their capital ratios and should maintain all ratios well in excess of the minimums. The current guidelines require all bank holding companies and federally-regulated banks to maintain a minimum risk-based total capital ratio equal to 8%, of which at least 4% must be Tier 1 capital. Tier 1 capital includes common shareholders' equity, qualifying perpetual preferred shares, and minority interests in equity accounts of consolidated subsidiaries, but excludes goodwill and most other intangibles and excludes the allowance for loan and lease losses. Tier 2 capital includes the excess of any preferred shares not included in Tier 1 capital, mandatory convertible securities, hybrid capital instruments, subordinated debt and intermediate term-preferred shares, and general reserves for loan and lease losses up to 1.25% of risk-weighted assets. Federal law contains "prompt corrective action" provisions pursuant to which banks are to be classified into one of five categories based upon capital adequacy, ranging from "well capitalized" to "critically undercapitalized" and which require, subject to certain exceptions, the appropriate federal banking agency to take prompt corrective action with respect to an institution which becomes "significantly undercapitalized" or "critically undercapitalized". The Comptroller of the Currency has issued final regulations to implement the "prompt corrective action" provisions. In general, the regulations define the five capital categories as follows: 71 77 o an institution is "well capitalized" if it has a total risk-based capital ratio of 10% or greater, has a Tier 1 risk-based capital ratio of 6% or greater, has a leverage ratio of 5% or greater and is not subject to any written capital order or directive to meet and maintain a specific capital level for any capital measures; o an institution is "adequately capitalized" if it has a total risk-based capital ratio of 8% or greater, has a Tier 1 risk-based capital ratio of 4% or greater, and has a leverage ratio of 4% or greater; o an institution is "undercapitalized" if it has a total risk-based capital ratio of less than 8%, has a Tier 1 risk-based capital ratio that is less than 4% or has a leverage ratio that is less than 4%; o an institution is "significantly undercapitalized" if it has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3% or a leverage ratio that is less than 3%; and o an institution is "critically undercapitalized" if its "tangible equity" is equal to or less than 2% of its total assets. The Comptroller of the Currency also, after an opportunity for a hearing, has authority to downgrade an institution from "well capitalized" to "adequately capitalized" or to subject an "adequately capitalized" or "undercapitalized" institution to the supervisory actions applicable to the next lower category, for supervisory concerns. The degree of regulatory scrutiny of a financial institution will increase, and the permissible activities of the institution will decrease, as it moves downward through the capital categories. Institutions that fall into one of the three undercapitalized categories may be required to o submit a capital restoration plan; o raise additional capital; o restrict their growth, deposit interest rates, and other activities; o improve their management; o eliminate management fees; or o divest themselves of all or part of their operations. Bank holding companies controlling financial institutions can be called upon to boost the institutions' capital and to partially guarantee the institutions' performance under their capital restoration plans. These capital guidelines can affect Centerstate Banks of Florida in several ways. After completion of the acquisition of the three Banks, Centerstate Banks of Florida's capital levels will be in excess of those required to be maintained by a "well capitalized" financial institution. However, rapid growth, poor loan portfolio performance, or poor earnings performance, or a combination of these 72 78 factors, could change Centerstate Banks of Florida's capital position in a relatively short period of time, making an additional capital infusion necessary. Federal law also requires that (1) only a "well capitalized" depository institution may accept brokered deposits without prior regulatory approval and (2) the appropriate federal banking agency annually examine all insured depository institutions, with some exceptions for small, "well capitalized" institutions and state-chartered institutions examined by state regulators. Federal law also contains a number of consumer banking provisions, including disclosure requirements and substantiative contractual limitations with respect to deposit accounts. Enforcement Powers. Congress has provided the federal bank regulatory agencies with an array of powers to enforce laws, rules, regulations and orders. Among other things, the agencies may require that institutions cease and desist from certain activities, may preclude persons from participating in the affairs of insured depository institutions, may suspend or remove deposit insurance, and may impose civil money penalties against institution-affiliated parties for certain violations. Maximum Legal Interest Rates. Like the laws of many states, Florida law contains provisions on interest rates that may be charged by banks and other lenders on certain types of loans. Numerous exceptions exist to the general interest limitations imposed by Florida law. The relative importance of these interest limitation laws to the financial operations of the Banks will vary from time to time, depending on a number of factors, including conditions in the money markets, the costs and availability of funds, and prevailing interest rates. Bank Branching. Banks in Florida are permitted to branch state wide. Such branch banking, by national banks, however, is subject to prior approval by the Comptroller of the Currency. Any such approval would take into consideration several factors, including the bank's level of capital, the prospects and economics of the proposed branch office, and other conditions deemed relevant by the Comptroller of the Currency for purposes of determining whether approval should be granted to open a branch office. Change of Control. Federal law restricts the amount of voting stock of a bank holding company and a bank that a person may acquire without the prior approval of banking regulators. The overall effect of such laws is to make it more difficult to acquire a bank holding company and a bank by tender offer or similar means than it might be to acquire control of another type of corporation. Consequently, shareholders of Centerstate Banks of Florida may be less likely to benefit from the rapid increases in stock prices that may result from tender offers or similar efforts to acquire control of other companies. Federal law also imposes restrictions on acquisitions of stock in a bank holding company and a state bank. Under the federal Change in Bank Control Act and the regulations thereunder, a person or group must give advance notice to the Federal Reserve before acquiring control of any bank holding company and the Comptroller of the Currency before acquiring control of any national bank, such as the Banks. Upon receipt of such notice, the Federal Reserve or the Comptroller of the Currency, as the case may be, may approve or disapprove the acquisition. The Change in Bank Control Act creates a rebuttable presumption of control if a member or group acquires a certain percentage or more of a bank holding company's or national bank's voting stock, or if one or more other control factors set forth in the Change in Bank Control Act are present. Interstate Banking. Federal law provides for nationwide interstate banking and branching. Under the law, interstate acquisitions of banks or bank holding companies in any state by bank holding companies in any other state are permissible subject to certain limitations. Florida also has a law that allows out-of-state 73 79 bank holding companies (located in states that allow Florida bank holding companies to acquire banks and bank holding companies in that state) to acquire Florida banks and Florida bank holding companies. The law essentially provides for out-of-state entry by acquisition only (and not by interstate branching). Interstate branching and consolidation of existing bank subsidiaries in different states is permissible. Effect of Governmental Policies. The earnings and businesses of Centerstate Banks of Florida and the Banks are affected by the policies of various regulatory authorities of the United States, especially the Federal Reserve. The Federal Reserve, among other things, regulates the supply of credit and deals with general economic conditions within the United States. The instruments of monetary policy employed by the Federal Reserve for those purposes influence in various ways the overall level of investments, loans, other extensions of credit, and deposits, and the interest rates paid on liabilities and received on assets. DESCRIPTION OF CAPITAL STOCK GENERAL Centerstate Banks of Florida's articles of incorporation authorize it to issue up to 20,000,000 common shares. Only one share of such common stock was outstanding as of the date of this proxy statement/prospectus was held by James H. White solely to facilitate the organization of Centerstate Banks of Florida. Centerstate Banks of Florida also is authorized to issue up to 5,000,000 shares of preferred stock, none of which were outstanding as of the date of this proxy statement/prospectus. COMMON SHARES The Centerstate Banks of Florida common stock to be issued in the merger will be fully paid and nonassessable. The holders of common shares are entitled to one vote for each share held of record on all matters voted upon by shareholders. Each outstanding common share is entitled to participate equally in any distribution of net assets made to the stockholders in liquidation, dissolution, or winding up Centerstate Banks of Florida and is entitled to participate equally in dividends as and when declared by Centerstate Banks of Florida's Board of Directors. There are no redemption, sinking fund, conversion, or preemptive rights with respect to the common stock. All common stock have equal rights and preferences. PREFERRED SHARES As of the date of this proxy statement/prospectus, no preferred shares were issued or outstanding. The board of directors is authorized to fix or alter the rights, preferences, privileges and restrictions of any wholly unissued series of preferred shares, including the dividend rights, original issue price, conversion rights, voting rights, terms of redemption, liquidation preferences and sinking fund terms thereof, and the number of shares constituting any such series and the designation thereof and to increase or decrease the number of shares of such series subsequent to the issuance of shares of such series but not below the number of shares then outstanding. The board of directors, without shareholder approval, can issue preferred shares with the voting and conversion rights described above, which could adversely affect the voting power of the shareholders of common shares. Centerstate Banks of Florida has no plans at this time to issue any preferred shares. Any such issuance of preferred shares could have the effect of delaying or preventing a change of control. 74 80 INDEMNIFICATION PROVISIONS Florida law authorizes a company to indemnify its directors and officers in certain instances against certain liabilities which they may incur by virtue of their relationship with the company. Further, a Florida company is authorized to provide further indemnification or advancement of expenses to any of its directors, officers, employees, or agents, except for acts or omissions which constitute: o a violation of the criminal law unless the individual had reasonable cause to believe it was lawful, o a transaction in which the individual derived an improper personal benefit, o in the case of a director, a circumstance under which certain liability provisions of the Florida Business Corporation Act are applicable related to payment of dividends or other distributions or repurchases of shares in violation of such Act, or o willful misconduct or a conscious disregard for the best interest of the company in a proceeding by the company, or a company shareholder. A Florida company also is authorized to purchase and maintain liability insurance for its directors, officers, employees and agents. Centerstate Banks of Florida's bylaws provide that Centerstate Banks of Florida shall indemnify each of its directors and officers to the fullest extent permitted by law, and that the indemnity will include advances for expenses and costs incurred by such director or officer related to any action in regard to which indemnity is permitted. There is no assurance that Centerstate Banks of Florida will maintain liability insurance for its directors and officers. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, or persons controlling Centerstate Banks of Florida pursuant to the foregoing provisions, Centerstate Banks of Florida has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. LEGAL OPINION The legality of the common stock being offered hereby will be passed upon for Centerstate Banks of Florida by Smith, Mackinnon, Greeley, Bowdoin, Edwards, Brownlee & Marks, P.A., Orlando, Florida. EXPERTS The financial statements of First National Bank of Osceola County, Community National Bank of Pasco County, and First National Bank of Polk County at December 31, 1998 and for the year then ended have been included herein and in the registration statement in reliance upon the report of KPMG LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of such firm 75 81 as experts in accounting and auditing. The financial statements of First National Bank of Osceola County at December 31, 1997 and for the year then ended have been included herein and in the registration statement in reliance upon the report of Graham & Cottrill, P.A., independent certified public accountants, and upon the authority of such firm as experts in accounting and auditing. The financial statements of Community National Bank of Pasco County at December 31, 1997 and for the year then ended have been included herein and in the registration statement in reliance upon the report of Dwight Darby & Company, independent certified public accountants, appearing elsewhere herein and upon the authority of such firm as experts in accounting and auditing. The financial statements of First National Bank of Polk County at December 31, 1997 and for the year then ended have been included herein and in the registration statement in reliance upon the report of G. T. Nunez & Associates, independent certified public accountants, appearing elsewhere herein and upon the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION Centerstate Banks of Florida has filed with the Commission a Registration Statement under the Securities Act, with respect to the common shares offered by the Registration Statement. This proxy statement/prospectus does not contain all of the information set forth in the Registration Statement and in the exhibits attached. Certain items were omitted in accordance with the rules and regulations of the Commission. For further information with respect to Centerstate Banks of Florida and the common shares, reference is made to the Registration Statement and the exhibits filed with it. Anyone can inspect the Registration Statement without charge at the Public Reference Section of the Commission Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following Commission's regional offices: Northeast Regional Office, 7 World Trade Center, Suite 1300, New York, New York, 10048; and Midwest Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies may be obtained upon payment of the required fees. Information contained in this proxy statement/prospectus which refer to a document filed as an exhibit to the Registration Statement are qualified in their entirety by reference to a copy of that document. In addition, Centerstate Banks of Florida is required to file electronic versions of these documents with the Commission through the Commission's EDGAR system. The Commission maintains a World Wide Web site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. Centerstate Banks of Florida intends to furnish its shareholders with annual reports containing financial statements audited by independent public accountants and with quarterly reports containing unaudited financial information for each of the first three quarters of each fiscal year. 76 82 INDEX TO FINANCIAL STATEMENTS CENTERSTATE BANKS OF FLORIDA, INC Balance Sheet at September 30, 1999 (unaudited) and Note to Balance Sheet .................... F-3 FIRST NATIONAL BANK OF OSCEOLA COUNTY Independent Auditors' Report -- December 31, 1998 ............................................ F-4 Independent Auditors' Report -- December 31, 1997 ............................................ F-5 Balance Sheets at September 30, 1999 (unaudited) and at December 31, 1998 and 1997 ........... F-6 Statements of Operations for the nine months ended September 30, 1999 (unaudited) and 1998 (unaudited), and for the years ended December 31, 1998 and 1997 .......................... F-7 Statements of Changes in Stockholders' Equity and Comprehensive Income for the nine months ended September 30, 1999 (unaudited) and 1998 (unaudited), and for the years ended December 31, 1998 and 1997 .......................... F-8 Statements of Cash Flows for the nine months ended September 30, 1999 (unaudited) and 1998 (unaudited), and for the years ended December 31, 1998 and 1997 .......................... F-9 Notes to the Financial Statements ............................................................ F-10 COMMUNITY NATIONAL BANK OF PASCO COUNTY Independent Auditors' Report -- December 31, 1998 ............................................ F-32 Independent Auditors' Report -- December 31, 1997 ............................................ F-33 Balance Sheets at September 30, 1999 (unaudited) and at December 31, 1998 and 1997 ........... F-34 Statements of Operations for the nine months ended September 30, 1999 (unaudited) and 1998 (unaudited), and for the years ended December 31, 1998 and 1997 .......................... F-35 Statements of Changes in Stockholders' Equity and Comprehensive Income for the nine months ended September 30, 1999 (unaudited) and 1998 (unaudited), and for the years ended December 31, 1998 and 1997 .......................... F-36 Statements of Cash Flows for the nine months ended September 30, 1999 (unaudited) and 1998 (unaudited), and for the years ended December 31, 1998 and 1997 .......................... F-37 Notes to the Financial Statements ............................................................ F-38
F-1 83 FIRST NATIONAL BANK OF POLK COUNTY Independent Auditors' Report -- December 31, 1998 .................................................. F-57 Independent Auditors' Report -- December 31, 1997 .................................................. F-58 Balance Sheets at September 30, 1999 (unaudited) and at December 31, 1998 and 1997 ................. F-59 Statements of Operations for the nine months ended September 30, 1999 (unaudited) and 1998 (unaudited), and for the years ended December 31, 1998 and 1997 ................................ F-60 Statements of Changes in Stockholders' Equity and Comprehensive Income for the nine months ended September 30, 1999 (unaudited) and 1998 (unaudited), and for the years ended December 31, 1998 and 1997 ................................ F-61 Statements of Cash Flows for the nine months ended September 30, 1999 (unaudited) and 1998 (unaudited), and for the years ended December 31, 1998 and 1997 ................................ F-62 Notes to the Financial Statements .................................................................. F-63
F-2 84 CENTERSTATE BANKS OF FLORIDA, INC. Balance Sheet September 30, 1999 (Unaudited) Cash $ 1 ========= Stockholders' equity $ 1 =========
Note to Balance Sheet (1) Organization Centerstate Banks of Florida was formed as a Florida corporation on September 20, 1999 to serve as a bank holding company for First National Bank of Osceola County, First National Bank of Polk County and Community National Bank of Pasco County. The outstanding capital stock of Centerstate Banks of Florida consists of one share of common stock, which is owned by James H. White solely to facilitate the organization of the company. Mr. White is chairman of the board of each of First National Bank of Osceola County, First National Bank of Polk County and Community National Bank of Pasco County. The merger agreement provides that prior to effectiveness of the merger Centerstate Banks of Florida will not conduct any business operations or enter into any contract or agreement of any kind, acquire any asset, or incur any liability, except as contemplated by the merger agreement. F-3 85 INDEPENDENT AUDITORS' REPORT The Board of Directors First National Bank of Osceola County Kissimmee, Florida We have audited the accompanying balance sheet of First National Bank of Osceola County as of December 31, 1998 and the related statements of operations, changes in stockholders' equity and comprehensive income and cash flows for the year then ended. These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of First National Bank of Osceola County at December 31, 1998, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ KPMG LLP Orlando, Florida January 15, 1999 F-4 86 GRAHAM & COTTRILL, P.A. CERTIFIED PUBLIC ACCOUNTANTS 110 EAST HILLCREST STREET ORLANDO, FLORIDA 32801 ---------- (407) 843-1681 (800) 342-2720 FACSIMILE (407) 423-3156 The Board of Directors First National Bank of Osceola County Kissimmee, Florida INDEPENDENT AUDITORS' REPORT We have audited the accompanying balance sheet of First National Bank of Osceola County (the "Bank") as of December 31, 1997 and the related statements of operations, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of First National Bank of Osceola County at December 31, 1997, the results of its operations, and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ GRAHAM & COTTRILL, P.A. January 16, 1998 F-5 87 FIRST NATIONAL BANK OF OSCEOLA COUNTY Balance Sheets
SEPTEMBER 30, DECEMBER 31, -------------- ------------------------------- ASSETS 1999 1998 1997 -------------- -------------- -------------- (UNAUDITED) Cash and due from banks .................................... $ 4,545,343 $ 4,687,944 $ 2,344,670 Federal funds sold ......................................... 2,150,000 5,017,000 10,216,000 Investment securities available for sale ................... 25,883,187 35,818,706 14,667,408 Investment securities held to maturity (market value of $ 3,484,850, $2,546,254 and $3,011,830 as of September 30, 1999 (unaudited) and as of December 31, 1998 and 1997, respectively ....... 3,537,952 2,555,226 3,002,679 Loans, less allowance for loan losses of $798,112, $781,034 and $780,995 as of September 30, 1999 (unaudited) and as of December 31, 1998 and 1997, respectively ............................................. 65,813,796 56,591,397 52,313,130 Accrued interest receivable ................................ 742,807 753,990 606,134 Bank premises and equipment, net ........................... 4,456,821 3,714,825 2,921,895 Deferred income taxes ...................................... 200,677 91,869 150,808 Prepaids and other assets .................................. 147,947 93,959 63,434 -------------- -------------- -------------- Total assets ................................... $ 107,478,530 $ 109,324,916 $ 86,286,158 ============== ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Interest bearing ......................................... $ 74,344,697 $ 78,886,965 $ 65,556,297 Noninterest bearing ...................................... 21,611,724 18,670,815 12,951,485 -------------- -------------- -------------- Total deposits ................................. 95,956,421 97,557,780 78,507,782 Securities sold under agreements to repurchase ........... 2,790,990 3,978,073 1,044,200 Accrued interest payable ................................. 111,410 143,246 127,000 Accounts payable and accrued expenses .................... 80,738 189,294 249,324 -------------- -------------- -------------- Total liabilities .............................. 98,939,559 101,868,393 79,928,306 -------------- -------------- -------------- Stockholders' equity: Common stock, $5 par value; 460,000 shares authorized; 511,175, 451,109 and 435,500 shares as of September 30, 1999 (unaudited) and as of December 31, 1998 and 1997, issued and outstanding, respectively .................. 2,555,875 2,255,545 2,177,500 Additional paid-in capital ............................. 2,763,787 2,334,249 2,200,078 Retained earnings ...................................... 3,273,315 2,741,285 1,960,171 Accumulated other comprehensive income ................. (54,006) 125,444 20,103 -------------- -------------- -------------- Total stockholders' equity ..................... 8,538,971 7,456,523 6,357,852 Commitments and contingent liabilities...................... -------------- -------------- -------------- Total liabilities and stockholders' equity ....................................... $ 107,478,530 $ 109,324,916 $ 86,286,158 ============== ============== ==============
See accompanying notes to financial statements. F-6 88 FIRST NATIONAL BANK OF OSCEOLA COUNTY Statements of Operations
NINE MONTHS ENDED YEARS ENDED SEPTEMBER 30, DECEMBER 31, -------------------------------- ------------------------------- 1999 1998 1998 1997 -------------- -------------- -------------- -------------- Interest income: Interest and fees on loans.............................. $ 4,086,715 $ 3,864,760 $ 5,160,699 $ 4,860,932 Investment securities .................................. 1,364,759 1,010,700 1,468,988 1,031,926 Federal funds sold ..................................... 129,945 515,654 636,830 362,596 -------------- -------------- -------------- -------------- Total interest income............................ 5,581,419 5,391,114 7,266,517 6,255,454 -------------- -------------- -------------- -------------- Interest expense: Deposits ............................................... 2,357,005 2,481,065 3,349,948 2,735,645 Securities sold under agreement to repurchase .......... 99,592 54,146 103,563 81,883 -------------- -------------- -------------- -------------- Total interest expense........................... 2,456,597 2,535,211 3,453,511 2,817,528 -------------- -------------- -------------- -------------- Net interest income ............................. 3,124,822 2,855,903 3,813,006 3,437,926 Provision for loan losses .................................. 99,000 96,000 38,473 212,400 -------------- -------------- -------------- -------------- Net interest income after loan loss provision ... 3,025,822 2,759,903 3,774,533 3,225,526 -------------- -------------- -------------- -------------- Other income: Service charges on deposit accounts .................... 519,922 409,657 584,789 439,390 Other service charges and fees ......................... 130,550 92,910 122,114 90,309 Loss on sale of available for sale securities .......... -- -- -- (5,874) -------------- -------------- -------------- -------------- Total other income .............................. 650,472 502,567 706,903 523,825 -------------- -------------- -------------- -------------- Other expenses: Salaries, wages and employee benefits .................. 1,215,246 972,001 1,373,971 1,205,179 Occupancy and equipment rental........................... 610,879 475,680 640,112 614,565 Other operating expenses................................ 1,009,963 768,710 1,061,066 922,462 -------------- -------------- -------------- -------------- Total other expenses ............................ 2,836,088 2,216,391 3,075,149 2,742,206 -------------- -------------- -------------- -------------- Income before income taxes ...................... 840,206 1,046,079 1,406,287 1,007,145 Provision for income taxes ................................. 308,176 387,096 512,396 405,413 -------------- -------------- -------------- -------------- Net income ...................................... $ 532,030 $ 658,983 $ 893,891 $ 601,732 ============== ============== ============== ============== Net Income per Share Basic................................................... $ 1.13 $ 1.48 $ 2.00 $ 1.41 Diluted................................................. $ 1.07 $ 1.38 $ 1.86 $ 1.32 Average Number of Common Shares Outstanding Basic................................................... 471,008 446,264 446,737 425,836 Diluted................................................. 495,739 479,113 481,677 456,159
See accompanying notes to financial statements. F-7 89 FIRST NATIONAL BANK OF OSCEOLA COUNTY Statements of Changes in Stockholders' Equity and Comprehensive Income Years ended December 31, 1998 and 1997
ADDITIONAL COMPREHENSIVE COMMON PAID-IN RETAINED INCOME STOCK CAPITAL EARNINGS ------------- ---------- ----------- ---------- Balance, December 31, 1996 ................................. $2,127,500 $ 2,127,500 $1,430,774 Dividends paid ............................................. -- -- (72,335) Stock options exercised .................................... 50,000 50,000 -- Tax effect of tax deduction in excess of book deduction on options exercised during the year ............ -- 22,578 -- Comprehensive income: Net income ................................................ $ 601,732 -- -- 601,732 Other comprehensive income, net of tax unrealized gain on securities ........................... $ 1,854 ----------- Comprehensive income ....................................... $ 603,586 =========== ---------- ----------- ---------- Balance, December 31, 1997 ................................. $2,177,500 $ 2,200,078 $1,960,171 Dividends paid ............................................. -- -- (112,777) Stock options exercised .................................... 78,045 78,045 -- Tax effect of tax deduction in excess of book deduction on options exercised during the year ............ -- 56,126 -- Comprehensive income: Net income ................................................ $ 897,491 -- -- 893,891 Other comprehensive income, net of tax unrealized gain on securities ........................... 105,341 -- -- -- ----------- Comprehensive income ....................................... $ 1,002,832 =========== ---------- ----------- ---------- Balance, December 31, 1998 ................................. $2,555,545 $ 2,334,249 $2,741,285 Dividends paid ............................................. -- -- -- Stock options exercised .................................... 308,330 300,330 -- Tax effect of tax deduction in excess of book deduction on options exercised during the year ............ -- 129,208 -- Comprehensive income: Net income ................................................ $ 532,030 -- -- 532,030 Other comprehensive income, net of tax unrealized loss on securities ........................... (179,450) -- -- -- ----------- Comprehensive income ....................................... $ 352,580 =========== ---------- ----------- ---------- Balance, September 30, 1999 ................................ $2,555,875 $ 2,763,787 $3,273,315 ========== =========== ========== ACCUMULATED OTHER TOTAL COMPREHENSIVE STOCKHOLDERS' INCOME EQUITY ------------- ----------- Balance, December 31, 1996.. ............................... $ 18,249 $ 5,704,023 Dividends paid ............................................. (72,335) Stock options exercised .................................... -- 100,000 Tax effect of tax deduction in excess of book deduction on options exercised during the year ............ -- 22,578 Comprehensive income: Net income ................................................ -- 601,732 Other comprehensive income, net of tax unrealized gain on securities ........................... Comprehensive income ....................................... 1,854 1,854 ----------- ----------- Balance, December 31, 1997 ................................. $ 20,103 $ 6,357,852 Dividends paid .............................................. -- (112,777) Stock options exercised .................................... -- 159,090 Tax effect of tax deduction in excess of book deduction on options exercised during the year ............ -- 56,126 Comprehensive income: Net income ................................................ -- 839,891 Other comprehensive income, net of tax unrealized gain on securities ........................... (105,341) (105,341) Comprehensive income ....................................... ----------- ----------- Balance, December 31, 1998 ................................. $ 125,444 $ 7,456,523 Dividends paid ............................................. -- -- Stock options exercised .................................... -- 600,060 Tax effect of tax deduction in excess of book deduction on options exercised during the year ............ -- 129,208 Comprehensive income: Net income ................................................ -- 532,030 Other comprehensive income, net of tax unrealized loss on securities ........................... (179,456) (179,456) Comprehensive income ....................................... ----------- ----------- Balance, September 30, 1999 ................................ $ (54,086) $ 8,538,971 =========== ===========
See accompanying notes to financial statements. F-8 90 FIRST NATIONAL BANK OF OSCEOLA COUNTY Statements of Cash Flows
NINE MONTHS ENDED YEARS ENDED SEPTEMBER 30, DECEMBER 31, ---------------------------- ---------------------------- 1999 1998 1998 1997 ------------ ------------ ------------ ------------ Cash flows from operating activities: Net income ........................................................ $ 532,030 $ 658,983 $ 893,891 $ 601,732 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses ...................................... 99,000 96,000 38,473 212,400 Depreciation of premises and equipment ......................... 243,949 196,600 217,172 206,238 Net amortization/accretion of investment securities ............ 99,986 28,378 189,386 -- Net deferred loan origination fees ............................. 26,569 8,353 471 -- Deferred income taxes .......................................... (2,744) (25,250) (5,091) (21,249) Net (gains) losses on sale of investment securities available for sale ..................................................... (8,205) -- -- 5,874 Tax deduction in excess of book deduction on options exercised ..................................................... 129,208 56,126 56,126 22,578 Cash provided by (used in) changes in: (Increase) decrease in accrued interest receivable ............. 11,183 (138,720) (147,856) (71,361) (Increase) decrease in prepaids and other assets ............... (53,988) (40,627) (30,525) 61,918 (Decrease) increase in accrued interest payable ................ (31,836) 12,408 16,246 3,624 (Decrease) increase in accounts payable and accrued expenses .............................................. (108,556) (18,164) (60,030) 226,809 ------------ ------------ ------------ ------------ Net cash provided by operating activities ..................... 936,596 834,087 1,168,263 1,248,563 ------------ ------------ ------------ ------------ Cash flows from investing activities: Purchases of investment securities available for sale ............. (2,537,023) (26,475,329) (33,032,503) (8,269,367) Proceeds from sales, maturities and calls of investment securities available for sale ............................................. 12,112,521 10,940,935 10,853,955 9,493,906 Purchases of investment securities held to maturity................ (1,500,000) -- (1,058,438) (503,672) Proceeds from maturities of investment securities held to maturity. 500,000 2,500,000 2,513,126 -- Increase in loans, net of repayments .............................. (9,347,968) (4,138,894) (4,317,211) (6,840,459) Net purchases of premises and equipment ........................... (985,945) (866,706) (1,010,102) (137,681) ------------ ------------ ------------ ------------ Net cash used in investing activities ......................... (1,758,415) (18,039,994) (26,051,173) (6,257,273) ------------ ------------ ------------ ------------ Cash flows from financing activities: Net (decrease) increase in demand and savings deposits ............ (1,601,359) 19,024,197 19,049,998 11,169,041 Net (decrease) increase in securities sold under agreements to repurchase .................................................. (1,187,083) 121,741 2,933,873 41,500 Stock options exercised ........................................... 600,660 156,090 156,090 100,000 Dividends paid .................................................... -- (112,777) (112,777) (72,335) ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities ........... (2,187,782) 19,189,251 22,027,184 11,238,206 ------------ ------------ ------------ ------------ Net (decrease) increase in cash and cash equivalents .......... (3,009,601) 1,983,344 (2,855,726) 6,229,496 Cash and cash equivalents, beginning of period ..................... 9,704,944 12,560,670 12,560,670 6,331,174 ------------ ------------ ------------ ------------ Cash and cash equivalents, end of period ........................... $ 6,695,343 $ 14,544,014 $ 9,704,944 $ 12,560,670 ============ ============ ============ ============ Supplemental schedule of noncash transactions: Market value adjustment-investment securities available for sale Market value adjustments-investments .......................... $ (84,385) $ 221,009 $ 201,129 $ 31,758 Deferred income tax liability ................................. 30,379 (81,110) (75,685) (11,655) ------------ ------------ ------------ ------------ Unrealized gain (loss) on investment securities available for sale .................................. $ (54,006) $ 139,899 $ 125,444 $ 20,103 ============ ============ ============ ============ Cash paid during the period for: Interest .......................................................... $ 2,488,433 $ 2,522,803 $ 3,437,265 $ 2,813,904 ============ ============ ============ ============ Income taxes ...................................................... $ 466,765 $ 408,496 $ 497,114 $ 177,275 ============ ============ ============ ============
See accompanying notes to financial statements. F-9 91 FIRST NATIONAL BANK OF OSCEOLA COUNTY Notes to the Financial Statements December 31, 1998 and 1997 (Information insofar as it relates to the nine months ended September 30, 1999 (unaudited)) (1) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a description of the basis of presentation and the significant accounting and reporting policies which First National Bank of Osceola County (the "Bank") follows in preparing and presenting its financial statements. (A) NATURE OF OPERATIONS First National Bank of Osceola County (the "Bank") is an independent community bank whose headquarters are located in Osceola County, Florida, with three branches in Poinciana, St. Cloud, and Ocoee, and whose customers are primarily located in the Central Florida area. (B) BASIS OF ACCOUNTING The accompanying financial statements have been prepared in conformity with generally accepted accounting principles. (C) CASH EQUIVALENTS For purposes of the statement of cash flows, the Bank considers cash and due from banks, federal funds sold and noninterest bearing deposits in other banks with a purchased maturity of three months or less to be cash equivalents. (D) INVESTMENT SECURITIES AVAILABLE FOR SALE AND INVESTMENT SECURITIES HELD TO MATURITY The Bank accounts for investments at fair value, except for those securities which the Bank has the positive intent and ability to hold to maturity. Investments to be held for indefinite periods of time and not intended to be held to maturity are classified as available for sale and are carried at fair value. Unrealized holding gains and losses are included as a separate component of shareholders' equity net of the effect of income taxes. Securities that management has the intent and the Bank has the ability at the time of purchase or origination to hold until maturity are classified as investment securities held to maturity. Securities in this category are carried at amortized cost adjusted for accretion of discounts and amortization of premiums using the level yield method over the estimated life of the securities. If a security has a decline in fair value below its amortized cost that is other than temporary, then the security will be written down to its new cost basis by recording a loss in the statements of operations. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. (E) LOANS Loans receivable that management has the intent and the Bank has the ability to hold until maturity or payoff are reported at their outstanding unpaid principal balance less the allowance for loan losses and deferred fees on originated loans. Interest on loans is computed by using the simple interest method on daily balances of the principal amounts outstanding. Loan origination fees, net of related costs, are capitalized and recognized in income over the contractual life of the loans, adjusted for estimated prepayments based on the Bank's historical prepayment experience. Commitment fees and costs relating to the commitments are recognized over the commitment period on a straight-line basis. If the commitment is exercised during the commitment period, the remaining unamortized commitment fee at the time of exercise is recognized over the life of the loan as an adjustment of yield. F-10 92 FIRST NATIONAL BANK OF OSCEOLA COUNTY Notes to the Financial Statements December 31, 1998 and 1997--Continued Loans are placed on nonaccrual status when the loan becomes 90 days past due as to interest or principal, unless the loan is both well secured and in the process of collection, or when the full timely collection of interest or principal becomes uncertain. When a loan is placed on nonaccrual status, the accrued and unpaid interest receivable is written off, amortization of the net deferred loan origination fees cease and the loan is accounted for on the cash or cost recovery method thereafter until qualifying for return to accrual status. The Bank, considering current information and events regarding the borrower's ability to repay their obligations, considers a loan to be impaired when it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is considered to be impaired, the amount of the impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, the secondary market value of the loan, or the fair value of the collateral for collateral dependent loans. Impaired loans are written down to the extent that principal is judged to be uncollectible and, in the case of impaired collateral dependent loans where repayment is expected to be provided solely by the underlying collateral and there is no other available and reliable sources of repayment, are written down to the lower of cost or collateral value. Impairment losses are included in the allowance for loan losses. (F) ALLOWANCE FOR LOAN LOSSES The Bank follows a consistent procedural discipline and accounts for loan loss contingencies in accordance with Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies" (Statement 5). The following is a description of how each portion of the allowance for loan losses is determined. The Bank segregates the loan portfolio for loan loss purposes into the following broad segments: commercial real estate; residential real estate; commercial business; and consumer loan. The Bank provides for a general allowance for losses inherent in the portfolio by the above categories, which consists of two components. General loss percentages are calculated based upon historical analyses. A supplemental portion of the allowance is calculated for inherent losses which probably exist as of the evaluation date even though they might not have been identified by the more objective processes used for the portion of the allowance described above. This is due to the risk of error and/or inherent imprecision in the process. This portion of the allowance is particularly subjective and requires judgments based on qualitative factors which do not lend themselves to exact mathematical calculations such as; trends in delinquencies and nonaccruals; migration trends in the portfolio; trends in volume, terms, and portfolio mix; new credit products and/or changes in the geographic distribution of those products; changes in lending policies and procedures; loan review reports on the efficacy of the risk identification process; changes in the outlook for local, regional and national economic conditions; and concentrations of credit. Specific allowances are provided in the event that the specific collateral analysis on each classified loan indicates that the probable loss upon liquidation of collateral would be in excess of the general percentage allocation. The provision for loan loss is debited or credited in order to state the allowance for loan losses to the required level as determined above. F-11 93 FIRST NATIONAL BANK OF OSCEOLA COUNTY Notes to the Financial Statements December 31, 1998 and 1997--Continued The Bank records impairment in the value of its loans as an addition to the allowance for loan losses. Any changes in the value of impaired loans due to the passage of time or revisions in estimates are reported as adjustments to provision expense in the same manner in which impairment initially was recognized. Regulatory examiners may require the Bank to recognize additions to the allowance based upon their judgment about the information available to them at the time of their examination. (G) PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation which is computed over the estimated useful lives of the assets which range from 5 to 40 years on a straight-line basis. (H) OTHER REAL ESTATE OWNED Real estate acquired in the settlement of loans is recorded at the lower of cost (principal balance of the former loan plus costs of obtaining title and possession) or estimated fair value, less estimated selling costs. Costs relating to development and improvement of the property are capitalized, whereas those relating to holding the property are charged to operations. (I) COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board established Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This Statement establishes standards for reporting and display of comprehensive income and its components in a full set of financial statements. This Statement requires that an enterprise classify items or other comprehensive income by nature in a financial statement, and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a balance sheet. The Bank adopted this Statement effective January 1, 1998 with the 1997 financial statements reclassified to reflect this adoption. The Bank's other comprehensive income is the unrealized gain/(loss) on investment securities available for sale. (J) INCOME TAXES Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date. Deferred tax assets are recognized subject to management's judgment that realization is more likely than not. F-12 94 FIRST NATIONAL BANK OF OSCEOLA COUNTY Notes to the Financial Statements December 31, 1998 and 1997--Continued (K) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. These estimates include the allowance for loan loss and the valuation of the deferred tax asset. Actual results could differ from these estimates. (L) EFFECT OF NEW PRONOUNCEMENTS In June 1997, the FASB issued Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information". This Statement requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. This Statement is effective for fiscal years beginning after December 15, 1997. The Company adopted the Statement effective January 1, 1998, however, the Company has only one reportable segment. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedge Activities". This Statement, which is effective for all fiscal quarters and all fiscal years beginning after June 15, 1999, requires all derivatives be measured at fair value and be recognized as assets and liabilities in the statement of financial position. This Statement sets forth the accounting for changes in fair value of a derivative depending on the intended use and designation of the derivative. Implementation of the Statement is not expected to have a significant impact on the financial position or results of operations of the Company. In October 1998, the FASB issued 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." This Statement requires that after the securitization of a mortgage loan held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed security as a trading security. The Statement is effective for the first fiscal quarter beginning after December 15, 1998. The Company does not expect the adoption of this Statement to have any impact on its financial statements. (M) RECLASSIFICATION Certain amounts in the 1997 and 1998 financial statements have been reclassified to conform with the September 30, 1999 presentation. F-13 95 FIRST NATIONAL BANK OF OSCEOLA COUNTY Notes to the Financial Statements December 31, 1998 and 1997--Continued (2) INVESTMENT SECURITIES AVAILABLE FOR SALE AND INVESTMENT SECURITIES HELD TO MATURITY The amortized cost and estimated market values of investment securities available for sale as of September 30, 1999 (unaudited) and as of December 31, 1998 and 1997 are as follows: INVESTMENT SECURITIES AVAILABLE FOR SALE:
SEPTEMBER 30, 1999 (UNAUDITED) -------------------------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ------------- ------------- ------------- ------------- U.S. Treasury securities ........... $ 15,567,172 $ 12,070 $ 37,972 $ 15,641,270 Obligations of U.S. government agencies .............. 8,265,050 -- 58,403 8,206,567 Municipals ......................... 2,000,000 -- -- 2,000,000 Federal reserve bank stock ......... 135,350 -- -- 135,350 ------------- ------------- ------------- ------------- $ 25,967,572 12,070 96,455 25,883,187 ============= ============= ============= ============= DECEMBER 31, 1998 ------------------------------------------------------------------- U.S. Treasury securities ........... $ 19,621,138 $ 153,434 $ -- $ 19,774,573 Obligations of U.S. government agencies ............ 15,861,089 53,664 5,969 15,908,784 Federal reserve bank stock ......... 135,350 -- -- 135,350 ------------- ------------- ------------- ------------- $ 35,617,577 $ 207,098 $ 5,969 $ 35,818,706 ============= ============= ============= ============= DECEMBER 31, 1997 ------------------------------------------------------------------- U.S. Treasury securities ........... $ 10,259,063 $ 25,963 $ -- $ 10,285,026 Obligations of U.S. government agencies ............ 4,248,973 5,795 -- 4,254,732 Federal reserve bank stock ......... 127,650 -- -- 127,650 ------------- ------------- ------------- ------------- $ 14,635,650 $ 31,758 $ -- $ 14,667,408 ============= ============= ============= =============
F-14 96 FIRST NATIONAL BANK OF OSCEOLA COUNTY Notes to the Financial Statements December 31, 1998 and 1997--Continued The amortized cost and estimated market values of investment securities held to maturity as of September 30, 1999 (unaudited) and as of December 31, 1998 and 1997 are as follows: INVESTMENT SECURITIES HELD TO MATURITY:
SEPTEMBER 30, 1999 (UNAUDITED) -------------------------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ------------- ------------- ------------- ------------- Obligations of U.S. government agencies ............. $ 3,537,952 $ -- $ 53,102 $ 3,484,850 ------------- ------------- ------------- ------------- $ 3,537,952 $ -- $ 53,102 $ 3,484,850 ============= ============= ============= ============= DECEMBER 31, 1998 ------------------------------------------------------------------- U.S. Treasury securities ........... $ 2,054,537 $ -- $ 12,658 $ 2,041,879 Obligations of U.S. government agencies ............ 500,689 3,686 -- 504,375 ------------- ------------- ------------- ------------- $ 2,555,226 $ 3,686 $ 12,658 $ 2,546,254 ============= ============= ============= ============= DECEMBER 31, 1997 ------------------------------------------------------------------- U.S. Treasury securities ........... $ 2,002,742 $ 7,888 $ -- $ 2,010,630 Obligations of U.S. government agencies ............ 999,937 1,263 -- 1,001,200 ------------- ------------- ------------- ------------- $ 3,002,679 $ 9,151 $ -- $ 3,011,830 ============= ============= ============= =============
F-15 97 FIRST NATIONAL BANK OF OSCEOLA COUNTY Notes to the Financial Statements December 31, 1998 and 1997--Continued The amortized cost and estimated market value of investment securities available for sale and held to maturity as of September 30, 1999 (unaudited) and for the years ended December 31, 1998 and 1997 by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
AMORTIZED ESTIMATED COST MARKET VALUE ------------ ------------ SEPTEMBER 30, 1999 (UNAUDITED): Investment securities available for sale: Due in one year or less ........................ $ 15,670,107 $ 15,670,350 Due after one year through five years .......... 8,297,465 8,212,837 Due after ten years ............................ 2,000,000 2,000,000 ------------ ------------ $ 25,967,572 $ 25,883,187 ============ ============ DECEMBER 31, 1998: Investment securities available for sale: Due in one year or less ........................ $ 10,395,243 $ 10,439,570 Due after one year through five years .......... 25,222,334 25,379,136 ------------ ------------ $ 35,617,577 $ 35,818,706 ============ ============ DECEMBER 31, 1997: Investment securities available for sale: Due in one year or less ........................ $ 7,242,428 $ 7,255,974 Due after one year through five years .......... 7,265,572 7,283,784 ------------ ------------ $ 14,508,000 $ 14,539,758 ============ ============ SEPTEMBER 30, 1999 (UNAUDITED): Investment securities held to maturity: Due in one year or less ........................ $ -- $ -- Due after one year through five years .......... 3,537,952 3,484,850 ------------ ------------ $ 3,537,952 $ 3,484,850 ============ ============ DECEMBER 31, 1998: Investment securities held to maturity: Due in one year or less ........................ $ 500,689 $ 504,375 Due after one year through five years .......... 2,054,537 2,041,879 ------------ ------------ $ 2,555,226 $ 2,546,254 ============ ============ DECEMBER 31, 1997: Investment securities held to maturity: Due in one year or less ........................ $ 2,500,200 $ 2,504,485 Due after one year through five years .......... 502,479 507,345 ------------ ------------ $ 3,002,679 $ 3,011,830 ============ ============
As of September 30, 1999, the Bank had $500,000, at cost, in securities pledged to the State of Florida as collateral on public fund deposits and for other purposes required or permitted by law. At December 31, 1998, the Bank had pledged $250,000, 25% of cost, in investment securities pledged to the Treasurer of the State of Florida; and $2,000,000 and $5,500,000, at par value, at December 31, 1998 and 1997, respectively, in investment securities pledged as collateral on repurchase agreements. Accrued interest receivable includes $373,632, $448,064 and $263,584 as of September 30, 1999, December 31, 1998 and 1997, respectively, related to investment securities. F-16 98 FIRST NATIONAL BANK OF OSCEOLA COUNTY Notes to the Financial Statements December 31, 1998 and 1997--Continued (3) LOANS Major categories of loans included in the loan portfolio as of September 30, 1999 (unaudited) and as of December 31, 1998 and 1997 are:
SEPTEMBER 30, DECEMBER 31, ------------- ------------------------------- 1999 1998 1997 ------------- ------------- ------------- (UNAUDITED) Real estate: Residential .................... $ 16,294,539 $ 17,055,229 $ 14,285,540 Commercial ..................... 28,505,097 20,799,754 18,702,294 Construction ................... 3,556,902 2,801,246 3,183,919 ------------- ------------- ------------- Total real estate .......... 48,356,538 40,656,229 36,171,753 Commercial ......................... 10,875,691 10,827,888 11,242,999 Installment ........................ 6,556,919 5,831,592 5,656,484 Overdrafts ......................... 885,659 93,052 58,748 ------------- ------------- ------------- 66,674,807 57,408,761 53,129,984 Less: Allowance for loan losses ...................... 798,112 781,034 780,995 Deferred loan origination fees ............ 62,899 36,330 35,859 ------------- ------------- ------------- Net loans .................. $ 65,813,796 $ 56,591,397 $ 52,313,130 ============= ============= =============
The following is a summary of information regarding nonaccrual and impaired loans as of September 30, 1999 (unaudited) and as of December 31, 1998 and 1997:
SEPTEMBER 30, DECEMBER 31, ------------- -------------------------------- 1999 1998 1997 ------------- ------------- ------------- (UNAUDITED) Nonaccrual loans ................... $ 156,000 -- -- ============= ============== ============= Recorded investment in impaired loans ........................... $ -- -- -- ============= ============== ============= Allowance for loan losses related to impaired loans ................. $ -- -- -- ============= ============== =============
Accrued interest receivable includes $369,175, $305,926, and $342,550 related to loans as of September 30, 1999, December 31, 1998 and December 31, 1997, respectively. F-17 99 FIRST NATIONAL BANK OF OSCEOLA COUNTY Notes to the Financial Statements December 31, 1998 and 1997--Continued
INTEREST INTEREST AVERAGE INCOME NOT INCOME RECORDED RECOGNIZED ON RECOGNIZED ON INVESTMENT IN NONACCRUAL IMPAIRED IMPAIRED LOANS LOANS LOANS ----------------- ----------------- ----------------- FOR THE NINE MONTHS ENDED SEPTEMBER 30: 1999 (Unaudited) ...................... $ 6,824 $ -- $ -- ================= ================= ================= FOR THE YEARS ENDED DECEMBER 31: 1998 ................................. $ 4,497 $ -- $ 747,000 ================= ================= ================= 1997 ................................. $ -- $ -- $ 81,000 ================= ================= =================
Certain directors and officers and their related interests were indebted to the Bank as summarized below as of September 30, 1999 (unaudited) and December 31, 1998 and 1997:
SEPTEMBER 30, DECEMBER 31, ------------- --------------------------- 1999 1998 1997 ------------- ----------- ----------- (UNAUDITED) Balance, beginning of period ............ $ 1,653,797 $ 1,587,000 $ 1,573,000 Additional new loans .................... 915,246 1,471,480 615,354 Repayments on outstanding loans ................................. 813,846 1,404,683 601,354 ----------- ----------- ----------- Balance, end of period .................. $ 1,755,197 $ 1,653,797 $ 1,587,000 =========== =========== ===========
As of September 30, 1999 (unaudited) and December 31, 1998 and 1997, directors and officers of the Bank and their related interests had $913,374, $842,077 and $338,570, respectively, available in lines of credit. F-18 100 FIRST NATIONAL BANK OF OSCEOLA COUNTY Notes to the Financial Statements December 31, 1998 and 1997--Continued Changes in the allowance for loan losses for the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998 and 1997 are as follows:
SEPTEMBER 30 DECEMBER 31, ------------ -------------------------- 1999 1998 1997 ------------ ----------- ----------- (UNAUDITED) Balance, beginning of period............. $ 781,034 $ 780,995 $ 616,490 Provision charged to operations ......... 38,473 99,000 96,000 Loans charged-off ....................... (108,102) (55,198) (72,221) Recoveries of previous charge-offs ......................... 26,180 16,764 24,326 ----------- ----------- ----------- Balance, end of period................... $ 798,112 $ 781,034 $ 780,995 =========== =========== ===========
As of September 30, 1999, nonaccrual loans were $156,000. If interest due on all nonaccrual loans as of September 30, 1999 had been accrued at the original contract rates, estimated interest income would have been increased by $6,824. In addition, there were no recorded investments for impaired loans or related allowance as of September 30, 1999. (4) PREMISES AND EQUIPMENT A summary of premises and equipment as of September 30, 1999 (unaudited) and as of December 31, 1998 and 1997 is as follows:
SEPTEMBER 30 DECEMBER 31, ------------ --------------------------- 1999 1998 1997 ------------ ----------- ----------- (UNAUDITED) Land .................................... $ 1,744,689 $ 1,732,098 $ 1,062,540 Building and building improvements........................... 1,720,714 1,210,327 1,082,404 Furniture, fixtures and equipment ............................. 1,653,515 1,267,758 1,185,940 Leasehold improvements .................. 266,887 244,020 211,377 ----------- ----------- ----------- Total............................... 5,385,805 4,454,203 3,542,261 Less accumulated depreciation .......................... 928,984 739,378 620,366 ----------- ----------- ----------- Net premises and equipment.......... $ 4,456,821 $ 3,714,825 $ 2,921,895 =========== =========== ===========
F-19 101 FIRST NATIONAL BANK OF OSCEOLA COUNTY Notes to the Financial Statements December 31, 1998 and 1997--Continued (5) FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Bank in estimating fair values of financial instruments as disclosed herein: CASH AND CASH EQUIVALENTS - The carrying amount of cash and cash equivalents approximates fair value. INVESTMENTS - The Bank's investment securities available for sale and held to maturity represent investments in U.S. Government obligations, U.S. Government Agency securities, and state and political subdivisions. The Bank's equity investments represent stock investments in the Federal Reserve Bank. The stock is not publicly traded and the carrying amount was used to estimate the fair value. The fair value of the U.S. Government obligations and U.S. Government Agency obligations and state and local political subdivision portfolios was estimated based on quoted market prices. LOANS - 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 commercial real estate, commercial and consumer loans other than variable rate loans are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values of impaired loans are estimated using discounted cash flow analysis or underlying collateral values, where applicable. DEPOSITS - The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand (that is their carrying amounts). The carrying amounts of variable rate, fixed term money market accounts and certificates of deposit (CDs) approximate their fair value at the reporting date. Fair values for fixed rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. REPURCHASE AGREEMENTS - The carrying amount of the repurchase agreements approximate their fair value. COMMITMENTS - Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. F-20 102 FIRST NATIONAL BANK OF OSCEOLA COUNTY Notes to the Financial Statements December 31, 1998 and 1997--Continued The following tables present the carrying amounts and estimated fair values of the Bank's financial instruments.
SEPTEMBER 30, 1999 (UNAUDITED) ------------------------------ CARRYING AMOUNT FAIR VALUE ------------ ------------ Financial assets: Cash and due from banks and federal funds sold ..................................... $ 6,695,343 $ 6,695,343 Investment securities available for sale ......... 25,883,187 25,883,187 Investment securities held to maturity ........... 3,537,952 3,484,850 Total loans ...................................... 66,611,908 65,256,112 Financial liabilities: Deposits: Without stated maturities ...................... $ 47,311,063 $ 47,311,063 With stated maturities ......................... 48,645,358 48,295,000 Securities sold under agreements to repurchase ... 2,790,900 2,790,900 Commitments: Letter of credit ................................. $ 195,549 $ 195,549 Loan commitments................................. 9,883,860 9,883,860
DECEMBER 31, 1998 ----------------------------- CARRYING AMOUNT FAIR VALUE ------------ ------------ Financial assets: Cash and due from banks and federal funds sold ..................................... $ 9,704,944 $ 9,704,944 Investment securities available for sale ......... 35,818,706 35,818,706 Investment securities held to maturity ........... 2,555,226 2,546,254 Total loans ...................................... 57,372,431 57,531,034 Financial liabilities: Deposits: Without stated maturities ...................... $ 42,793,386 $ 42,793,386 With stated maturities ......................... 54,764,394 55,080,000 Securities sold under agreements to repurchase ... 3,978,073 3,978,073 Commitments: Letter of credit ................................. $ 191,149 $ 191,149 Loan commitments................................. 6,028,801 6,028,801
DECEMBER 31, 1997 ----------------------------- CARRYING AMOUNT FAIR VALUE ------------ ------------ Financial assets: Cash and due from banks and federal funds sold ..................................... $12,560,670 $12,560,670 Investment securities available for sale ......... 14,667,408 14,667,408 Investment securities held to maturity ........... 3,002,679 3,011,830 Total loans ...................................... 53,094,000 53,047,000 Interest earned, not collected ................... 606,134 606,134 Financial liabilities: Deposits: Without stated maturities ..................... 31,553,359 31,553,359 With stated maturities ........................ 46,954,423 48,205,641 Securities sold under agreements to repurchase ... 1,044,200 1,044,200
F-21 103 FIRST NATIONAL BANK OF OSCEOLA COUNTY Notes to the Financial Statements December 31, 1998 and 1997--Continued (6) DEPOSITS A detail of deposits as of September 30, 1999 (unaudited) and as of December 31, 1998 and 1997 is as follows:
SEPTEMBER 30, ----------------------------- WEIGHTED AVERAGE INTEREST 1999 RATE ------------ ---------- (UNAUDITED) Non-interest bearing demand deposits ........ $ 21,611,724 --% Interest bearing: Interest-bearing demand deposits .......... 15,517,026 1.01% Savings deposits .......................... 10,182,313 1.65% Time deposits less than $100,000 .......... 37,885,056 4.90% Time deposits of $100,000 or greater ...... 10,760,302 5.18% ------------ ---------- $ 95,956,421 2.85% ============ ========== DECEMBER 31, ---------------------------------------------- WEIGHTED AVERAGE INTEREST 1998 RATE 1997 ------------ ---------- ------------ (UNAUDITED) Non-interest bearing demand deposits ........ $ 18,670,815 --% $ 12,951,485 Interest bearing: Interest-bearing demand deposits .......... 16,093,120 1.43% 13,574,565 Savings deposits .......................... 8,029,451 1.65% 5,027,309 Time deposits less than $100,000 .......... 43,203,321 5.43% 36,415,815 Time deposits of $100,000 or greater ...... 11,561,073 5.60% 10,538,608 ------------ ---------- ------------ $ 97,557,780 3.09% $ 78,507,782 ============ ========== ============
The following table presents, by various interest rate categories, the amount of certificate accounts as of September 30, 1999, maturing during the periods reflected below:
INTEREST RATE 1999 2000 2001 2002 2003 2004 TOTAL - ------------------ ------------ --------- --------- --------- --------- ----------- ----------- 1.00% - 3.99% $ 936,557 -- -- -- -- -- 936,557 4.00% - 4.99% 7,032,109 811,366 26,652 5,110 106,201 -- 7,981,348 5.00% - 5.99% 26,647,994 2,981,718 703,366 551,686 258,329 -- 31,143,093 6.00% - 6.99% 10,592,074 1,227,883 702,702 198,792 43,480 -- 12,764,931 7.00% - 7.45% 90,000 340,202 -- 67,932 -- -- 498,134 ------------ --------- --------- --------- --------- ----------- ----------- $ 45,298,734 5,361,169 1,432,630 823,520 408,010 -- 53,324,063 ============ ========= ========= ========= ========= =========== ===========
F-22 104 l FIRST NATIONAL BANK OF OSCEOLA COUNTY Notes to the Financial Statements December 31, 1998 and 1997--Continued Included in interest-bearing deposits are certificates of deposit which have remaining maturities as of September 30, 1999 (unaudited) and as of December 31, 1998 and 1997 as follows:
SEPTEMBER 30, DECEMBER 31, ------------- ----------------------------- 1999 1998 1997 ------------- ------------ ------------ (unaudited) One year ................................................... $ 38,556,072 $ 46,833,079 $ 33,762,420 Two years .................................................. 7,435,130 5,384,106 10,095,011 Three years ................................................ 225,023 1,398,041 1,374,780 Four years ................................................. 1,188,040 766,052 979,024 Five years ................................................. 710,043 383,116 743,188 Thereafter ................................................. 531,050 -- -- ------------ ------------ ------------ $ 48,645,358 $ 54,764,394 $ 46,954,423 ============ ============ ============
A summary of interest expense on deposits and other borrowed money is as follows:
SEPTEMBER 30, DECEMBER 31, ----------------------------- ----------------------------- 1999 1998 1998 1997 ------------ ------------ ------------ ------------ (UNAUDITED) Interest-bearing demand deposits ................................ $ 183,421 $ 175,653 $ 231,130 $ 222,650 Savings deposits ............................ 177,208 129,517 181,338 85,030 Time deposits less than $100,000 ............................... 1,570,701 1,673,416 2,269,057 1,867,270 Time deposits of $100,000 or greater ................................. 425,675 502,480 668,423 560,695 Interest on other borrowed money.................................... 99,592 54,146 103,563 81,883 ------------ ------------ ------------ ------------ $ 2,456,597 $ 2,535,211 $ 3,453,511 $ 2,817,528 ============ ============ ============ ============
The Bank had deposits from directors, officers and employees and their related interests of approximately $3,729,021, $1,280,453 and $1,186,000 as of September 30, 1999 (unaudited) and as of December 31, 1998 and 1997, respectively. (7) OTHER BORROWINGS The Bank enters into sales of securities under agreements to repurchase substantially identical securities. These fixed-coupon agreements are treated as secured borrowings, and the obligations to repurchase securities sold are reflected as a liability in the balance sheet. The dollar amount of securities underlying the agreements remain in the asset accounts. F-23 105 FIRST NATIONAL BANK OF OSCEOLA COUNTY Notes to the Financial Statements December 31, 1998 and 1997--Continued Repurchase agreements averaged $3,540,164, $2,315,848 and $1,732,210 during the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998 and 1997, respectively. The maximum amount outstanding at any month-end for the corresponding periods was $5,097,021, $4,729,620 and $3,285,100, respectively. Total interest expense paid on repurchase agreements for the nine months ending September 30, 1999 and 1998 (unaudited) and for the years ending December 31, 1998 and 1997 was $99,591, $54,146, $103,563 and $81,883, respectively. As of December 31, 1998 and September 30, 1999, the Bank has available repurchase lines equal to the amount of all unpledged investment securities. In 1998, the Bank had an unsecured line of credit with another financial institution of $1,000,000, with an interest rate of 5.59%. As of December 31, 1998, the outstanding balance was zero. (8) INCOME TAXES The provision for income taxes for the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998 and 1997 consists of the following:
CURRENT DEFERRED TOTAL ----------- ----------- ----------- SEPTEMBER 30, 1999 (UNAUDITED): Federal $ 285,378 $ (2,239) $ 283,139 State 25,420 (383) 25,037 ----------- ----------- ----------- $ 310,798 $ (2,622) $ 308,176 =========== =========== =========== DECEMBER 31, 1998: Federal $ 462,781 $ (4,784) $ 457,997 State 54,706 (307) 54,399 ----------- ----------- ----------- $ 517,487 $ (5,091) $ 512,396 =========== =========== =========== DECEMBER 31, 1997: Federal $ 384,342 $ (18,929) $ 365,413 State 42,320 (2,320) 40,000 ----------- ----------- ----------- $ 426,662 $ (21,249) $ 405,413 =========== =========== ===========
F-24 106 FIRST NATIONAL BANK OF OSCEOLA COUNTY Notes to the Financial Statements December 31, 1998 and 1997--Continued The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of September 30, 1999 (unaudited) and December 31, 1998 and 1997 are as follows:
SEPTEMBER 30, DECEMBER 31, ------------- --------------------------- 1999 1998 1997 ------------- ----------- ----------- (UNAUDITED) Deferred tax assets: Unrealized loss on investments ........ $ 31,754 $ -- $ -- Allowance for loan losses ............. 258,883 256,862 250,945 Reserve for group insurance ........... -- -- 2,367 ------------- ----------- ----------- Total deferred tax asset ........ 290,637 256,862 253,312 ------------- ----------- ----------- Deferred tax liabilities: Premises and equipment, due to differences in depreciation methods and useful lives ............................ (89,960) (89,308) (90,849) Unrealized gain on investment securities available for sale .............................. -- (75,685) (11,655) ------------- ----------- ----------- Total deferred tax liability ..................... (89,960) (164,993) (102,504) ------------- ----------- ----------- Net deferred tax asset ............ $ 200,677 $ 91,869 $ 150,808 ============= =========== ===========
The Bank has recorded a deferred tax asset of $200,677, $91,869 and $150,808 as of September 30, 1999 (unaudited) and as of December 31, 1998 and 1997, respectively. No valuation allowance as defined by SFAS 109 is required as of September 30, 1999 (unaudited) and December 31, 1998 and 1997, because management believes that based on levels of historical taxable income, projections for future taxable income and reversals of deferred tax liabilities over the periods which the deferred tax assets are deductible, it is more likely than not that the Bank will realize the benefits of these deductible differences. F-25 107 FIRST NATIONAL BANK OF OSCEOLA COUNTY Notes to the Financial Statements December 31, 1998 and 1997--Continued A reconciliation between the provision for taxes and the "expected" tax expense computed by applying the U.S. federal statutory corporate rate of 34% to earnings before income taxes is as follows:
SEPTEMBER 30, DECEMBER 31, --------------------------- --------------------------- 1999 1998 1998 1997 ----------- ----------- ----------- ----------- (UNAUDITED) Tax expense at statutory rate ........... $ 285,670 $ 358,603 $ 478,138 $ 342,429 State income taxes, net of federal income tax benefits ................. 16,524 23,484 35,800 26,400 Other, primarily nondeductible expenses, net ....................... 5,982 5,008 (1,542) 36,584 ----------- ----------- ----------- ----------- Provision for income taxes .............. $ 308,176 $ 387,086 $ 512,396 $ 405,413 =========== =========== =========== ===========
(9) RENT The following is a schedule of future minimum annual rentals under the noncancellable operating leases of the Bank's facilities as of September 30, 1999:
YEAR ENDING DECEMBER 31, ------------------------------------ 1999 .................................. $ 35,730 2000 .................................. 142,921 2001 .................................. 142,921 2002 .................................. 142,921 2003 .................................. 142,921 Thereafter ............................ 714,604 ------------ $ 1,429,209 ============
Rent expense for the years ended December 31, 1998 and 1997 was $142,687 and $138,408, respectively, and is included in occupancy expense in the accompanying consolidated statements of income. Operating lease income from subleases of the Bank's premises for 1998 and 1997 amounted to $6,250 and $10,200, respectively. (10) REGULATORY CAPITAL The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct and material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. F-26 108 FIRST NATIONAL BANK OF OSCEOLA COUNTY Notes to the Financial Statements December 31, 1998 and 1997--Continued Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total risk-based capital and Tier I capital (as defined in the regulations) to risk-weighted assets and Tier I capital to adjusted total assets (as defined in the regulations). Management believes, as of December 31, 1998, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1998, the most recent notification from the Office of Comptroller of the Currency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain total risk-based, Tier I risk-based, Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category. The Bank's actual capital amounts and ratios are also presented in the table.
TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISION ------------------------ ------------------------ --------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ---------- ----- ---------- ----- ---------- ----- AS OF SEPTEMBER 30, 1999 (UNAUDITED): Total risk-based capital (to risk weighted assets) .............. $9,251,485 13.9% $5,308,480 >8% $6,635,600 >10% - - Tier I capital (to risk weighted assets) .............. 8,453,373 12.7% 2,654,20 >4% 3,981,360 > 6% - - Tier I capital (to adjusted total assets) ....................... 8,453,373 7.9% 4,280,840 >4% 5,351,050 > 5% - -
F-27 109 FIRST NATIONAL BANK OF OSCEOLA COUNTY Notes to the Financial Statements December 31, 1998 and 1997--Continued
TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISION ----------------------- --------------------- -------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ---------- ----- ---------- ----- ---------- ----- DECEMBER 31, 1998: Total risk-based capital (to risk weighted assets) .................. $8,019,444 13.7% $4,668,192 >8% $5,835,241 >10% - - Tier I capital (to risk weighted assets ....................... 7,289,402 12.5% 2,334,096 >4% 3,501,144 > 6% - - Tier I capital (to adjusted total assets) ....................... 7,289,402 6.7% 4,336,161 >4% 5,420,201 > 5% - - AS OF DECEMBER 31, 1997: Total risk-based capital (to risk weighted assets) .................. $7,009,000 13.0% $4,301,000 >8% $5,376,268 >10% - - Tier I capital (to risk weighted assets ............................ 6,335,000 11.8% 2,155,000 >4% 3,252,218 > 6% - - Tier I capital (to adjusted total assets) ........................... 6,335,000 7.3% 3,452,000 >4% 4,314,308 > 5% - -
(11) DIVIDENDS The Board of Directors of the Bank declared cash dividends of $66,188, $112,777 and $72,335 during the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998 and 1997, respectively. Banking regulations limit the amount of dividends that may be paid by the Bank without prior approval of the Bank's regulatory agency. (12) STOCK OPTION PLANS The Bank currently has an incentive stock plan for its directors and employees. In September 1989, the Bank authorized 97,500 common shares for future options for all directors under an incentive stock option and non-statutory stock option plan. The number of options granted to each director shall not exceed 7,500. Options were granted at $10.00 per share (fair market value of the stock). Each option provides that the underlying option expires no later than September 18, 1999 and vesting occurs at 20% on September 18th of each year. As of September 30, 1999 (unaudited) and December 31, 1998 and 1997, all directors options are fully vested, with no additional options granted and 22,891 and 10,000 exercised during the nine month period ended September 30, 1999 and the year ended December 31, 1997, respectively. There were 400 and 38,900 outstanding options as of September 30, 1999 (unaudited) and December 31, 1997, respectively. F-28 110 FIRST NATIONAL BANK OF OSCEOLA COUNTY Notes to the Financial Statements December 31, 1998 and 1997--Continued In addition, in 1989, the Bank authorized options for a total of 45,000 shares under a stock option plan to key employees of the Bank. Options were granted at a minimum price of $10.00 per share (fair market value of the stock). Each option provides an exercise period as decided by the Board with expiration at ten years from the date of grant. In January 1998, the Bank granted an additional 1,000 options with an exercise price of $20.00 per share (fair market value of the stock). The options vest over a four year period beginning with the date of the grant and expire in ten years. In October 1998, the Bank granted an additional 2,500 options with an exercise price of $25.00 per share (fair market value of the stock). The options vest over a four year period beginning with the date of grant and expire in ten years. During the nine month period ended September 30, 1999 and the year ended December 31, 1997, 37,175 and 0 options were exercised, respectively, and none were granted for either year. As of September 30, 1999 and December 31, 1997, there were 5,506 and 41,075 options outstanding, of which 2,881 and 39,825 were vested. The Bank applies APB Opinion No. 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation cost for the Bank's stock-based compensation plan been determined consistent with FASB Statement No. 123, the Bank's net income would have been reduced to the pro forma amounts indicated below:
SEPTEMBER 30, DECEMBER 31, ----------------------- --------------------------- 1999 1998 1998 1997 --------- ------- ------------ ----------- (UNAUDITED) Net income: As reported ......... $ 532,030 $658,983 $893,891 $601,732 Pro forma ........... $ 529,687 $656,580 $887,746 $584,232 Basic net income As reported .......... $ 1.13 $ 1.48 $ 2.00 $ 1.41 Pro forma ............ $ 1.12 $ 1.47 $ 1.99 $ 1.37 Diluted net income As reported .......... $ 1.07 $ 1.38 $ 1.86 $ 1.32 Pro forma ............ $ 1.07 $ 1.37 $ 1.84 $ 1.28
The fair value of each option granted is estimated on the date of grant using the minimum value method with the following weighted-average assumptions used for grants for the nine months ended September 30, 1999 and for the year ended December 31, 1998: annual dividend per share of $0.25; expected volatility of 0%; risk-free interest rates of 4.73% and expected lives of 10 years for the plan options. A summary of the status of the Bank's stock option plan for the nine months ended September 30, 1999 (unaudited) and for the years December 31, 1998 and 1997, and changes during the periods ended on those dates is presented below:
SEPTEMBER 30, DECEMBER 31, Weighted Average --------------- ---------------------------- Exercise Price FIXED OPTIONS 1999 1998 1997 at December 31, 1997 ---------------------------------------- ------------ ------------ ---------- -------------------- (UNAUDITED) Outstanding at beginning of period: ......... 65,972 79,975 89,975 $ 10 Granted ................................. -- 3,500 -- Exercised ............................... (60,066) (15,609) (10,000) $ 10 Forfeited ............................... -- (1,894) -- ------------ ------------ ---------- Outstanding at end of period ................ 5,906 65,972 79,975 $ 10 ------------ ------------ ---------- Options exercisable at end of period ........ 3,281 62,972 78,725 ------------ ============ ========== Weighted-average fair value of options granted during the period per share ............................... $ -- $ 6.67 $ -- ============ ============ ==========
F-29 111 The following table summarizes information about fixed stock options outstanding at September 30, 1999 (unaudited) and December 31, 1998:
SEPTEMBER 30, 1999 (UNAUDITED) -------------------------------------------------------------------------------------------------------------------- WEIGHTED NUMBER WEIGHTED WEIGHTED NUMBER AVERAGE EXERCISE OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT PRICE AT RANGE OF SEPTEMBER 30, CONTRACTUAL EXERCISE SEPTEMBER 30, SEPTEMBER 30, EXERCISE PRICES 1999 LIFE PRICE 1999 1999 --------------- -------------- ----------- -------- -------------- ---------------- $ 10.00 406 1 year $ 10.00 406 $ 10.00 $14.00-415.00 2,000 7 years $ 14.67 1,750 $ 14.50 $20.00-$25.00 3,500 9 years $ 23.50 1,125 $ 23.50 DECEMBER 31, 1998 -------------------------------------------------------------------------------------------------------------------- WEIGHTED NUMBER WEIGHTED WEIGHTED NUMBER AVERAGE EXERCISE OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT PRICE AT RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, DECEMBER 31, EXERCISE PRICES 1998 LIFE PRICE 1998 1998 --------------- -------------- ----------- -------- -------------- ---------------- $ 10.00 60,472 1 year $ 10.00 60,472 $ 10.00 $14.00-$15.00 2,000 8 years $ 14.67 1,750 $ 14.50 $20.00-$25.00 3,500 10 years $ 23.50 1,125 $ 23.50
(13) EMPLOYEE BENEFIT PLAN The Bank maintains a 401(k) compensation and incentive plan for the benefit of its employees. Employees are eligible to participate in the plan after completing one year of continuous employment. The Bank contributes an amount equal to a certain percentage of the employees' contributions based on the discretion of the Board of Directors. The Bank's total contributions are not to exceed six percent of the employees' annual compensation. During the nine months ended September 30, 1999 and 1998 (unaudited) and for the years ended December 31, 1998 and 1997, the Bank's contributions to the plan were $20,487, $18,403, $32,267 and $34,785, respectively. F-30 112 FIRST NATIONAL BANK OF OSCEOLA COUNTY Notes to the Financial Statements December 31, 1998 and 1997--Continued (14) CREDIT COMMITMENTS The Bank has outstanding at any time a significant number of commitments to extend credit. These arrangements are subject to strict credit control assessments and each customer's credit worthiness is evaluated on a case-by-case basis. A summary of commitments to extend credit and standby letters of credit written for the nine months ended September 30, 1999 and 1998 (unaudited) and for the years ended December 31, 1998 and 1997 are as follows:
Contract or Notional Amount -------------------------------------------------- SEPTEMBER 30, DECEMBER 31, ------------- ----------------------------- 1999 1998 1997 ------------- --------- ---------- (UNAUDITED) Standby letters of credit ......... $ 195,549 191,149 1,289,386 Available lines of credit ......... 9,883,960 6,028,801 7,072,527
Because many commitments expire without being funded in whole or part, the contract amounts are not estimates of future cash flows. The majority of loan commitments have terms up to one year and have variable interest rates. Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. The credit risk amounts are equal to the contractual amounts, assuming that the amounts are fully advanced and that the collateral or other security is of no value. The Bank's policy is to require customers to provide collateral prior to the disbursement of approved loans. The amount of collateral obtained, if it is deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, real estate and income providing commercial properties. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. As of September 30, 1999 (unaudited) and December 31, 1998, essentially all letters of credit issued have expiration dates within one year. As of December 31, 1997, approximately $1,145,000 of these letters of credit had expiration dates greater than one year, with all other letters of credit expiring 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. (15) CONCENTRATIONS OF CREDIT RISK Most of the Bank's business activity is with customers located within Osceola County and portions of adjacent counties. The majority of commercial and mortgage loans are granted to customers residing in this area. Generally, commercial loans are secured by real estate, and mortgage loans are secured by either first or second mortgages on residential or commercial property. As of September 30, 1999, substantially all of the Bank's loan portfolio was secured. Although the Bank has a diversified loan portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent upon the economy of Osceola County and portions of adjacent counties. The Bank does not have significant exposure to any individual customer or counterparty. In addition, cash and cash equivalents in excess of federal deposit insurance coverage amounted to approximately $12,300,000 at December 31, 1997. The bank has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. F-31 113 INDEPENDENT AUDITORS' REPORT The Board of Directors Community National Bank of Pasco County: We have audited the accompanying balance sheet of Community National Bank of Pasco County as of December 31, 1998 and the related statements of operations, changes in stockholders' equity and comprehensive income and cash flows for the year then ended. These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Community National Bank of Pasco County at December 31, 1998, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. /s/ KPMG LLP Orlando, Florida February 1, 1999 F-32 114 INDEPENDENT AUDITORS' REPORT January 14, 1998 Board of Directors Community National Bank of Pasco County Zephyrhills, Florida We have audited the accompanying statement of financial condition of Community National Bank of Pasco County as of December 21, 1997, and the related statement of income, changes in stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Community National Bank of Pasco County as of December 31, 1997, the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Dwight Darby & Company --------------------------------------- Certified Public Accountants F-33 115 COMMUNITY NATIONAL BANK OF PASCO COUNTY Balance Sheets
SEPTEMBER 30, DECEMBER 31, ------------- -------------------------- Assets 1999 1998 1997 ------------- ----------- ----------- (UNAUDITED) Cash and due from banks .............................. $ 6,174,798 $ 3,787,574 $ 3,557,064 Federal funds sold ................................... 4,207,000 5,175,000 3,720,000 Investment securities available for sale ............. 22,236,228 21,955,703 14,185,891 Investment securities held to maturity (market value of $3,006,075 at December 31, 1997) ........ -- -- 3,000,846 Loans, less allowance for loan losses of $865,306, $865,503 and $754,637 for the nine months ended September 30, 1999 and for the years ended December 31, 1998 and 1997, respectively.......... 56,033,412 55,783,943 50,813,641 Accrued interest receivable .......................... 711,989 666,606 609,410 Bank premises and equipment, net ..................... 5,954,581 5,294,524 3,450,588 Other real estate owned .............................. -- 34,672 359,254 Deferred income taxes ................................ 315,852 235,942 223,896 Prepaids and other assets ............................ 86,491 46,960 44,488 ----------- ----------- ----------- $95,720,351 $92,980,924 $79,965,078 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest bearing .............................. $10,789,505 $11,324,586 $ 9,281,953 Interest bearing ................................. 74,430,885 73,322,182 62,388,590 ----------- ----------- ----------- Total deposits .......................... 85,220,390 84,646,768 71,670,543 Securities sold under agreements to repurchase ... 2,211,244 652,948 1,487,751 Accrued interest payable ......................... 124,546 144,862 141,957 Accounts payable and accrued expenses ............ 322,298 89,694 176,518 ----------- ----------- ----------- Total liabilities ....................... 87,878,478 85,534,272 73,476,769 ----------- ----------- ----------- Stockholders' equity: Common stock, $5 par value; 5,000,000 shares authorized; 486,435, 461,585 and 436,648 shares for the nine months ended September 30, 1999 and for the years ended December 31, 1998 and 1997, respectively, issued and outstanding ........................ 2,434,175 2,307,925 2,183,240 Additional paid-in capital ....................... 2,559,580 2,430,696 2,265,349 Retained earnings ................................ 2,883,095 2,591,424 2,005,032 Accumulated other comprehensive income ........... (34,977) 116,607 34,688 ----------- ----------- ----------- Total stockholders' equity .............. 7,841,873 7,446,652 6,488,309 Commitments and contingent liabilities ----------- ----------- ----------- Total liabilities and stockholders' equity ............................... $95,720,351 $92,980,924 $79,965,078 =========== =========== ===========
See accompanying notes to financial statements. F-34 116 COMMUNITY NATIONAL BANK OF PASCO COUNTY Statements of Operations
YEARS ENDED SEPTEMBER 30, DECEMBER 31, ------------------------ ------------------------ 1999 1998 1998 1997 ---------- ---------- ---------- ---------- (Unaudited) Interest income: Loans ................................................ $3,756,223 $3,587,471 $4,868,419 $4,546,805 Investment securities ................................ 928,884 817,155 1,108,953 998,874 Federal funds sold ................................... 206,698 233,372 296,312 261,436 ---------- ---------- ---------- ---------- 4,891,805 4,637,998 6,273,684 5,807,115 ---------- ---------- ---------- ---------- Interest expense: Deposits ............................................. 2,256,364 2,250,329 3,039,598 2,916,542 Securities sold under agreement to repurchase ........ 25,874 50,533 58,853 40,090 ---------- ---------- ---------- ---------- 2,282,238 2,300,862 3,098,451 2,956,632 ---------- ---------- ---------- ---------- Net interest income ......................... 2,609,567 2,337,136 3,175,233 2,850,483 Provision for loan losses ................................ 9,000 150,000 150,000 150,000 ---------- ---------- ---------- ---------- Net interest income after loan loss provision 2,600,567 2,187,136 3,025,233 2,700,483 ---------- ---------- ---------- ---------- Other income: Service charges on deposit accounts .................. 431,091 301,865 423,759 336,680 Other service charges and fees ....................... 45,688 29,901 41,098 36,849 Gain on sale of other real estate owned .............. -- -- 99,659 148,985 ---------- ---------- ---------- ---------- 476,779 331,766 564,516 522,514 ---------- ---------- ---------- ---------- Other expenses: Salaries, wages and employee benefits ................ 1,079,930 839,014 1,131,682 893,967 Occupancy expense .................................... 302,497 194,473 272,603 195,728 Depreciation of premises and equipment ............... 231,857 157,069 215,412 172,896 Stationary and printing supplies ..................... 58,175 55,454 83,034 64,677 Advertising and public relations ..................... 59,331 30,641 47,772 53,209 Data processing expense .............................. 180,091 152,866 208,688 109,566 Legal and professional fees .......................... 77,196 74,713 114,735 136,945 Other expenses ....................................... 395,353 285,205 420,755 287,041 ---------- ---------- ---------- ---------- 2,384,430 1,789,435 2,494,681 1,914,029 ---------- ---------- ---------- ---------- Income before provision for income taxes .... 692,916 729,467 1,095,068 1,308,968 Provision for income taxes ............................... 255,194 295,538 393,405 484,235 ---------- ---------- ---------- ---------- Net income .................................. $ 437,722 $ 433,929 $ 701,663 $ 824,733 ========== ========== ========== ========== Net Income per Share Basic ................................................ $ 0.94 $ 0.95 $ 1.53 $ 1.97 Diluted .............................................. $ 0.90 $ 0.90 $ 1.45 $ 1.83 Average Number of Common Shares Outstanding Basic ................................................ 465,417 456,805 458,049 418,129 Diluted .............................................. 483,472 481,734 483,581 451,096
See accompanying notes to financial statements. F-35 117 COMMUNITY NATIONAL BANK OF PASCO COUNTY Statements of Changes in Stockholder' Equity and Comprehensive Income
ACCUMULATED OTHER TOTAL COMPREHENSIVE COMMON CAPITAL RETAINED COMPREHENSIVE STOCKHOLDERS' INCOME STOCK SURPLUS EARNINGS INCOME EQUITY -------------- ---------- ---------- ----------- ------------- ------------ Balance, December 31, 1996 ...................... $2,017,000 2,017,000 1,253,222 26,094 5,313,316 Dividends paid .................................. -- -- (72,923) -- (72,923) Stock options exercised ......................... 166,240 166,240 -- -- 322,480 Tax effect of tax deduction in excess of book deduction on options exercised during the year -- 82,109 -- -- 82,109 Comprehensive income: Net income ................................... $ 824,733 -- -- 824,733 -- 824,733 Other comprehensive income, net of tax unrealized gain on securities ............ 8,594 -- -- -- 8,594 8,594 --------- Comprehensive income ............................ $ 833,327 ========= ---------- ---------- ----------- --------- ----------- Balances, September 30, 1997 .................... $2,183,240 $2,265,349 $ 2,005,032 $ 34,688 $ 6,488,309 Dividends paid .................................. -- -- (115,271) -- (115,271) Stock options exercised ......................... 124,685 124,685 -- -- 249,370 Tax effect of tax deduction in excess of book deduction on options exercised during the year -- 40,662 -- -- 40,662 Comprehensive income: Net income ................................... $ 701,663 -- -- 701,663 -- 701,663 Other comprehensive income, net of tax unrealized gain on securities ............ 81,919 -- -- -- 81,919 81,919 --------- Comprehensive income ............................ $ 783,582 ========= Balances, December 31, 1998 ..................... $2,307,925 $2,430,696 $ 2,591,424 $ 116,607 $ 7,446,652 Dividends paid .................................. -- -- (146,051) -- (146,051) Stock options exercised ......................... 126,250 126,250 -- -- 252,500 Tax effect of tax deduction in excess of book deduction on options exercised during the year -- 2,634 -- -- 2,634 Comprehensive income: Net income ................................... $ 437,722 -- -- 437,722 -- 437,722 Other comprehensive income, net of tax unrealized gain on securities ............ (151,584) -- -- -- (151,584) (151,584) --------- Comprehensive income ............................ $ 286,138 ========= ---------- ---------- ----------- --------- ----------- Balance, September 30, 1999 ..................... $2,434,175 $2,559,580 $ 2,883,095 $ (34,977) $ 7,841,873 ========== ========== =========== ========= ===========
See accompanying notes to financial statements. F-36 118 COMMUNITY NATIONAL BANK OF PASCO COUNTY Statements of Cash Flows
NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31, ----------------------------- ---------------------------- 1999 1998 1998 1997 ------------ ------------ ------------ ----------- (UNAUDITED) Cash flows from operating activities: Net income ................................................ $ 437,722 $ 433,929 $ 701,663 $ 824,733 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses ........................... 9,000 150,000 150,000 150,000 Depreciation of premises and equipment .............. 231,857 157,069 215,412 172,896 Net amortization/accretion of investment securities . 58,299 8,837 17,571 2,217 Net deferred loan origination fees .................. (858) (2,114) (62) -- Provision for loss of other assets owned ............ -- -- -- (2,000) Loss (gain) on sale of other real estate owned ...... 3,428 (643) (99,659) (148,985) Deferred income taxes ............................... 11,547 (53,536) (61,139) (41,069) Tax deduction in excess of book deduction on options exercised ........................................ 2,634 40,662 40,662 -- Cash provided by (used in) changes in: .................... 82,109 Net change in accrued interest receivable ........... (45,383) (25,500) (57,196) (57,036) Net change in prepaids and other assets ............. (39,531) (9,267) (2,472) (37,002) Net change in accrued interest payable .............. (20,316) (1,857) 2,905 23,502 Net change in accounts payable and accrued expenses . 232,604 100,189 (86,824) 14,668 ------------ ------------ ------------ ----------- Net cash provided by operating activities ........ 881,003 797,769 820,861 984,033 ------------ ------------ ------------ ----------- Cash flows from investing activities: Purchases of investment securities available for sale ..... (6,081,865) (13,923,376) (15,955,525) (8,027,148) Proceeds from callable investment securities available for sale ............................................... 1,000,000 1,000,000 2,300,000 -- Proceeds from maturities of investment securities available for sale ............................................... 3,500,000 5,500,000 6,000,000 6,000,000 Proceeds from sales of investment securities available for sale ............................................... 1,000,000 -- -- -- Proceeds from maturities of investment securities held to maturity ............................................ -- 3,000,000 3,000,000 1,000,000 Increase in loans, net of repayments ...................... (257,611) (2,110,496) (5,086,240) (5,386,764) Purchases of premises and equipment ....................... (891,914) (1,433,114) (2,059,348) (937,244) Proceeds from sale of other real estate owned ............. 31,244 32,663 390,241 40,250 ------------ ------------ ------------ ----------- Net cash used in investing activities ............ (1,700,146) (7,934,323) (11,410,872) (7,310,906) ------------ ------------ ------------ ----------- Cash flows from financing activities: Net increase in demand and savings deposits ............... 573,622 5,167,722 12,976,225 8,047,930 Net (decrease) increase in other borrowings ............... 1,558,296 (29,862) (834,803) 1,487,751 Stock options exercised ................................... 252,500 244,370 249,370 414,589 Dividends paid ............................................ (146,051) (115,271) (115,271) (72,923) ------------ ------------ ------------ ----------- Net cash provided by financing activities ...... 2,238,367 5,266,959 12,275,521 9,877,347 ------------ ------------ ------------ ----------- Net increase in cash and due from banks ........ 1,419,224 (1,869,595) 1,685,510 3,550,474 Cash and cash equivalents, beginning of period ................ 8,962,574 7,277,064 7,277,064 3,726,590 ------------ ------------ ------------ ----------- Cash and cash equivalents, end of period ...................... $ 10,381,798 $ 5,407,469 $ 8,962,574 $ 7,277,064 ============ ============ ============ =========== Supplemental schedule of noncash transactions: Market value adjustment-investment securities available- for-sale ............................................... Market value adjustments-investments ................ $ (56,081) $ 204,866 $ 186,960 $ 55,948 Deferred income tax liability ....................... 21,104 (77,849) (70,353) (21,260) ------------ ------------ ------------ ----------- Unrealized gain (loss) on investments available-for-sale ......................... $ (34,977) $ 127,017 $ 116,607 $ 34,688 ============ ============ ============ =========== Transfer of loan to other real estate owned ............ $ -- $ -- $ 34,000 $ 77,062 ============ ============ ============ =========== Other supplemental disclosures: Cash paid during the year for: Interest ............................................... $ 2,302,554 $ 2,302,719 $ 3,095,546 $ 2,933,130 ============ ============ ============ =========== Income taxes ........................................... $ 206,145 $ 303,522 $ 368,750 $ 371,637 ============ ============ ============ ===========
See accompanying notes to financial statements. F-37 119 COMMUNITY NATIONAL BANK OF PASCO COUNTY Notes to the Financial Statements December 31, 1998 and 1997 (Information insofar as it relates to the nine months ended September 30, 1999 and 1998 (unaudited)) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a description of the basis of presentation and the significant accounting and reporting policies which Community National Bank of Pasco County (the "Bank") follows in preparing and presenting its financial statements. (A) CASH EQUIVALENTS For purposes of the statement of cash flows, the Bank considers cash and due from banks, federal funds sold and noninterest bearing deposits in other banks with a purchased maturity of three months or less to be cash equivalents. (B) INVESTMENT SECURITIES AVAILABLE FOR SALE AND INVESTMENT SECURITIES HELD TO MATURITY The Bank accounts for investments at fair value except for those securities which the Bank has the positive intent and ability to hold to maturity. Investments to be held for indefinite periods of time and not intended to be held to maturity are classified as available for sale and are carried at fair value. Unrealized holding gains and losses are included as a separate component of shareholders' equity net of the effect of income taxes. Securities that management has the intent and the Bank has the ability at the time of purchase or origination to hold until maturity are classified as investment securities held to maturity. Securities in this category are carried at amortized cost adjusted for accretion of discounts and amortization of premiums using the level yield method over the estimated life of the securities. If a security has a decline in fair value below its amortized cost that is other than temporary, then the security will be written down to its new cost basis by recording a loss in the statements of operations. (C) LOANS Loans receivable that management has the intent and the Bank has the ability to hold until maturity or payoff are reported at their outstanding unpaid principal balance less the allowance for loan losses and deferred fees on originated loans. Loan origination fees, net of related costs, are capitalized and recognized in income over the contractual life of the loans, adjusted for estimated prepayments based on the Bank's historical prepayment experience. Commitment fees and costs relating to the commitments are recognized over the commitment period on a straight-line basis. If the commitment is exercised during the commitment period, the remaining unamortized commitment fee at the time of exercise is recognized over the life of the loan as an adjustment of yield. F-38 120 COMMUNITY NATIONAL BANK OF PASCO COUNTY Notes to the Financial Statements -- Continued December 31, 1998 and 1997 Loans are placed on nonaccrual status when the loan becomes 90 days past due as to interest or principal, unless the loan is both well secured and in the process of collection, or when the full timely collection of interest or principal becomes uncertain. When a loan is placed on nonaccrual status, the accrued and unpaid interest receivable is written off, amortization of the net deferred loan origination fees cease and the loan is accounted for on the cash or cost recovery method thereafter until qualifying for return to accrual status. The Bank, considering current information and events regarding the borrower's ability to repay their obligations, considers a loan to be impaired when it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is considered to be impaired, the amount of the impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, the secondary market value of the loan, or the fair value of the collateral for collateral dependent loans. Impaired loans are written down to the extent that principal is judged to be uncollectible and, in the case of impaired collateral dependent loans where repayment is expected to be provided solely by the underlying collateral and there is no other available and reliable sources of repayment, are written down to the lower of cost or collateral value. Impairment losses are included in the allowance for loan losses. (D) ALLOWANCE FOR LOAN LOSSES The Bank follows a consistent procedural discipline and accounts for loan loss contingencies in accordance with Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies" (Statement 5). The following is a description of how each portion of the allowance for loan losses is determined. The Bank segregates the loan portfolio for loan loss purposes into the following broad segments: commercial real estate; residential real estate; commercial business; and consumer loan. The Bank provides for a general allowance for losses inherent in the portfolio by the above categories, which consists of two components. General loss percentages are calculated based upon historical analyses. A supplemental portion of the allowance is calculated for inherent losses which probably exist as of the evaluation date even though they might not have been identified by the more objective processes used for the portion of the allowance described above. This is due to the risk of error and/or inherent imprecision in the process. This portion of the allowance is particularly subjective and requires judgments based on qualitative factors which do not lend themselves to exact mathematical calculations such as; trends in delinquencies and nonaccruals; migration trends in the portfolio; trends in volume, terms, and portfolio mix; new credit products and/or changes in the geographic distribution of those products; changes in lending policies and procedures; loan review reports on the efficacy of the risk identification process; changes in the outlook for local, regional and national economic conditions; and concentrations of credit. Specific allowances are provided in the event that the specific collateral analysis on each classified loan indicates that the probable loss upon liquidation of collateral would be in excess of the general percentage allocation. The provision for loan loss is debited or credited in order to state the allowance for loan losses to the required level as determined above. F-39 121 COMMUNITY NATIONAL BANK OF PASCO COUNTY Notes to the Financial Statements -- Continued December 31, 1998 and 1997 The Bank records impairment in the value of its loans as an addition to the allowance for loan losses. Any changes in the value of impaired loans due to the passage of time or revisions in estimates are reported as adjustments to provision expense in the same manner in which impairment initially was recognized. Regulatory examiners may require the Bank to recognize additions to the allowance based upon their judgment about the information available to them at the time of their examination. (E) PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation which is computed over the estimated useful lives of the assets which range from 5 to 31.5 years on a straight-line basis. (F) OTHER REAL ESTATE OWNED Real estate acquired in the settlement of loans is recorded at the lower of cost (principal balance of the former loan plus costs of obtaining title and possession) or estimated fair value, less estimated selling costs. Costs relating to development and improvement of the property are capitalized, whereas those relating to holding the property are charged to operations. (G) COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board established Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This Statement establishes standards for reporting and display of comprehensive income and its components in a full set of financial statements. This Statement requires that an enterprise classify items or other comprehensive income by nature in a financial statement, and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a balance sheet. The Bank adopted this Statement effective January 1, 1998 with the 1997 financial statements reclassified to reflect the adoption. The Bank's other comprehensive income is the unrealized gain/(loss) on investment securities available for sale. (H) INCOME TAXES Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date. Deferred tax assets are recognized subject to management's judgment that realization is more likely than not. F-40 122 COMMUNITY NATIONAL BANK OF PASCO COUNTY Notes to the Financial Statements -- Continued December 31, 1998 and 1997 (I) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. These estimates include the allowance for loan loss and the valuation of the deferred tax asset. Actual results could differ from these estimates. (J) EFFECT OF NEW PRONOUNCEMENTS In June 1997, the FASB issued Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information". This Statement requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision make in deciding how to allocate resources and in assessing performance. This Statement is effective for fiscal years beginning after December 15, 1997. The Company adopted the Statement effective January 1, 1998, however, the Company has only one reportable segment. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedge Activities". This Statement, which is effective for all fiscal quarters and all fiscal years beginning after June 15, 1999, requires all derivatives be measured at fair value and be recognized as assets and liabilities in the statement of financial position. This Statement sets forth the accounting for changes in fair value of a derivative depending on the intended use and designation of the derivative. Implementation of the Statement is not expected to have a significant impact on the financial position or results of operations of the Company. In October 1998, the FASB issued 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." This Statement requires that after the securitization of a mortgage loan held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed security as a trading security. The Statement is effective for the first fiscal quarter beginning after December 15, 1998. The Company does not expect the adoption of this Statement to have any impact on its consolidated financial statements. (K) RECLASSIFICATION Certain amounts in the 1997 and 1998 financial statements have been reclassified to conform with the September 30, 1999 presentation. F-41 123 COMMUNITY NATIONAL BANK OF PASCO COUNTY Notes to the Financial Statements -- Continued December 31, 1998 and 1997 (2) INVESTMENT SECURITIES AVAILABLE FOR SALE AND INVESTMENT SECURITIES HELD TO MATURITY The amortized cost and estimated market values of investment securities available for sale for the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998 and 1997 are as follows: INVESTMENT SECURITIES AVAILABLE FOR SALE:
SEPTEMBER 30, 1999 (UNAUDITED) ---------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ----------- ---------- ------------ ----------- U.S. Treasury securities . $16,590,903 $ 10,516 $ (33,899) $16,567,520 Obligations of U.S. government agencies .... 5,560,456 470 (33,168) 5,527,758 Federal reserve bank stock 140,950 -- -- 140,950 ----------- -------- ------------ ----------- $22,292,309 $ 10,986 $ (67,067) $22,236,228 =========== ======== ============ =========== ---------------------------------------------------- U.S. Treasury securities . $15,075,747 $149,425 $ -- $15,225,172 Obligations of U.S. government agencies .. 5,552,046 37,535 -- 5,589,581 Municipals ............... 1,000,000 -- -- 1,000,000 Federal reserve bank stock 140,950 -- -- 140,950 ----------- -------- ----------- ----------- $21,768,743 $186,960 $ -- $21,955,703 =========== ======== =========== =========== DECEMBER 31, 1997 ---------------------------------------------------- U.S. Treasury securities . $13,507,921 $49,632 $ 212 $15,337,341 Obligations of U.S. government agencies .. 500,972 6,528 -- 507,500 Federal reserve bank stock 121,050 -- -- 121,050 ----------- ------- ----------- ----------- $14,129,943 $56,160 $ 212 $14,185,891 =========== ======= =========== ===========
F-42 124 COMMUNITY NATIONAL BANK OF PASCO COUNTY Notes to the Financial Statements -- Continued December 31, 1998 and 1997 The amortized cost and estimated market values of investment securities held to maturity at December 31, 1997: INVESTMENT SECURITIES HELD TO MATURITY:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES MARKET VALUE ---------- ---------- ----------- ------------ 1997: U.S. Treasury securities . $2,500,892 4,583 -- 2,505,475 Obligations of U.S. government agencies .. 499,954 646 -- 500,600 ---------- ----- --------- --------- $3,000,846 5,229 -- 3,006,075 ========== ===== ========= =========
The amortized cost and estimated market value of investment securities available for sale for the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998 and 1997 by contractual maturity, are below:
SEPTEMBER 30, 1999 (UNAUDITED) ------------------------------ AMORTIZED ESTIMATED COST MARKET VALUE ----------- ------------ Investment securities available for sale: Due in one year or less ............. $14,218,318 $14,215,748 Due after one year through five years 8,073,991 8,020,480 ----------- ----------- $22,292,309 $22,236,228 =========== =========== DECEMBER 31, 1998 ---------------- ------------ Investment securities available for sale: Due in one year or less ............. $ 8,147,879 $ 8,210,505 Due after one year through five years 13,620,864 13,745,198 ----------- ----------- $21,768,743 $21,955,704 =========== =========== DECEMBER 31, 1997 ------------------------------ AMORTIZED ESTIMATED COST MARKET VALUE ----------- ------------ Investment securities available for sale: Due in one year or less ............. $ 6,114,462 $ 6,123,860 Due after one year through five years 8,015,481 8,062,031 ----------- ----------- $14,129,943 $14,185,891 =========== =========== DECEMBER 31, 1997 ---------------- ------------ Investment securities held to maturity: Due in one year or less ............. $ 3,000,846 $ 3,006,075 Due after one year through five years -- -- ----------- ----------- $ 3,000,846 $ 3,006,075 =========== ===========
At September 30, 1999 (unaudited) and at December 31, 1998 and 1997, the Bank had $2,000,000, $2,023,915 and $3,551,861, respectively, in securities pledged to the State of Florida as collateral on public fund deposits; and for other purposes. F-43 125 COMMUNITY NATIONAL BANK OF PASCO COUNTY Notes to the Financial Statements -- Continued December 31, 1998 and 1997 (3) LOANS Major categories of loans included in the loan portfolio for the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998 and 1997 are:
SEPTEMBER 30, DECEMBER 31, ------------- -------------------------- 1999 1998 1997 ------------- ----------- ----------- (UNAUDITED) Real estate: Residential ........... $21,793,499 $23,590,905 $25,593,687 Commercial ............ 20,862,060 19,121,381 15,524,421 Construction .......... 5,756,335 4,697,886 2,978,253 ----------- ----------- ----------- Total real estate 48,411,894 47,410,172 44,096,361 Commercial ............... 6,093,136 7,689,922 6,115,991 Installment .............. 2,492,889 1,654,245 1,464,355 Overdrafts ............... 14,700 9,866 6,392 ----------- ----------- ----------- 57,012,619 56,764,205 51,683,099 Less: Allowance for loan losses ............ 865,306 865,503 754,637 Deferred loan origination fees .. 113,901 114,759 114,821 ----------- ----------- ----------- Net loans ....... $56,033,412 $55,783,943 $50,813,641 =========== =========== ===========
Certain principal stockholders, directors and officers and their related interests were indebted to the Bank as summarized below for the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998 and 1997:
SEPTEMBER 30, DECEMBER 31, ------------- ------------------------ 1999 1998 1997 ------------- ---------- ---------- (UNAUDITED) Balance, beginning of period .. $1,973,214 $2,172,197 $1,454,561 Additional new loans .......... 797,102 1,192,571 1,437,872 Repayments on outstanding loans 725,291 617,181 720,236 ---------- ---------- ---------- Balance, end of period......... $2,045,025 $2,747,587 $2,172,197 ========== ========== ==========
F-44 126 COMMUNITY NATIONAL BANK OF PASCO COUNTY Notes to the Financial Statements -- Continued December 31, 1998 and 1997 All such loans were made in the ordinary course of business. For the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998 and 1997, principal stockholders, directors and officers of the Bank and their related interests had $830,533, $194,900, $169,909, respectively, available in lines of credit. Changes in the allowance for loan losses for the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998 and 1997 were as follows:
SEPTEMBER 30, DECEMBER 31, ------------- ----------------------- 1999 1998 1997 ------------- --------- --------- (UNAUDITED) Balance, beginning of period ..... $ 865,503 $ 754,637 $ 654,332 Provision charged to operations .. 9,000 150,000 150,000 Loans charged-off ................ (53,926) (42,808) (59,197) Recoveries of previous charge-offs 44,729 3,674 9,502 --------- --------- --------- Balance, end of period ........... $ 865,306 $ 865,503 $ 754,637 ========= ========= =========
For the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998 and 1997, nonaccrual loans were $201,141, $180,003 and $290,272, respectively. If interest due on all nonaccrual loans for the nine months ended September 30, 1999 and for the years ended December 31, 1998 and 1997 had been accrued at the original contract rates, estimated interest income would have been increased by $18,607, $6,881 and $4,600 for the nine months ended September 30, 1999 and for the years ended December 31, 1998 and 1997, respectively. The recorded investment in loans for which impairment has been recognized and the related allowance for loan losses for the nine months ended September 30, 1999 and for the years ended December 31, 1998 and 1997 were $813,000 and $15,000, $596,000 and $54,000 and $1,202,000 and $93,000, respectively. The average recorded investment in impaired loans during the nine months ended September 30, 1999 and for the years ended December 31, 1998 and 1997 was $1,043,000, $899,000 and 1,176,755, respectively. Interest income recognized on impaired loans for the nine months ended September 30, 1999 and 1998 and for the years ended December 31, 1998 and 1997 was $62,300, $53,300, $40,005 and $102,238, respectively. F-45 127 COMMUNITY NATIONAL BANK OF PASCO COUNTY Notes to the Financial Statements -- Continued December 31, 1998 and 1997 (4) PREMISES AND EQUIPMENT A summary of premises and equipment for the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998 and 1997 is as follows:
SEPTEMBER 30, DECEMBER 31, ------------- ------------------------ 1999 1998 1997 ------------- ---------- ---------- (UNAUDITED) Land ............................ $1,682,576 $1,109,845 $ 806,698 Building ........................ 3,931,552 3,710,891 2,331,270 Furniture, fixtures and equipment 1,706,760 1,524,662 1,103,446 Construction in progress ........ -- 87,008 131,654 ---------- ---------- ---------- 7,320,888 6,432,406 4,373,068 Less accumulated depreciation ................ 1,366,307 1,137,882 922,480 ---------- ---------- ---------- $5,954,581 $5,294,524 $3,450,588 ========== ========== ==========
(5) DEPOSITS A detail of deposits for the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998 and 1997 follows:
SEPTEMBER 30, ------------------------ WEIGHTED AVERAGE INTEREST 1999 RATE ----------- -------- (UNAUDITED) Non-interest bearing deposits ......... $10,789,505 --% Interest bearing: Interest-bearing demand deposits ... 16,590,241 1.6% Savings deposits ................... 7,383,492 2.0% Time deposits less than $100,000 ... 40,478,575 4.5% Time deposits of $100,000 or greater 9,978,577 4.7% ----------- --- $85,220,390 3.2% =========== ===
F-46 128 COMMUNITY NATIONAL BANK OF PASCO COUNTY Notes to the Financial Statements -- Continued December 31, 1998 and 1997
DECEMBER 31, --------------------------------------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE INTEREST INTEREST 1998 RATE 1997 RATE ----------- -------- ----------- -------- Non-interest bearing deposits ......... $11,324,586 --% $ 9,281,953 --% Interest bearing: Interest-bearing demand deposits ... 14,213,877 1.7% 9,119,593 1.7% Savings deposits ................... 6,411,103 2.0% 4,288,161 2.0% Time deposits less than $100,000 ... 44,323,979 4.7% 41,765,836 4.8% Time deposits of $100,000 or greater 8,373,223 4.9% 7,215,000 5.0% ----------- --- ----------- --- $84,646,768 3.4% $71,670,543 3.6% =========== === =========== ===
The following table presents, by various interest rate categories, the amount of certificate accounts maturing during the periods reflected below:
INTEREST RATE 1999 2000 2001 2002 2003 2004 TOTAL ------------- ----------- ---------- --------- --------- --------- ---------- ---------- 1.00% - 3.99% $ 508,725 4,213 -- -- -- -- 512,938 4.00% - 4.99% 8,184,357 13,404,104 4,287,028 1,072,420 672,617 77,475 27,698,001 5.00% - 5.99% 5,763,734 8,961,102 2,855,925 714,423 448,082 51,613 18,794,879 6.00% - 6.99% 1,058,404 1,645,542 524,438 131,191 82,282 9,477 3,451,334 ----------- ---------- --------- --------- --------- ---------- ---------- $15,515,220 24,014,961 7,667,391 1,918,034 1,202,981 138,565 50,457,152 =========== ========== ========= ========= ========= ========== ==========
Included in interest-bearing deposits are certificates of deposit which have remaining maturities for the nine months ended September 30, 1999 (unaudited) and for the year ended December 31, 1998 as follows:
SEPTEMBER 30, 1999 DECEMBER 31, 1998 ------------------ ----------------- One year ........... 28,971,032 29,745,046 Two years .......... 11,190,011 12,658,064 Three years ........ 4,314,056 4,624,012 Four years ......... 2,073,029 2,269,018 Five years ......... 3,909,024 3,401,062 ---------- ---------- 50,457,152 52,697,202 ========== ==========
F-47 129 COMMUNITY NATIONAL BANK OF PASCO COUNTY Notes to the Financial Statements -- Continued December 31, 1998 and 1997 A summary of interest expense on deposits and other borrowed money is as follows:
SEPTEMBER 30, DECEMBER 31, ------------------------ ------------------------ 1999 1998 1998 1997 ---------- ---------- ---------- ---------- (UNAUDITED) Interest-bearing demand deposits ............... $ 203,917 $ 135,895 $ 186,682 $ 159,713 Savings deposits ........... 106,099 75,508 105,377 81,445 Time deposits less than $100,000 ............... 1,760,889 1,837,653 2,484,703 2,409,615 Time deposits of $100,000 or greater ................ 185,459 201,273 262,836 265,769 Interest on other borrowed money .................. 25,874 50,533 58,853 40,090 ---------- ---------- ---------- ---------- $2,282,238 $2,300,862 $3,098,451 $2,956,632 ========== ========== ========== ==========
The Bank had deposits from directors, officers and employees and their related interests of approximately $1,137,000, $931,000 and $636,000 for the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998 and 1997, respectively. (6) OTHER BORROWINGS The Bank enters into sales of securities under agreements to repurchase. These fixed-coupon agreements are treated as financings, and the obligations to repurchase securities sold are reflected as a liability in the balance sheet. The dollar amount of securities underlying the agreements remain in the asset accounts. The repurchase agreements were to repurchase the identical securities as those which were sold. Repurchase agreements averaged $952,134, $1,268,558 and $832,203 during the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998 and 1997, respectively. The maximum amount outstanding at any month-end for the corresponding periods was $2,848,705, $1,525,913 and $1,575,512, respectively. Total interest expense paid on repurchase agreements for the nine months ended September 30, 1999 and 1998 (unaudited) for the years ending December 31, 1998 and 1997 was $25,874, $50,533, $58,853 and $40,090, respectively. The Bank has available repurchase lines equal to the amount of all unpledged investment securities. F-48 130 COMMUNITY NATIONAL BANK OF PASCO COUNTY Notes to the Financial Statements -- Continued December 31, 1998 and 1997 (7) INCOME TAXES The provision for income taxes for the nine months ended September 30, 1999 and 1998 (unaudited) and for the years ended December 31, 1998 and 1997 consists of the following:
CURRENT DEFERRED TOTAL --------- --------- -------- SEPTEMBER 30, 1999 (UNAUDITED): Federal ....................... $ 248,048 $ (20,190) $227,858 State ......................... 30,792 (3,456) 27,336 --------- --------- -------- $ 278,840 $ (23,646) $255,194 ========= ========= ======== DECEMBER 31, 1998: Federal ....................... $ 397,901 $ (52,234) $345,667 State ......................... 56,643 (8,905) 47,738 --------- --------- -------- $ 454,544 $ (61,139) $393,405 ========= ========= ======== DECEMBER 31, 1997: Federal ....................... $ 458,873 $ (35,067) $423,806 State ......................... 66,431 (6,002) 60,429 --------- --------- -------- $ 525,304 $ (41,069) $484,235 ========= ========= ========
F-49 131 COMMUNITY NATIONAL BANK OF PASCO COUNTY Notes to the Financial Statements -- Continued December 31, 1998 and 1997 The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities for the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998 and 1997 are presented below:
SEPTEMBER 30, DECEMBER 31, ------------- --------- --------- 1999 1998 1997 ---------- --------- --------- (UNAUDITED) Unrealized loss on investment securities ................ $ 21,103 $ -- $ -- Deferred tax assets: Allowance for loan losses . 297,424 294,038 243,624 Deferred loan fees ........ 42,861 43,184 40,509 --------- --------- --------- Total deferred tax asset $ 361,388 337,222 176,135 --------- --------- --------- Deferred tax liabilities: Accretion of discount on investments ........... (512) (3,498) (13,049) Unrealized gain on investment securities available for sale .... -- (70,353) (21,472) Premises and equipment due to differences in depreciation method and useful lives .......... (45,024) (27,429) (25,716) Other .......................... -- -- -- --------- --------- --------- Total deferred tax liability ......... (45,536) (101,280) (60,237) --------- --------- --------- Net deferred tax asset $ 315,852 $ 235,942 $ 223,896 ========= ========= =========
The Company has recorded a deferred tax asset of $315,852, $235,942 and $223,896 for the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998 and 1997, respectively. No valuation allowance as defined by SFAS 109 is required at September 30, 1999 (unaudited) and December 31, 1998 and 1997, because management believes that based on levels of historical taxable income, projections for future taxable income and reversals of deferred tax liabilities over the periods which the deferred tax assets are deductible, it is more likely than not that the Bank will realize the benefits of these deductible differences. F-50 132 COMMUNITY NATIONAL BANK OF PASCO COUNTY Notes to the Financial Statements -- Continued December 31, 1998 and 1997 A reconciliation between the actual tax expense and the "expected" tax expense (computed by applying the U.S. federal corporate rate of 34% to earnings before income taxes) is as follows:
SEPTEMBER 30, DECEMBER 31, 1999 1998 1998 1997 -------- -------- --------- --------- (UNAUDITED) "Expected" tax expense .................. $235,591 $279,245 $ 372,323 $ 445,049 State income taxes, net of federal income tax benefits ........................ 18,042 14,652 32,879 47,123 Other ................................... 1,561 1,641 (11,797) (7,937) -------- -------- --------- --------- $255,194 $295,538 $ 393,405 $ 484,235 ======== ======== ========= =========
(8) REGULATORY CAPITAL The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets. Management believes, as of December 31, 1998, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1998, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain total risk-based, Tier I risk-based, Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. F-51 133 COMMUNITY NATIONAL BANK OF PASCO COUNTY Notes to the Financial Statements -- Continued December 31, 1998 and 1997 The Bank's actual capital amounts and ratios are also presented in the table.
TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS ----------------------- -------------------- --------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ----------------------- -------------------- --------------------- AS OF SEPTEMBER 30, 1999 UNAUDITED): Total capital (to risk weighted assets) ...... $8,571,000 15.29% $4,485,520 =>.0% $5,606,900 =>10.0% Tier I capital (to risk weighted assets) ...... 7,868,000 14.03% 2,242,760 =>4.0% 3,364,140 => 6.0% Tier I capital (to average assets) ............... 7,868,000 8.39% 3,807,480 =>4.0% 4,759,350 => 5.0%
F-52 134 COMMUNITY NATIONAL BANK OF PASCO COUNTY Notes to the Financial Statements -- Continued December 31, 1998 and 1997
TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS ----------------------- --------------------- -------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ----------------------- --------------------- -------------------- AS OF DECEMBER 31, 1998: Total capital (to risk weighted assets) ...... $7,965,900 14.86% $4,288,320 8.0% $5,360,400 =>10.0% Tier I capital (to risk weighted assets) ...... 7,267,000 13.56% 2,144,160 =>4.0% 3,216,240 => 6.0% Tier I capital (to average assets) ............... 7,267,000 8.20% 3,544,800 =>4.0% 4,431,000 => 5.0% AS OF DECEMBER 31, 1997: Total capital (to risk weighted assets) ...... $6,931,000 15.17% $3,655,040 =>8.0% $4,568,800 =>10.0% Tier I capital (to risk weighted assets) ...... 6,358,000 13.92% 1,827,520 =>4.0% 2,741,280 => 6.0% Tier I capital (to average assets) ............... 6,358,000 8.07% 3,152,600 =>4.0% 3,940,750 => 5.0%
(9) DIVIDENDS The Board of Directors of the Bank declared cash dividends of $115,271, $115,271 and $72,923 for the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998 and 1997, respectively. Banking regulations limit the amount of dividends that may be paid by the Company without prior approval of the Bank's regulatory agency. (10) STOCK OPTION PLANS The Bank currently has an incentive stock plan for the directors and employees. In October 1989, the Bank authorized 62,500 common shares for future options for each director under an incentive stock option and non-statutory stock option plan. The number of options granted to each director shall not exceed 7,500. Options were granted at $10.00 per share (fair market value of the stock). Each option provides that the underlying option expires no later than December 31, 1999 and vesting occurs at 25% for each year of service from the effective date of the grant. As of September 30, 1999 (unaudited) and December 31, 1998, there were 6,000 and 7,000, respectively, options vested and outstanding. No additional options were granted and 1,000 were exercised during the nine month period ended September 30, 1999. F-53 135 COMMUNITY NATIONAL BANK OF PASCO COUNTY Note to the Financial Statements -- Continued December 31, 1998 and 1997 In addition, in 1989, the Bank granted options for a total of 45,000 shares under a stock option plan to key employees of the Bank. Options were granted at a minimum price of $10.00 per share or fair market value of the stock at the date of grant. Each option provides a vesting period of 25% at the date of grant and 25% for each year of service thereafter. The option expires in ten years from the date of the grant. As of September 30, 1999 (unaudited) and December 31, 1998, there were 5,375 and 32,000 shares outstanding with 4,875 and 29,750 shares vested, respectively. During the nine month period ended September 30, 1999, no additional shares were granted, there were no forfeitures and 24,625 shares were exercised. At December 31, 1998, the Bank has two stock-based compensation plans, which are described above. The Bank applies APB Opinion No. 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation cost for the Bank's stock-based compensation plans been determined consistent with FASB Statement No. 123, the Bank's net income would have been reduced to the pro forma amounts indicated below:
SEPTEMBER 30, DECEMBER 31, ------------------- ------------------ 1999 1998 1998 1997 -------- ------- ------- ------- (UNAUDITED) Net income: As reported.................... $437,722 433,929 701,663 824,733 Pro forma...................... 698,966 822,036 Basic net income As reported.................... $ 0.94 $ 0.95 $ 1.53 $ 1.97 Pro forma...................... $ 0.94 $ 0.94 $ 1.53 $ 1.97 Diluted net income As reported.................... $ 0.90 $ 0.90 $ 1.45 $ 1.83 Pro forma...................... $ 0.90 $ 0.90 $ 1.45 $ 1.82
There were no options granted during the nine months ended September 30, 1999 and 1998 (unaudited) and for the years ended December 31, 1998 or 1997, therefore, there is no fair value of options granted. A summary of the status of the Bank's stock option plan for the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998 and 1997, and changes during the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998 and 1997 on those dates is presented below:
SEPTEMBER 30, DECEMBER 31, ------------- ------------------- FIXED OPTIONS 1999 1998 1997 - -------------------------------------- ------------- ------- ------- (UNAUDITED) Outstanding at beginning of period: . 37,000 67,607 100,935 Granted .......................... -- -- -- Exercised ........................ (25,625) (24,937) (33,248) Forfeited ........................ -- -- -- --------- ------- ------- Outstanding at end of period ........ 11,375 42,750 67,867 --------- ------- ------- Options exercisable at period-end .... 10,875 40,500 61,062 --------- ======= ======= Weighted-average fair value of options granted during the period per share ........................ $ -- -- -- ========= ======= =======
F-54 136 COMMUNITY NATIONAL BANK OF PASCO COUNTY Note to the Financial Statements -- Continued December 31, 1998 and 1997 The following table summarizes information about fixed stock options outstanding for the nine months ended September 30, 1999 (unaudited) and for the year December 31, 1998:
SEPTEMBER 30, 1999 (UNAUDITED) - ---------------------------------------------------------------------------------------------------------------------- WEIGHTED NUMBER WEIGHTED WEIGHTED NUMBER AVERAGE EXERCISE OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT PRICE AT RANGE OF SEPTEMBER 30, CONTRACTUAL EXERCISE SEPTEMBER 30, SEPTEMBER 30, EXERCISE PRICES 1999 LIFE PRICE 1999 1999 - --------------- -------------- ----------- -------- -------------- ---------------- $10.00-$12.81 11,350 2.9 years $10.49 10,875 $10.49
DECEMBER 31, 1998 - ---------------------------------------------------------------------------------------------------------------------- WEIGHTED NUMBER WEIGHTED WEIGHTED NUMBER AVERAGE EXERCISE OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT PRICE AT RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, DECEMBER 31, EXERCISE PRICES 1999 LIFE PRICE 1998 1998 - --------------- -------------- ----------- -------- -------------- ---------------- $10.00-$12.81 42,750 2.5 years $10.12 40,500 $10.00
(11) EMPLOYEE BENEFIT PLAN The Bank has adopted a 401(k) profit sharing plan. The effective date of the 401(k) portion of the plan is April 1, 1992, and was restated January 1, 1996. The effective date of the profit sharing portion of the plan is January 1, 1995. The plan covers all employees with one year of service who are 18 years of age or older. Under the 401(k) plan, employees can contribute and defer taxes on compensation contributed, as defined in the plan, within prescribed limits. The Bank may make discretionary matching contributions, qualified nonelective contributions and discretionary nonelective contributions, which are allocated on deferring bases. The Bank's contribution to the 401(k) portion of the plan amounted to $14,902, $13,206, $17,756 and $13,780 for the nine months ended September 30, 1999 and 1998 and for the years ended December 31, 1998 and 1997, respectively. The Bank's contribution to the profit sharing portion of the plan was $33,000, $35,083, $24,783 and $59,758 for nine months ended September 30, 1999 and 1998 (unaudited) and for the years ended December 31, 1998 and 1997, respectively. (12) CREDIT COMMITMENTS The Bank has outstanding at any time a significant number of commitments to extend credit. These arrangements are subject to strict credit control assessments and each customer's credit worthiness is evaluated on a case-by-case basis. A summary of commitments to extend credit and standby letters of credit written for the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998 and 1997 are as follows: F-55 137 COMMUNITY NATIONAL BANK OF PASCO COUNTY Note to the Financial Statements -- Continued December 31, 1998 and 1997
SEPTEMBER 30, DECEMBER 31, ------------- ---------------------- 1999 1998 1997 ------------- --------- --------- (UNAUDITED) Standby letters of credit $ 324,795 401,295 783,723 Available lines of credit 8,536,826 4,697,456 2,571,680
Because many commitments expire without being funded in whole or part, the contract amounts are not estimates of future cash flows. The majority of loan commitments have terms up to one year and have variable interest rates. Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. The credit risk amounts are equal to the contractual amounts, assuming that the amounts are fully advanced and that the collateral or other security is of no value. The Bank's policy is to require customers to provide collateral prior to the disbursement of approved loans. The amount of collateral obtained, if it is deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, real estate and income providing commercial properties. Standby letters of credit are contractual commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. (13) CONCENTRATIONS OF CREDIT RISK Most of the Bank's business activity is with customers located within Pasco County and portions of adjacent counties. The majority of commercial and mortgage loans are granted to customers residing in this area. Generally, commercial loans are secured by real estate, and mortgage loans are secured by either first or second mortgages on residential or commercial property. As of December 31, 1998, substantially all of the Bank's loan portfolio was secured. Although the Bank has a diversified loan portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent upon the economy of Pasco County and portions of adjacent counties. The Bank does not have significant exposure to any individual customer or counterparty. F-56 138 INDEPENDENT AUDITORS' REPORT The Board of Directors First National Bank of Polk County: We have audited the accompanying balance sheet of First National Bank of Polk County as of December 31, 1998 and the related statements of operations, changes in stockholders' equity and comprehensive income and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of First National Bank of Polk County at December 31, 1998, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. /s/ KPMG LLP Orlando, Florida January 22, 1999 F-57 139 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders First National Bank of Polk County We have audited the accompanying statement of condition of First National Bank of Polk County as of December 31, 1997, and the related statement of income, changes in stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the First National Bank of Polk County's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of First National Bank of Polk County as of December 31, 1997, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. January 27, 1998 /s/ GT Nunez F-58 - ------------------------------------------------------------- GTN ------------------------------------------------------------- 900 Ingraham Avenue, Haines City, FL 33844 Tel:(941)422-4861 Fax: (941)421-9830 E-mail: GTNCPA's@AOL.com
140 FIRST NATIONAL BANK OF POLK COUNTY Balance Sheets
SEPTEMBER 30, DECEMBER 31, ------------- ------------------------- Assets 1999 1998 1997 ------------- ----------- ----------- (UNAUDITED) Cash and due from banks .......................... $ 2,468,087 $ 3,106,304 $ 2,602,062 Federal funds sold ............................... 2,673,000 3,752,000 4,566,000 Investment securities available for sale ......... 23,182,047 23,809,823 18,646,836 Loans, less allowance for loan losses of $636,028, $688,503, and $653,750 for September 30, 1999 (unaudited) and December 31, 1998 and 1997, respectively .................. 40,180,058 39,414,516 34,497,300 Accrued interest receivable ...................... 516,071 533,345 483,910 Premises and equipment, net ...................... 2,596,466 2,701,899 2,994,487 Other real estate owned .......................... 208,295 -- Deferred income taxes ............................ 250,543 184,117 110,178 Prepaids and other assets ........................ 138,515 72,493 24,681 ------------ ----------- ----------- $ 72,213,082 $73,777,676 $63,925,454 ============ =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Interest bearing ............................. $ 54,282,199 $57,359,893 $51,374,944 Noninterest bearing ........................... 10,816,226 10,066,213 7,079,391 ------------ ----------- ----------- Total deposits ..................... 65,098,425 67,426,106 58,454,335 Securities sold under agreements to repurchase 365,000 255,000 389,000 Accrued interest payable ..................... 66,821 91,057 95,922 Accounts payable and accrued expenses ........ 123,526 115,617 85,466 ------------ ----------- ----------- Total liabilities .................. 65,653,772 67,887,780 59,024,723 ------------ ----------- ----------- Stockholders' equity: Common stock, $5 par value; 5,000,000 shares authorized; 475,625, 441,250 and 412,500 shares or for the nine months ended September 30, 1999 (unaudited) and as of December 31, 1998 and 1997, issued and outstanding, respectively............................... 2,378,125 2,206,250 2,062,500 Additional paid-in capital ................... 2,500,034 2,250,547 2,074,435 Retained earnings ............................ 1,727,480 1,364,345 739,242 Accumulated other comprehensive income ....... (46,329) 68,754 24,554 ------------ ----------- ----------- Total stockholders' equity ......... 6,559,310 5,889,896 4,900,731 Commitments and contingent liabilities ------------ ----------- ----------- Total liabilities and stockholders' equity ........................... $ 72,213,082 $73,777,676 $63,925,454 ============ =========== ===========
See accompanying notes to financial statements. F-59 141 FIRST NATIONAL BANK OF POLK COUNTY Statements of Operations
NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31, -------------------------- -------------------------- 1999 1998 1998 1997 ---------- ---------- ---------- ---------- (UNAUDITED) Interest income: Loans ................................................ $2,610,461 $2,577,351 $3,452,295 $3,145,803 Investment securities ................................ 1,003,904 943,084 1,254,071 1,097,001 Federal funds sold ................................... 119,377 240,937 291,839 196,637 ---------- ---------- ---------- ---------- Total interest income ....................... 3,733,742 3,761,372 4,998,205 4,439,441 ---------- ---------- ---------- ---------- Interest expense: Deposits ............................................. 1,507,428 1,648,927 2,198,379 1,939,256 Securities sold under agreement to repurchase ........ 12,315 30,578 33,975 20,189 ---------- ---------- ---------- ---------- Total interest expense ...................... 1,519,743 1,679,505 2,232,354 1,959,445 ---------- ---------- ---------- ---------- Net interest income ......................... 2,213,999 2,081,867 2,765,851 2,479,996 Provision for loan losses ................................ 63,000 39,000 39,000 73,000 ---------- ---------- ---------- ---------- Net interest income after loan loss provision 2,150,999 2,042,867 2,726,851 2,406,996 ---------- ---------- ---------- ---------- Other income: Service charges on deposit accounts .................. 173,351 141,944 195,016 140,569 Other service charges and fees ....................... 93,003 56,951 79,701 68,822 ---------- ---------- ---------- ---------- 266,354 198,895 274,717 209,391 ---------- ---------- ---------- ---------- Other expenses: Salaries, wages and employee benefits ................ 769,828 660,931 887,138 802,415 Occupancy expense .................................... 189,567 165,960 215,842 214,413 Depreciation of premises and equipment ............... 164,150 166,300 212,826 167,278 Stationary and printing supplies ..................... 67,121 64,096 77,193 83,164 Advertising and public relations ..................... 37,591 41,770 56,837 45,518 Data processing expense .............................. 168,900 132,029 185,072 132,931 Legal and professional fees .......................... 49,354 55,853 52,288 36,223 Other operating expenses ............................. 266,439 249,672 326,910 284,001 ---------- ---------- ---------- ---------- 1,712,950 1,536,611 2,014,106 1,765,943 ---------- ---------- ---------- ---------- Income before provision for income taxes .... 704,403 705,151 987,462 850,444 Provision for income taxes ............................... 255,656 220,587 296,171 302,751 ========== ========== ========== ========== Net income .................................. $ 448,747 $ 484,564 $ 691,291 $ 547,693 ========== ========== ========== ========== Net Income per Share Basic................................................. $ 0.95 $ 1.11 $ 1.58 $ 1.35 Diluted............................................... $ 0.92 $ 1.05 $ 1.49 $ 1.27 Average Number of Common Shares Outstanding Basic................................................. 470,616 436,049 437,360 406,719 Diluted............................................... 488,726 461,599 462,603 431,201
See accompanying notes to financial statements. F-60 142 FIRST NATIONAL BANK OF POLK COUNTY Statements of Changes in Stockholder' Equity and Comprehensive Income
ACCUMULATED OTHER TOTAL COMPREHENSIVE COMMON CAPITAL RETAINED COMPREHENSIVE STOCKHOLDERS' INCOME STOCK SURPLUS EARNINGS INCOME EQUITY ------------- ---------- --------- ---------- ------------- ------------- Balance, December 31, 1996 ....................... $2,012,500 2,012,500 232,299 54,153 4,311,452 Dividends paid ................................... -- -- (40,750) -- (40,750) Stock options exercised .......................... 50,000 50,000 -- -- 100,000 Tax effect of tax deduction in excess of book deduction on options exercised during the year -- 11,935 -- -- 11,935 Comprehensive income: Net income ................................... $ 547,693 -- -- 547,693 -- 547,693 Other comprehensive income, net of tax unrealized gain on securities ............ (29,599) -- -- -- (29,599) (29,599) ------------- Comprehensive income ............................. $ 518,094 ============= --------- --------- --------- ------------- ------------- Balance, September 31, 1997 ..................... 2,062,500 2,074,435 739,242 24,554 4,900,731 Dividends paid ................................... -- -- (66,188) -- (66,188) Stock options exercised .......................... 143,750 143,750 -- -- 287,500 Tax effect of tax deduction in excess of book deduction on options exercised during the year -- 32,362 -- -- 32,362 Comprehensive income: Net income ................................... $ 691,291 -- -- 691,291 -- 691,291 Other comprehensive income, net of tax unrealized gain on securities ............ (44,200) -- -- -- (44,200) (44,200) ------------- Comprehensive income ............................. $ 735,491 ============= ---------- --------- ---------- ------------- ------------- Balance, December 31, 1998 ...................... 2,206,250 2,250,547 1,364,345 68,754 5,889,896 Dividends paid ................................... -- -- (85,612) -- (85,612) Stock options exercised .......................... 171,875 171,875 -- -- 343,750 Tax effect of tax deduction in excess of book deduction on options exercised during the year -- 77,612 -- -- 77,612 Comprehensive income: Net income ................................... $ 448,747 -- -- 448,747 -- 448,747 Other comprehensive income, net of tax unrealized loss on securities ............ (115,083) -- -- -- (115,083) (115,083) ------------- Comprehensive income ............................. $ 333,664 ============= ---------- --------- ---------- ------------- ------------- Balance, September 30, 1999 ..................... $2,378,125 2,500,034 1,727,480 (46,329) 6,559,310 ========== ========= ========== ============= =============
See accompanying notes to financial statements. F-61 143 FIRST NATIONAL BANK OF POLK COUNTY Statements of Cash Flows
NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31, ---------------------------- ---------------------------- 1999 1998 1998 1997 ----------- ------------ ------------ ----------- (UNAUDITED) Cash flows from operating activities: Net income .................................................. $ 448,747 $ 484,564 $ 691,291 $ 547,693 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses .............................. 63,000 39,000 39,000 73,000 Depreciation of premises and equipment ................. 164,150 166,300 212,828 165,538 Net accretion of discounts on investment securities .... 52,667 (15,346) (12,300) -- Net deferred loan origination fees ..................... 9,888 18,227 20,366 8,487 Gain on sale of other real estate owned ................ (10,535) -- -- -- Write down of other real estate owned .................. -- -- 9,227 -- Deferred income taxes .................................. 2,970 (89,512) (101,847) -- Tax deduction in excess of book deduction on options exercised ........................................... 77,612 32,362 32,362 11,935 Cash provided by (used in) changes in: Net change in accrued interest receivable .............. 17,274 15,444 (49,435) (28,403) Net change in prepaids and other assets ................ (66,022) (56,213) (47,812) 17,184 Net change in accrued interest payable ................. (24,236) (11,770) (4,865) 6,554 Net change in accounts payable and accrued expenses .... 7,909 140,264 30,151 (121,684) ----------- ------------ ------------ ----------- Net cash provided by operating activities ........... 743,424 723,320 818,966 680,304 ----------- ------------ ------------ ----------- Cash flows from investing activities: Maturities of investment securities available for sale ...... 5,457,321 12,015,366 12,521,191 6,500,000 Call of investment securities available for sale ............ 2,000,000 1,000,000 1,500,000 -- Purchases of investment securities .......................... (7,066,691) (16,082,537) (19,099,770) (7,540,759) Increase in loans, net of repayments ........................ (1,013,011) (4,333,134) (5,188,988) (4,916,973) Purchases of premises and equipment ......................... (58,717) (192,068) (196,655) (681,391) Proceeds from sale of other real estate owned ............... 180,000 -- 276,415 -- ----------- ------------ ------------ ----------- Net cash used in investing activities ............... (501,098) (7,592,373) (10,187,807) (6,639,123) ----------- ------------ ------------ ----------- Cash flows from financing activities: Net (decrease) increase in demand and savings deposits ...... (2,327,681) 5,398,609 8,971,771 9,104,674 Net (decrease) increase in other borrowings ................. 110,000 (128,000) (134,000) 52,000 Stock options exercised ..................................... 343,750 287,500 287,500 100,000 Dividends paid .............................................. (85,612) (66,188) (66,188) (40,750) ----------- ------------ ------------ ----------- Net cash provided by (used in) financing activities ..................................... (1,959,543) 5,491,921 9,059,083 9,215,924 ----------- ------------ ------------ ----------- Net increase (decrease) in cash and due from banks (1,717,217) (1,377,132) (309,758) 3,257,105 Cash and cash equivalents, beginning of period .................. 6,858,304 7,168,062 7,168,062 3,910,957 ----------- ------------ ------------ ----------- Cash and cash equivalents, end of period ........................ $ 5,141,087 $ 5,790,930 $ 6,858,304 $ 7,168,062 =========== ============ ============ =========== Supplemental schedule of noncash transactions: Market value adjustment-investment securities available- for-sale ................................................. Market value adjustments-investments ................... $ (74,244) $ 130,138 $ 110,235 $ 38,127 Deferred income tax liability .......................... 27,915 (47,630) (41,481) (13,573) ----------- ------------ ------------ ----------- Unrealized gain (loss) on investments available-for-sale ............................. $ (46,329) $ 82,508 $ 68,754 $ 24,554 =========== ============ ============ =========== Transfer of loan to other real estate owned .............. $ 174,581 $ -- $ 212,406 $ -- =========== ============ ============ =========== Cash paid during the year for: Interest ................................................. $ 1,543,979 $ 1,691,275 $ 2,237,219 $ 1,952,891 =========== ============ ============ =========== Income taxes ............................................. $ 249,629 $ 262,792 $ 357,513 $ 407,190 =========== ============ ============ ===========
See accompanying notes to financial statements. F-62 144 FIRST NATIONAL BANK OF POLK COUNTY Notes to the Financial Statements December 31, 1998 and 1997 (Information insofar as it relates to the nine months ended September 30, 1999 and 1998 (unaudited)) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a description of the basis of presentation and the significant accounting and reporting policies which First National Bank of Polk County (the "Bank") follows in preparing and presenting its financial statements. (A) CASH EQUIVALENTS For purposes of the statement of cash flows, the Bank considers cash and due from banks, federal funds sold and noninterest bearing deposits in other banks with a purchased maturity of three months or less to be cash equivalents. (B) INVESTMENT SECURITIES AVAILABLE FOR SALE AND INVESTMENT SECURITIES HELD TO MATURITY The Bank accounts for investments at fair value except for those securities which the Bank has the positive intent and ability to hold to maturity. Investments to be held for indefinite periods of time and not intended to be held to maturity are classified as available for sale and are carried at fair value. Unrealized holding gains and losses are included as a separate component of stockholders' equity net of the effect of income taxes. Realized gains and losses on investment securities available for sale are computed using the specific identification method. Securities that management has the intent and the Bank has the ability at the time of purchase or origination to hold until maturity are classified as investment securities held to maturity. Securities in this category are carried at amortized cost adjusted for accretion of discounts and amortization of premiums using the level yield method over the estimated life of the securities. If a security has a decline in fair value below its amortized cost that is other than temporary, then the security will be written down to its new cost basis by recording a loss in the statement of operations. (C) LOANS Loans receivable that management has the intent and the Bank has the ability to hold until maturity or payoff are reported at their outstanding unpaid principal balance less the allowance for loan losses and deferred fees on originated loans. Loan origination fees, net of related costs, are capitalized and recognized in income over the contractual life of the loans, adjusted for estimated prepayments based on the Bank's historical prepayment experience. Commitment fees and costs relating to the commitments are recognized over the commitment period on a straight-line basis. If the commitment is exercised during the commitment period, the remaining unamortized commitment fee at the time of exercise is recognized over the life of the loan as an adjustment of yield. F-63 145 FIRST NATIONAL BANK OF POLK COUNTY Notes to the Financial Statements December 31, 1998 and 1997 -- Continued Loans are placed on nonaccrual status when the loan becomes 90 days past due as to interest or principal, unless the loan is both well secured and in the process of collection, or when the full timely collection of interest or principal becomes uncertain. When a loan is placed on nonaccrual status, the accrued and unpaid interest receivable is written off, amortization of the net deferred loan origination fees cease and the loan is accounted for on the cash or cost recovery method thereafter until qualifying for return to accrual status. The Bank, considering current information and events regarding the borrower's ability to repay their obligations, considers a loan to be impaired when it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is considered to be impaired, the amount of the impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, the secondary market value of the loan, or the fair value of the collateral for collateral dependent loans. Impaired loans are written down to the extent that principal is judged to be uncollectible and, in the case of impaired collateral dependent loans where repayment is expected to be provided solely by the underlying collateral and there is no other available and reliable sources of repayment, are written down to the lower of cost or collateral value. Impairment losses are included in the allowance for loan losses. (D) ALLOWANCE FOR LOAN LOSSES The Bank follows a consistent procedural discipline and accounts for loan loss contingencies in accordance with Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies" (Statement 5). The following is a description of how each portion of the allowance for loan losses is determined. The Bank segregates the loan portfolio for loan loss purposes into the following broad segments: commercial real estate; residential real estate; commercial business; and consumer loan. The Bank provides for a general allowance for losses inherent in the portfolio by the above categories, which consists of two components. General loss percentages are calculated based upon historical analyses. A supplemental portion of the allowance is calculated for inherent losses which probably exist as of the evaluation date even though they might not have been identified by the more objective processes used for the portion of the allowance described above. This is due to the risk of error and/or inherent imprecision in the process. This portion of the allowance is particularly subjective and requires judgments based on qualitative factors which do not lend themselves to exact mathematical calculations such as; trends in delinquencies and nonaccruals; migration trends in the portfolio; trends in volume, terms, and portfolio mix; new credit products and/or changes in the geographic distribution of those products; changes in lending policies and procedures; loan review reports on the efficacy of the risk identification process; changes in the outlook for local, regional and national economic conditions; and concentrations of credit. Specific allowances are provided in the event that the specific collateral analysis on each classified loan indicates that the probable loss upon liquidation of collateral would be in excess of the general percentage allocation. The provision for loan loss is debited or credited in order to state the allowance for loan losses to the required level as determined above. F-64 146 FIRST NATIONAL BANK OF POLK COUNTY Notes to the Financial Statements December 31, 1998 and 1997 -- Continued The Bank records impairment in the value of its loans as an addition to the allowance for loan losses. Any changes in the value of impaired loans due to the passage of time or revisions in estimates are reported as adjustments to provision expense in the same manner in which impairment initially was recognized. Regulatory examiners may require the Bank to recognize additions to the allowance based upon their judgment about the information available to them at the time of their examination. (E) PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation which is computed over the estimated useful lives of the assets which range from 3 to 40 years on a double-declining balance. (F) OTHER REAL ESTATE OWNED Real estate acquired in the settlement of loans is recorded at the lower of cost (principal balance of the former loan plus costs of obtaining title and possession) or estimated fair value, less estimated selling costs. Costs relating to development and improvement of the property are capitalized, whereas those relating to holding the property are charged to operations. (G) COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board established Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This Statement establishes standards for reporting and display of comprehensive income and its components in a full set of financial statements. This Statement requires that an enterprise classify items or other comprehensive income by nature in a financial statement, and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a balance sheet. The Bank adopted this Statement effective January 1, 1998 with the 1997 financial statements reclassified to reflect this adoption. The Bank's other comprehensive income is the unrealized gain/(loss) on investment securities available for sale. (H) INCOME TAXES Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date. Deferred tax assets are recognized subject to management's judgment that realization is more likely than not. F-65 147 FIRST NATIONAL BANK OF POLK COUNTY Notes to the Financial Statements December 31, 1998 and 1997 -- Continued (I) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. These estimates include the allowance for loan loss and the valuation of the deferred tax asset. Actual results could differ from these estimates. (J) EFFECT OF NEW PRONOUNCEMENTS In June 1997, the FASB issued Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information". This Statement requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision make in deciding how to allocate resources and in assessing performance. This Statement is effective for fiscal years beginning after December 15, 1997. The Company adopted the Statement effective January 1, 1998, however, the Company has only one reportable segment. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedge Activities". This Statement, which is effective for all fiscal quarters and all fiscal years beginning after June 15, 1999, requires all derivatives be measured at fair value and be recognized as assets and liabilities in the statement of financial position. This Statement sets forth the accounting for changes in fair value of a derivative depending on the intended use and designation of the derivative. Implementation of the Statement is not expected to have a significant impact on the financial position or results of operations of the Company. In October 1998, the FASB issued 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." This Statement requires that after the securitization of a mortgage loan held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed security as a trading security. The Statement is effective for the first fiscal quarter beginning after December 15, 1998. The Company does not expect the adoption of this Statement to have any impact on its consolidated financial statements. (K) RECLASSIFICATIONS Certain amounts in the 1997 and 1998 financial statements have been reclassified to conform with the September 30, 1999 presentation. (2) INVESTMENT SECURITIES AVAILABLE FOR SALE AND INVESTMENT SECURITIES HELD TO MATURITY The amortized cost and estimated market values of investment securities available for sale for the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998 and 1997 are as follows: F-66 148 FIRST NATIONAL BANK OF POLK COUNTY Notes to the Financial Statements December 31, 1998 and 1997 -- Continued INVESTMENT SECURITIES AVAILABLE FOR SALE:
SEPTEMBER 30, 1999 (UNAUDITED) -------------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ------------ ---------- ----------- ----------- U.S. Treasury securities . $ 12,535,672 $ 6,988 $ 28,425 $12,514,235 Obligations of U.S. government agencies .. 9,576,570 465 53,273 9,523,762 Municipals ............... 1,000,000 -- -- 1,000,000 Federal Reserve Bank stock 144,050 -- -- 144,050 ------------ ---------- ----------- ----------- $ 23,256,292 $ 7,453 $ 81,698 $23,182,047 ============ ========== =========== =========== DECEMBER 31, 1998 -------------------------------------------------------- U.S. Treasury securities . $ 8,535,040 $ 62,497 $ (220) $ 8,597,317 Obligations of U.S. government agencies .. 14,031,798 57,424 (9,466) 14,079,756 Municipals ............... 1,000,000 -- -- 1,000,000 Federal reserve bank stock 132,750 -- -- 132,750 ------------ ---------- ----------- ----------- $ 23,699,588 $ 119,921 $ (9,686) $23,809,823 ============ ========== =========== =========== DECEMBER 31, 1997 -------------------------------------------------------- U.S. Treasury securities . $ 14,486,746 $ 38,127 $ -- $14,524,873 Obligations of U.S. government agencies .. 4,002,013 -- -- 4,002,013 Federal reserve bank stock 119,950 -- -- 119,950 ------------ ---------- ----------- ----------- $ 18,608,709 $ 38,127 $ -- $18,646,836 ============ ========== =========== ===========
F-67 149 FIRST NATIONAL BANK OF POLK COUNTY Notes to the Financial Statements December 31, 1998 and 1997 -- Continued The amortized cost and estimated market value of investment securities available for sale for the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998 and 1997 by contractual maturity are listed below:
SEPTEMBER 30, 1999 (UNAUDITED) ----------------------------- AMORTIZED ESTIMATED COST MARKET VALUE ----------- ------------ Investment securities available for sale: Due in one year or less ............. $18,239,006 $18,208,127 Due after one year through five years 4,017,286 3,973,920 Due after ten years ................. 1,000,000 1,000,000 ----------- ----------- $23,256,292 $23,182,047 =========== =========== DECEMBER 31, 1998 --------------------------- Investment securities available for sale: Due in one year or less ............. $ 8,649,107 $ 8,689,995 Due after one year through five years 15,050,481 15,119,828 ----------- ----------- $23,699,588 $23,809,823 =========== =========== DECEMBER 31, 1997 --------------------------- Investment securities available for sale: Due in one year or less ............. $13,093,558 $13,116,570 Due after one year through five years 5,515,151 5,530,266 ----------- ----------- $18,608,709 $18,646,836 =========== ===========
At September 30, 1999 and at December 31, 1998 and 1997, the Bank had $1,750,000, $1,750,000 and $1,989,980, at cost, respectively, in securities pledged to the State of Florida as collateral on public fund deposits and for other purposed required or permitted by law. F-68 150 FIRST NATIONAL BANK OF POLK COUNTY Notes to the Financial Statements December 31, 1998 and 1997 -- Continued (3) LOANS Major categories of loans included in the loan portfolio at and September 30, 1999 (unaudited) and December 31, 1998 and 1997 are:
SEPTEMBER 30, DECEMBER 31, ------------- -------------------------- 1999 1998 1997 ------------- ----------- ----------- (UNAUDITED) Real estate: Residential ......... $17,659,343 $15,623,778 $13,225,586 Commercial .......... 10,999,881 10,166,172 9,961,255 Construction ........ 1,151,507 1,800,438 1,562,980 ----------- ----------- ----------- Total real estate 29,810,731 27,590,388 24,749,821 Commercial .............. $ 4,249,230 5,433,823 3,962,480 Installment ............. 6,513,214 6,788,342 6,250,691 Equity lines of credit .. 343,165 306,565 237,481 Overdrafts .............. 7,959 82,253 28,536 ----------- ----------- ----------- 40,924,299 40,201,371 35,229,009 Less: Allowance for loan losses ........... 636,028 688,530 653,750 Deferred loan origination fees . 108,213 98,325 77,959 ----------- ----------- ----------- Net loans ....... $40,180,058 $39,414,516 $34,497,300 =========== =========== ===========
The following is a summary of information regarding nonaccrual and impaired loans for the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998 and 1997:
SEPTEMBER 30, DECEMBER 31, ------------- -------------------- 1999 1998 1997 ------------- -------- --------- (UNAUDITED) Nonaccrual loans .................... $201,000 $452,832 $ -- ======== ======== ======== Recorded investment in impaired loans ........................... $551,992 $778,407 $208,057 ======== ======== ======== Allowance for loan losses related to impaired loans .................. $585,694 $716,347 $ 13,411 ======== ======== ========
F-69 151 FIRST NATIONAL BANK OF POLK COUNTY Notes to the Financial Statements December 31, 1998 and 1997 -- Continued
INTEREST INTEREST AVERAGE INCOME NOT INCOME RECORDED RECOGNIZED ON RECOGNIZED ON INVESTMENT IN NONACCRUAL IMPAIRED IMPAIRED LOANS LOANS LOANS ------------- ------------- ------------- FOR THE NINE MONTHS ENDED SEPTEMBER 30: 1999 (Unaudited) ........... $ 8,690 $ 17,957 $ 321,768 ============= ============= ============= FOR THE YEARS ENDED DECEMBER 31: 1998 ....................... $ 4,497 $ -- $ 747,000 ============= ============= ============= 1997 ....................... $ -- $ -- $ 46,000 ============= ============= =============
Certain principal stockholders, directors and officers and their related interests were indebted to the Bank as summarized below at September 30, 1999 (unaudited) and December 31, 1998 and 1997:
SEPTEMBER 30, DECEMBER 31, ------------- -------------------------- 1999 1998 1997 ------------- ----------- ----------- (UNAUDITED) Balance, beginning of period.. $ 2,588,361 $ 2,429,671 $ 2,140,540 Additional new loans ......... 10,000 1,416,572 274,800 Repayments on outstanding loans .................... 1,218 1,257,882 14,331 ----------- ----------- ----------- Balance, end of period........ $ 2,597,143 $ 2,588,361 $ 2,429,671 =========== =========== ===========
All such loans were made in the ordinary course of business. For the nine months ended September 30, 1999 (unaudited) and December 31, 1998 and 1997, principal stockholders, directors and officers of the Bank and their related interests had $3,469,497, $864,592 and $876,099, respectively, available in lines of credit. F-70 152 FIRST NATIONAL BANK OF POLK COUNTY Notes to the Financial Statements December 31, 1998 and 1997 -- Continued Changes in the allowance for loan losses for the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998 and 1997 were as follows:
SEPTEMBER 30, DECEMBER 31, ------------- ---------------------- 1999 1998 1997 ------------- -------- -------- (UNAUDITED) Balance, beginning of period...... $ 688,530 $653,750 $613,013 Provision charged to operations .. 63,000 39,000 73,000 Loans charged-off ................ (117,256) (23,601) (50,722) Recoveries of previous charge-offs 1,754 19,381 18,459 --------- -------- -------- Balance, end of period............ $ 636,028 $688,530 $653,750 ========= ======== ========
For the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998 and 1997, nonaccrual loans were $201,000, $452,832 and $-0-, respectively. If interest due on all nonaccrual loans for the nine months ended September 30, 1999 (unaudited) and as of December 31, 1998 and 1997 had been accrued at the original contract rates, estimated interest income would have been increased by $8,690, $4,497 and $-0- in September 30, 1999 (unaudited) and December 31, 1998 and 1997, respectively. The recorded investment in loans for which impairment has been recognized and the related allowance for loan losses for the nine months ended September 30, 1999 (unaudited) and as of December 31, 1998 and 1997 were $551,992, $76,423, $778,407 and $208,057, $716,347 and $13,411, respectively. The average recorded investment in impaired loans during the nine months ended September 30, 1999 (unaudited) and as of December 31, 1998 and 1997 was $321,768, $747,000 and $46,000, respectively. Interest income recognized on impaired loans for the nine months ended September 30, 1999 and for the years ended December 31, 1998 and 1997 was $17,957, $-0-, and $-0-, respectively. (4) PREMISES AND EQUIPMENT A summary of premises and equipment for the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998 and 1997 is as follows:
SEPTEMBER 30, DECEMBER 31, ------------- ------------------------ 1999 1998 1997 ------------- ---------- ---------- (UNAUDITED) Land .................. $ 941,507 $ 757,346 $ 997,346 Building and building improvements ...... 1,652,492 1,836,652 1,851,318 Furniture, fixtures and equipment ......... 1,159,599 1,100,883 937,401 ---------- ---------- ---------- 3,753,598 3,694,881 3,786,065 Less accumulated depreciation ...... 1,157,132 992,982 791,578 ---------- ---------- ---------- $2,596,466 $2,701,899 $2,994,487 ========== ========== ==========
F-71 153 FIRST NATIONAL BANK OF POLK COUNTY Notes to the Financial Statements December 31, 1998 and 1997 -- Continued (5) FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Bank in estimating fair values of financial instruments as disclosed herein: CASH AND CASH EQUIVALENTS - The carrying amount of cash and cash equivalents represents fair value. INVESTMENTS - The Bank's investment securities available for sale and held to maturity represent investments in U.S. Government obligations, U.S. Government Agency securities, and state and political subdivisions. The Bank's equity investments at year end represents stock investments in the Federal Reserve Bank. The stock is not publicly traded and the carrying amount was used to estimate the fair value. The fair value of the U.S. Government obligations and U.S. Government Agency obligations and state and local political subdivision portfolios was estimated based on quoted market prices. LOANS - 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 commercial real estate, commercial and consumer loans other than variable rate loans are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values of impaired loans are estimated using discounted cash flow analysis or underlying collateral values, where applicable. DEPOSITS - The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at December 31, 1998 (that is their carrying amounts). The carrying amounts of variable rate, fixed term money market accounts and certificates of deposit (CDs) approximate their fair value at the reporting date. Fair values for fixed rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. REPURCHASE AGREEMENTS - The carrying amount of the repurchase agreements approximate their fair value. COMMITMENTS - Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. F-72 154 FIRST NATIONAL BANK OF POLK COUNTY Notes to the Financial Statements December 31, 1998 and 1997 -- Continued The following tables present the carrying amounts and estimated fair values of the Bank's financial instruments.
SEPTEMBER 30, 1999 (UNAUDITED) ----------------------------- CARRYING AMOUNT FAIR VALUE ----------- ----------- Financial assets: Cash and due from banks and federal funds sold ............................................. $ 5,141,087 $ 5,141,087 Investment securities available for sale ................. 23,182,047 23,182,047 Loans (carrying amount less allowance for loan losses of $636,028) ........................... 40,180,058 40,849,000 Financial liabilities: Deposits: Without stated maturities .............................. $29,489,139 $29,489,139 With stated maturities ................................. 24,793,060 24,790,000 Securities sold under agreement to repurchase ............ 365,000 365,000 Commitments: Letter of credit ......................................... $ 446,000 $ 446,000 Loan commitments ......................................... 7,012,000 7,012,000
DECEMBER 31, 1998 ---------------------------- CARRYING AMOUNT FAIR VALUE ------------ ----------- Financial assets: Cash and due from banks and federal Funds sold ............................................. $ 6,858,304 $ 6,858,304 Investment securities available for sale ................. 23,809,823 23,809,823 Loans (carrying amount less allowance for loan losses of $658,503) ........................... 39,414,516 39,414,516 Financial liabilities: Deposits: Without stated maturities .............................. $29,370,419 $29,370,419 With stated maturities ................................. 27,989,474 28,404,000 Securities sold under agreement to repurchase............. 255,000 255,000 Commitments: Letter of credit ......................................... $ 200,000 $ 200,000 Loan commitments ......................................... 4,038,203 4,038,203
F-73 155 FIRST NATIONAL BANK OF POLK COUNTY Notes to the Financial Statements December 31, 1998 and 1997 -- Continued (6) DEPOSITS A detail of deposits for the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998 and 1997 follows:
SEPTEMBER 30, -------------------------- WEIGHTED AVERAGE INTEREST 1999 RATE ------------ -------- (UNAUDITED) Non-interest bearing deposits ............... $ 10,816,226 0% Interest bearing: Interest-bearing demand deposits .......... 24,544,344 2.85% Savings deposits .......................... 4,944,795 1.19% Time deposits less than $100,000 .......... 21,536,136 4.63% Time deposits of $100,000 or greater ...... 3,256,924 4.52% ------------ -------- $ 65,098,425 3.15% ============ ========
DECEMBER 31, ---------------------------------------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE INTEREST INTEREST 1998 RATE 1997 RATE ------------ -------- ------------ -------- Non-interest bearing deposits .............. $ 10,066,213 0% $ 7,079,391 0% Interest bearing: Interest-bearing demand deposits ......... 25,077,507 2.65% 18,513,207 2.52% Savings deposits ......................... 4,292,912 1.75% 3,700,742 2.00% Time deposits less than $100,000 ......... 24,383,845 5.13% 25,618,826 5.36% Time deposits of $100,000 or greater ..... 3,605,629 5.22% 3,542,169 5.36% ------------ -------- ------------ ------- $ 67,426,106 3.51% $ 58,454,335 3.60% ============ ======== ============ =======
The following table presents, by various interest rate categories, the amount of certificate accounts maturing during the periods reflected below:
INTEREST RATE 1999 2000 2001 2002 2003 2004 TOTAL ------------- -------- -------- -------- -------- -------- -------- -------- 1.00% - 3.99% $ 1,540 161 -- -- -- -- 1,701 4.00% - 4.99% 3,481 11,513 984 216 51 138 16,383 5.00% - 5.99% 840 1,560 582 1,186 342 -- 4,510 6.00% - 6.99% 313 1,686 -- 200 -- -- 2,199 -------- -------- -------- -------- -------- -------- -------- $ 6,174 14,920 1,566 1,602 393 138 24,793 ======== ======== ======== ======== ======== ======== ========
F-74 156 FIRST NATIONAL BANK OF POLK COUNTY Notes to the Financial Statements December 31, 1998 and 1997 -- Continued Included in interest-bearing deposits are certificates of deposit which have remaining maturities for the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998 as follows:
SEPTEMBER 30, DECEMBER 31, ------------- -------------- 1999 1998 ------------- -------------- One year ............................... $ 18,851,001 $ 20,100,111 Two years .............................. 3,803,014 5,050,078 Three years ............................ 1,605,008 1,189,023 Four years ............................. 396,012 1,310,106 Five years ............................. 138,025 340,156 ------------- ------------- $ 24,793,060 $ 27,989,474 ============= =============
A summary of interest expense on deposits and other borrowed money is as follows:
SEPTEMBER 30, DECEMBER 31, ------------------------- ------------------------- 1999 1998 1998 1997 ---------- ---------- ---------- ---------- (UNAUDITED) Interest-bearing demand deposits ...................... $ 514,350 $1,358,546 $ 613,574 $ 265,284 Savings deposits .................. 46,973 59,589 78,558 60,304 Time deposits less than $100,000 .. 818,295 100,388 1,333,051 1,394,809 Time deposits of $100,000 or greater ....................... 127,810 130,404 173,196 218,859 Interest on other borrowed money... 12,315 30,578 33,975 20,189 ---------- ---------- ---------- ---------- $1,519,743 $1,679,505 $2,232,354 $1,959,445 ========== ========== ========== ==========
The Bank had deposits from directors, officers and employees and their related interests of approximately $1,420,182, $1,506,131 and $1,567,797 for the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998 and 1997, respectively. (7) OTHER BORROWINGS The Bank enters into sales of securities under agreements to repurchase. These fixed-coupon agreements are treated as financings, and the obligations to repurchase securities sold are reflected as a liability in the balance sheet. The dollar amount of securities underlying the agreements remain in the asset accounts. F-75 157 FIRST NATIONAL BANK OF POLK COUNTY Notes to the Financial Statements December 31, 1998 and 1997 -- Continued The repurchase agreements were to repurchase similar securities as those which were sold. Repurchase agreements averaged $384,278, $682,822 and $411,212 during the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998 and 1997, respectively. The maximum amount outstanding at any month-end for the corresponding periods was $734,000, $1,161,000 and $646,000, respectively. Total interest expense paid on repurchase agreements for the nine months ended September 30, 1999 and 1998 (unaudited) and for the years ended December 31, 1998 and 1997 was $12,315, $30,578, $33,975 and $20,186, respectively. The Bank has available repurchase lines equal to the amount of all unpledged investment securities. (8) INCOME TAXES The provision for income taxes for the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998 and 1997 consists of the following:
CURRENT DEFERRED TOTAL --------- --------- -------- SEPTEMBER 30, 1999 (UNAUDITED): Federal ................... $ 227,062 $ 2,538 $229,600 State ..................... 25,622 434 26,056 --------- --------- -------- $ 252,684 $ 2,972 $255,656 ========= ========= ======== DECEMBER 31, 1998: Federal ................... $ 344,241 $ (80,219) $264,022 State ..................... 53,777 (21,628) 32,149 --------- --------- -------- $ 398,018 $(101,847) $296,171 ========= ========= ======== DECEMBER 31, 1997: Federal ................... $ 267,895 $ 5,804 $273,699 State ..................... 34,856 (5,804) 29,052 --------- --------- -------- $ 302,751 $ -- $302,751 ========= ========= ========
F-76 158 FIRST NATIONAL BANK OF POLK COUNTY Notes to the Financial Statements December 31, 1998 and 1997 -- Continued The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities for the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998 and 1997 are presented below:
SEPTEMBER 30, DECEMBER 31, ------------- --------------------- 1999 1998 1997 ------------- -------- -------- (UNAUDITED) Deferred tax assets: Unrealized loss on investments ................ $ 27,917 $ -- $ -- Allowance for loan losses ...... 218,837 227,139 212,463 Nonaccrual interest ............ 1,694 1,694 -- Deferred loan fees ............. 40,721 37,000 29,338 -------- -------- -------- Deferred tax asset ...... 289,169 265,833 241,801 Valuation allowance ............ -- -- 65,666 -------- -------- -------- Total deferred tax asset .. 289,169 265,833 176,135 -------- -------- -------- Deferred tax liabilities: Depreciation ................... 38,626 40,235 40,236 Unrealized gain on investment securities available for sale -- 41,481 13,573 Other .......................... -- -- 12,148 -------- -------- -------- Total deferred tax Liability ............... 38,626 81,716 65,957 -------- -------- -------- Net deferred tax asset ..... $250,543 $184,117 $110,178 ======== ======== ========
The Company has recorded a deferred tax asset of $250,543, $184,117 and $110,178 for the nine months ended September 30, 1999 (unaudited) and as of December 31, 1998 and 1997, respectively. No valuation allowance as defined by SFAS 109 is required at September 30, 1999 (unaudited) December 31, 1998. Management believes the valuation allowance is no longer necessary because it is more likely than not the deferred tax asset will be recovered based on projections of future taxable income and reversal of deferred tax liabilities over the periods which the deferred tax assets are deductible. F-77 159 FIRST NATIONAL BANK OF POLK COUNTY Notes to the Financial Statements December 31, 1998 and 1997 -- Continued A reconciliation between the actual tax expense and the "expected" tax expense (computed by applying the U.S. federal corporate rate of 34% to earnings before income taxes) is as follows:
SEPTEMBER 30, DECEMBER 31, ------------------------ ----------------------- 1999 1998 1998 1997 --------- --------- --------- -------- (UNAUDITED) "Expected" tax expense .............. $ 239,497 $ 251,803 $ 335,737 $289,151 Tax exempt interest ................. (2,066) (2,535) (3,381) -- State income taxes, net of federal income tax benefits ............. 17,197 11,040 17,878 13,600 Valuation allowance ................. -- (49,250) (65,666) -- Other ............................... 1,028 9,529 11,603 -- --------- --------- --------- -------- $ 255,656 $ 220,587 $ 296,171 $302,751 ========= ========= ========= ========
(9) REGULATORY CAPITAL The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets. Management believes, as of December 31, 1998, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1998, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain total risk-based, Tier I risk-based, Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. F-78 160 FIRST NATIONAL BANK OF POLK COUNTY Notes to the Financial Statements December 31, 1998 and 1997 -- Continued The Bank's actual capital amounts and ratios are also presented in the table.
TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS -------------------- ------------------- ------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ---------- ------- ---------- ------- ---------- ------ AS OF SEPTEMBER 30, 1999 (UNAUDITED): Total capital (to risk weighted assets) ....... $7,012,000 18.1% $3,100,000 =>.0% $3,874,000 =>10.0% Tier I capital (to risk weighted assets) ....... 6,526,000 16.8% 1,550,000 =>4.0% 2,325,000 =>6.0% Tier I capital (to average assets) ................ 6,526,000 8.9% 2,934,000 =>4.0% 3,668,000 =>5.0% AS OF DECEMBER 31, 1998: Total capital (to risk weighted assets) ....... $6,315,000 16.05% $3,147,200 =>8.0% $3,934,000 =>10.0% Tier I capital (to risk weighted assets) ....... 5,821,000 14.80% 1,573,600 =>4.0% 2,360,400 =>6.0% Tier I capital (to average assets) ................ 5,821,000 8.19% 2,844,040 =>4.0% 3,555,050 =>5.0% AS OF DECEMBER 31, 1997: Total capital (to risk weighted assets) ....... $5,301,000 15.70% $2,701,000 =>8.0% $3,376,700 =>10.0% Tier I capital (to risk weighted assets) ....... 4,876,000 14.44% 1,351,000 =>4.0% 2,026,020 =>6.0% Tier I capital (to average assets) ................ 4,876,000 7.63% 2,556,360 =>4.0% 3,195,450 =>5.0%
F-79 161 FIRST NATIONAL BANK OF POLK COUNTY Notes to the Financial Statements December 31, 1998 and 1997 -- Continued (10) DIVIDENDS The Board of Directors of the Company declared cash dividends of $85,612, $66,188 and $40,750 for the nine months ended September 30, 1999 (unaudited) and for the years ended 1998 and 1997, respectively. Banking regulations limit the amount of dividends that may be paid by the Company without prior approval of the Bank's regulatory agency. (11) STOCK OPTION PLANS The Bank currently has an incentive stock plan for the directors and employees. In March 1991, the Bank authorized 97,500 common shares for future options for each director under an incentive stock option and non-statutory stock option plan. The number of options granted to each director shall not exceed 7,500. Options were granted at $10.00 per share (fair market value of the stock). Each option provides that the underlying options expires no later than December 31, 2002 and vesting occurs at the time of grant. As of December 31, 1998, there were 34,375 options vested and outstanding. No additional options were granted and 28,750 were exercised during the year. In addition, in March 1991, the Bank granted options for a total of 40,250 shares under a stock option plan to key employees of the Bank. Options were granted at a minimum price of $10.00 per share or fair market value of the stock at the date of grant. Each option provides a vesting period of 25% at the date of grant and 25% for each year of service thereafter. The option expires in ten years from the date of the grant. During January 1998, the Bank granted an additional 1,000 options with an exercise price of $16.00 per share (fair market value of the stock). An additional 1,000 options were granted at $17.50 per share (fair market value of the stock) in July 1998. As of December 31, 1998, there were 31,175 shares outstanding with 28,575 shares vested. During 1998, 1,225 were forfeited due to terminations. At December 31, 1998, the Bank has two stock-based compensation plans, which are described above. The Bank applies APB Opinion No. 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its stock option plan. Had compensation cost for the Bank's stock-based compensation plans been determined consistent with FASB Statement No. 123, the Bank's net income would have been reduced to the pro forma amounts indicated below:
SEPTEMBER 30, DECEMBER 31, -------------------- --------------------- 1999 1998 1998 1997 -------- -------- -------- -------- (UNAUDITED) Net income: As reported ............. $ 448,747 484,564 691,291 547,693 Pro forma ............... $ 444,155 480,089 685,445 543,548 Basic net income: As reported ............. $ 0.95 1.11 1.58 1.35 Pro forma ............... $ 0.94 1.10 1.57 1.34 Dilutes net income: As reported ............. $ 0.92 1.05 1.49 1.27 Pro forma ............... $ 0.91 1.04 1.48 1.26
The fair value of each option grant is estimated on the date of grant using the minimum value method with the following weighted-average assumptions used for grants for the nine months ended September 30, 1998 (unaudited) and for the years ended December 31, 1998 and 1997, respectively; annual dividend yield of $0.18 expected volatility of 0 percent; risk-free interest rate of 4.30 percent, and expected lives of 10 years for the plan options. F-80 162 FIRST NATIONAL BANK OF POLK COUNTY Notes to the Financial Statements December 31, 1998 and 1997 -- Continued A summary of the status of the Bank's stock option plan for the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998 and 1997, and changes during the years ended on those dates is presented below:
SEPTEMBER 30, DECEMBER 31, ------------- ------------------- FIXED OPTIONS 1999 1998 1997 - ------------------------------------------------ ------------- ------- ------- (UNAUDITED) Outstanding at beginning of period: ............ 71,950 93,525 100,525 Granted .................................... -- 2,000 3,000 Exercised .................................. (34,375) (28,750) (10,000) Forfeited .................................. (125) (1,225) -- ------- ------- ------- Outstanding at end of period ................... 37,450 65,550 93,525 ------- ------- ------- Options exercisable at end of period ........... 36,100 62,950 89,025 ------- ======= ======= Weighted-average fair value of options granted during the period per share .................................. $ -- 5.52 5.82 ======= ======= =======
The following table summarizes information about fixed stock options outstanding at September 30, 1999 (unaudited) and December 31, 1998:
SEPTEMBER 30, 1999 (UNAUDITED) - -------------------------------------------------------------------------------------------------------- WEIGHTED NUMBER WEIGHTED WEIGHTED NUMBER AVERAGE EXERCISE OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT PRICE AT RANGE OF SEPTEMBER 30, CONTRACTUAL EXERCISE SEPTEMBER 30, SEPTEMBER 30, EXERCISE PRICES 1999 LIFE PRICE 1999 1999 - ---------------- -------------- ----------- -------- -------------- ---------------- $10.00 - $17.50 37,450 3.29 years $ 10.61 36,100 $10.61
DECEMBER 31, 1998 - -------------------------------------------------------------------------------------------------------- WEIGHTED NUMBER WEIGHTED WEIGHTED NUMBER AVERAGE EXERCISE OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT PRICE AT RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, DECEMBER 31, EXERCISE PRICES 1998 LIFE PRICE 1998 1998 - ----------------- -------------- ----------- -------- -------------- ---------------- $10.00 - $17.50 65,550 2.8 years $10.35 62,950 $10.35
F-81 163 FIRST NATIONAL BANK OF POLK COUNTY Notes to the Financial Statements December 31, 1998 and 1997 -- Continued (12) EMPLOYEE BENEFIT PLAN The Bank has a qualified profit sharing plan covering all officers and employees. Under the plan, profits are distributed based on the Bank's actual return on capital compared to benchmarks established annually by the Board. The plan, available to employees and officers generally after completing one year of service, consists of a current cash award component and a deferred award component. The deferred award component vests ten percent for the first four years and the remaining sixty percent at the end of year five. The total amount accrued and funded under this plan for the nine months ended September 30, 1999 (unaudited) and for the years ended December 31, 1998 and 1997 was $36,000, $45,299 and $36,333, respectively. The Bank also has a I.R.C. Section 401-K deferred compensation plan, whereby the Bank matches 50% of the employees' contributions up to 6% of compensation. Employees are fully vested after six years of service. The Bank's contributions to this plan for the nine months ended September 30, 1999 and 1998 (unaudited) and for the year ended December 31, 1998 and 1997 were $9,834, $10,595, $14,123 and $11,580, respectively. (13) CREDIT COMMITMENTS The Bank has outstanding at any time a significant number of commitments to extend credit. These arrangements are subject to strict credit control assessments and each customer's credit worthiness is evaluated on a case-by-case basis. A summary of commitments to extend credit and standby letters of credit written for the nine months ended September 30, 1999 and 1998 (unaudited) and for the years ended December 31, 1998 and 1997 are as follows:
SEPTEMBER 30, DECEMBER 31, ------------- -------------------------- 1999 1998 1997 ----------- ----------- ----------- (UNAUDITED) Standby letters of credit $ 446,000 200,000 175,000 Available lines of credit 7,012,000 4,038,203 5,341,378
Because many commitments expire without being funded in whole or part, the contract amounts are not estimates of future cash flows. The majority of loan commitments have terms up to one year and have variable interest rates. Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. The credit risk amounts are equal to the contractual amounts, assuming that the amounts are fully advanced and that the collateral or other security is of no value. F-82 164 FIRST NATIONAL BANK OF POLK COUNTY Notes to the Financial Statements December 31, 1998 and 1997 -- Continued The Bank's policy is to require customers to provide collateral prior to the disbursement of approved loans. The amount of collateral obtained, if it is deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, real estate and income providing commercial properties. Standby letters of credit are contractual commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. (14) CONCENTRATIONS OF CREDIT RISK Most of the Bank's business activity is with customers located within Polk County and portions of adjacent counties. The majority of commercial and mortgage loans are granted to customers residing in this area. Generally, commercial loans are secured by real estate, and mortgage loans are secured by either first or second mortgages on residential or commercial property. As of December 31, 1998, substantially all of the Bank's loan portfolio was secured. Although the Bank has a diversified loan portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent upon the economy of Polk County and portions of adjacent counties. The Bank does not have significant exposure to any individual customer or counterparty. F-83 165 APPENDIX A Agreement to Merge Among First National Bank of Osceola County, Centerstate Banks of Florida, Inc. and First Interim National Bank of Osceola County . 166 AGREEMENT TO MERGE AMONG FIRST NATIONAL BANK OF OSCEOLA COUNTY CENTERSTATE BANKS OF FLORIDA, INC. AND FIRST INTERIM NATIONAL BANK OF OSCEOLA COUNTY 167 TABLE OF CONTENTS
Page ---- ARTICLE I - THE MERGER.......................................................2 Section 1.1 Consummation of Merger; Closing Date.......................2 Section 1.2 Effect of Merger...........................................2 Section 1.3 Further Assurances.........................................3 Section 1.4 Directors and Officers.....................................3 Section 1.5 Name of Surviving Bank.....................................3 Section 1.6 Capitalization of Surviving Bank...........................3 Section 1.7 Articles of Association and Bylaws.........................3 Section 1.8 Absence of Trust Powers....................................3 ARTICLE II - CONVERSION OF SHARES............................................4 Section 2.1 Manner of Conversion of First National/Osceola Shares.....4 Section 2.2 First National/Osceola Stock Options and Related Matters...4 Section 2.3 Fractional Shares..........................................5 Section 2.4 Effectuating Conversion....................................5 Section 2.5 Laws of Escheat............................................6 Section 2.6 CBF Shares.................................................6 Section 2.7 FINB Shares................................................6 ARTICLE III - REPRESENTATIONS AND WARRANTIES OF FIRST NATIONAL/OSCEOLA.....................................7 Section 3.1 Representations and Warranties of First National/Osceola...7 (a) Organization, Qualification, and Corporate Power...........7 (b) Capitalization.............................................7 (c) First National/Osceola Subsidiaries........................8 (d) Authorization of Transaction...............................8 (e) Noncontravention...........................................8 (f) Financial Statements.......................................9 (g) Undisclosed Liabilities....................................9 (h) Brokers' Fees..............................................9 (i) Taxes.....................................................10 (j) Allowance for Loan or Credit Losses.......................10 (k) Properties; Insurance.....................................10 (1) Material Contracts........................................11 (m) Material Contract Defaults................................11 (n) Compliance with Laws......................................11 (o) Employee Benefit Plans....................................12 (p) Legal Proceedings.........................................13 (q) Absence of Certain Changes or Events......................14 (r) Reports...................................................14 (s) Statements True and Correct...............................14 (t) Environmental Matters.....................................14 (u) Labor Matters.............................................15
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Page ---- ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF CBF..........................16 Section 4.1 Representations and Warranties of CBF.....................16 (a) Organization, Qualification, and Corporate Power..........16 (b) Capitalization............................................16 (c) CBF Subsidiaries..........................................17 (d) Authorization of Transaction..............................17 (e) Noncontravention..........................................17 (f) Statements True and Correct...............................17 ARTICLE V - COVENANTS AND AGREEMENTS........................................18 Section 5.1 Covenants.................................................18 (a) Current Information.......................................18 (b) Regulatory Matters and Approvals..........................18 (c) Tax Opinion...............................................19 (d) Conduct of Business Prior to the Effective Time of the Merger.............................................20 (e) Forbearance...............................................20 (f) Issuance of Securities....................................21 (g) No Acquisitions...........................................21 (h) Other Actions.............................................22 (i) Government Filings........................................22 (j) Tax-Free Reorganization Treatment.........................22 (k) Full Access...............................................22 (1) Notice of Material Adverse Developments...................22 (m) Exclusivity...............................................23 (n) Filings with the Offices..................................23 (o) Press Releases............................................23 (p) Agreements of Affiliates..................................23 (q) Miscellaneous Agreements and Consents.....................23 (r) Indemnification...........................................24 (s) Fairness Opinions.........................................24 (t) Employee Benefit Plans....................................24 ARTICLE VI - CONDITIONS TO THE OBLIGATIONS OF FIRST NATIONAL/OSCEOLA AND CBF............................25 Section 6.1 Conditions to Obligation to Close.........................25 (a) Conditions to Obligation of CBF...........................25 (b) Conditions to Obligation of First National/Osceola........26 ARTICLE VII - TERMINATION...................................................27 Section 7.1 Termination...............................................27 (a) Termination of Agreement..................................27 (b) Effect of Termination.....................................28
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Page ---- ARTICLE VIII - MISCELLANEOUS................................................28 Section 8.1 Miscellaneous.............................................28 (a) Survival..................................................28 (b) No Third Party Beneficiaries..............................28 (c) Entire Agreement..........................................28 (d) Successors and Assigns....................................28 (e) Counterparts..............................................29 (f) Headings..................................................29 (g) Notices...................................................29 (h) Governing Law.............................................29 (i) Amendments and Waivers....................................29 (j) Severability..............................................30 (k) Expenses..................................................30 (l) Construction..............................................30 (m) Incorporation of Exhibits and Schedules...................30 (n) Jurisdiction and Venue....................................30 (o) Remedies Cumulative.......................................31
170 AGREEMENT TO MERGE AMONG FIRST NATIONAL BANK OF OSCEOLA COUNTY, CENTERSTATE BANKS OF FLORIDA, INC. AND FIRST INTERIM NATIONAL BANK OF OSCEOLA COUNTY This Agreement to Merge (the "Agreement") is dated as of the 10th day of December, 1999 by and among FIRST NATIONAL BANK OF OSCEOLA COUNTY, a national banking association ("First National/Osceola") and CENTERSTATE BANKS OF FLORIDA, INC., a Florida corporation ("CBF"); to be joined in by FIRST INTERIM NATIONAL BANK OF OSCEOLA COUNTY, an interim national banking association to be organized as a wholly-owned subsidiary of CBF under the laws of the United States and to become a party to this Agreement upon its organization ("FINB"). First National/Osceola, CBF and FINB are individually referred to in this Agreement as a "Party" and collectively as the "Parties." BACKGROUND The respective Boards of Directors of First National/Osceola and CBF deem it in the best interests of First National/Osceola and CBF, respectively, and of their respective shareholders, that First National/Osceola and FINB merge pursuant to this Agreement in a transaction that qualifies as a reorganization pursuant to Section 368(a) of the Internal Revenue Code of 1986 (the "Internal Revenue Code") (the "Merger"), and the Boards of Directors of the Parties have approved this Agreement and the Merger, which provides for CBF to issue shares of its common stock to the shareholders of First National/Osceola, as herein provided. This Agreement is between (A) First National/Osceola, being located at 920 North Bermuda Avenue, City of Kissimmee, County of Osceola, in the State of Florida, with a capital of $8,399,367, consisting of (i) 2,555,875 shares of common stock divided into 511,175 shares of common stock, each of $5.00 par value, (ii) surplus of $2,634,579, and (iii) undivided profits of $3,208,913 as of September 30, 1999, acting pursuant to a resolution of its board of directors, adopted by the vote of a majority of its directors, pursuant to the authority given by and in accordance with the provisions of the Act of November 7, 1918, as amended (12 U.S.C. 215(a)); (B) CBF, which has been organized for purposes of serving as a bank holding company for First National/Osceola and other banks; and (C) FINB, to be located at 920 North Bermuda Avenue, Kissimmee, Florida 34741, with a capital of $200,000, divided into 2,000 shares of common stock, each of $100 par value, surplus of $40,000, and no undivided profits, acting pursuant to a resolution to be adopted by its Board of Directors, and by the vote of a majority of its directors, pursuant to the authority given by and in accordance with the provisions of the Act of November 7, 1918, as amended (12 U.S.C. 215(a)). NOW, THEREFORE, in consideration of the premises and the mutual covenants, representations, warranties and agreements herein contained, the Parties agree as follows: 1 171 ARTICLE I THE MERGER Section 1.1 Consummation of Merger; Closing Date. (a) Subject to the provisions hereof, First National/Osceola shall be merged with and into FINB (which has heretofore and shall hereinafter be referred to as the "Merger"), under the charter of First National/Osceola, pursuant to 12 U.S.C. ss.215a of the National Bank Act, and FINB shall be the surviving corporation (sometimes hereinafter referred to as "Surviving Bank" when reference is made to it after the Effective Time of the Merger (as defined below)). The name of the Surviving Bank shall be First National Bank of Osceola County, and the business of the Surviving Bank shall be that of a national banking association. The Merger shall become effective on the date and at the time set forth in the Certificate of Merger relating to the Merger issued by the Office of the Comptroller of the Currency (the "OCC") (such time is hereinafter referred to as the "Effective Time of the Merger"). Subject to the terms and conditions hereof, unless otherwise agreed upon by First National/Osceola and CBF, the Effective Time of the Merger shall occur on the 10th business day following the later to occur of (i) the effective date (including the expiration of any applicable waiting period) of the last required Consent (as defined below) of any Regulatory Authority (as defined below) having authority over the transactions contemplated pursuant to this Agreement, (ii) the date on which the shareholders of First National/Osceola approve the transactions contemplated by this Agreement, and (iii) the date of the satisfaction or waiver of all other conditions precedent to the transactions contemplated by this Agreement. As used in this Agreement, "Consent" shall mean a consent, approval, authorization, waiver, clearance, exemption or similar affirmation by any person pursuant to any contract, permit, law, regulation or order, and "Regulatory Authorities" shall mean, collectively, the OCC, the Florida Department of Banking and Finance (the "Florida Department"), the Office of Thrift Supervision ("OTS"), the Federal Trade Commission (the "FTC"), the United States Department of Justice (the "Justice Department"), the Board of Governors of the Federal Reserve System (the "FRB"), the Federal Deposit Insurance Corporation (the "FDIC"), the National Association of Securities Dealers, Inc., all national securities exchanges and the Securities and Exchange Commission (the "SEC"). (b) The closing of the Merger (the "Closing") shall take place at such location as the Parties hereto shall determine at 10:00 a.m. local time on the day that the Effective Time of the Merger occurs, or such other date, time and place as the Parties may agree (the "Closing Date"). Subject to the provisions of this Agreement, at the Closing there shall be delivered to each of the Parties hereto the opinions, certificates and other documents and instruments required to be so delivered pursuant to this Agreement. (c) After the Effective Time of the Merger, the business of the Surviving Bank shall be conducted at its main office which shall be located at 920 North Bermuda Avenue, Kissimmee, FL 34741, and at its legally established branches. Section 1.2 Effect of Merger. At the Effective Time of the Merger, First National/Osceola shall be merged with and into FINB, under the charter of First National/Osceola, and the separate existence of First National/Osceola shall cease. The Surviving Bank shall be that of a national banking association. Except as otherwise provided in this Agreement, the Surviving Bank shall have all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a banking association organized under the laws of the United States and shall thereupon and thereafter possess all other privileges, immunities and franchises of a private, as well as of a public nature, of each of the constituent corporations. All property (real, personal and mixed) and all debts on whatever account, including subscriptions to shares, and all choses in action, all and every other interest, of or belonging to or due to each of the constituent corporations so merged shall be taken and deemed to be transferred to and vested in the Surviving Bank without further act or deed. The 2 172 title to any real estate, or any interest therein, vested in any of the constituent corporations shall not revert or be in any way impaired by reason of the Merger. Except as otherwise provided in this Agreement, the Surviving Bank shall thenceforth be responsible and liable for all the liabilities and obligations of each of the constituent corporations so merged and any claim existing or action or proceeding pending by or against either of the constituent corporations may be prosecuted as if the Merger had not taken place or the Surviving Bank may be substituted in its place. Neither the rights of creditors nor any liens upon the property of any constituent corporation shall be impaired by the Merger. Section 1.3 Further Assurances. From and after the Effective Time of the Merger, as and when requested by the Surviving Bank, the officers and directors of First National/Osceola last in office shall execute and deliver or cause to be executed and delivered in the name of First National/Osceola such deeds and other instruments and take or cause to be taken such further or other actions as shall be necessary in order to vest or perfect in or confirm of record or otherwise to the Surviving Bank title to and possession of all of the property, interests, assets, rights, privileges, immunities, powers, franchises and authority of First National/Osceola. Section 1.4 Directors and Officers. From and after the Effective Time of the Merger and until their successors shall be duly elected and qualified, James H. Bingham, G. Robert Blanchard, Sr., Terry W. Donley, W. Bryan Judge, Jr., Samuel L. Lupfer, IV, J. Thomas Rocker and James H. White shall serve as the CBF Board of Directors (or, if any one or more of such Directors is unwilling or unable to serve as a Director of CBF, such substitute Director as the then remaining directors of CBF shall determine). From and after the Effective Time of the Merger and until their successors shall be duly elected and qualified, the directors and executive officers of the Surviving Bank shall consist of those individuals who were serving as directors and executive officers, respectively, of First National/Osceola as of the Effective Time of the Merger. The names and addresses of the Directors and executive officers of the Surviving Bank are attached hereto as Schedule 1.4. From and after the Effective Time of the Merger and until their successors shall be duly elected and qualified: James H. White shall serve as Chairman of the Board, President and Chief Executive Officer, G. Robert Blanchard, Sr. shall serve as Vice Chairman of the Board, and George H. Carefoot shall serve as Secretary. Section 1.5 Name of Surviving Bank. The name of the Surviving Bank shall be First National Bank of Osceola County. Section 1.6 Capitalization of Surviving Bank. As of the Effective Time of the Merger, the Surviving Bank shall have 550,000 shares of common stock, par value $5.00 per share, authorized of which 511,175 shares shall be issued and outstanding (plus shares of First National/Osceola common stock issued after September 30,1999), all of which shall be owned by CBF. The Surviving Bank shall have no other classes of capital stock authorized or outstanding. As of the Effective Time of the Merger, the capital, surplus and retained earnings of the Surviving Bank shall be as set forth on Schedule 1.6. Preferred stock shall not be issued by the Surviving Bank. Section 1.7 Articles of Association and Bylaws. The Articles of Association and Bylaws under which the Surviving Bank will operate are attached hereto as Schedule 1.7. Section 1.8 Absence of Trust Powers. The Surviving Bank shall not have trust powers. 3 173 ARTICLE II CONVERSION OF SHARES Section 2.1 Manner of Conversion of First National/Osceola Shares. Subject to the provisions hereof, as of the Effective Time of the Merger and by virtue of the Merger and without any further action on the part of the holder of any shares of common stock of First National/Osceola, par value $5.00 per share (the "First National/Osceola Shares"): (a) All First National/Osceola Shares which are held by First National/Osceola as treasury stock, if any, shall be canceled and retired and no consideration shall be paid or delivered in exchange therefor. (b) Subject to the terms and conditions of this Agreement, including, without limitation, Section 2.3 hereof and except with regard to Dissenting First National/Osceola Shares (as hereinafter defined), each First National/Osceola Share outstanding immediately prior to the Effective Time of the Merger shall be converted into the right to receive 2.00 shares of common stock of CBF, par value $.01 per share (the "CBF Shares"). The applicable amount of CBF Shares issuable in the Merger for each First National/Osceola Share pursuant to this Section, as may be adjusted as provided herein, shall be hereinafter referred to as the "Conversion Ratio." The Conversion Ratio, including the number of CBF Shares issuable in the Merger, shall be subject to an appropriate adjustment in the event of any stock split, reverse stock split, dividend payable in CBF Shares, reclassification or similar distribution whereby CBF issues CBF Shares or any securities convertible into or exchangeable for CBF Shares without receiving any consideration in exchange therefor, provided that the record date of such transaction is a date after the date of this Agreement and prior to the Effective Time of the Merger. (c) Each outstanding First National/Osceola Share, the holder of which has perfected dissenters' rights in accordance with the provisions of the National Bank Act (the "Dissent Provisions") and has not effectively withdrawn or lost such holder's right to such appraisal (the "Dissenting First National/Osceola Shares"), shall not be converted into or represent a right to receive the CBF Shares issuable in the Merger but the holder thereof shall be entitled only to such rights as are granted by the Dissent Provisions. First National/Osceola shall give CBF prompt notice upon receipt by First National/Osceola of any written objection to the Merger and any written demands for payment of the fair or appraised value of First National/Osceola Shares, and of withdrawals of such demands, and any other instruments provided to First National/Osceola pursuant to the Dissent Provisions (any shareholder duly making such demand being hereinafter called a "Dissenting Shareholder"). Each Dissenting Shareholder who becomes entitled, pursuant to the Dissent Provisions, to payment of fair value of any First National/Osceola Shares held by such Dissenting Shareholder shall receive payment therefor from the Surviving Bank (but only after the amount thereof shall have been agreed upon or at the times and in the amounts required by the Dissent Provisions) and all of such Dissenting Shareholder's First National/Osceola Shares shall be canceled. If any Dissenting Shareholder shall have failed to perfect or shall have effectively withdrawn or lost such right to demand payment of fair or appraised value, the First National/Osceola Shares held by such Dissenting Shareholder shall thereupon be deemed to have been converted into the right to receive the consideration to be issued in the Merger as provided by this Agreement. Section 2.2 First National/Osceola Stock Options and Related Matters. As of the Effective Time of the Merger, all rights with respect to the First National/Osceola Shares issuable pursuant to the exercise of stock purchase options ("First National/Osceola Options") granted by First National/Osceola, and which are outstanding at the Effective Time of Merger shall be converted 4 174 into options for CBF Shares (the "Merger Options") in compliance with any restrictions contained in the plan or agreement, if any, under which such First National/Osceola Options were issued. Each holder of a First National/Osceola Option shall have the right to acquire as of the Effective Time of the Merger a number of CBF Shares equal to the product (rounded up to the next whole share) of (i) the number of First National/Osceola Shares covered by such First National/Osceola Option immediately prior to the Effective Time of the Merger and (ii) the Conversion Ratio; and the exercise price per share of the CBF Shares at which such First National/Osceola Option is exercisable shall be an amount (rounded up to the next whole cent) computed by dividing (i) the exercise price per share of the First National/Osceola Shares at which such First National/Osceola Option is exercisable immediately prior to the Effective Time of the Merger by (ii) the Conversion Ratio. Section 2.3 Fractional Shares. Notwithstanding any other provision of this Agreement, each holder of First National/Osceola Shares converted pursuant to the Merger who would otherwise have been entitled to receive a fraction of a CBF Share (after taking into account all certificates delivered by such holder), shall receive, in lieu thereof, cash (without interest) in an amount equal to such fractional part of such CBF Share, multiplied by the book value per First National/Osceola Share as of the end of the calendar month immediately preceding or occurring on the Effective Time of the Merger. No such holder shall be entitled to dividends, voting rights or any other rights as a shareholder in respect of any fractional share. Section 2.4 Effectuating Conversion. (a) CBF, or such other institution as CBF may designate, shall serve as the exchange agent (the "Exchange Agent"). The Exchange Agent may employ sub-agents in connection with performing its duties. After the Effective Time of the Merger, CBF shall cause the Exchange Agent to deliver the consideration to be paid by CBF for the First National/Osceola Shares, along with the appropriate cash payment in lieu of fractional interests in CBF Shares. As promptly as practicable after the Effective Time of the Merger, the Exchange Agent shall send or cause to be sent to each former holder of record of First National/Osceola Shares transmittal materials (the "Letter of Transmittal") for use in exchanging their certificates formerly representing First National/Osceola Shares for the consideration provided for in this Agreement. The Letter of Transmittal shall contain instructions with respect to the surrender of certificates representing First National/Osceola Shares and the receipt of the consideration contemplated by this Agreement and shall require each holder of First National/Osceola Shares to transfer good and marketable title to such First National/Osceola Shares to CBF, free and clear of all liens, claims and encumbrances. (b) At the Effective Time of the Merger, the stock transfer books of First National/Osceola shall be closed as to holders of First National/Osceola Shares immediately prior to the Effective Time of the Merger and no transfer of First National/Osceola Shares by any such holder shall thereafter be made or recognized and each outstanding certificate formerly representing First National/Osceola Shares shall, without any action on the part of any holder thereof, no longer represent First National/Osceola Shares. If, after the Effective Time of the Merger, certificates are properly presented to CBF, such certificates shall be exchanged for the consideration contemplated by this Agreement into which the First National/Osceola Shares represented thereby were converted in the Merger. (c) In the event that any holder of First National/Osceola Shares is unable to deliver the certificate which represents such holder's First National/Osceola Shares, CBF, in the absence of actual notice that any First National/Osceola Shares theretofore represented by any such certificate have been acquired by a bona fide purchaser, may, in its discretion, deliver to such holder the consideration contemplated by this Agreement and the amount of cash representing fractional CBF Shares to which such holder is entitled in accordance with the provisions of this Agreement upon the presentation of all of the following: 5 175 (i) An affidavit or other evidence to the reasonable satisfaction of CBF that any such certificate has been lost, wrongfully taken or destroyed; (ii) Such security or indemnity as may be reasonably requested by CBF to indemnify and hold CBF harmless; and (iii) Evidence to the satisfaction of CBF that such holder is the owner of the First National/Osceola Shares theretofore represented by each certificate claimed by such holder to be lost, wrongfully taken or destroyed and that such holder is the person who would be entitled to present each such certificate for exchange pursuant to this Agreement. (d) In the event that the delivery of the consideration contemplated by this Agreement and the amount of cash representing fractional CBF Shares are to be made to a person other than the person in whose name any certificate representing First National/Osceola Shares surrendered is registered, such certificate so surrendered shall be properly endorsed (or accompanied by an appropriate instrument of transfer), with the signature(s) appropriately guaranteed, and otherwise in proper form for transfer, and the person requesting such delivery shall pay any transfer or other taxes required by reason of the delivery to a person other than the registered holder of such certificate surrendered or establish to the satisfaction of CBF that such tax has been paid or is not applicable. (e) No holder of First National/Osceola Shares shall be entitled to receive any dividends or distributions declared or made with respect to the CBF Shares with a record date before the Effective Time of the Merger. Neither the consideration contemplated by this Agreement, any amount of cash representing fractional CBF Shares nor any dividend or other distribution with respect to CBF Shares where the record date thereof is on or after the Effective Time of the Merger shall be paid to the holder of any unsurrendered certificate or certificates representing First National/Osceola Shares as provided for by this Agreement. Subject to applicable laws, following surrender of any such certificate or certificates, there shall be paid to the holder of the certificate or certificates then representing CBF Shares issued in the Merger, without interest at the time of such surrender, the consideration contemplated by this Agreement, the amount of any cash representing fractional CBF Shares and the amount of any dividends or other distributions with respect to CBF Shares to which such holder is entitled as a holder of CBF Shares. Section 2.5 Laws of Escheat. If any of the consideration due or other payments to be paid or delivered to the holders of First National/Osceola Shares is not paid or delivered within the time period specified by any applicable laws concerning abandoned property, escheat or similar laws, and if such failure to pay or deliver such consideration occurs or arises out of the fact that such property is not claimed by the proper owner thereof, CBF shall be entitled to dispose of any such consideration or other payments in accordance with applicable laws concerning abandoned property, escheat or similar laws. Any other provision of this Agreement notwithstanding, none of First National/Osceola, CBF, FINB, the Surviving Bank, nor any other person acting on their behalf shall be liable to a holder of First National/Osceola Shares for any amount paid or property delivered in good faith to a public official pursuant to and in accordance with any applicable abandoned property, escheat or similar law. Section 2.6 CBF Shares. The one CBF Share issued and outstanding at the Effective Time of the Merger shall be cancelled and thus shall not be outstanding after the Merger. Section 2.7 FINB Shares. The shares of FINB common stock, par value $100 per share, issued and outstanding at the Effective Time of the Merger shall be converted as a result of, and upon the Effective Time of the Merger, into 511,175 shares of common stock, each of $5.00 par 6 176 value (plus shares of First National/Osceola Shares issued by First National/Osceola after September 30, 1999). ARTICLE III REPRESENTATIONS AND WARRANTIES OF FIRST NATIONAL/OSCEOLA Section 3.1 Representations and Warranties of First National/Osceola. First National/Osceola represents and warrants to CBF that the statements contained in this Article III are correct and complete as of the date of this Agreement and shall be correct and complete as of the Closing Date (as though made then and as though the Closing Date were substituted for the date of this Agreement throughout this Article III), except (i) representations and warranties which are confined to a specified date shall speak only as of such date, (ii) as expressly contemplated by this Agreement, or (iii) as set forth in the disclosure schedule prepared by First National/Osceola and delivered to CBF prior to the date of this Agreement (the "First National/Osceola Disclosure Schedule"). The First National/Osceola Disclosure Schedule has been arranged in paragraphs corresponding to the numbered and lettered paragraphs contained in this Article III. (a) Organization, Qualification, and Corporate Power. First National/Osceola is a national banking association duly organized, validly existing, and in good standing under the laws of the United States. First National/Osceola is duly authorized to engage in the business of banking in Florida as an insured bank under the Federal Deposit Insurance Act, as amended (the "FDIA"). First National/Osceola is duly authorized to conduct business and is in good standing under the laws of each jurisdiction in which the nature of its business or the ownership or leasing of its properties requires such qualification except where the lack of such qualification would not have a material adverse effect on its (i) business, financial condition or results of operations, or (ii) ability to consummate the transactions contemplated by this Agreement (together, its "Condition"); it being understood and agreed that, for purposes of this Agreement, a material adverse effect on the Condition of a Party shall not include a decline in results of operations resulting from any change in law, rule, regulation or GAAP which impacts banks or bank holding companies generally in a substantially similar manner. First National/Osceola has full corporate power and authority to carry on the businesses in which it is engaged and to own and use the properties owned and used by it. True and complete copies of the Articles of Association and the Bylaws of First National/Osceola are attached hereto as Schedule 3(a). First National/Osceola has in effect all federal, state, local and foreign governmental, regulatory and other authorizations, permits and licenses necessary for it to own or lease its properties and assets and to carry on its business as now conducted, the absence of which, individually or in the aggregate, would have a material adverse effect on the Condition of First National/Osceola. (b) Capitalization. The authorized capital stock of First National/Osceola consists of 550,000 First National/Osceola Shares, of which 511,175 First National/Osceola Shares are issued and outstanding on the date of this Agreement. There are no other classes of capital stock of First National/Osceola authorized. First National/Osceola holds no First National/Osceola Shares as treasury stock. All of the issued and outstanding First National/Osceola Shares have been duly authorized and are validly issued, fully paid and nonassessable. None of the outstanding First National/Osceola Shares has been issued in violation of any preemptive rights of the current or past stockholders of First National/Osceola. Except with respect to the 2,650 First National/Osceola Shares issuable pursuant to the First National/Osceola Options, there are no outstanding or authorized options, warrants, rights, contracts, calls, puts, rights to subscribe, conversion rights, or other agreements or commitments to which First National/Osceola is a party or which are binding upon First National/Osceola or, to the Knowledge of First National/Osceola, any other party 7 177 providing for the issuance, voting, transfer, disposition, or acquisition of any of the capital stock of First National/Osceola. There are no outstanding or authorized stock appreciation, phantom stock or similar rights with respect to First National/Osceola. For purposes of this Agreement, the term "Knowledge" means actual knowledge after reasonable investigation of the Chairman, President, Chief Financial Officer, Chief Accounting Officer or any Executive or Senior Vice President of such Party. (c) First National/Osceola Subsidiaries. First National/Osceola has no Subsidiary or Subsidiaries. For purposes of this Agreement, the term "Subsidiary" means all those corporations, associations or other entities of which the entity in question owns or controls 5% or more of the outstanding equity securities either directly or through an unbroken chain of entities as to each of which 5% or more of the outstanding equity securities is owned directly or indirectly by its parent; provided, however, there shall not be included any such entity acquired through foreclosure, any such entity which owns or operates an automatic teller machine interchange network, any such entity the equity securities of which are owned or controlled in a fiduciary capacity or any such entity which is a general industry association or group. (d) Authorization of Transaction. First National/Osceola has full power and authority (including full corporate power and authority) to execute and deliver this Agreement and to perform its obligations hereunder; provided, however, that First National/Osceola cannot consummate the Merger unless and until all requisite approvals are received from the Regulatory Authorities and the approval of the shareholders of First National/Osceola has been obtained. Subject to the foregoing sentence, (i) this Agreement has been duly executed and delivered by First National/Osceola and this Agreement constitutes a valid and binding agreement of First National/Osceola, enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency and other similar laws affecting creditors' rights generally, general equitable principles and the discretion of courts in granting equitable remedies, (ii) the performance by First National/Osceola of its obligations under this Agreement and the consummation of the Merger and the other transactions provided for under this Agreement have been or will be duly and validly authorized by all necessary corporate action on the part of First National/Osceola, and (iii) the Board of Directors of First National/Osceola has approved the execution, delivery and performance of this Agreement and the consummation of the Merger and the other transactions provided for under this Agreement. Other than to or from the Regulatory Authorities or to or from the Internal Revenue Service ("IRS") or the Pension Benefit Guaranty Corporation ("PBGC") with respect to any employee benefit plans, First National/Osceola does not need to give any notice to, make any filing with, or obtain any authorization, consent or approval of any government or governmental agency in order for the Parties to consummate the transactions contemplated by this Agreement, except where the failure to give notice, to file, or to obtain any authorization, consent, or approval would not have a material adverse effect on the Condition of First National/Osceola. (e) Noncontravention. Neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (i) subject to the receipt of the approvals contemplated in Section 3(d) above, violate any statute, regulation, rule, judgment, order, decree, stipulation, injunction, charge, or other restriction of any government, governmental agency, or court to which First National/Osceola is subject or any provision of the Articles of Association or Bylaws of First National/Osceola or (ii) with the passing of time or the giving of notice or both, conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require any notice under any contract, lease, sublease, license, franchise, permit, indenture, agreement or mortgage for borrowed money, instrument of indebtedness, Security Interest, or other obligation to which First National/Osceola is a party or by which it is bound or to which any of its assets is subject (or result in the imposition of any Security Interest upon any of its assets) except where the violation, conflict, 8 178 breach, default, acceleration, termination, modification, cancellation, failure to give notice, or Security Interest would not have a material adverse effect on the Condition of First National/Osceola. For purposes of this Agreement, the term "Security Interest" means any mortgage, pledge, security interest, encumbrance, charge, or other lien, other than (a) mechanics, materialmen, and similar liens, (b) liens for taxes not yet due and payable or for taxes that the taxpayer is contesting in good faith through appropriate proceedings, (c) liens arising under workers compensation, unemployment insurance, social security, retirement, and similar legislation, (d) liens on goods in transit incurred pursuant to documentary letters of credit, (e) purchase money liens and liens securing rental payments under capital lease arrangements, and (f) other liens arising in the Ordinary Course of Business and not incurred in connection with the borrowing of money. For purposes of this Agreement, the term "Ordinary Course of Business" means the ordinary course of business consistent with past custom and practice (including with respect to quantity and frequency). (f) Financial Statements. First National/Osceola has delivered to CBF prior to the execution of this Agreement copies of the following financial statements of First National/Osceola (collectively referred to herein as the "First National/Osceola Financial Statements"): (i) audited balance sheets of First National/Osceola at December 31, 1998 and 1997, and the related statements of (A) income, (B) shareholders' equity and (C) cash flows for the years then ended and the notes thereto as reported upon by its independent certified public accountants, and (ii) unaudited balance sheet of First National/Osceola at September 30, 1999, and the related unaudited statements of (A) income and (B) shareholders' equity for the period then ended. The First National/Osceola Financial Statements (as of the dates thereof and for the periods covered thereby): (i) have been prepared from the books and records of First National/Osceola, which in all material respects account for those transactions which in accordance with good business practices and applicable banking and other legal requirements are required to be accounted for, and (ii) present fairly in all material respects the financial position and the results of operations and cash flows of First National/Osceola as of the dates and for the periods indicated, in accordance with GAAP, applied on a basis consistent with prior periods except as disclosed in the notes thereto or, in the case of unaudited quarterly statements, subject to normal recurring year-end adjustments that are not material and the absence of certain footnote and cash flow information. (g) Undisclosed Liabilities. First National/Osceola has no liability (whether known or unknown, whether absolute or contingent, whether liquidated or unliquidated, and whether due or to become due), including any liability for taxes, except for (i) liabilities for future disbursements on letters of credit, lines of credit and similar instruments or unfunded loan commitments, (ii) liabilities accrued or reserved against in the balance sheet dated as of September 30, 1999 included in the First National/Osceola Financial Statements or reflected in the notes thereto, and (iii) liabilities which have arisen after September 30, 1999 in the Ordinary Course of Business or in connection with the transactions provided for in this Agreement (none of which relates to any breach of contract, breach of warranty, tort, infringement, or violation of law or arose out of any charge, complaint, action, suit, proceeding, hearing, investigation, claim, or demand and none of which, individually or in the aggregate, materially and adversely affect the Condition of First National/Osceola). Since September 30, 1999, First National/Osceola has not incurred or paid any obligation or liability which would be material to the Condition of First National/Osceola, except in the Ordinary Course of Business. (h) Brokers' Fees. Neither First National/Osceola nor any of its officers, directors or employees, has any liability or obligation to pay any fees or commissions to, or has employed, any broker, finder, or agent with respect to the transactions contemplated by this Agreement. 9 179 (i) Taxes. (i) All federal, state, local and foreign tax returns required to be filed by or on behalf of First National/Osceola have been timely filed or requests for extensions have been timely filed, granted and have not expired, for periods ending on or before September 30, 1999, and all such returns filed are true, complete and accurate in all material respects. First National/Osceola has timely paid or caused to be paid all taxes shown to be due on such tax returns. There is no audit, examination, deficiency or refund litigation or matter in controversy with respect to any taxes currently pending involving First National/Osceola. All material tax, interest, additions, and penalties due with respect to completed and settled examinations or concluded litigation have been paid, accrued or provided for. (ii) First National/Osceola has not executed an extension or waiver of any statute of limitations on the assessment or collection of any material tax due that is currently in effect. (iii) Adequate provision for any federal, state, local or foreign taxes due or to become due for First National/Osceola for any period or periods through and including September 30, 1999, has been made and is reflected on the September 30, 1999 financial statements included in the First National/Osceola Financial Statements. (iv) Deferred taxes of First National/Osceola have been provided for in the First National/Osceola Financial Statements in accordance with GAAP, subject in the case of interim financial statements to normal recurring year-end adjustments. (v) All taxes which First National/Osceola is required by law to withhold or to collect for payment have been duly withheld and collected, and have been paid to the proper governmental entity or are being withheld by First National/Osceola, except where the failure of any of which, individually or in the aggregate, would not have a material adverse effect on the Condition of First National/Osceola. (j) Allowance for Loan or Credit Losses. The allowance for loan or credit losses ("Allowance") shown on the balance sheet of First National/Osceola as of September 30, 1999 included in the First National/Osceola Financial Statements was, and the Allowance shown on the balance sheets of First National/Osceola as of dates subsequent to the execution of this Agreement will to the Knowledge of First National/Osceola be, in each case as of the dates thereof, adequate to provide for losses relating to or inherent in the loan and lease portfolios (including accrued interest receivable) of First National/Osceola and other extensions of credit (including letters of credit and commitments to make loans or extend credit) by First National/Osceola, except where the failure of the Allowance to be so adequate would not have a material adverse effect on the Condition of First National/Osceola. (k) Properties; Insurance. First National/Osceola has good and marketable title free and clear of all material liens, encumbrances, charges, defaults or equities of whatever character to all of the properties and assets, tangible or intangible, reflected in the First National/Osceola Financial Statements, except for liens disclosed in such Financial Statements, those arising in the Ordinary Course of Business after September 30, 1999 or liens which are not reasonably likely to have, individually or in the aggregate, a material adverse effect on the Condition of First National/Osceola. All buildings, and all fixtures, equipment and other property and assets which are material to its business and which are held under leases or subleases by First National/Osceola are held under valid instruments enforceable in accordance with their respective terms (except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting 10 180 creditors' rights generally and except that the availability of the equitable remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceedings may be brought). The real property owned and used as facilities by First National/Osceola has never been used for the handling, treatment, storage or disposal of any hazardous or toxic substance as defined under any applicable state or federal law. All policies of fire, theft, liability and other insurance maintained with respect to the assets or businesses of First National/Osceola, and the fidelity bonds in effect as to which First National/Osceola is a named insured, are described in Schedule 3(k) hereto. Substantially all of First National/Osceola's equipment in regular use has been well maintained and is in good and serviceable condition, reasonable wear and tear excepted. (1) Material Contracts. Neither First National/Osceola nor any of its assets, businesses or operations as of the date of this Agreement is a party to, or is bound or affected by, or receives benefits under, any of the following (whether written or oral and excluding agreements for the extension of credit by First National/Osceola made in the Ordinary Course of Business): (i) any employment agreement or understanding (including any understandings or obligations with respect to severance or termination pay liabilities or fringe benefits) with any present or former officer, director, or employee, including in any such person's capacity as a consultant (other than those which are terminable at will without any further amount being payable thereunder), (ii) any other agreement with any officer, director, employee, or affiliate, (iii) any agreement with any labor union, (iv) any agreement which limits the ability of First National/Osceola to compete in any line of business or which involves any restriction of the geographical area in which First National/Osceola may carry on its business (other than as may be required by law or applicable regulatory authorities), or (v) any agreement, contract, arrangement or commitment with annual payments aggregating $20,000 or more. (m) Material Contract Defaults. First National/Osceola is not in default, and has not received any written notice or has any Knowledge that any other party is in default, in any material respect under any contract, lease, sublease, license, franchise, permit, indenture, agreement, or mortgage for borrowed money, or instrument of indebtedness (except, as to the foregoing, extensions of credit by First National/Osceola in the Ordinary Course of Business), and there has not occurred any event that with the lapse of time or the giving of notice or both would constitute such a default. (n) Compliance with Laws. (i) First National/Osceola is in compliance in all respects with all laws, regulations, reporting and licensing requirements and orders applicable to its business or to its employees conducting its business, with any Regulatory Agreements (as hereinafter defined) applicable to First National/Osceola, and with its internal policies and procedures, except where the breach or violation of any of which, individually or in the aggregate, would not have a material adverse effect on the Condition of First National/Osceola. (ii) First National/Osceola has not received any written notification or communication from any Regulatory Authorities (A) asserting that First National/Osceola is not in substantial compliance with any of the statutes, regulations, or ordinances which such Regulatory Authority enforces which as a result of such noncompliance would have a material adverse effect on the Condition of First National/Osceola, (B) threatening to revoke any license, franchise, permit or governmental authorization which is material to the Condition of First National/Osceola, (C) requiring or threatening to require First National/Osceola, or indicating that First National/Osceola may be required, to enter into or be subject to a cease and desist order, agreement, memorandum of understanding or any other agreement or undertaking (or to cause its Board of Directors to adopt any resolutions) restricting or limiting or purporting to restrict or limit in any manner the operations of 11 181 First National/Osceola, including, without limitation, any restriction on the payment of dividends, or (D) directing, restricting or limiting, or purporting to direct, restrict or limit in any manner the operations of First National/Osceola, including, without limitation, any restriction on the payment of dividends (any such notice, communication, order, agreement, memorandum, resolutions or undertaking described in this sentence herein referred to as a "Regulatory Agreement"). First National/Osceola has not consented to, entered into, agreed to enter into, or been made subject to, any Regulatory Agreement. First National/Osceola has no Knowledge that any Regulatory Authority is considering imposing on First National/Osceola any Regulatory Agreement. (o) Employee Benefit Plans. (i) The First National/Osceola Disclosure Schedule lists every pension, retirement, profit-sharing, deferred compensation, stock option, employee stock ownership, severance pay, vacation, bonus or other incentive plan, any other written or unwritten employee program, arrangement, agreement or understanding, whether arrived at through collective bargaining or otherwise, any medical, vision, dental or other health plan, any life insurance plan, any golden parachute or other executive compensation plan, or any other employee benefit plan or fringe benefit plan, including, without limitation, any "employee benefit plan" as that term is defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") (a "Benefit Plan" or, collectively, "Benefit Plans"), currently or expected to be adopted, maintained by, sponsored in whole or in part by, or contributed to by First National/Osceola or any ERISA Affiliate (as herein defined) for the benefit of its employees, retirees, dependents, spouses, directors, independent contractors or other beneficiaries and under which any of its employees, retirees, dependents, spouses, directors, independent contractors or other beneficiaries are eligible to participate (collectively, the "First National/Osceola Benefit Plans"). No First National/Osceola Benefit Plan is or has been a multi-employer plan within the meaning of Section 3(37) and Section 4001(a)(3) of ERISA. For purposes of this Section 4(o), the term "ERISA Affiliate" means each trade or business (whether or not incorporated) which together with First National/Osceola is treated as a single employer under Section 414(b), (c), (m) or (o) of the Internal Revenue Code. (ii) True, correct and complete copies of all written First National/Osceola Benefit Plans and descriptions of all unwritten First National/Osceola Benefit Plans listed in the First National/Osceola Disclosure Schedule and all trust agreements or other funding arrangements, including insurance contracts, all amendments thereto and, where applicable, with respect to any such plans or plan amendments, all determination letters, rulings, opinion letters, information letters, or advisory opinions issued by the IRS or the United States Department of Labor after December 31, 1974, annual reports or returns, audited or unaudited financial statements, actuarial valuations, and summary annual reports for the most recent three plan years, the most recent summary plan descriptions and any material modifications thereto, have previously been delivered to CBF or will be attached to the First National/Osceola Disclosure Schedule. (iii) All the First National/Osceola Benefit Plans and the related trusts are in material compliance with, and have been administered in material compliance with, the provisions of ERISA, the provisions of the Internal Revenue Code and all other applicable laws, rules and regulations and collective bargaining agreements. Any required governmental approvals for the First National/Osceola Benefit Plans have been obtained, including, but not limited to, favorable determination letters on the qualification of the ERISA Plans and tax exemption of related trusts, as applicable, under the Internal Revenue Code, and all such governmental approvals continue in full force and effect. To the Knowledge of First National/Osceola, neither First National/Osceola nor any administrator or fiduciary of any First National/Osceola Benefit Plan or agent or delegate of any of the foregoing has engaged in any transaction or acted or failed to act in any manner which could subject First National/Osceola, CBF or any affiliate thereof to any direct or indirect liability for a 12 182 breach of any fiduciary, co-fiduciary or other duty under ERISA. To the Knowledge of First National/Osceola, no oral or written representation or communication with respect to any aspect of the First National/Osceola Benefit Plans has been made to employees of First National/Osceola prior to the Effective Time of the Merger which is not in accordance with the written or otherwise pre-existing terms and provisions of such First National/Osceola Benefit Plans in effect at the time of such communication. There are no unresolved claims or disputes under the terms of, or in connection with, the First National/Osceola Benefit Plans and no action, legal or otherwise, has been commenced with respect to any claim under the terms of, or in connection with, the First National/Osceola Benefit Plans. (iv) To the Knowledge of First National/Osceola, no "party in interest" (as defined in Section 3(14) of ERISA) or "disqualified person" (as defined in Section 4975(e)(2) of the Internal Revenue Code) of any First National/Osceola Benefit Plan has engaged in any "prohibited transaction" (within the meaning of Section 4975(c) of the Internal Revenue Code or Section 406 of ERISA). There has been no (A) "reportable event" (as defined in Section 4043 of ERISA), or event described in Section 4062(e) or Section 4063(a) of ERISA, or (B) termination or partial termination, withdrawal or partial withdrawal with respect to any of the ERISA Plans which: (1) First National/Osceola maintains or contributes to or has maintained or contributed to or was required to maintain or contribute to for the benefit of employees of First National/Osceola; or (2) which has been maintained or contributed to or was required to be maintained or contributed to by any member of a controlled group of trades or business as defined in ERISA Section 4001(a)(14) which has, since January 1, 1975, included First National/Osceola. (v) For any given ERISA Plan relating to First National/Osceola, all assets of such plan are carried at their fair market value, to the extent required by the plan document and applicable law, and the fair market value of such plan's assets equals or exceeds the present value of all benefits (whether vested or not) accrued to date by all present or former participants in such plan. No First National/Osceola Benefit Plan is subject to the rules of the PBGC. (vi) As of the Effective Time, First National/Osceola will not have any material current or future liability under any First National/Osceola Benefit Plan that was not reflected in the First National/Osceola Financial Statements. (vii) No First National/Osceola Benefit Plan provides for welfare benefits (as defined in ERISA Section 3(1)) to employees after retirement other than as may be required by Section 601 et seq. of ERISA. (viii) Each First National/Osceola Benefit Plan may be terminated by the Surviving Bank in its sole discretion on or after the Closing Date without liability of any kind or description arising from either such termination or any action attributable to the Surviving Bank. (ix) The execution of, or performance of the transactions contemplated by, this Agreement will not create, accelerate or increase any obligations under the First National/Osceola Benefit Plans, and will not require or cause to be payable any payment which is or would be an "excess parachute payment" under Section 28OG of the Internal Revenue Code. (p) Legal Proceedings. There are no actions, suits or proceedings instituted or pending or, to the Knowledge of First National/Osceola, threatened (or unasserted but considered probable of assertion and which if asserted would have at least a reasonable probability of an unfavorable outcome) against First National/Osceola, or against any property, asset, interest or right of First National/Osceola, that have a reasonable probability either individually or in the aggregate of having a material adverse effect on the Condition of First National/Osceola. 13 183 (q) Absence of Certain Changes or Events. Since September 30, 1999, the businesses of First National/Osceola has been operated only in the ordinary course consistent with past practices and since such date there has not been, occurred or arisen: (i) any damage, destruction, loss or casualty whether or not covered by insurance which has had or is reasonably likely to have a material adverse effect on the Condition of First National/Osceola; (ii) any declaration, setting aside or payment of any dividend or distribution (whether in cash, stock or property) in respect of the First National/Osceola Shares or any redemption or other acquisition of the First National/Osceola Shares by First National/Osceola or any split, combination or reclassification of First National/Osceola Shares declared or made; (iii) any extraordinary losses required by GAAP to be disclosed as such that have been suffered and not adequately reserved against, whether or not in the Ordinary Course of Business; (iv) any material assets mortgaged, pledged or subjected to any lien, charge or other encumbrance; (v) any agreement to do any of the foregoing; or (vi) any other event, development or condition of any character including any change in results of operations, financial condition, method of accounting or accounting practices, nature of business, or manner of conducting the business of First National/Osceola that has had, or is reasonably likely to have, a material adverse effect on the Condition of First National/Osceola. (r) Reports. Since September 30, 1999, First National/Osceola has filed all reports and statements, together with any amendments required to be made with respect thereto, that it was required to file with any Regulatory Authority. Each such report and statement, including the financial statements, exhibits and schedules thereto, at the time of filing thereof complied in all material respects with the laws and rules and regulations applicable to it and did not contain any untrue statement of material fact or omit to state any material fact necessary to make the statements made, in the light of the circumstances under which they were made, not misleading. (s) Statements True and Correct. No representation or warranty made by First National/Osceola in this Agreement, no written statement or certificate included in an Exhibit or Schedule by First National/Osceola in connection with this Agreement, and no written statement or certificate to be furnished by First National/Osceola to CBF pursuant to this Agreement contains any untrue statement of material fact or omits to state a material fact necessary to make the statements made, in the light of the circumstances under which they were made, not misleading. None of the information supplied or to be supplied by First National/Osceola for inclusion in the definitive proxy materials to be mailed to First National/Osceola shareholders in connection with the Special First National/Osceola Meeting (as defined in Section 5(b)(iii)), or in any other documents to be filed with any Regulatory Authority in connection with the transactions contemplated hereby, will at the respective time such documents are filed fail to comply in all material respects with the laws and rules and regulations applicable to First National/Osceola, contain any untrue statement of a material fact, or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. All documents that First National/Osceola is responsible for filing with any Regulatory Authority in connection with the Merger will comply as to form in all material respects with the provisions of applicable law. (t) Environmental Matters. (i) To the Knowledge of First National/Osceola, the Participation Facilities, and the Loan Properties (each as hereinafter defined) are, and have been, in compliance with all applicable laws, rules, regulations, standards and requirements of the United States Environmental Protection Agency ("EPA") and of state and local agencies with jurisdiction over pollution or protection of the environment, except for violations which, either individually or in the aggregate, do not or would not result in a material adverse effect on the Condition of First National/Osceola. 14 184 (ii) To the Knowledge of First National/Osceola, there is no suit, claim, action or proceeding, pending or threatened, before any court, governmental agency or board or other forum in which First National/Osceola or any Participation Facility has been or, with respect to threatened proceedings, may be, named as a defendant (A) for alleged noncompliance (including by any predecessor), with any environmental law, rule or regulation or (B) relating to the release into the environment of any Hazardous Material (as hereinafter defined) or oil whether or not occurring at or on a site owned, leased or operated by First National/Osceola or any Participation Facility except as would not, either individually or in the aggregate, result in a material adverse effect on the Condition of First National/Osceola. (iii) To the Knowledge of First National/Osceola, there is no suit, claim, action or proceeding, pending or threatened, before any court, governmental agency or board or other forum in which any Loan Property has been or, with respect to threatened proceedings, may be, named as a defendant (A) for alleged noncompliance (including by any predecessor) with any environmental law, rule or regulation or (B) relating to the release into the environment of any Hazardous Material or oil whether or not occurring at or on a site owned, leased or operated by a Loan Property, except where such noncompliance or release does not or would not result, either individually or in the aggregate, in a material adverse effect on the Condition of First National/Osceola. (iv) To the Knowledge of First National/Osceola, there is no reasonable basis for any suit, claim, action or proceeding as described in subsection (ii) or (iii) of this Section 3(t) except as would not, individually or in the aggregate, have a material adverse effect on the Condition of First National/Osceola. (v) During the period of (A) First National/Osceola's ownership or operation of any of its current properties, (B) First National/Osceola's participation in the management of any Participation Facilities, or (C) First National/Osceola's holding of a Security Interest in a Loan Property, to the Knowledge of First National/Osceola, there has been no release of Hazardous Material or oil in, on, under or affecting such properties, except where such release does not or would not result, either individually or in the aggregate, in a material adverse effect on the Condition of First National/Osceola. Prior to the period of (A) First National/Osceola's ownership or operation of any of its current properties, (B) First National/Osceola's participation in the management of any Participation Facility, or (C) First National/Osceola holding of a Security Interest in a Loan Property, to the Knowledge of First National/Osceola, there was no release of Hazardous Material or oil in, on, under or affecting any such property, Participation Facility or Loan Property, except where such release does not or would not result, either individually or in the aggregate, in a material adverse effect on the condition of First National/Osceola. (vi) The following definitions apply for purposes of this Section 3(t): (A) "Loan Property" means any real property in which First National/Osceola holds a Security Interest and, where required by the context, said term means the owner or operator of such property; (B) "Participation Facility" means any facility in which First National/Osceola participates in the management and where required by the context, said term means the owner or operator of such property; and (C) "Hazardous Material" means any pollutant, contaminant, or hazardous substance under the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. ss.9601 et seq. or any similar state law. (u) Labor Matters. First National/Osceola is not a party to, or bound by, any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor organization, nor is it the subject of any material proceeding asserting that it has committed an unfair labor practice or seeking to compel it to bargain with any labor organization as to wages or conditions of employment nor is there any strike or other labor dispute involving it pending or, 15 185 to its Knowledge, threatened, any of which would have, individually or in the aggregate, a material adverse effect on the Condition of First National/Osceola. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF CBF Section 4.1 Representations and Warranties of CBF. CBF represents and warrants to First National/Osceola that the statements contained in this Article IV are correct and complete as of the date of this Agreement and shall be correct and complete as of the Closing Date (as though made then and as though the Closing Date were substituted for the date of this Agreement throughout this Article IV), except (i) representations and warranties which are confined to a specified date shall speak only as of such date, (ii) as expressly contemplated by this Agreement, or (iii) as set forth in the disclosure schedule prepared by CBF and delivered to First National/Osceola prior to the date of this Agreement (the "CBF Disclosure Schedule"). The CBF Disclosure Schedule has been arranged in paragraphs corresponding to the numbered and lettered paragraphs contained in this Article IV. (a) Organization, Qualification, and Corporate Power. CBF is a corporation duly organized, validly existing, and in good standing under the laws of Florida. CBF is duly authorized to conduct business and is in good standing under the laws of each jurisdiction in which the nature of its business or the ownership or leasing of its properties requires such qualification except where the lack of such qualification would not have a material adverse effect on its Condition. CBF has full corporate power and authority to carry on the business in which it is engaged and to own and use the properties owned and used by it. True and complete copies of the Articles of Incorporation and the Bylaws of CBF are attached hereto as Schedule 4(a). CBF has in effect all federal, state, local and foreign governmental, regulatory and other authorizations, permits and licenses necessary for it to own or lease its properties and assets and to carry on its business as now conducted, the absence of which, individually or in the aggregate, would have a material adverse effect on the Condition of CBF on a consolidated basis. As of the Effective Time of the Merger, FINB (i) will be an interim national banking association duly organized, validly existing and in good standing under the laws of the United States (ii) will have the corporate power and authority to own or lease all of its properties and assets and to carry on its business as proposed to be conducted pursuant to this Agreement, and (iii) will be licensed or qualified to do business in each jurisdiction which the nature of the business conducted or to be conducted by FINB, or the character or location or the properties and assets owned or leased by FINB, make such licensing or qualification necessary, except where the failure to be so licensed or qualified (or steps necessary to cure such failure) would not have a material adverse effect on the Condition of CBF on a consolidated basis. FINB, as of the Effective Time of the Merger, will have in effect all federal, state, local and foreign governmental, regulatory or other authorizations, permits and licenses necessary for it to own or lease its properties and assets and to carry on its business as proposed to be conducted, the absence of which, either individually or in the aggregate, would have a material adverse effect on the Condition of CBF on a consolidated basis. (b) Capitalization. The authorized capital stock of CBF consists of (i) 20,000,000 CBF Shares, of which one CBF Shares is issued and outstanding on the date of this Agreement, and (ii) 5,000,000 shares of preferred stock, $.01 par value, none of which are issued and outstanding on the date of this Agreement. There are no other classes of capital stock of CBF authorized. CBF holds no CBF Shares as treasury stock. All of the issued and outstanding CBF Shares have been duly authorized and are validly issued, fully paid and nonassessable. None of the 16 186 outstanding CBF Shares has been issued in violation of any preemptive rights of the current or past stockholders of CBF. There are no outstanding or authorized options, warrants, rights, contracts, calls, puts, rights to subscribe, conversion rights, or other agreements or commitments to which CBF is a party or which are binding upon CBF or, to the Knowledge of CBF, any other party providing for the issuance, voting, transfer, disposition, or acquisition of any of the capital stock of CBF. There are no outstanding or authorized stock appreciation, phantom stock or similar rights with respect to CBF. (c) CBF Subsidiaries. Except for FINB (and other interim banking associations organized to facilitate consummation of the merger referred to in Sections 6(a)(xiii) and 6(b)(xi)), which at the Effective Time of the Merger will be organized as a wholly-owned subsidiary of CBF, CBF has no Subsidiary or Subsidiaries. (d) Authorization of Transaction. CBF has full power and authority (including full corporate power and authority) to execute and deliver this Agreement and to perform its obligations hereunder; provided, however, that CBF cannot consummate the Merger unless and until all requisite approvals are received from the Regulatory Authorities. Subject to the foregoing sentence, (i) this Agreement has been duly executed and delivered by CBF and this Agreement constitutes a valid and binding agreement of CBF, enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency and other similar laws affecting creditors' rights generally, general equitable principles and the discretion of courts in granting equitable remedies, (ii) the performance by CBF of its obligations under this Agreement and the consummation of the Merger and the other transactions provided for under this Agreement have been or will be duly and validly authorized by all necessary corporate action on the part of CBF, and (iii) the Board of Directors of CBF has approved the execution, delivery and performance of this Agreement and the consummation of the Merger and the other transactions provided for under this Agreement. Other than to or from the Regulatory Authorities or to or from the IRS or the PBGC with respect to any employee benefit plans, CBF does not need to give any notice to, make any filing with, or obtain any authorization, consent or approval of any government or governmental agency in order for the Parties to consummate the transactions contemplated by this Agreement, except where the failure to give notice, to file, or to obtain any authorization, consent, or approval would not have a material adverse effect on the Condition of CBF on a consolidated basis. (e) Noncontravention. Neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (i) subject to the receipt of the approvals contemplated in Section 4(d) above, violate any statute, regulation, rule, judgment, order, decree, stipulation, injunction, charge, or other restriction of any government, governmental agency, or court to which CBF is subject or any provision of the Articles of Incorporation or Bylaws of CBF or (ii) with the passing of time or the giving of notice or both, conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require any notice under any contract, lease, sublease, license, franchise, permit, indenture, agreement or mortgage for borrowed money, instrument of indebtedness, Security Interest, or other obligation to which CBF is a party or by which it is bound or to which any of its assets is subject (or result in the imposition of any Security Interest upon any of its assets) except where the violation, conflict, breach, default, acceleration, termination, modification, cancellation, failure to give notice, or Security Interest would not have a material adverse effect on the Condition of CBF on a consolidated basis. (f) Statements True and Correct. No representation or warranty made by CBF in this Agreement, no written statement or certificate included in an Exhibit or Schedule by CBF in connection with this Agreement, and no written statement or certificate to be furnished by CBF to First National/Osceola pursuant to this Agreement contains any untrue statement of material fact or 17 187 omits to state a material fact necessary to make the statements made, in the light of the circumstances under which they were made, not misleading. None of the information supplied or to be supplied by CBF for inclusion in the definitive proxy materials to be mailed to First National/Osceola shareholders in connection with the Special First National/Osceola Meeting (as defined in Section 5(b)(iii)), or in any other documents to be filed with any Regulatory Authority in connection with the transactions contemplated hereby, will at the respective time such documents are filed fail to comply in all material respects with the laws and rules and regulations applicable to CBF, contain any untrue statement of a material fact, or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. All documents that CBF is responsible for filing with any Regulatory Authority in connection with the Merger will comply as to form in all material respects with the provisions of applicable law. ARTICLE V COVENANTS AND AGREEMENTS Section 5.1 Covenants. Except as otherwise set forth in the Disclosure Schedules, the Parties agree as follows with respect to the period from and after the execution of this Agreement until the earlier of the consummation of the transactions contemplated by this Agreement or the termination of this Agreement: (a) Current Information. During the period from the date of this Agreement to the Effective Time of the Merger, each Party shall, and shall cause its representatives to, confer on a regular and frequent basis with representatives of the other. Within twenty (20) days after the end of each calendar month beginning after the date of this Agreement, each of First National/Osceola and CBF shall deliver to the other copies of their respective unaudited balance sheets and statements of income, and any other financial or statistical information submitted by management to the Board of Directors of First National/Osceola or CBF (other than information provided to a Board of Directors specifically in connection with its consideration of the Merger, this Agreement, and the transactions contemplated hereby) for or in the preceding fiscal month. All such financial statements shall be prepared in accordance with the books and records of such Party, shall be complete and accurate in all material respects, shall present fairly the financial position and the results of operations of that Party as of and for the periods indicated, and shall be prepared in accordance with GAAP, subject to normal recurring year-end adjustments and the absence of certain footnote information in the unaudited statements. (b) Regulatory Matters and Approvals. (i) Bank Regulatory Matters. CBF and First National/Osceola shall cause to be promptly prepared and filed with the FRB, the FDIC, and the OCC, applications for their approval of the Merger and with any other Regulatory Authority having jurisdiction any other applications for approvals or Consents which may be necessary for the consummation of the Merger. The Parties shall provide copies of all such applications and notices to the others for review prior to submission or filing with the appropriate Regulatory Authorities. Each Party agrees to promptly review and provide any comments on such applications and notices to the others. Each Party shall use its best efforts to take or cause to be taken all actions necessary for such applications and notices to be approved and shall provide the others with copies of all correspondence and notices to or from such agencies concerning such applications and notices. No Consent obtained which is necessary to consummate the transactions contemplated by this Agreement shall be conditioned or restricted in a manner which in the reasonable judgment of a Party would (A) unduly impair or restrict the operations, or would have a material adverse effect on the Condition, of CBF or the Surviving Bank, 18 188 or (B) render consummation of the Merger unduly burdensome; provided, that such Party has used its reasonable efforts (it being understood that such reasonable efforts shall not include the threatening or commencement of any litigation) to cause such conditions or restrictions to be removed or modified as appropriate. (ii) Definitive Proxy Materials. First National/Osceola shall prepare a proxy statement which shall consist of the First National/Osceola definitive proxy materials relating to the Special First National/Osceola Meeting (the "Proxy Statement"). The Proxy Statement shall contain the affirmative recommendation of the Board of Directors of First National/Osceola in favor of the adoption of this Agreement and the approval of the Merger. CBF shall provide to First National/Osceola such information and assistance in connection with the preparation of the Proxy Statement as First National/Osceola may reasonably request. First National/Osceola shall not be liable for any untrue statement of a material fact or omission to state a material fact in the Proxy Statement made in reliance upon, or in conformity with, information furnished to First National/Osceola by CBF for use therein. In connection with the Special First National/Osceola Meeting, the Parties shall file the proxy statement with such Regulatory Agencies as may be required by law in order for such materials to be furnished to First National/Osceola shareholders in connection with such meeting. (iii) Shareholder Approvals. First National/Osceola shall call a special meeting of its shareholders (the "Special First National/Osceola Meeting") and mail to them the Proxy Statement (as soon as reasonably practicable following a determination by First National/Osceola and CBF that such special meeting should be called) in order that First National/Osceola shareholders may consider and vote upon the adoption of this Agreement and the approval of the Merger in accordance with applicable law. CBF, as sole shareholder of FINB, agrees to vote in favor of adoption of this Agreement and approval of the Merger. (iv) Securities Act Matters. CBF will prepare and file with the SEC a Registration Statement under the Securities Act in connection with the CBF Shares to be issued to First National/Osceola shareholders in the Merger. First National/Osceola and CBF shall each promptly furnish all information concerning it and the holders of its outstanding shares as the other may reasonably request from time to time in connection with the preparation of the Registration Statement. The Parties shall use their reasonable efforts to cause the Registration Statement to become effective under the Securities Act as soon as reasonably practicable after the filing thereof and to take any action required to be taken under applicable state, Blue Sky or securities laws in connection with the issuance of the CBF Shares upon consummation of the Merger. (v) Other Governmental Matters. Subject to the last sentence of Section 5(b)(i), each of the Parties shall take any additional action that may be necessary, proper, or advisable in connection with any other notice to, filings with, and authorizations, consents, and approvals of governments and governmental agencies that it may be required to give, make or obtain in connection with the transactions contemplated by this Agreement. (c) Tax Opinion. On or before the date the Proxy Statement is mailed to First National/Osceola shareholders, First National/Osceola and CBF shall each use all reasonable efforts to obtain a written opinion from an accounting or law firm selected by First National/Osceola and CBF, to the effect that the exchange of First National/Osceola Shares, to the extent exchanged for CBF Shares as contemplated herein, shall not give rise to gain or loss to the holders of such First National/Osceola Shares, or gain or loss to CBF with respect to such exchange (except to the extent of any cash paid in lieu of fractional shares), and accordingly, the Merger will constitute a tax-free reorganization within the meaning of Section 368(a) of the Internal Revenue Code (the "Tax 19 189 Opinion"). The Tax Opinion shall be reasonably satisfactory to each of First National/Osceola and CBF in form and substance. (d) Conduct of Business Prior to the Effective Time of the Merger. During the period from the date of this Agreement to the Effective Time of the Merger, except as set forth in the First National/Osceola or CBF Disclosure Schedules, or with the prior written consent of the other Parties, or as expressly contemplated or permitted by this Agreement, each of First National/Osceola and CBF shall (i) conduct its business in, and only in, the usual, regular and ordinary course consistent with past practices, (ii) use its reasonable best efforts to maintain and preserve intact its business organization, employees and advantageous business relationships and retain the services of its officers and key employees, and (iii) take no action which would materially adversely affect or delay the ability of any Party to obtain any necessary approvals of any Regulatory Authority or other governmental authority required for the transactions contemplated hereby or to perform its covenants and agreements under this Agreement. (e) Forbearance. During the period from the date of this Agreement to the Effective Time of the Merger, except as set forth in the First National/Osceola or CBF Disclosure Schedules, or except as expressly contemplated or permitted by this Agreement, no Party shall, or permit its Subsidiaries to, without the prior written consent of the other Parties: (i) Other than in the Ordinary Course of Business, incur any indebtedness for borrowed money (other than short-term indebtedness incurred to refinance short-term indebtedness; it being understood and agreed that incurrence of indebtedness in the Ordinary Course of Business shall include, without limitation, the creation of deposit liabilities, purchases of federal funds, sales of certificates of deposit and entering into repurchase agreements), assume, guarantee, endorse or otherwise as an accommodation become responsible for the obligations of any other individual, corporation or other entity, or make any loan or advance other than in the Ordinary Course of Business; (ii) Adjust, split, combine or reclassify any capital stock; make, declare or pay any dividend (except in accordance with past practice) or make any other distribution on, or directly or indirectly redeem, purchase or otherwise acquire, any shares of its capital stock or any securities or obligations convertible into or exchangeable for any shares of its capital stock, or, grant any stock options or stock appreciation rights or grant any individual, corporation or other entity any right to acquire any shares of its capital stock; (iii) Sell, transfer, mortgage, encumber or otherwise dispose of any of its material properties or assets to any individual, corporation or other entity, or cancel, release or assign any material indebtedness to any such person or any claims held by any such person, except (A) in the Ordinary Course of Business, or (B) as set forth in a Disclosure Schedule pursuant to contracts or agreements in force at the date of this Agreement; (iv) Except for transactions in the Ordinary Course of Business, make any material investment in, either by purchase of stock or securities, contributions to capital, property transfers, or purchase of property or assets, any other individual, corporation or other entity; (v) Except for transactions in the Ordinary Course of Business, enter into or terminate any material contract or agreement, or make any change in any of its material leases or contracts, other than renewals of contracts and leases without material adverse changes of terms; (vi) Increase in any material manner the compensation or fringe benefits of any of its employees or pay any bonus or pension or retirement allowance not required by any 20 190 existing plan or agreement to any such employees, or become a party to, amend or commit itself to any pension, retirement, profit-sharing or welfare benefit plan or agreement or employment agreement with or for the benefit of any employee, other than in the Ordinary Course of Business (except that First National/Osceola may amend the stock option plans pursuant to which the First National/Osceola Options were issued to provide that the First National/Osceola Options shall not terminate as a result of the Merger); with the understanding that entering into any new employment contracts, or renewing or amending any existing employment contracts, shall be deemed outside the Ordinary Course of Business; (vii) Amend its Articles of Incorporation, Articles of Association, or its bylaws; (viii) Enter into any new line of business; (ix) Change its lending, investment, asset/liability management or other material banking policies in any respect which is material, including without limitation, policies and procedures relating to calculating and funding the Allowance; (x) Incur or commit to any capital expenditure or any obligations or liabilities in connection therewith other than capital expenditures and obligations or liabilities incurred or committed to in the Ordinary Course of Business; (xi) Change its methods of accounting in effect at December 31, 1998, except as required by generally accepted accounting principles, or its fiscal year; or (xii) Agree to, or make any commitment to, take any of the actions prohibited by this Section 5(e). (f) Issuance of Securities. Except as set forth in a Disclosure Schedule or as contemplated by this Agreement, no Party shall or shall permit any of its Subsidiaries to issue, deliver or sell, or authorize or propose the issuance, delivery or sale of, any shares of its capital stock of any class, any voting debt or any securities convertible into or exercisable for or any rights, warrants or options to acquire, any such shares or voting debt, or enter into any agreement with respect to any of the foregoing, other than (i) the issuance of First National/Osceola Shares, pursuant to outstanding First National/Osceola Options, in each case as in effect on the date of this Agreement and in each case in accordance with their present terms; (ii) the issuance of CBF Shares pursuant to outstanding CBF Options or CBF Warrants, in each case as in effect on the date of this Agreement and in each case in accordance with their present terms; (iii) issuances by a Subsidiary of its capital stock to its parent; and (iv) the issuance by a Party of any shares of its capital stock in a transaction approved by the Parties pursuant to Section 5(g). (g) No Acquisitions. Other than acquisitions which may be mutually agreed upon in writing by the Parties, no Party shall or shall permit any of its Subsidiaries to acquire or agree to acquire, by merging or consolidation with or by purchasing a substantial equity interest in, or by purchasing a substantial portion of the assets, or assuming a substantial portion of the liabilities of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof or otherwise acquire or agree to acquire any assets in each case which are material, individually or in the aggregate, to such Party and its Subsidiaries taken as a whole; provided, however, that the foregoing shall not prohibit (i) internal reorganizations, consolidations or dissolutions involving only existing Subsidiaries, (ii) foreclosure and other acquisitions related to previously contracted debt, in each case in the Ordinary Course of Business, (iii) acquisitions of control by First National/Osceola in its fiduciary capacity, (iv) investments made 21 191 by small business investment corporations, acquisitions of financial assets and merchant banking activities, in each case in the Ordinary Course of Business, or (v) the creation of new Subsidiaries organized to conduct or continue activities otherwise permitted by this Agreement. (h) Other Actions. No Party shall or shall permit any of its Subsidiaries to take any action that, or fail to take any action the failure of which, results in any of its representations and warranties set forth in this Agreement being or becoming untrue in any material respect, or in any of the conditions set forth in this Agreement not being satisfied or in a violation of any provision of this Agreement which would adversely affect the ability of any of them to obtain any of the Regulatory Approvals, except in every case as may be required by applicable law. (i) Government Filings. Each Party shall file all reports, applications and other documents required to be filed with the appropriate bank regulators between the date hereof and the Effective Time of the Merger and shall make available to the other Party copies of all such reports promptly after the same are filed. (j) Tax-Free Reorganization Treatment. No Party shall take or cause to be taken any action, whether before or after the Effective Time of the Merger, which would disqualify the Merger as a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code. (k) Full Access. Each Party shall and shall cause each of its Subsidiaries to permit representatives of the others to have full access at all reasonable times, and in a manner so as not to interfere with the normal business operations of such Party and its Subsidiaries, to all premises, properties, books, records, contracts, tax records, and documents of or pertaining to each of such Party and its Subsidiaries. Each Party agrees to furnish any other Party and its advisers with such financial operating data and other information with respect to its business, properties and employees as such Party shall, from time to time, reasonably request. No investigation by a Party shall affect the representations and warranties of any other Party to this Agreement, and each such representation and warranty shall survive any such investigation. (1) Notice of Material Adverse Developments. Each Party shall give prompt written notice to the other Parties of any material adverse effect on its Condition, or any material adverse development affecting the assets, liabilities, business, financial condition, operations, results of operations, or future prospects of such Party and its Subsidiaries taken as a whole, including without limitation (i) any material change in its business or operations, (ii) any material complaints, investigations or hearings (or communications indicating that the same may be contemplated) of any Regulatory Authority, (iii) the institution or the threat of material litigation involving such Party, or (iv) any event or condition that might be reasonably expected to cause any of such Party's representations and warranties set forth herein not to be true and correct in all material respects as of the Closing Date. Each Party shall also give prompt written notice to the other Parties of any other material adverse development affecting the ability of such Party to consummate the transactions contemplated by this Agreement. Any such notices shall be accompanied by copies of any and all pertinent documents, correspondence and similar papers relevant to a complete understanding of such material adverse development, which shall be promptly updated as necessary. CBF shall have 20 business days after First National/Osceola gives any written notice pursuant to this Section 5(l) within which to exercise any right CBF may have to terminate this Agreement pursuant to Section 7(a)(iv) below by reason of the material adverse development, and First National/Osceola likewise shall have 20 business days after CBF gives any written notice pursuant to this Section 5(l) within which to exercise any right First National/Osceola may have to terminate this Agreement pursuant to Section 7(a)(iii) below by reason of the material adverse development. Unless one of the Parties terminates this Agreement within the aforementioned period, the written notice of a material development shall be deemed to have amended the Disclosure Schedule, to have 22 192 qualified the representations and warranties contained herein, and to have cured any misrepresentation or breach of warranty that otherwise might have existed hereunder by reason of the material adverse development. (m) Exclusivity. Except as specifically permitted or contemplated by this Agreement, the Parties shall not (and shall not cause or permit any of their Subsidiaries to) solicit, initiate, encourage, entertain, consider, or participate in the negotiation, discussion or submission of any proposal or offer from any person (other than a Party) relating to any (i) liquidation, dissolution, or recapitalization, (ii) merger or consolidation, (iii) acquisition or purchase of 25% or more of securities or assets, or (iv) similar transaction or business combination involving any of the Parties and/or its Subsidiaries, or their respective assets (the foregoing transactions referred to in subclauses (i) through (iv), inclusive, are referred to in this Agreement as an "Acquisition Proposal"); provided, however, that each Party shall be entitled to entertain, consider, and participate in negotiations and discussions regarding, and furnish any information with respect to, any effort or attempt by any person to do or seek to do any of the foregoing to the extent that the Board of Directors of such Party determines in good faith, based upon the written advice of its legal counsel, that the failure to so consider or participate in such negotiations or discussions would be inconsistent with the fiduciary obligations of the directors of such Party to the shareholders of such Party. The Party shall give all of the other Parties prompt notice of any such negotiations and discussions. Each Party shall notify others immediately if any person (other than a Party) makes any proposal, offer, inquiry, or contact with respect to any Acquisition Proposal. (n) Filings with the Offices. Upon the terms and subject to the conditions of this Agreement, the Parties shall execute and file any and all documents in connection with the Merger for filing with any Federal and state offices. (o) Press Releases. Each Party shall consult with each other as to the form and substance of any press release or other public disclosure materially related to this Agreement, the Merger or any other transaction contemplated hereby; provided, however, that any Party may make any public disclosure it believes in good faith is required by law or regulation. (p) Agreements of Affiliates. First National/Osceola shall deliver to CBF a letter identifying all persons whom First National/Osceola believes to be, at the time the Merger is submitted to a vote of the First National/Osceola shareholders, "affiliates" of First National/Osceola for purposes of Rule 145 under the Securities Act. First National/Osceola shall use its best efforts to cause each person who is identified as an "affiliate" in the letter referred to above to deliver to CBF prior to the Effective Time of the Merger a written agreement providing that each such person shall agree not to sell, transfer or otherwise dispose of the CBF Shares to be received by such person in the Merger, except in compliance with the applicable provisions of the Securities Act and until such time as the financial results covering at least 30 days of combined operations of CBF and First National/Osceola have been published within the meaning of Section 201.01 of the SEC's Codification of Financial Reporting Policies. Prior to the Effective Time of the Merger, First National/Osceola shall amend and supplement such letter and use its reasonable best efforts to cause each additional person who is identified as an "affiliate" to execute a written agreement as set forth in this Section 5(p). (q) Miscellaneous Agreements and Consents. Subject to the terms and conditions of this Agreement, each of the Parties hereto agrees to use its respective best efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement as expeditiously as reasonably practicable, including, without limitation, using their respective reasonable best efforts to lift or rescind any injunction or restraining order or other 23 193 order adversely affecting the ability of the Parties to consummate the transactions contemplated hereby. Each Party shall, and shall cause each of their respective Subsidiaries to, use their reasonable best efforts to obtain all approvals and Consents of all third parties and Regulatory Authorities necessary or, in the reasonable opinion of any Party, desirable for the consummation of the transactions contemplated by this Agreement. No Consent obtained which is necessary to consummate the transactions contemplated by this Agreement shall be conditioned or restricted in a manner which in the reasonable judgment of a Party would (A) unduly impair or restrict the operations, or would have a material adverse effect on the Condition, of CBF or the Surviving Bank, or (B) render consummation of the Merger unduly burdensome; provided, that such Party has used its reasonable efforts (it being understood that such reasonable efforts shall not include the threatening or commencement of any litigation) to cause such conditions or restrictions to be removed or modified as appropriate. (r) Indemnification. (i) After the Effective Time of the Merger, CBF shall cause the Surviving Bank to indemnify, defend and hold harmless the present and former officers, directors, employees and agents of First National/Osceola (each, an "Indemnified Party") after the Effective Time of the Merger against all losses, expenses, claims, damages or liabilities arising out of actions or omissions occurring on or prior to the Effective Time of the Merger (including, without limitation, the transactions contemplated by this Agreement) to the full extent then permitted under, and in accordance with the terms and conditions of, the Florida Business Corporation Act and by the Articles of Association and Bylaws of First National/Osceola as in effect on the date hereof, including provisions relating to advances of expenses incurred in the defense of any action or suit. CBF shall cause the Surviving Bank to apply such rights of indemnification in good faith and to the fullest extent permitted by applicable law. (ii) If the Surviving Bank or any of its successors or assigns (A) shall consolidate with or merge into any other corporation or entity and shall not be the continuing or surviving corporation or entity of such consolidation or merger, or (B) shall transfer all or substantially all of its properties and assets to any individual, corporation or other entity, then and in each such case, CBF shall cause the Surviving Bank to cause proper provision to be made so that the successors and assigns of the Surviving Bank shall assume the obligations set forth in this Section 5(r). (s) Fairness Opinions. On or before 10 days prior to the date of the Proxy Statement, (i) First National/Osceola shall use all reasonable efforts to obtain an opinion from a firm selected by it that the terms of the Merger are fair to First National/Osceola shareholders from a financial point of view (the "First National/Osceola Fairness Opinion"), and (ii) CBF shall have the right to obtain an opinion from a firm selected by it that the terms of the Merger are fair to CBF shareholders from a financial point of view (the "CBF Fairness Opinion"). (t) Employee Benefit Plans. First National/Osceola and CBF shall use their best efforts to coordinate the conversion of each First National/Osceola Benefit Plan into similar plans of the Surviving Bank, to the extent similar plans are maintained by the Surviving Bank, and to make available for eligibility for First National/Osceola employees all benefit plans and policies maintained by the Surviving Bank following the Effective Time of the Merger with such employees receiving credit for past service with a Party prior to the Effective Time of the Merger for purposes of eligibility for participation, vesting, and years of service, under such benefit plans and policies. 24 194 ARTICLE VI CONDITIONS TO THE OBLIGATIONS OF FIRST NATIONAL/OSCEOLA AND CBF Section 6.1 Conditions to Obligation to Close. (a) Conditions to Obligation of CBF. The obligation of CBF to consummate the transactions to be performed by it in connection with the Closing are subject to satisfaction of the following conditions: (i) This Agreement and the Merger shall have received the requisite approval of the shareholders of First National/Osceola and the number of Dissenting First National/Osceola Shares shall not exceed 5% of the number of First National/Osceola Shares issued and outstanding immediately prior to the Effective Time of the Merger; (ii) The Parties shall have procured all approvals, authorizations and Consents specified in Section 5(b) above and the Disclosure Schedules, including but not limited to all necessary consents, authorizations and approvals of Regulatory Authorities which, with respect to those from the Regulatory Authorities, shall not contain provisions which (A) unduly impair or restrict the operations, or would have a material adverse effect on the Condition, of CBF or the Surviving Bank, or (B) render consummation of the Merger unduly burdensome, in each case as determined in the reasonable discretion of CBF; (iii) The representations and warranties set forth in Article III above shall be true and correct in all material respects at and as of the Closing Date; (iv) First National/Osceola shall have performed and complied in all material respects with all its covenants required to be complied with hereunder through the Closing; (v) No action, suit, or proceeding shall be pending or threatened before any court or quasi-judicial or administrative agency of any federal, state, local, or foreign jurisdiction wherein an unfavorable judgment, order, decree, stipulation, injunction, or charge could (A) prevent consummation of any of the transactions contemplated by this Agreement, (B) cause any of the transactions contemplated by this Agreement to be rescinded following consummation, or (C) affect adversely the right after the Effective Time of the Merger of the Surviving Bank to own, operate, or control substantially all of the assets and operations of First National/Osceola and/or CBF to own, operate, or control substantially all of the assets and operations of the Surviving Bank (and no such judgment, order, decree, stipulation, injunction, or charge shall be in effect); (vi) The shareholders' equity of First National/Osceola on the last day of the calendar month immediately preceding the Closing Date, as determined in accordance with GAAP before any adjustments required pursuant to Statement of Financial Accounting Standards No. 115 ("FAS 115"), shall not be less than the amount set forth in the September 30,1999 First National/Osceola Financial Statements. (vii) First National/Osceola shall have delivered to CBF a certificate (without qualification as to knowledge or materiality or otherwise) to the effect that each of the conditions specified above in Section 6(a)(i) through (vi) is satisfied in all respects; (viii) All actions to be taken by First National/Osceola in connection with consummation of the transactions contemplated hereby and all certificates, opinions, instruments, 25 195 and other documents required to effect the transactions contemplated hereby shall be reasonably satisfactory in form and substance to CBF; (ix) CBF shall have received the Tax Opinion in a form reasonably satisfactory to CBF; (x) CBF shall have received the CBF Fairness Opinion; (xi) CBF shall have received a letter, dated as of the Effective Time of the Merger, from an accounting firm selected by CBF and First National/Osceola to the effect that the Merger will qualify for pooling-of-interests accounting treatment if closed and consummated in accordance with this Agreement; and (xii) CBF shall close simultaneously with the Effective Time of the Merger the acquisitions by CBF of First National Bank of Polk County and Community National Bank of Pasco County. CBF may waive any condition specified in this Section 6(a) if it executes a writing so stating at or prior to the Closing. (b) Conditions to Obligation of First National/Osceola. The obligations of First National/Osceola to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following conditions: (i) This Agreement and the Merger shall have received the requisite approval of the shareholders of First National/Osceola and the number of Dissenting First National/Osceola Shares shall not exceed 5% of the number of First National/Osceola Shares issued and outstanding immediately prior to the Effective Time of the Merger; (ii) The Parties shall have procured all of the third party approvals, authorizations and consents specified in Section 5(b) above, and the Disclosure Schedules, including but not limited to all necessary consents, authorizations and approvals of Regulatory Authorities which, with respect to those from the Regulatory Authorities, shall not contain provisions which (A) unduly impair or restrict the operations, or would have a material adverse effect on the Condition, of CBF or the Surviving Bank, or (B) render consummation of the Merger unduly burdensome, in each case as determined in the reasonable discretion of First National/Osceola; (iii) The representations and warranties set forth in Article IV above shall be true and correct in all material respects at and as of the Closing Date; (iv) CBF shall have performed and complied in all material respects with all its covenants required to be complied with hereunder through the Closing; (v) No action, suit, or proceeding shall be pending or threatened before any court or quasi-judicial or administrative agency of any federal, state, local, or foreign jurisdiction wherein an unfavorable judgment, order, decree, stipulation, injunction, or charge could (A) prevent consummation of any of the transactions contemplated by this Agreement, (B) cause any of the transactions contemplated by this Agreement to be rescinded following consummation, or (C) affect adversely the right after the Effective Time of the Merger of the Surviving Bank, to own, operate, or control substantially all of the assets and operations of First National/Osceola (and no such judgment, order, decree, stipulation, injunction or charge shall be in effect); 26 196 (vi) CBF shall have delivered to First National/Osceola a certificate (without qualification as to knowledge or materiality or otherwise) to the effect that each of the conditions specified in Section 6(b)(i) through (vii) is satisfied in all respects; (vii) All actions to be taken by CBF in connection with consummation of the transactions contemplated hereby and all certificates, opinions, instruments, and other documents required to effect the transactions contemplated hereby shall be reasonably satisfactory in form and substance to First National/Osceola; (viii) First National/Osceola shall have received the Tax Opinion in a form reasonably satisfactory to First National/Osceola; and (ix) CBF shall close simultaneously with the Effective Time of the Merger the acquisitions by CBF of First National Bank of Polk County and Community National Bank of Pasco County. First National/Osceola may waive any condition specified in this Section 6(b) if it executes a writing so stating at or prior to the Closing. ARTICLE VII TERMINATION Section 7.1 Termination. (a) Termination of Agreement. Any of the Parties may terminate this Agreement with the prior authorization of its Board of Directors (whether before or after approval of its or any other Party's shareholders) as provided below: (i) The Parties may terminate this Agreement by mutual written consent at any time prior to the Effective Time of the Merger; (ii) CBF may terminate this Agreement by giving written notice to First National/Osceola at any time prior to the Effective Time of the Merger in the event First National/Osceola is in breach, and First National/Osceola may terminate this Agreement by giving written notice to CBF at any time prior to the Effective Time of the Merger in the event CBF or FINB is in breach, of any representation, warranty, or covenant contained in this Agreement in any material respect. Each Party shall have the right to cure any such breach, if such breach is capable of being cured, within 15 days after receipt of written notice of such breach or within any such longer period mutually agreed to in writing by the Parties hereto ("Cure Period"); provided, however, that in no event shall the Cure Period extend beyond December 31, 2000; (iii) If a material adverse development shall have occurred affecting the Condition of CBF on a consolidated basis, First National/Osceola may terminate this Agreement by giving written notice to CBF; (iv) If a material adverse development shall have occurred affecting the Condition of First National/Osceola, CBF may terminate this Agreement by giving written notice to First National/Osceola; 27 197 (v) First National/Osceola and CBF each may terminate this Agreement by giving written notice to the other Party at any time after (i) the First National/Osceola Special Meeting in the event this Agreement or the Merger fails to receive the requisite First National/Osceola shareholder approval, or (ii) the denial, and any final appeal or rehearing thereof (or if any denial by such authority is not appealed within the time limit for appeal), of any approval from a Regulatory Authority necessary to permit the Parties to consummate the Merger and the transactions contemplated by this Agreement or if any Consent shall be conditioned or restricted in the manner provided in the last sentence of Section 5(b)(i); and (vi) Any Party may terminate this Agreement by giving written notice to the other Parties at any time after December 31, 2000 if the Effective Time of the Merger has not yet then occurred and such termination was approved by a two-thirds vote of such Party's full Board of Directors. (b) Effect of Termination. If any Party terminates this Agreement pursuant to Section 7(a) above, all obligations of the Parties hereunder shall terminate without any liability of any Party to any other Party (except for any liability of any Party then in breach); provided, however, that the confidentiality provisions contained in Section 5(k) above, and the expense provisions in 8(k) below, shall survive any such termination. ARTICLE VIII MISCELLANEOUS Section 8.1 Miscellaneous. (a) Survival. None of the representations, warranties, and covenants of the Parties (other than the provisions in Article II above concerning issuance of CBF Shares and the provisions in Section 5(r) above concerning insurance and indemnification) shall survive the Effective Time of the Merger. (b) No Third Party Beneficiaries. This Agreement shall not confer any rights or remedies upon any person other than the Parties and their respective successors and permitted assigns; provided, however, that (i) the provisions in Article II above concerning issuance of CBF Shares are intended for the benefit of First National/Osceola shareholders and (ii) the provisions in Section 5(r) above concerning insurance and indemnification are intended for the benefit of the individuals specified and their respective legal representatives. (c) Entire Agreement. This Agreement (including the documents referred to herein) constitutes the entire agreement among the Parties and supersedes any prior understandings, agreements, or representations by or among the Parties, written or oral, that may have related in any way to the subject matter hereof. (d) Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Parties named herein and their respective successors and permitted assigns. No Party may assign either this Agreement or any of its rights, interests, or obligations hereunder without the prior written approval of the other Parties. 28 198 (e) Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (f) Headings. The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. (g) Notices. All notices, requests, consents and other communications required or permitted under this Agreement shall be in writing (including telex and telegraphic communication) and shall be (as elected by the person giving such notice) hand delivered by messenger or courier service, delivered by facsimile transmission, or mailed (airmail if international) by registered or certified mail (postage prepaid), return receipt requested, addressed to: If to CBF or FINB: James H. White Chairman of the Board, President and Chief Executive Officer Centerstate Banks of Florida, Inc. 7722 State Road 544 East Winter Haven, Florida 33881 Facsimile: (941) 421-6663 If to First National/Osceola: Thomas E. White President and Chief Executive Officer First National Bank of Osceola County 920 North Bermuda Avenue Kissimmee, Florida 34741 Facsimile: (407) 847-8482 and, in all cases, with copies to: John P. Greeley, Esquire Smith, Mackinnon, Greeley, Bowdoin, Edwards, Brownlee & Marks, P.A. 255 S. Orange Avenue, Suite 800 Orlando, FL 32801 Facsimile: (407) 843-2448 or to such other address as any Party may designate by notice complying with the terms of this Section. Each such notice shall be deemed delivered (a) on the date delivered if by hand delivery; (b) on the date of transmission with confirmed answer back if by telex, facsimile or other telegraphic method; and (c) on the date upon which the return receipt is signed or delivery is refused or the notice is designated by the postal authorities as not deliverable, as the case may be, if mailed. (h) Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Florida without regard to principles of conflict of laws. (i) Amendments and Waivers. To the extent permitted by law, the Parties may amend any provision of this Agreement at any time prior to the Effective Time of the Merger by a subsequent writing signed by each of the Parties upon the approval of their respective Boards of Directors; provided, however, that after approval of this Agreement by a Party's shareholders, there shall be made no amendment in the Conversion Ratio in a manner that adversely affects the 29 199 economic value of the Merger to such shareholders without their further approval. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by all of the Parties. No waiver by any Party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. (j) Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the remaining terms and provision hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. If the final judgment of a court of competent jurisdiction declares that any term or provision hereof is invalid or unenforceable, the Parties agree that the court making the termination of invalidity or unenforceability shall have the power to reduce the scope, duration, or area of the term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provisions with a term or provisions that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified after the expiration of the time within which the judgment may be appealed. (k) Expenses. Each Party shall bear its own expenses in connection with the negotiation and execution of this Agreement and the implementation and effectiveness of the Merger. Notwithstanding the foregoing, if any legal action or other proceeding is brought for the enforcement of this Agreement, or because of an alleged dispute, breach, default or misrepresentation in connection with any provision of this Agreement, the successful or prevailing Party or Parties shall be entitled to recover reasonable attorneys' fees, sales and use taxes, court costs and all expenses even if not taxable as court costs (including, without limitation, all such fees, taxes, costs and expenses incident to arbitration, appellate, bankruptcy and post-judgment proceedings), incurred in that action or proceeding, in addition to any other relief to which such Party or Parties may be entitled. Attorneys' fees shall include, without limitation, paralegal fees, investigative fees, administrative costs, sales and use taxes and all other charges billed by the attorney to the prevailing Party. (l) Construction. The language used in this Agreement shall be deemed to be the language chosen by the Parties hereto to express their mutual intent, and no rule of strict construction shall be applied against any Party. Any reference to any federal, state, local or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context otherwise requires. (m) Incorporation of Exhibits and Schedules. The Exhibits and Schedules identified in this Agreement are incorporated herein by reference and made a part hereof. (n) Jurisdiction and Venue. The Parties acknowledge that a substantial portion of negotiations and anticipated performance and execution of this Agreement occurred or shall occur in Polk County, Florida, and that, therefore, without limiting the jurisdiction or venue of any other federal or state courts, each of the Parties irrevocably and unconditionally (a) agrees that any suit, action or legal proceeding arising out of or relating to this Agreement may be brought in a state or federal court of record in Polk County; (b) consents to the jurisdiction of each such Court in any suit, action or proceeding; (c) waives any objection which it may have to the laying of venue of any such suit, action or proceeding in any of such courts; and (d) agrees that service of any court paper may be effected on such Party by mail, as provided in this Agreement, or in such other manner as may be provided under applicable laws or court rules in said state. 30 200 (o) Remedies Cumulative. Except as otherwise expressly provided herein, no remedy herein conferred upon any Party is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or otherwise. No single or partial exercise by any Party of any right, power or remedy hereunder shall preclude any other or further exercise thereof. IN WITNESS WHEREOF, the Parties hereto have executed this Agreement and have affixed their respective seals as of the date first above written, each by its President and Chief Executive Officer and attested to by its Cashier or Secretary, pursuant to a resolution of its Board of Directors, acting by a majority. CENTERSTATE BANKS OF FLORIDA, INC. FIRST NATIONAL BANK OF OSCEOLA COUNTY /s/ James H. White /s/ Thomas E. White - ------------------------------------- ------------------------------------- James H. White, Chairman of the Board Thomas E. White President and Chief Executive Officer President and Chief Executive Officer Attest: Attest: /s/ George H. Carefoot /s/ Linda J. Davidson - ------------------------------------- ------------------------------------- George H. Carefoot, Secretary Linda J. Davidson, Senior Vice President and Cashier STATE OF FLORIDA COUNTY OF POLK The foregoing instrument was acknowledged before me this 10th day of December, 1999, by James H. White and George H. Carefoot, Chairman of the Board, President and Chief Executive Officer, and Secretary, respectively, of Centerstate Banks of Florida, Inc. /s/ John P. Greeley ------------------------------------- Printed Name: /s/ John P. Greeley Notary Public, State of Florida Personally Known [X] or Produced Identification [ ] Type of Identification Produced _______________________________________________ 31 201 STATE OF FLORIDA COUNTY OF OSCEOLA The foregoing instrument was acknowledged before me this 10th day of December, 1999, by Thomas E. White and Linda J. Davidson, President and Chief Executive Officer, and Senior Vice President and Cashier, respectively, of First National Bank of Osceola County. /s/ John P. Greeley ------------------------------------- Printed Name: /s/ John P. Greeley Notary Public, State of Florida Personally Known [ ] or Produced Identification [ ] Type of Identification Produced _______________________________________________ 32 202 JOINDER First Interim National Bank of Osceola County hereby joins in the foregoing Agreement, undertakes that it be bound thereby and that it will duly perform all the acts and things therein referred or provided to be done by it. IN WITNESS WHEREOF, First Interim National Bank of Osceola County has caused this undertaking to be made by its duly authorized officers as of this ____ day of _____________, ______. FIRST INTERIM NATIONAL BANK OF OSCEOLA COUNTY ------------------------------------- Thomas E. White President and Chief Executive Officer Attest: ------------------------------------- Linda J. Davidson, Cashier STATE OF FLORIDA COUNTY OF OSCEOLA The foregoing instrument was acknowledged before me this _____ day of __________, _____, by Thomas E. White and Linda J. Davidson, the President and Chief Executive Officer, and Cashier, respectively, of First Interim National Bank of Osceola County. ------------------------------------- Printed Name: Notary Public, State of Florida Personally Known [ ] or Produced Identification [ ] Type of Identification Produced _______________________________________________ 33 203 SCHEDULE 1.4 TO AGREEMENT TO MERGE NAMES AND ADDRESSES OF DIRECTORS AND EXECUTIVE OFFICERS OF SURVIVING BANK DIRECTORS EXECUTIVE OFFICERS - --------- ------------------ O. Sam Ackley James W. Burns 3295 Royal Oak Drive 512 Wheatstone Place Titusville, FL 32789-4847 Orlando, FL 32835 James C. Chapman Linda J. Davidson 3650 N. Canoe Creek Road 740 Maderia Ct. Kenansville, FL 34739 Kissimmee, FL 34758 A. Gerald Divers James H. White P. O. Box One P. O. Box 188 Tampa, FL 33601 Haines City, FL 33845-0188 Bryan W. Judge Thomas E. White 251 Fowler Boulevard 1472 Regal Court Kissimmee, FL 34744 Kissimmee, FL 34744 Danny L. Lackey 1600 S. Lyndell Drive Kissimmee, FL 34741 Sara S. Lewis 4501 Neptune Road St. Cloud, FL 34769 Samuel L. Lupfer, IV 222 Church Street Kissimmee, FL 34741 R. Stephen Miles, Jr. 100 Church Street Kissimmee, FL 34741 Charles H. Parsons 220 E. Monument Ave., B Kissimmee, FL 34741 E. Hampton Sessions P. O. Box 421404 Kissimmee, FL 34742-1404 Larry L. Walter 809 E. Church Street, Suite 200 Kissimmee, FL 34744 34 204 SCHEDULE 1.6 TO AGREEMENT TO MERGE CAPITALIZATION OF SURVIVING BANK The capital stock, capital surplus and retained earnings of the Surviving Bank shall be the following amounts adjusted, however, for earnings and expenses and shares issued between September 30, 1999 and the Effective Time of the Merger:
Common Stock, $5.00 par value; 550,000 shares authorized; 511,175 shares issued and outstanding $2,555,875 Capital surplus 2,634,579 Net unrealized gains/losses on securities held as available-for-sale (84,650) Retained earnings 3,293,563 ---------- Total Shareholders' Equity $8,399,367 ==========
35 205 APPENDIX B Opinion of Allen C. Ewing & Co. 206 December 22, 1999 The Board of Directors First National Bank of Osceola County 920 North Bermuda Avenue Kissimmee, Florida 34741 Members of the Board: First National Bank of Osceola County ("First National/Osceola"), Centerstate Banks of Florida, Inc., a registered bank holding company ("Centerstate"), and First Interim National Bank of Osceola County, an interim banking association to be organized as a wholly-owned subsidiary of Centerstate ("Interim Bank"), have entered into a definitive agreement to merge dated as of December 10, 1999 (the "Agreement"), providing for First National/Osceola to merge with and into Interim Bank (the "Merger"). The Agreement provides, among other things, that each share of outstanding common stock, par value $5.00 per share, of First National/Osceola ("First National/Osceola Common Stock") will be converted in the Merger into the right to receive 2.00 (the "Conversion Ratio") shares of common stock, par value $0.01 per share, of Centerstate ("Centerstate Common Stock"). Each option to purchase First National/Osceola Common Stock outstanding at the Effective Time of the Merger shall be converted into an option to purchase Centerstate Common Stock in accordance with a formula set forth in the Agreement. The Agreement also provides that Centerstate shall close simultaneously with the Effective Time of the Merger (as defined in the Agreement) the acquisitions by Centerstate of First National Bank of Polk County ("First National/Polk") and Community National Bank of Pasco County ("Community National/Pasco"). First National/Osceola, First National/Polk and Community National/Pasco will become wholly-owned subsidiaries of Centerstate. Reference should be made to the Agreement for a more complete description of the terms and conditions of the Merger. You have requested our opinion as investment bankers as to the fairness, from a financial point of view, of the Conversion Ratio to the shareholders of First National/Osceola. Allen C. Ewing & Co. is a registered broker-dealer under the Securities Exchange Act of 1934 and a member of the National Association of Securities Dealers, Inc. As part of its investment banking business, Allen C. Ewing & Co. is regularly engaged in the valuation of securities of banking and thrift companies in connection with mergers and acquisitions, underwritings, private placements, trading and market making activities, and valuations for various other purposes. Allen C. Ewing & Co. was engaged by the Board of Directors of First National/Osceola (the "Board") as financial advisor to First National/Osceola for the limited purposes of (i) assisting in the 207 determination of the Conversion Ratio contained in the Agreement and (ii) rendering an opinion as to the fairness, from a financial point of view, of the Conversion Ratio to the shareholders of First National/Osceola. Consistent with the limited scope of our engagement, we did not make any recommendations to the Board as to alternative strategies to the Board's business decision to enter into the Merger. Allen C. Ewing & Co. was also engaged by the Boards of Directors of First National/Polk and Community National/Pasco for the same limited purposes described in this paragraph. In arriving at the opinion expressed in this letter, we have reviewed, analyzed, and relied upon information and material bearing upon the Merger and the financial and operating condition of First National/Osceola, Centerstate, Interim Bank, First National/Polk and Community National/Pasco, including, among other things, the following: (i) the Agreement; (ii) Annual Reports to Shareholders and audited financial statements for First National/Osceola, First National/Polk and Community National/Pasco for the three years ended December 31, 1998; (iii) certain unaudited interim financial information for First National/Osceola, First National/Polk and Community National/Pasco for various periods during 1999; (iv) other financial information concerning the business and operations of First National/Osceola, First National/Polk and Community National/Pasco furnished to us by senior management from each respective institution for purposes of our analysis, including certain internal forecasts for each; and (v) certain adjustments for nonrecurring income and expenses for various periods for First National/Osceola, First National/Polk and Community National/Pasco. We have also held discussions with the management of First National/Osceola, First National/Polk and Community National/Pasco concerning their respective operations, financial condition, and prospects, as well as the results of regulatory examinations. We have considered financial, economic, regulatory, and other factors as we have deemed relevant and appropriate under the circumstances, including among others the following: (i) certain publicly available information concerning the financial terms of certain mergers and acquisitions of other financial institutions in Florida and the financial position and operating performance of the institutions acquired in those transactions; and (ii) certain publicly available information concerning the trading of, and the trading market for, the publicly-traded common stocks of certain other financial institutions. We have taken into account our assessment of general economic, market, and financial conditions, our experience in other transactions, our experience in securities valuation and our knowledge of the banking industry. In conducting our review and arriving at our opinion, we have relied upon and assumed the accuracy and completeness of all of the financial and other information provided to us or publicly available, including that referred to above, and we have not attempted independently to verify such information. We have relied upon the management of First National/Osceola, First National/Polk and Community National/Pasco, respectively, as to the reasonableness and achievability (and the assumptions and bases therein) of the financial and operational forecasts and projections, as well as the adjustments for nonrecurring income and expenses, provided to us by the respective companies. We have assumed that such forecasts, projections, and adjustments reflect the best currently available estimates and judgments of management and that such forecasts and projections will be realized in the amounts and in the time periods currently estimated by management. We have also assumed, without independent verification, that the allowances for loan and other losses of First National/Osceola, Centerstate, Interim Bank, First National/Polk and Community National/Pasco are adequate to cover any such losses. We have not made or obtained any inspections, evaluations, or appraisals of any of the assets or liabilities of First National/Osceola, Centerstate, Interim Bank, First National/Polk and Community National/Pasco, nor have we examined any individual loan, property, or securities files. We have also assumed that First National/Osceola, Centerstate, Interim Bank, First National/Polk and Community National/Pasco have taken the necessary steps to address Year 2000 208 issues. Ewing makes no representations with respect to Year 2000 readiness for First National/Osceola, Centerstate, Interim Bank, First National/Polk or Community National/Pasco. In the ordinary course of its business as a broker-dealer, Allen C. Ewing & Co. may, from time to time, purchase securities from, and sell securities to, banking and thrift companies and as a market maker in securities may from time to time have a long or short position in, and buy or sell, debt or equity securities of banking and thrift companies for its own account and for the accounts of its customers. As of the date of this letter, Allen C. Ewing & Co. has no such positions in First National/Osceola, Centerstate, Interim Bank, First National/Polk or Community National/Pasco. Based upon and subject to the foregoing, we are of the opinion that the Conversion Ratio is fair, from a financial point of view, to the shareholders of First National/Osceola. This opinion is necessarily based upon our limited scope and conditions as they exist and can be evaluated on the date of this letter and the information made available to us through such date. This opinion is also necessarily contingent upon execution of the Agreement and the provisions therein, including, among other things, the provision requiring Centerstate to close simultaneously with the Effective Time of the Merger the acquisitions by Centerstate of First National/Polk and Community National/Pasco. This letter is directed to the Board of Directors of First National/Osceola and does not constitute a recommendation as to how any shareholder of First National/Osceola should vote in connection with the Merger. Very truly yours, ALLEN C. EWING & CO. By: /s/ Brian C. Beach ------------------------ Brian C. Beach Executive Vice President 209 APPENDIX C Excerpts from Section 215a of the National Bank Act 210 SS.215A. MERGER OF NATIONAL BANKS OR STATE BANKS INTO NATIONAL BANKS (a) APPROVAL OF COMPTROLLER, BOARD AND SHAREHOLDERS; MERGER AGREEMENT; NOTICES; CAPITAL STOCK; LIABILITY OF RECEIVING ASSOCIATION One or more national banking associations or one or more State banks, with the approval of the Comptroller, under an agreement not inconsistent with this subchapter, may merge into a national banking association located within the same State, under the charter of the receiving association. The merger agreement shall -- (1) be agreed upon in writing by a majority of the board of directors of each association or State bank participating in the plan of merger; (2) be ratified and confirmed by the affirmative vote of the shareholders of each such association or State bank owning at least two-thirds of its capital stock outstanding, or by a greater proportion of such capital stock in the case of a State bank if the laws of the State where it is organized so require, at a meeting to be held on the call of the directors, after publishing notice of the time, place, and object of the meeting for four consecutive weeks in a newspaper of general circulation published in the place where the association or State bank is located, or, if there is no such newspaper, then in the newspaper of general circulation published nearest thereto, and after sending such notice to each shareholder of record by certified or registered mail at least ten days prior to the meeting, except to those shareholders who specifically waive notice, but any additional notice shall be given to the shareholders of such State bank which may be required by the laws of the State where it is organized. Publication of notice may be waived, in cases where the Comptroller determines that an emergency exists justifying such waiver, by unanimous action of the shareholders of the association or State banks; (3) specify the amount of the capital stock of the receiving association, which shall not be less than that required under existing law for the organization of a national bank in the place in which it is located and which will be outstanding upon completion of the merger, the amount of stock (if any) to be allocated, and cash (if any) to be paid, to the shareholders of the association or State bank being merged into the receiving association; and (4) provide that the receiving association shall be liable for all liabilities of the association or State bank being merged into the receiving association. (b) DISSENTING SHAREHOLDERS If a merger shall be voted for at the called meetings by the necessary majorities of the shareholders of each association or State bank participating in the plan of merger, and thereafter the merger shall be approved by the Comptroller, any shareholder of any association or State bank to be merged into the receiving association who has voted against such merger at the meeting of the association or bank of which he is a stockholder; or has given notice in writing at or prior to such meeting to the presiding officer that he dissents from the plan of merger, shall be entitled to receive the value of the shares so held by him when such merger shall be approved by the Comptroller upon written request made to the receiving association at any time before thirty days after the date of consummation of the merger, accompanied by the surrender of his stock certificates. C-1 211 (c) VALUATION OF SHARES The value of the shares of any dissenting shareholder shall be ascertained, as of the effective date of the merger, by an appraisal made by a committee of three persons, composed of (1) one selected by the vote of the holders of the majority of the stock, the owners of which are entitled to payment in cash; (2) one selected by the directors of the receiving association; and (3) one selected by the two so selected. The valuation agreed upon by any two of the three appraisers shall govern. If the value so fixed shall not be satisfactory to any dissenting shareholder who has requested payment, that shareholder may, within five days after being notified of the appraised value of his shares, appeal to the Comptroller, who shall cause a reappraisal to be made which shall be final and binding as to the value of the shares of the appellant. (d) APPLICATION TO SHAREHOLDERS OF MERGING ASSOCIATIONS: APPRAISAL BY COMPTROLLER; EXPENSES OF RECEIVING ASSOCIATION; SALE AND RESALE OF SHARES; STATE APPRAISAL AND MERGER LAW If, within ninety days from the date of consummation of the merger, for any reason one or more of the appraisers is not selected as herein provided, or the appraisers fail to determine the value of such shares, the Comptroller shall upon written request of any interested party cause an appraisal to be made which shall be final and binding on all parties. The expenses of the Comptroller in making the reappraisal or the appraisal, as the case may be, shall be paid by the receiving association. The value of the shares ascertained shall be promptly paid to the dissenting shareholders by the receiving association. The shares of stock of the receiving association which would have been delivered to such dissenting shareholders had they not requested payment shall be sold by the receiving association at an advertised public auction, and the receiving association shall have the right to purchase any of such shares at such public auction, if it is the highest bidder therefor, for the purpose of reselling such shares within thirty days thereafter to such person or persons and at such price not less than par as its board of directors by resolution may determine. If the shares are sold at public auction at a price greater than the amount paid to the dissenting shareholders, the excess in such sale price shall be paid to such dissenting shareholders. The appraisal of such shares of stock in any State bank shall be determined in the manner prescribed by the law of the State in such cases, rather than as provided in this section, if such provision is made in the State law; and no such merger shall be in contravention of the law of the State under which such bank is incorporated. The provisions of this subsection shall apply only to shareholders of (and stock owned by them in) a bank or association being merged into the receiving association. C-2 212 APPENDIX D Information on Community National Bank of Pasco County 213 BUSINESS OF COMMUNITY NATIONAL BANK GENERAL Community National Bank was organized as a national banking association on November 3, 1989. Community National Bank provides a range of consumer and commercial banking services to individuals, businesses and industries. The basic services offered by Community National Bank include: demand interest bearing and noninterest bearing accounts, money market deposit accounts, NOW accounts, time deposits, safe deposit services, credit cards, cash management, direct deposits, notary services, money orders, night depository, travelers' checks, cashier's checks, domestic collections, savings bonds, bank drafts, drive-in tellers, and banking by mail. In addition, Community National Bank makes secured and unsecured commercial and real estate loans and issues stand-by letters of credit. Community National Bank provides automated teller machine ("ATM") cards, as a part of the HONOR ATM network, thereby permitting customers to utilize the convenience of larger ATM networks. Community National Bank does not have trust powers and, accordingly, no trust services are provided. The revenues of Community National Bank are primarily derived from interest on, and fees received in connection with, real estate and other loans, and from interest and dividends from investment and mortgage-backed securities, and short-term investments. The principal sources of funds for Community National Bank's lending activities are its deposits, repayment of loans, and the sale and maturity of investment securities. The principal expenses of Community National Bank are the interest paid on deposits, and operating and general administrative expenses. As is the case with banking institutions generally, Community National Bank's operations are materially and significantly influenced by general economic conditions and by related monetary and fiscal policies of financial institution regulatory agencies, including the Federal Reserve and the OCC. Deposit flows and costs of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for financing of real estate and other types of loans, which in turn is affected by the interest rates at which such financing may be offered and other factors affecting local demand and availability of funds. Community National Bank faces strong competition in the attraction of deposits (its primary source of lendable funds) and in the origination of loans. See "Competition." LENDING ACTIVITIES Community National Bank offers a range of lending services, including real estate, consumer and commercial loans, to individuals and small businesses and other organizations that are located in or conduct a substantial portion of their business in the Bank's market area. Community National Bank's total loans at September 30, 1999 and December 31, 1998 were $57.0 million, or 60% of total assets, and $56.7 million, or 61% of total assets, respectively. The interest rates charged on loans vary with the degree of risk, maturity, and amount of the loan, and 1 214 are further subject to competitive pressures, money market rates, availability of funds, and government regulations. Community National Bank has no foreign loans or loans for highly leveraged transactions. Community National Bank's loans are concentrated in three major areas: real estate loans, commercial loans, and consumer loans. At September 30, 1999, 84.9%, 10.7% and 4.4% and at December 31, 1998, 83.5%, 13.5%, and 3.0% of Community National Bank's loan portfolio consisted of real estate, commercial and consumer loans, respectively. In excess of 94% and 95% of Community National Bank's loans at September 30, 1999 and December 31, 1998, respectively, were made on a secured basis. As of September 30, 1999 and December 31, 1998, 84.9% and 83.5%, respectively of the loan portfolio consisted of loans secured by mortgages on real estate. Community National Bank's commercial loans include loans to individuals and small-to-medium sized businesses located primarily in Pasco, Sumter and Lake Counties for working capital, equipment purchases, and various other business purposes. A majority of Community National Bank's commercial loans are secured by equipment or similar assets, but these loans may also be made on an unsecured basis. Commercial loans may be made at variable- or fixed-interest rates. Commercial lines of credit are typically granted on a one-year basis, with loan covenants and monetary thresholds. Other commercial loans with terms or amortization schedules of longer than one year will normally carry interest rates which vary with the prime lending rate and will become payable in full and are generally refinanced in three to five years. Community National Bank's real estate loans are secured by mortgages and consist primarily of loans to individuals and businesses for the purchase, improvement of or investment in real estate and for the construction of single-family residential units or the development of single-family residential building lots. These real estate loans may be made at fixed- or variable-interest rates. Community National Bank generally does not make fixed-interest rate commercial real estate loans for terms exceeding five years. Loans in excess of five years generally have adjustable interest rates. Community National Bank's residential real estate loans generally are repayable in monthly installments based on up to a 30-year amortization schedule with variable-interest rates. Community National Bank's consumer loan portfolio consists primarily of loans to individuals for various consumer purposes, but includes some business purpose loans which are payable on an installment basis. The majority of these loans are for terms of less than five years and are secured by liens on various personal assets of the borrowers, but consumer loans may also be made on an unsecured basis. Consumer loans are made at fixed- and variable-interest rates, and are often based on up to a five-year amortization schedule. For additional information regarding Community National Bank's loan portfolio, see "Community National Bank's Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition." 2 215 DEPOSIT ACTIVITIES Deposits are the major source of Community National Bank's funds for lending and other investment activities. Community National Bank considers the majority of its regular savings, demand, NOW and money market deposit accounts to be core deposits. These accounts comprised 40.8% and 37.7% of Community National Bank's total deposits at September 30, 1999 and December 31, 1998, respectively. Approximately 59.2% and 62.3% of Community National Bank's deposits at September 30, 1999 and December 31, 1998 were certificates of deposit. Generally, Community National Bank attempts to maintain the rates paid on its deposits at a competitive level. Time deposits of $100,000 and over made up 7.0% and 5.7% of Community National Bank's total deposits at September 30, 1999 and December 31, 1998, respectively. The majority of the deposits of Community National Bank are generated from Pasco, Sumter and Lake Counties. Community National Bank does not accept brokered deposits. For additional information regarding Community National Bank's deposit accounts, see "Community National Bank's Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition." EMPLOYEES At September 30, 1999, Community National Bank employed 51 full-time employees. The employees are not represented by a collective bargaining unit. Community National Bank consider relations with its employees to be good. PROPERTIES The main office of Community National Bank is located at 6930 Gall Blvd., Zephyrhills, Florida, in a two-story building of approximately 11,400 square feet, which is owned by Community National Bank. Community National Bank also has a branch office of approximately 3,361 square feet in a single story building located at 36239 St. Rd 54W, Zephyrhills, Florida; a branch office of approximately 4,000 square feet in a single story building located at 114 West Belt Avenue, Bushnell, Florida; a branch office of approximately 4,000 square feet in a single story building located at 1017 South Main Street, Wildwood, Florida; a branch office of approximately 4,000 square feet in a single story building located at 1105 West Broad Street, Groveland, Florida; and a branch office located at 1051 East Highway 50, Clermont, Florida, in a single story building of approximately 4,000 square feet. All of Community National Bank's branch offices are owned by it. LITIGATION In the ordinary course of operations, Community National Bank is a party to various legal proceedings. Management does not believe there is any proceeding against Community National Bank which, if determined adversely, would have a material adverse effect on the financial condition or results of operations of Community National Bank. 3 216 MANAGEMENT Board of Directors. The Board of Directors of Community National Bank currently consists of 11 directors, each of whom holds office until the next annual meeting of Community National Bank shareholders. The following table sets forth certain information with respect to the directors of Community National Bank.
DIRECTOR OR OFFICER PRINCIPAL OCCUPATION AND BUSINESS NAME AND AGE OF CNB SINCE EXPERIENCE DURING PAST FIVE YEARS - ------------ ------------------- --------------------------------- James H. Bingham, 51 1988 President of Bingham Realty, Inc. (commercial real estate company) G. Robert Blanchard, Sr., 72 1990 President and CEO of WRB Enterprises, Inc. (diversified holding company) Pavitar S. Cheema, 50 1988 Urologist for Pavitar S. Cheema, M.D., P.A. Emory R. Guess, 59 1994 Owner of Emory Guess Realty (real estate business) Larry S. Hersch, 49 1988 Partner in Hersch & Kelly (law firm) Michael R. Langley, 40 1997 President of Mike Langley Citrus (citrus grower) Carol Madill Lockey, 56 1994 Real Estate Investor Jean M. Murphy, 67 1992 Owner of Freedom Travel (travel agency) Ronald E. Oakley, 54 1988 Vice President and Secretary of Oakley Groves, Inc. (citrus harvester, hauler and grower) James S. Stalnaker, Jr., 45 1988 President and Chief Executive Officer of Community National Bank James H. White, 73 1988 Chairman of the Board of Community National Bank, First National Bank of Osceola County, and First National Bank of Polk County
4 217 Executive Officers. The following sets forth information regarding the executive officers of Community National Bank. The officers of Community National Bank serve at the pleasure of the Board of Directors.
PRINCIPAL OCCUPATION AND BUSINESS NAME AND AGE EXPERIENCE DURING PAST FIVE YEARS - ------------ --------------------------------- James S. Stalnaker, Jr., 45 President and Chief Executive Officer Timothy A. Pierson, 40 Executive Vice President Elizabeth J. Bowen, 51 Sr. Vice President and Cashier Linda A. Jones, 42 Sr. Vice President Thomas M. Ward, 42 Sr. Vice President (June 1999 to present); Vice President of First Union National Bank (1987 to June 1999) James H. White, 73 Chairman of the Board of Community National Bank, First National Bank of Osceola County, and First National Bank of Polk County
COMPENSATION AND BENEFITS The table below sets forth certain information with respect to compensation paid to Mr. Stalnaker (the President and Chief Executive Officer of Community National Bank) during the years presented. No other executive officer of Community National Bank received a total salary and bonus in excess of $100,000 in 1998.
ANNUAL COMPENSATION ----------------------------------------------- NAME AND OTHER ANNUAL ALL OTHER PRINCIPAL POSITION YEAR SALARY($) BONUS COMPENSATION COMPENSATION(1) - ------------------ ---- --------- ----- ------------ --------------- James S. Stalnaker, 1998 $117,460 $ 0 $ 0 $20,098 President and Chief 1997 $107,460 $ 0 $ 0 $15,722 Executive Officer 1996 $ 97,691 $ 0 $ 0 $16,765
- ------------------ (1) Represents amounts contributed by Community National Bank to Mr. Stalnaker's Section 401(k) savings plan accounts and Profit Sharing Plan. Non-employee directors of Community National Bank receive directors fees of $250 for each Board and $100 committee meeting attended. 5 218 Savings Plan Community National Bank has a 401(k) savings plan covering substantially all employees of Community National Bank. Under the provisions of the plan, employees may contribute up to 15% of their compensation on a pre-tax basis, subject to limits specified in the Internal Revenue Code. Community National Bank may make, at the discretion of the Board of Directors, matching contributions up to 3% of the employee's annual compensation and within various limitations specified by the Code. Profit Sharing Plan Community National Bank has a Profit Sharing Plan covering substantially all employees of Community National Bank. Under the provisions of the plan, Community National Bank may make, at the discretion of the Board of Directors, a cash payout and a deferred contribution to employees and officers, annually. Stock Option Plan Community National Bank has an Officers' and Employees' Stock Option Plan. Under the plan, options for an aggregate of 5,750 shares of Community National Bank Common Stock were outstanding as of the date of this Proxy Statement. The plan provides that options are granted at prices equal to market value on the date of grant as determined by the Board of Directors, and become exercisable over four years at the rate of 25% each year. The options remain exercisable up to 10 years from the date of grant. The exercise prices for the outstanding options range from $10.00 to $12.81 per share. MANAGEMENT AND PRINCIPAL STOCK OWNERSHIP Directors and Officers The following table sets forth the beneficial ownership of outstanding shares of Community National Bank Common Stock as of the date of this Proxy Statement by Community National Bank's current directors, and by current directors and executive officers as a group. Except as set forth below, management of Community National Bank is not aware of any individual or group that owns in excess of 5% of the outstanding shares of Community National Bank.
NAME OF INDIVIDUAL AMOUNT/NATURE OF PERCENT (AND ADDRESS OF 5% OWNER) BENEFICIAL OWNERSHIP(1) OF CLASS - ------------------------- ----------------------- -------- James H. Bingham 21,382 (2) 4.39%
6 219
G. Robert Blanchard, Sr. 42,500 (3) 8.73% 1414 Swan Ave., Suite 201 Tampa, FL 33606 Pavitar S. Cheema 25,725 (4) 5.28% 38023 Medical Center Dr. Zephyrhills, FL 33543 Emory R. Guess 300 (5) 0.06% Larry S. Hersch 11,162 (6) 2.29% Michael R. Langley 200 0.04% Carol Madill Lockey 23,982 (7) 4.93% Jean M. Murphy 500 0.10% Ronald E. Oakley 19,977 (8) 4.10% James S. Stalnaker, Jr. 22,200 4.56% James H. White 32,500 (9) 6.68% P. O. Box 188 Haines City, FL 33845-0188 All directors and executive officers as a group (15 persons) 208,028 42.73%
- --------------------------- (1) Information related to beneficial ownership is based upon the information available to Community National Bank. (2) Includes 11,025 held by a trust as to which he exercises voting and investment power, 200 shares held jointly with his spouse, 100 shares held by his spouse, 450 shares held by him as custodian for a minor child, and 5 shares held by a company as to which shares he exercises voting and investment power. (3) Includes 39,800 shares held by a company as to which shares he exercises voting and investment power, and 2,500 shares held by a trust as to which shares he exercises voting and investment power. (4) Consists of shares held jointly with spouse. (5) Consists of shares held by a trust as to which the individual exercises voting and investment power. 7 220 (6) Includes 500 shares held by his spouse and 100 shares held as custodian for minor children. (7) Consists of 10,982 shares held by trusts as to which she exercises voting and investment power, 9,000 held by her spouse, and 4,000 shares held by her spouse as custodian for minor children. (8) Includes 12,300 shares held by a trust as to which he exercises voting and investment power. (9) Includes 14,000 shares held by his spouse, 5,800 shares held jointly with his spouse, and 2,000 held by his individual retirement account. 8 221 COMMUNITY NATIONAL BANK MANAGEMENT'S DISCUSSION AND ANALYSIS THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS COVERS IMPORTANT FACTORS AFFECTING THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION OF COMMUNITY NATIONAL BANK FOR THE PERIODS SHOWN. COMMUNITY NATIONAL BANK'S FINANCIAL STATEMENTS SHOULD BE READ IN CONJUNCTION WITH THIS ANALYSIS. OVERVIEW Community National Bank is a national bank chartered November 1989. It provides traditional deposit and lending products and services to its commercial and retail customers through six full service branches located within Pasco County in central Florida. Community National Bank is a national bank and is subject to the supervision of the Office of the Comptroller of the Currency. At September 30, 1999, the Bank had total assets of $95.7 million, total loans of $56.0 million, total deposits of $85.2 million, and total shareholders' equity of $7.8 million. Net income for the nine months ended September 30, 1999 and for the year ended December 31, 1998, was $438,000 and $702,000 respectively, as compared with $434,000 and $825,000 for the nine months ended September 30, 1998 and for the year ended December 31, 1997, respectively. Community National Bank is located in Pasco county, which is primarily a retirement and agricultural community. Pasco county is contiguous to Hillsborough county in which Tampa is located. Community National Bank's locations are situated along Interstate 75 and Interstate 4 in small communities. At September 30, 1999 real estate loans were approximately 75% of total gross loans outstanding. Of this amount, approximately half were residential real estate loans and half were commercial real estate loans. Due to the demographics of the market, the concentration in real estate loans is expected to continue. RESULTS OF OPERATIONS NET INCOME Nine Months Ended September 30, 1999, Compared to Nine Months Ended September 30, 1998 Community National Bank's net income for the nine month period ended September 30, 1999 was $438,000 compared to $434,000 for the nine month period ending September 30, 1998. The net income per share for the periods ended September 30, 1999 and 1998 were $0.94 ($0.90 diluted) and $0.95 ($0.90 diluted). The per share income was negatively impacted due to the issuance of additional shares from the exercise of stock options. Community National Bank has a qualified stock option plan for its employees, as well as a non qualified stock option plan for its directors. Community National Bank's return on average assets ("ROA") and return on average equity ("ROE") for the nine month period ended September 30, 1999 was 0.62% and 7.70% as compared to the ROA and ROE of 0.70% and 8.41% for the nine month period ended September 30, 1998. The efficiency ratios for the two periods ended September 30, 1999 and 1998 approximated 77% and 67% respectively. There were positive improvements in net interest income of approximately $273,000 and in non interest income of approximately $145,000 in the nine month period ending September 30, 1999 as compared to the same period for 1998. The current provision for loan losses decreased by $141,000 and 9 222 income tax expense decreased by $41,000. These positive impacts were offset by the negative impacts resulting from a $596,000 increase in non-interest expense for the nine month period ending September 30, 1999, compared to the same period for 1998. The improvement in net interest margin was primarily due to a combination of increased interest earning assets and changes in interest bearing liabilities plus an increase in non interest bearing demand deposits. The increase in non interest expense was primarily due to an increase in compensation related expenses, occupancy and other related expenses associated with the opening of two branch locations in October 1998. Year Ended December 31, 1998, Compared to Year Ended December 31, 1997 Net income decreased $123,000, or 15%, to $702,000 in 1998 compared to $825,000 in 1997. Earnings per share decreased $0.44 ($0.38 diluted), or 22%, to $1.53 ($1.45 diluted) in 1998 compared to $1.97 ($1.83 diluted) in 1997. ROA and ROE both decreased to 0.84% and 10.03% in 1998 compared to 1.10% and 14.30% in 1997. Earnings per share was negatively impacted due to the issuance of additional shares related to the exercise of stock options. The increase in net income was due to an increase in net interest margin $326,000, a decrease in income tax expense $91,000, and an increase in non interest income (+$41,000). These positive effects on net income were offset by an increase in non-interest expense $581,000. This was a result of Community National Bank opening a new branch in November 1997 and two new branches in October 1998. NET INTEREST INCOME/MARGIN Net interest income consists of interest and fee income generated by earning assets, less interest expense. Nine Months Ended September 30, 1999, Compared to Nine Months Ended September 30, 1998 Net interest income increased $273,000, or 12%, to $2,610,000 during the nine month period ended September 30, 1999 compared to $2,337,000 for the nine month period ended September 30, 1998. The $273,000 increase was a combination of a $254,000 increase in interest income and a $19,000 decrease in interest expense. Average interest earning assets increased $9,144,000 to $83,901,000 during the nine month period ending September 30, 1999 compared to $74,757,000 for the nine month period ending September 30, 1998. Comparing these same two periods, yield on average interest earning assets decreased from 8.29% to 7.80%. The increase in volume had a positive effect on the change in interest income (+$535,000 volume variance), which was partially offset by the negative impact resulting from the 0.49% decrease in average yields (-$281,000 rate variance). The result was a $254,000 increase in interest income. Average interest bearing liabilities increased $9,255,000 to $75,301,000 during the nine month period ending September 30, 1999 compared to $66,046,000 for the nine month period ending September 30, 1998. Comparing these same two periods, the cost of average interest bearing liabilities decreased from 4.66% to 4.05%. The increase in volume resulted in an increase in interest expense (+$191,000 10 223 volume variance), which was offset by the 0.61% decrease in average yields (-$210,000 rate variance). The result was a $19,000 decrease in interest expense. Year Ended December 31, 1998, Compared to Year Ended December 31, 1997 Net interest income increased $326,000 or 11% to $3,176,000 during 1998 compared to $2,850,000 for 1997. The $326,000 increase was a combination of a $467,000 increase in interest income and a $141,000 increase in interest expense. Average interest earning assets increased $7,092,000 to $75,995,000 during 1998 compared to $68,903,000 for 1997. Comparing these same two periods, the yield on average interest earning assets decreased from 8.43% to 8.26%. The increase in volume had a positive effect on the change in interest income (+$537,000 volume variance), which was partially offset by the negative impact resulting from the 0.17% decrease in average yields (-$70,000 rate variance). The result was a $467,000 increase in interest income. Average interest bearing liabilities increased $6,011,000 to $67,250,000 during 1998 compared to $61,239,000 for 1997. Comparing these same two periods, the cost of average interest bearing liabilities decreased from 4.83% to 4.61%. The increase in volume had an increasing effect on interest expense (+$205,000 volume variance). The decrease in yield had a decreasing effect on interest expense (-$64,000 rate variance). The result was a $141,000 increase in interest expense. 11 224 AVERAGE BALANCES - YIELDS & RATES (Dollars are in Thousands)
Nine Months Ended September 30, ---------------------------------------------------------- 1999 1998 -------------------------- ----------------------------- Average Interest Average Average Interest Average Balance Inc/Exp Rate(1) Balance Inc/Exp Rate(1) -------- -------- ------- ------- -------- ------- ASSETS: Federal Funds Sold $ 5,681 $ 207 4.87% $ 5,679 $ 233 5.49% Securities Available for Sale 22,649 929 5.48% 17,777 782 5.88% Securities Held to Maturity 0 0 746 35 6.27% Loans (2) (5) 55,571 3,756 9.04% 50,555 3,588 9.49% ------- ------- ---- ------- ------- ---- TOTAL EARNING ASSETS $83,901 $ 4,892 7.80% $74,757 $ 4,638 8.29% All Other Assets 10,036 7,387 ------- ------- TOTAL ASSETS $93,937 $82,144 ======= ======= LIABILITIES & SHAREHOLDERS' EQUITY: Deposits: NOW & Money Markets $15,757 $ 204 1.73% $10,843 $ 135 1.66% Savings 7,115 106 1.99% 5,049 76 2.01% Time Deposits 51,477 1,946 5.05% 48,712 2,039 5.60% Short Term Borrowings 952 26 3.65% 1,442 51 4.73% ------- ------- ---- ------- ------- ---- TOTAL INTEREST BEARING LIABILITIES $75,301 $ 2,282 4.05% $66,046 $ 2,301 4.66% Demand Deposits 10,991 9,119 Other Liabilities 62 95 Shareholders' Equity 7,583 6,884 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $93,937 $82,144 ======= ======= NET INTEREST SPREAD (3) 3.74% 3.64% ==== ==== NET INTEREST INCOME $ 2,610 $2,337 ======= ====== NET INTEREST MARGIN (4) 4.16% 4.18% ==== =====
Years Ended December 31, ---------------------------------------------------------- 1998 1997 -------------------------- ----------------------------- Average Interest Average Average Interest Average Balance Inc/Exp Rate(1) Balance Inc/Exp Rate(1) -------- -------- ------- ------- -------- ------- ASSETS: Federal Funds Sold $ 5,518 $ 296 5.36% $ 4,815 $ 261 5.42% Securities Available for Sale 18,451 1,074 5.82% 12,382 746 6.02% Securities Held to Maturity 558 35 6.27% 3,923 253 6.45% Loans (2) (5) 51,468 4,869 9.46% 47,783 4,547 9.52% ------- ------ ---- ------- ------- ---- TOTAL EARNING ASSETS $75,995 $6,274 8.26% $68,903 $ 5,807 8.43% All Other Assets 7,781 6,296 ------- ------- TOTAL ASSETS $83,776 $75,199 ======= ======= LIABILITIES & SHAREHOLDERS' EQUITY: Deposits: NOW & Money Markets $11,248 $ 187 1.66% $ 8,997 $ 159 1.77% Savings 5,272 105 1.99% 4,080 82 2.01% Time Deposits 49,461 2,747 5.55% 47,330 2,676 5.65% Short Term Borrowings 1,269 59 4.65% 832 40 4.81% ------- ------ ---- ------- ------- ---- TOTAL INTEREST BEARING LIABILITIES $67,250 $3,098 4.61% $61,239 $ 2,957 4.83% Demand Deposits 9,417 8,045 Other Liabilities 109 146 Shareholders' Equity 7,000 5,769 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $83,776 $75,199 ======= ======= NET INTEREST SPREAD (3) 3.65% 3.60% ==== ==== NET INTEREST INCOME $3,176 $2,850 ====== ====== NET INTEREST MARGIN (4) 4.18% 4.14% ==== ====
(1) Nine month data presented on an annualized basis. (2) Interest income on average loans includes loan fee recognition of $139,000 and $126,000 for the nine month periods ended September 30 1999 and 1998, and $185,000 and $175,000 for the years ended December 31, 1998 and 1997. Generally, interest is not accrued on loans past due by more than 90 days. (3) Represents the average rate earned on interest earning assets minus the average rate paid on interest bearing liabilities. (4) Represents net interest income divided by total earning assets. (5) Loan balances are net of deferred fees/cost of origination and reserve for loan loss allowances. 12 225 ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSES (Dollars are in Thousands)
Net Change Net Change Sept 30, 1998 - 1999 Dec 31, 1998 - 1999 ---------------------------- ----------------------------- Net Net Volume(1) Rate(2) Change Volume(1) Rate(2) Change ---------------------------- ----------------------------- INTEREST INCOME Federal Funds sold $0 ($26) ($26) $38 ($3) $35 Securities Available for Sale 214 (67) 147 366 (38) 328 Securities Held to Maturity (35) 0 (35) (217) (1) (218) Loans 356 (188) 168 351 (29) 322 ---------------------------- ----------------------------- TOTAL INTEREST INCOME $535 ($281) $254 $537 ($70) $467 ---------------------------- ----------------------------- INTEREST EXPENSE Deposits NOW & Money Market Accounts $61 $8 $69 $40 ($12) $28 Savings 31 (1) 30 24 (1) 23 Time Deposits 116 (209) (93) 120 (49) 71 Short-Term Borrowings (17) (8) (25) 21 (2) 19 ---------------------------- ----------------------------- TOTAL INTEREST EXPENSE $191 ($210) ($19) $205 ($64) $141 ---------------------------- ----------------------------- NET INTEREST INCOME $345 ($72) $273 $332 ($6) $326 ============================ =============================
(1) The volume variance reflects the change in the average balance outstanding multiplied by the actual average rate during the prior period. (2) The rate variance reflects the change in the actual average rate multiplied by the average balance outstanding during the current period. PROVISION FOR LOAN LOSSES Management's policy is to maintain the allowance for loan losses at a level sufficient to absorb inherent losses in the loan portfolio. The allowance is increased by the provision for loan losses, which is a charge to current period earnings, and net recoveries on prior period loan charge-offs. The allowance is decreased by net charge-offs. In determining the adequacy of the reserve for loan losses, management considers the conditions of individual borrowers, Community National Bank's historical loan loss experience, the general economic environment, and the overall portfolio composition. As these factors change, the level of loan loss provision changes. Nine Months Ended September 30, 1999, Compared to Nine Months Ended September 30, 1998 The provision for loan loss expense decreased $141,000, or 94%, to $9,000 during the nine month period ending September 30, 1999, as compared to $150,000 for the comparable period in 1998. The difference was due primarily to a change in management's assessments of conditions of individual borrowers and the overall portfolio composition. At September 30, 1999 the allowance for loan losses totaled $866,000, or 1.52%, of total loans outstanding compared to $875,000, or 1.63%, of total loans outstanding at September 30, 1998. Year Ended December 31, 1998, Compared to Year Ended December 31, 1997 The provision for loan loss expense was $150,000 for the year ended December 31, 1998 and for the year ended December 31, 1997. At December 31, 1998 the allowance for loan losses totaled $866,000, 13 226 or 1.53%, of total loans outstanding compared to $755,000, or 1.46%, of total loans outstanding at December 31, 1997. Management believes that Community National Bank's allowance for loan losses was adequate at September 30, 1999. The following sets forth certain information on Community National Bank's allowance for potential future loan losses for the periods presented. ACTIVITY IN ALLOWANCE FOR LOAN LOSSES (In Thousands of Dollars)
Nine Months Ended Years Ended Sept 30 Dec 31 ------------------ ------------------ 1999 1998 1998 1997 ------------------ ------------------ Balance at Beginning of Year $866 $755 $755 $654 Loans Charged-Off: Commercial, Financial & Agricultural 0 (11) (11) (20) Real Estate, Mortgage (54) (19) (28) (10) Consumer 0 (2) (4) (29) ----------------- ------------------ Total Loans Charged-Off ($54) ($32) ($43) ($59) ----------------- ------------------ Recoveries on Loans Previously Charged-Off: Commercial, Financial & Agricultural $42 $2 $2 $9 Real Estate, Mortgage 2 0 0 1 Consumer 1 0 2 0 ----------------- ------------------ Total Loan Recoveries $45 $2 $4 $10 ----------------- ------------------ Net Loans Charged-Off ($9) ($30) ($39) ($49) ----------------- ------------------ Provision for Loan Losses Charged to Expense $9 $150 $150 $150 ----------------- ------------------ Ending Balance $866 $875 $866 $755 ================= ================== Total Loans Outstanding $57,013 $53,764 $56,764 $51,683 Average Loans Outstanding $56,584 $51,488 $52,414 $48,638 Allowance for Loan Losses to Loans Outstanding 1.52% 1.63% 1.53% 1.46% Net Charge-offs to Average Loans Outstanding (annualized) 0.02% 0.08% 0.07% 0.10%
NON-INTEREST INCOME Nine Months Ended September 30, 1999, Compared to Nine Months Ended September 30, 1998 Non interest income for the nine months ended September 30, 1999 increased $145,000 or 44% 14 227 to $477,000 as compared to $332,000 for the same period in 1998. Most of this increase ($129,000) was due to an increase in service fees from various deposit accounts. Year Ended December 31, 1998, Compared to Year Ended December 31, 1997 Non interest income for 1998 increased by $41,000 or 8%, to $564,000 as compared to $523,000 for 1997. The net increase was comprised of a $88,000 increase in service fees on various deposit accounts, a $49,000 decrease from gain on sale of other real estate owned, and a $2,000 net increase from other miscellaneous fees. NON-INTEREST EXPENSE Nine Months Ended September 30, 1999, Compared to Nine Months Ended September 30, 1998 Non-interest expense increased $596,000 (33%) for the nine months ended September 30, 1999, to $2,385,000 compared to $1,789,000 for the same period in 1998. The increase was a result of a $241,000 increase in compensation and related employee costs. Office occupancy and related equipment expenses increased $184,000. All other expenses combined increased by $171,000 as summarized in the table below - Non Interest Expenses. These increases were primarily due to the opening of two new branches in October 1998. Year Ended December 31, 1998, Compared to Year Ended December 31, 1997 Non-interest expense increased $581,000 (30%) to $2,495,000 during 1998 compared to $1,914,000 for 1997. The increase was a result of a $238,000 increase in compensation and related employee expenses. Data processing service expense increased $100,000 and office occupancy and related equipment expenses increased by $118,000. All other expenses combined increased by $125,000 as summarized in the table below - Non Interest Expenses. These increases are primarily due to the opening of one new branch office in November 1997 and two new branch offices in October 1998. NON INTEREST EXPENSES (Dollars are in Thousands)
Nine months ended Year ended Sept 30 Dec 31 ----------------------------- ----------------------------- 1999 1998 Incr/(Decr) 1998 1997 Incr/(Decr) ----------------------------- ----------------------------- Salary, wages and employee benefits $1,080 $839 $241 $1,132 $894 $238 Occupancy expense 303 194 109 272 196 76 Depreciation of premises and equipment 232 157 75 215 173 42 Stationary and printing supplies 58 55 3 83 65 18 Advertising and public relations 59 31 28 48 53 (5) Data processing expense 180 153 27 209 109 100 Legal & professional fees 77 75 2 115 137 (22) Other operating expenses 396 285 111 421 287 134 ----------------------------- ----------------------------- Total non interest expenses $2,385 $1,789 $596 $2,495 $1,914 $581 ----------------------------- -----------------------------
15 228 INCOME TAX PROVISION The income tax provision for the nine month period ended September 30, 1999 was $255,000, an effective tax rate of 36.8%, as compared to $296,000 for the nine month period ended September 30, 1998, an effective tax rate of 40.5%. The income tax provision for the year ended December 31, 1998, was $393,000, an effective tax rate of 35.9%, as compared to $484,000 for the year ended December 31, 1997, an effective tax rate of 37.0%. NET INCOME Net income for the years ended December 31, 1998, and 1997 was $702,000 and $825,000, respectively. Net income for the nine month periods ended September 30, 1999 and 1998 was $438,000 and $434,000 respectively. FINANCIAL CONDITION As of September 30, 1999, the Community National Bank had total assets of $95.7 million, compared to $93.0 million and $80.0 million as of December 31, 1998, and 1997, respectively. Net loans outstanding on September 30, 1999, were $56.0 million, compared to $55.8 million and $50.8 million as of December 31, 1998, and 1997, respectively. Loans Lending related income is the most important component of Community National Bank's net interest income and is the major contributor to profitability. The loan portfolio is the largest component of earning assets, and it generates the largest portion of revenues. The absolute volume of loans and the volume of loans as a percentage of earning assets is an important determinant of net interest margin as loans are expected to produce higher yields than securities and other earning assets. Average loans during the nine-month period ending September 30, 1999, were $55,571,000, or 66.2% of earning assets as compared to $51,468,000 or 67.7% of earning assets for December 31, 1998 and $47,783,000, or 69.3% of earning assets, for December 31, 1997. This represented an average loan to average deposit ratio of 65.2%, 68.3%, and 69.8% for September 30, 1999, December 31, 1998, and December 31, 1997, respectively. As of September 30, 1999, Community National Bank had total loans, net of deferred fees/costs, of $56,899,000 as compared to $56,650,000 at December 31, 1998, an increase of $249,000, or 0.4%. The growth in loans in the nine-month period was mainly due to the general growth in the market and the calling efforts of the loan officers. As of September 30, 1999, commercial, financial and agricultural loans totaled $6,093,000, or 10.7%, of the loan portfolio. Real estate construction loans totaled $5,756,000, or 10.1%, of the loan portfolio. Real estate mortgage loans totaled $42,542,000 or 74.8% of the loan portfolio. Installment and consumer loans totaled $2,508,000, or 4.4% of the loan portfolio. As of December 31, 1998, Community National Bank had total loans, net of deferred fees/costs, of $56,650,000 as compared to $51,569,000 at December 31, 1997, an increase of $5,081,000, or 9.8%. The growth was mainly due to general growth in the market and the calling efforts of the loan officers. As of December 31, 1998, commercial, financial and agricultural loans totaled $7,690,000, or 13.6%, of the loan portfolio. Real estate construction loans totaled $4,698,000, or 8.3%, of the loan portfolio. Real estate mortgage loans totaled $42,598,000, or 75.2% of the loan portfolio. Installment and consumer loans totaled $1,664,000, or 2.9% of the loan portfolio. Loan concentrations are considered by management to exist where there are amounts loaned to multiple borrowers engaged in similar activities which collectively could be similarly impacted by economic or other conditions and when the total of such amounts would exceed 25% of total capital. Due 16 229 to the lack of diversified industry in the markets served, Community National Bank has concentrations in geographic locations as well as in types of loans funded. LOAN PORTFOLIO COMPOSITION (Dollars are in Thousands)
TYPES OF LOANS September 30, December 31, ----------------------- ----------------------- 1999 1998 1998 1997 -------- -------- -------- -------- Commercial, Financial & Agricultural $ 6,093 $ 6,816 $ 7,690 $ 6,116 Real Estate - Construction 5,756 3,563 4,698 2,978 Real Estate - Mortgage 42,542 41,655 42,598 41,007 Installment & Consumer Lines 2,508 1,617 1,664 1,468 -------- -------- -------- -------- Total Loans, Net of Deferred fees/costs $ 56,899 $ 53,651 $ 56,650 $ 51,569 Less: Allowance for Loan Losses (866) (875) (866) (755) -------- -------- -------- -------- Net Loans $ 56,033 $ 52,776 $ 55,784 $ 50,814 ======== ======== ======== ========
LOAN MATURITY SCHEDULE (Dollars are in Thousands)
September 30, 1999 ---------------------------------------------------------- 0 - 12 1 - 5 Over 5 Months Years Years Total ------- ------- ------- ------- All Loans other Than Construction $32,549 $17,327 $ 2,073 $51,949 Real Estate - Construction 5,064 0 0 5,064 ------- ------- ------- ------- Total $37,613 $17,327 $ 2,073 $57,013 ======= ======= ======= ======= Fixed Interest Rate $ 5,967 $17,327 $ 2,073 $25,367 Variable Interest Rate 31,646 0 0 31,646 ------- ------- ------- ------- Total $37,613 $17,327 $ 2,073 $57,013 ======= ======= ======= =======
December 31, 1998 ---------------------------------------------------------- 0 - 12 1 - 5 Over 5 Months Years Years Total ------- ------- ------- ------- All Loans Other Than Construction $36,159 $14,203 $ 1,704 $52,066 Real Estate - Construction 4,698 0 0 4,698 ------- ------- ------- ------- Total $40,857 $14,203 $ 1,704 $56,764 ======= ======= ======= ======= Fixed Interest Rate $ 4,929 $14,203 $ 1,704 $20,836 Variable Interest Rate 35,928 0 0 35,928 ------- ------- ------- ------- Total $40,857 $14,203 $ 1,704 $56,764 ======= ======= ======= =======
Credit Quality Community National Bank maintains an allowance for loan losses to absorb inherent losses in the loan portfolio. The loans are charged against the allowance when management believes collection of the principal is unlikely. The allowance consists of amounts established for specific loans and is also based on historical loan loss experience. The specific reserve element is the result of a regular analysis of all loans and commitments based on credit rating classifications. The historical loan loss element represents a 17 230 projection of possible future credit problems and is determined using loan loss experience of each loan type. Management also weighs general economic conditions based on knowledge of specific factors that may affect the collectibility of loans. Community National Bank is committed to the early recognition of problems and to maintaining a sufficient allowance. At September 30, 1999, the allowance for loan losses was $866,000, or 1.5% of total loans outstanding, net of deferred fees/costs, compared to $866,000, or 1.5% at December 31, 1998, and $755,000, or 1.5%, at December 31, 1997. Non-performing assets consist of non-accrual loans, loans past due 90 days or more and still accruing interest, and other real estate owned. Loans are placed on a non-accrual status when they are past due 90 days and management believes the borrower's financial condition, after giving consideration to economic conditions and collection efforts, is such that collection of interest is doubtful. When a loan is placed on non-accrual status, interest accruals cease and uncollected interest is reversed and charged against current income. Subsequent collections reduce the principal balance of the loan until the loan is returned to accrual status. Total non-performing assets as of September 30, 1999, increased $14,000, or 2%, to $591,000, compared to $577,000 on the same date in 1998. Non-performing loans, plus other real estate owned, as a percentage of total assets at September 30, 1999, and 1998, was .62% and .67%, respectively. Management believes that the allowance for loan losses was adequate at September 30, 1999. Total non-performing assets decreased by $439,000 to $215,000 in 1998 from $654,000 in 1997. Non-performing assets, as a percentage of total assets decreased to .23% in 1998 from .82% in 1997. Management is continually analyzing its loan portfolio in an effort to recognize and resolve its problem assets as quickly and efficiently as possible. As of September 30, 1999, management believes that it has identified and adequately reserved for such problem assets. However, management recognizes that many factors can adversely impact various segments of its market. As such, management continuously focuses its attention on promptly identifying and managing potential problem loans as they arise. The tables below summarizes Community National Bank's non performing Assets and Allocation of Allowance for loan losses for the periods provided. NON PERFORMING ASSETS (Dollars are in Thousands)
September 30, December 31, -------------------- -------------------- 1999 1998 1998 1997 ------- ------- ------- ------- Non-Accrual Loans $201 $212 $180 $290 Past Due Loans 90 Days or More and Still Accruing 390 38 0 5 Interest Other Real Estate Owned 0 327 35 359 ------- ------- ------- ------- Total Non-Performing Assets $591 $577 $215 $654 ------- ------- ------- ------- Percent of Total Assets 0.62% 0.67% 0.23% 0.82% ======= ======= ======= ======= Allowance for Loan Losses $866 $875 $866 $755 ======= ======= ======= ======= Allowance for Loan Losses to Nonperforming Loans 146.53% 151.65% 402.79% 115.44% ======= ======= ======= =======
18 231 ALLOCATION OF ALLOWANCE FOR LOAN LOSSES (Dollars are in Thousands)
September 30, 1999 December 31, 1998 December 31, 1997 -------------------------- -------------------------- -------------------------- Percent Percent Percent of of of Loans Loans Loans in Each in Each in Each Category Category Category to to to Amount Total Loans Amount Total Loans Amount Total Loans ------ ----------- ------ ----------- ------ ------------ Commercial, Financial & Agricultural $259 11% $264 14% $428 12% Real Estate Construction 78 10% 60 8% 32 6% Real Estate - Mortgage 364 75% 385 75% 284 79% Consumer 165 4% 157 3% 11 3% ---- ---- ---- ---- ---- ---- Total $866 100% $866 100% $755 100% ==== ==== ==== ==== ==== ====
Deposits and Funds Purchased Total deposits as of September 30, 1999, were $85,220,000 compared to $76,838,000 on December 31, 1998, an increase of $8,382,000 or 11%, during the nine month period ended September 30, 1999. Total deposits for the year ended December 31, 1998, increased by $12,976,000 or 18%, as compared to total deposits of $71,671,000 at December 31, 1997. Community National Bank does not rely on purchased or brokered deposits as a source of funds. Instead, the generation of deposits within its market area, serves as Community National Bank's fundamental tool in providing a source of funds to be invested, primarily in loans. The tables below summarize selected deposit information for the periods indicated. SELECTED STATISTICAL INFORMATION FOR DEPOSITS (Dollars are in Thousands)
September 30, December 31, ------------------- -------------------------------------- 1999 1998 1997 ------------------- ----------------- ------------------ Average Average Average Balance Rate Balance Rate Balance Rate ------- ----- ------- ----- -------- ----- Noninterest-bearing demand deposits $10,991 0.00% $ 9,417 0.00% $ 8,045 0.00% Interest-bearing demand Deposits 15,757 1.73% 11,248 1.66% 8,997 1.77% Savings deposits 7,115 1.99% 5,272 1.99% 4,080 2.01% Time deposits 51,477 5.05% 49,461 5.55% 47,330 5.65% ------- ---- ------- ---- ------- ---- Total Average Deposits $85,340 3.53% $75,398 4.03% $68,452 4.26% ======= ==== ======= ==== ======= ====
19 232 MATURITY OF TIME DEPOSITS OF $100,000 OR MORE (Dollars are in Thousands)
Sept 30, 1999 Dec 31, 1998 ------------- ------------ Three Months or Less $3,919 $3,141 Three Through Six Months 3,270 1,456 Six Through Twelve Months 1,191 2,670 Over Twelve Months 1,599 1,106 ------ ------ Total $9,979 $8,373 ====== ======
Repurchase Agreements Community National Bank enters into agreements to repurchase ("repurchase agreements") under which Community National Bank pledges investment securities owned and under its control as collateral against the one-day agreements. The daily average balance of these agreements for the periods ended September 30, 1999 and 1998 was approximately $952,000 and $1,442,000, respectively. Interest expense for the same periods was approximately $35,000 and $68,000, respectively, resulting in an average rate paid of 3.65% and 4.73% for the nine-month periods ended September 30, 1999 and 1998, respectively. The daily average balance for the period ended December 31, 1998, and 1997 was approximately $1,269,000 and $832,000, respectively. Interest expense for these periods was approximately $59,000 and $40,000, respectively, resulting in an average rate paid of 4.65% and 4.81% for the years ended 1998 and 1997, respectively. SCHEDULE OF SHORT-TERM BORROWINGS (1) (Dollars are in Thousands)
Maximum Average Weighted Outstanding Interest Rate Average at any Average during the Ending Interest Rate Month End Balance Year Balance at Year End ----------- ------- ------------- ------- ------------- NINE MONTHS ENDED September 30, 1999 $2,848 $ 952 3.64% $2,211 3.64% September 30, 1998 $1,785 $1,442 4.68% $1,458 4.68% YEAR ENDED DECEMBER 31, 1998 $1,526 $1,269 4.63% $ 653 4.63% 1997 $1,576 $ 832 4.85% $1,488 4.82%
- ------------------------- (1) Consists of Securities sold under agreements to repurchase Securities Community National Bank accounts for investments at fair value except for those securities which Community National Bank has the positive intent and ability to hold to maturity. Investments to be held for indefinite periods of time and not intended to be held to maturity are classified as available for sale and are carried at fair value. Unrealized holding gains and losses are included as a separate component of stockholders' equity net of the effect of income taxes. Realized gains and losses on investment securities available for sale are computed using the specific identification method. Securities that management has the intent and the Community National Bank has the ability at the 20 233 time of purchase or origination to hold until maturity are classified as investment securities held to maturity. Securities in this category are carried at amortized cost adjusted for accretion of discounts and amortization of premiums using the level yield method over the estimated life of the securities. If a security has a decline in fair value below its amortized cost that is other than temporary, then the security will be written down to its new cost basis by recording a loss in the statement of operations. Community National Bank does not engage in trading activities as defined in Statement of Financial Accounting Standard No. 115. Community National Bank 's available for sale portfolio was $22,236,000 at September 30, 1999, $21,956,000 at December 31, 1998, and $14,186,000 at December 31, 1997, 23%, 24% and 18% respectively of total assets. See the tables below for a summary of security type, maturity and average yield distributions. Community National Bank did not have any securities in its held to maturity portfolio at September 30, 1999, or December 31, 1998. At December 31, 1997 the held to maturity portfolio was $3,001,000. Community National Bank uses its securities portfolio primarily as a source of liquidity and a base from which to pledge assets for repurchase agreements and public deposits. When the company's liquidity position exceeds expected loan demand, other investments are considered by management as a secondary earnings alternative. Typically, management remains short-term (under 5 years) in its decision to invest in certain securities. As these investments mature, they will be used to meet cash needs or will be reinvested to maintain a desired liquidity position.. Community National Bank has designated substantially all of its securities as available for sale to provide flexibility, in case an immediate need for liquidity arises. The composition of the portfolio offers management full flexibility in managing its liquidity position and interest rate sensitivity, with the intent to minimize the adverse impact on its regulatory capital levels. The available for sale portfolio is carried at fair market value and had a net unrealized loss of approximately $56,000 on September 30, 1999, a net unrealized gain of approximately $187,000 on December 31, 1998 and a net unrealized gain of approximately $56,000 on December 31, 1997. Community National Bank invests primarily in direct obligations of the United States, obligations guaranteed as to the principal and interest by the United States and obligations of agencies of the United States. In addition, Community National Bank enters into federal funds transactions with its principal correspondent banks, and acts as a net seller of such funds. The Federal Reserve Bank also requires equity investments to be maintained by Community National Bank. The tables below summarize the maturity distribution of investment securities, weighted average yield by range of maturities, and distribution of investment securities for the periods provided. 21 234 MATURITY DISTRIBUTION OF INVESTMENT SECURITIES (Dollars are in Thousands)
September 30, 1999 December 31, 1998 December 31, 1997 --------------------- ---------------------- ----------------------- Amortized Estimated Amortized Estimated Amortized Estimated AVAILABLE-FOR-SALE Cost Market Cost Market Cost Market Value Value Value -------- --------- --------- --------- --------- --------- U.S. Treasury and U.S. Government Agencies and Corporations and Obligations of State and Political Subdivisions: One Year or Less $14,077 $14,075 $ 7,508 $ 7,576 $ 5,994 $ 6,003 Over One Through Five Years 8,074 8,020 13,120 13,239 8,015 8,062 Over Five Through Ten Years 0 0 0 0 0 0 Over Ten Years 0 0 1,000 1,000 0 0 Federal Reserve Bank Stock 141 141 141 141 121 121 ------- ------- ------- ------- ------- ------- Total $22,292 $22,236 $21,769 $21,956 $14,130 $14,186 ======= ======= ======= ======= ======= ======= HELD-TO-MATURITY State and Political Subdivisions $ 0 $ 0 $ 0 $ 0 $ 3,001 $ 3,006 ------- ------- ------- ------- ------- ------- Total $ 0 $ 0 $ 0 $ 0 $ 3,001 $ 3,006 ======= ======= ======= ======= ======= =======
WEIGHTED AVERAGE YIELD BY RANGE OF MATURITIES (Average Yields on Securities Available for Sale Were Calculated Based on Amortized Cost)
Sept 30, 1999 Dec 31, 1998 Dec 31, 1997 ------------------------------------------------------- One Year or Less 5.54% 6.10% 6.19% Over One Through Five Years 5.29% 5.42% 6.06% Over Five Through Ten Years 0.00% 0.00% 0.00% Over Ten Years 0.00% 5.62% 0.00%
DISTRIBUTION OF INVESTMENT SECURITIES (Dollars are in Thousands)
September 30, 1999 December 31, 1998 December 31, 1997 --------------------- --------------------- --------------------- Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value --------- ------- --------- ------- --------- ------- US Treasury Securities $16,591 $16,568 $15,076 $15,225 $13,508 $13,557 US Government Agencies 5,560 5,528 5,552 5,590 501 508 State, County, & Municipal 0 0 1,000 1,000 0 0 Mortgage-Backed Securities 0 0 0 0 0 0 Federal Reserve Bank Stock 141 141 141 141 121 121 ------- ------- ------- ------- ------- ------- Total $22,292 $22,236 $21,769 $21,956 $14,130 $14,186 ======= ======= ======= ======= ======= =======
Liquidity and Interest Rate Sensitivity Market and public confidence is the financial strength of Community National Bank and financial institutions in general, and will largely determine the institutions access to appropriate levels of liquidity. This confidence is significantly dependent on Community National Bank ability to maintain sound asset quality and appropriate levels of capital reserves. Liquidity is defined as the ability of Community National Bank to meet anticipated customer demands for funds under credit commitments and deposit withdrawals at a reasonable cost and on a timely basis. Management measures the company's liquidity position by giving consideration to both on- and off-balance sheet sources of and demands for funds on a daily and weekly basis. Sources of liquidity include cash and cash equivalents, net of federal requirements to maintain reserves against deposit liabilities; investment securities eligible for pledging to secure borrowings from 22 235 dealers and customers pursuant to securities sold under repurchase agreements; loan repayments; loan sales; deposits and certain interest rate-sensitive deposits; and borrowings under overnight federal fund lines available from correspondent banks. In addition to interest rate-sensitive deposits, Community National Bank's primary demand for liquidity is anticipated fundings under credit commitments to customers. Interest rate sensitivity refers to the responsiveness of interest-earning assets and interest-bearing liabilities to changes in market interest rates. The rate sensitive position, or gap, is the difference in the volume of rate-sensitive assets and liabilities, at a given time interval, including both floating rate instruments and instruments which are approaching maturity. The measurement of Community National Bank's interest rate sensitivity, or gap, is one of the principal techniques used in asset and liability management. Management generally attempts to maintain a balance between rate-sensitive assets and liabilities as the exposure period is lengthened to minimize the overall interest rate risks to the company. The asset mix of the balance sheet is evaluated continually in terms of several variables: yield, credit quality, appropriate funding sources and liquidity. Management of the liability mix of the balance sheet focuses on expanding the various funding sources. Community National Bank's gap and liquidity positions are reviewed periodically by management to determine whether or not changes in policies and procedures are necessary to achieve financial goals. At September 30, 1999, approximately 56% of total gross loans were adjustable rate and 61% of total securities either reprice or mature in less than one year. Total deposit liabilities consisted of approximately $23,971,000 (28%) in NOW, Money Market Accounts and Savings, $50,457,000 (59%) in time deposits, and $10,790,000 (13%) in non interest bearing demand accounts. At December 31, 1998, approximately 64% of total gross loans were adjustable rate and 32% of total securities either reprice or mature in less than one year. Total deposit liabilities consisted of approximately $20,625,000 (24%) in NOW, Money Market Accounts and Savings, $52,697,000 (63%) in time deposits, and $11,325,000 (13%) in non interest bearing demand accounts. A rate sensitivity analysis is presented below as of September 30, 1999 and December 31, 1998. Community National Bank has prepared a table which presents the market risk associated with financial instruments held by the company. In the "Rate Sensitivity Analysis" table, rate sensitive assets and liabilities are shown by maturity or repricing periods, separating fixed and variable interest rates. The estimated fair value of each instrument category is also shown in the table. While these estimates of fair value are based on management's judgment of the most appropriate factors, there is no assurance that, were Community National Bank have to dispose of such instruments at December 31, 1998, and September 30, 1999, the estimated fair values would necessarily have been achieved at that date, since market values may differ depending on various circumstances. The estimated fair values at December 31, 1998, and September 30, 1999, should not necessarily be considered to apply at subsequent dates. 23 236 RATE SENSITIVITY ANALYSIS September 30, 1999 (Dollars are in Thousands)
Est. Fair 0-1 Yr 1-2 Yrs 2-3 Yrs 3-4 Yrs 4 Yrs+ TOTAL Value ------- ------- ------- ------- ------- ------- --------- INTEREST EARNING ASSETS Loans Fixed Rate Loans $ 5,967 $ 4,162 $5,749 $7,29 $ 2,073 $25,245 $25,341 Average Interest Rate 8.63% 9.42% 8.87% 8.81% 8.26% 8.84% Variable Rate Loans 31,129 256 242 139 0 31,766 31,766 Average Interest Rate 8.09% 7.42% 6.75% 6.75% 8.07% Investment Securities (1) Fixed Rate Securities 13,577 7,574 1,000 0 0 22,151 22,095 Average Interest Rate 5.42% 5.33% 5.73% 5.40% Variable Rate Securities 0 0 0 0 0 0 Average Interest Rate Federal Funds Sold 4,207 0 0 0 0 4,207 4,207 Average Interest Rate 4.86% 4.86% Other Earning Assets (2) 141 0 0 0 0 141 141 Average Interest Rate 6.00% 6.00% ------- ------- ------- ------- ------- ------- ------- Total Interest-Earning $55,021 $11,992 $ 6,991 $ 7,433 $ 2,073 $83,510 $83,550 Assets 7.24% 6.79% 8.35% 8.77% 8.26% 7.43% ------- ------- ------- ------- ------- ------- ------- INTEREST BEARING LIABILITIES NOW Accounts $10,278 $ 0 $ 0 $ 0 $ 0 $10,278 $10,278 Average Interest Rate 1.04% 1.04% Money Market Accounts 6,312 0 0 0 0 6,312 6,223 Average Interest Rate 2.72% 2.72% Savings Accounts 7,383 0 0 0 0 7,383 7,383 Average Interest Rate 2.05% 2.05% CDs $100,000 & Over 8,380 1,096 102 401 0 9,979 9,973 Average Interest Rate 4.74% 4.79% 5.24% 5.61% 4.79% CDs Under $100,000 20,591 10,094 4,212 1,672 3,909 40,478 40,593 Average Interest Rate 4.51% 5.35% 5.69% 5.75% 5.74% 5.01% Securities Sold Under Repurchase Agreement 2,211 0 0 0 0 2,211 2,211 Average Interest Rate 3.63% 3.63% ------- ------- ------- ------- ------- ------- ------- Total Interest-Bearing $55,155 $11,190 $ 4,314 $ 2,073 $ 3,909 $76,641 $76,661 Liabilities 3.33% 5.30% 5.68% 5.72% 5.74% 3.94% ======= ======= ======= ======= ======= ======= =======
- -------------------- (1) Securities for sale are shown at their amortized cost. (2) Represents interest earning Federal Reserve Bank Stock 24 237 RATE SENSITIVITY ANALYSIS December 31, 1998 (Dollars are in Thousands)
Est. Fair 0-1 Yr 1-2 Yrs 2-3 Yrs 3-4 Yrs 4 Yrs+ TOTAL Value ------- ------- ------- ------- ------- ------- --------- INTEREST EARNING ASSETS Loans Fixed Rate Loans $ 4,929 $ 5,042 $ 3,384 $ 5,640 $ 1,407 $20,402 $20,729 Average Interest Rate 9.19% 9.74% 9.56% 9.13% 8.08% 9.29% Variable Rate Loans 35,807 474 81 0 0 36,362 36,362 Average Interest Rate 8.28% 7.50% 7.25% 8.27% Investment Securities (1) Fixed Rate Securities 7,007 10,620 2,001 1,000 1,000 21,628 21,816 Average Interest Rate 6.01% 5.34% 6.07% 5.73% 5.62% 5.66% Variable Rate Securities 0 0 0 0 0 0 Average Interest Rate Federal Funds Sold 5,175 0 0 0 0 5,175 5175 Average Interest Rate 5.72% 5.72% Other Earning Assets (2) 141 0 0 0 0 141 141 Average Interest Rate 6.00% 6.00% ------- ------- ------- ------- ------- ------- ------- Total Interest-Earning Assets $53,059 $16,136 $ 5,466 $6,640 $ 2,407 $83,708 $84,223 7.81% 6.78% 8.25% 8.62% 7.06% 7.68% ======= ======= ======= ======= ======= ======= ======= INTEREST BEARING LIABILITIES NOW Accounts $ 9,032 $ 0 $ 0 $ 0 $ 0 $ 9,032 $ 9,032 Average Interest Rates 1.08% 1.08% Money Market Accounts 5,182 0 0 0 0 5,182 5,182 Average Interest Rates 2.28% 2.28% Savings Accounts 6,411 0 0 0 0 6,411 6,411 Average Interest Rates 1.85% 1.85% CDs $100,000 & Over 7,266 602 103 302 100 8,373 8,477 Average Interest Rates 5.23% 5.61% 6.02% 6.02% 6.09% 5.31% CDs Under $100,000 22,479 12,056 4,521 1,967 3,301 44,324 45,111 Average Interest Rates 5.11% 5.71% 5.66% 5.82% 5.88% 5.42% Securities Sold Under Repurchase Agreement 653 0 0 0 0 653 653 Average Interest Rates 4.63% 4.63% ------- ------- ------- ------- ------- ------- ------- Total Interest-Bearing Liabilities $51,023 $12,658 $4,624 $ 2,269 $ 3,401 $73,975 $74,866 3.71% 5.71% 5.67% 5.85% 5.89% 4.34% ======= ======= ======= ======= ======= ======= =======
- -------------------- (1) Securities for sale are shown at their amortized cost. (2) Represents interest earning Federal Reserve Bank Stock 25 238 Primary Use of Funds Nine Month period ending September 30, 1999 The primary source of funds during the period included an increase in deposits ($573,000), increase in borrowings from repurchase agreements ($1,558,000), exercise of stock options net of tax benefit ($255,000) and net income ($438,000). The primary uses of funds during the period included a decrease in cash and federal funds sold ($1,419,000), an increase in net loans outstanding ($249,000), an increase in net investments outstanding ($280,000), an increase in premises and equipment ($660,000), dividends paid ($146,000) and other miscellaneous net uses ($70,000). Twelve Month period ending December 31, 1998 The primary source of funds during the period included net growth in deposits ($12,976,000), exercise of stock options net of tax benefit ($290,000), net income ($702,000), and other miscellaneous net sources ($251,000). The primary uses of funds during the period included an increase in investments outstanding ($4,769,000), an increase in net loans outstanding ($4,970,000), an increase in cash and federal funds sold ($1,686,000), an increase in premises and equipment ($1,844,000), a decrease in borrowings from repurchase ageements ($835,000), and dividends paid ($115,000). CAPITAL RESOURCES Shareholders' equity at September 30, 1999, was $7,842,000, as compared to $7,184,000 at September 30, 1998. Shareholders' equity was $7,447,000 at December 31, 1998, as compared to $6,488,000 at December 31, 1997. The Comptroller has established risk-based capital requirements for national banks. These guidelines are intended to provide an additional measure of a bank's capital adequacy by assigning weighted levels of risk to asset categories. Banks are also required to systematically maintain capital against such "off-balance sheet" activities as loans sold with recourse, loan commitments, guarantees and standby letters of credit. These guidelines are intended to strengthen the quality of capital by increasing the emphasis on common equity and restricting the amount of loan loss reserves and other forms of equity such as preferred stock that may be included in capital. Community National Bank's goal is to maintain its current status as a "well-capitalized institution" as that term is defined by its regulators. Under the terms of the guidelines, banks must meet minimum capital adequacy based upon both total assets and risk adjusted assets. All banks are required to maintain a minimum ratio of total capital to risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to risk-weighted assets of 4%. Adherence to these guidelines has not had an adverse impact on Community National Bank. Selected capital ratios at December 31, 1998, and 1997 compared to September 30, 1999, were as follows: 26 239
CAPITAL RATIOS (Dollars are in Thousands) Actual Well Capitalized ----------------- ----------------- Excess Amount Ratio Amount Ratio Amount ------ ----- ------ ----- ------ AS OF SEPTEMBER 30, 1999: Total Capital: (to Risk Weighted Assets): $8,571 15.3% $5,607 10.0% $2,964 Tier 1 Capital: (to Risk Weighted Assets): $7,868 14.0% $3,364 6.0% $4,504 Tier 1 Capital: (to Average Assets): $7,868 8.3% $4,759 5.0% $3,109 AS OF DECEMBER 31, 1998: Total Capital: (to Risk Weighted Assets): $7,966 14.9% $5,360 10.0% $2,606 Tier 1 Capital: (to Risk Weighted Assets): $7,267 13.6% $3,216 6.0% $4,051 Tier 1 Capital: (to Average Assets): $7,267 8.2% $4,431 5.0% $2,836 AS OF DECEMBER 31, 1997: Total Capital: (to Risk Weighted Assets): $6,931 15.2% $4,569 10.0% $2,362 Tier 1 Capital: (to Risk Weighted Assets): $6,358 13.9% $2,741 6.0% $3,617 Tier 1 Capital: (to Average Assets): $6,358 8.1% $3,941 5.0% $2,417
EFFECTS OF INFLATION AND CHANGING PRICES The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on the performance of a financial institution than the effects of general levels of inflation. Although interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services, increases in inflation generally have resulted in increased interest rates. In addition, inflation affects financial institutions' increased cost of goods and services purchased, the cost of salaries and benefits, occupancy expense, and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings, and shareholders' equity. Commercial and other loan originations and refinancings tend to slow as interest rates increase, and can reduce Community National Bank's earnings from such activities. ACCOUNTING PRONOUNCEMENTS On January 1, 1998, the Bank adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 provides new accounting and reporting standards for reporting and displaying comprehensive income 27 240 and its components in a full set of general-purpose financial statements. The adoption of this standard did not have a material impact on reported results of operations of Community National Bank. In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The statement establishes accounting and reporting standards for derivative instruments (including certain derivative instruments imbedded in other contracts). The statement is effective for fiscal years beginning after June 15, 1999. The financial impact of the adoption of this statement has not been determined. However, the effect of the adoption of the statement is not expected to be material. In June 1999, the FASB issued SFAS No. 137, which delays implementation of SFAS No. 133 for one year. Quarterly Financial Information The following table sets forth, for the periods indicated, certain consolidated quarterly financial information for Community National Bank. This information is derived from Community National Bank's unaudited financial statements which include, in the opinion of management, all normal recurring adjustments which management considers necessary for a fair presentation of the results for such periods. This information should be read in conjunction with Community National Bank's Financial Statements included elsewhere in this Prospectus. The results for any quarter are not necessarily indicative of results for future periods. SELECTED QUARTERLY DATA
(Dollars in Thousands except 1999 1998 1997 for per share data) ------------------- ------------------------- ------------------------- - ---------------------------- 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q ------------------- ------------------------- ------------------------- Net Interest Income $867 $859 $884 $839 $767 $780 $790 $714 $726 $713 $698 Provision for Loan Losses 6 (18) 21 0 30 60 60 0 60 45 45 ------------------- ------------------------- ------------------------- Net Interest Income after after provision for loan losses $861 $877 $863 $839 $737 $720 $730 $714 $666 $668 $653 Other Income (excluding Security transactions) $169 $158 $149 $233 $123 $104 $104 $172 $174 $89 $87 Securities gains (losses), net $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Other expenses $791 $815 $778 $706 $599 $607 $583 $483 $472 $480 $479 ------------------- ------------------------- ------------------------- Income before income tax expense $239 $220 $234 $366 $261 $217 $251 $403 $368 $277 $261 Income tax expense $90 $83 $88 $118 $98 $82 $95 $140 $140 $105 $99 ------------------- ------------------------- ------------------------- Net Income $149 $137 $146 $248 $163 $135 $156 $263 $228 $172 $162 Basic earnings per common share $0.32 $0.30 $0.32 $0.54 $0.36 $0.30 $0.36 $0.61 $0.57 $0.43 $0.40 Diluted earnings per common share $0.31 $0.28 $0.30 $0.51 $0.34 $0.28 $0.33 $0.57 $0.52 $0.39 $0.37
28 241 APPENDIX E Information on First National Bank of Polk County 242 BUSINESS OF FIRST NATIONAL/POLK GENERAL First National/Polk was organized as a national banking association on February 21, 1992, First National/Polk provides a range of consumer and commercial banking services to individuals, businesses and industries. The basic services offered by First National/Polk include: demand interest bearing and noninterest bearing accounts, money market deposit accounts, NOW accounts, time deposits, safe deposit services, credit cards, cash management, direct deposits, notary services, money orders, night depository, travelers' checks, cashier's checks, domestic collections, savings bonds, bank drafts, drive-in tellers, and banking by mail. In addition, First National/Polk makes secured and unsecured commercial and real estate loans and issues stand-by letters of credit. First National/Polk provides automated teller machine ("ATM") cards, as a part of the HONOR ATM network, thereby permitting customers to utilize the convenience of larger ATM networks. First National/Polk does not have trust powers and, accordingly, no trust services are provided. The revenues of First National/Polk are primarily derived from interest on, and fees received in connection with, real estate and other loans, and from interest and dividends from investment and mortgage-backed securities, and short-term investments. The principal sources of funds for First National/Polk's lending activities are its deposits, repayment of loans, and the sale and maturity of investment securities. The principal expenses of First National/Polk are the interest paid on deposits, and operating and general administrative expenses. As is the case with banking institutions generally, First National/Polk's operations are materially and significantly influenced by general economic conditions and by related monetary and fiscal policies of financial institution regulatory agencies, including the Federal Reserve and the OCC. Deposit flows and costs of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for financing of real estate and other types of loans, which in turn is affected by the interest rates at which such financing may be offered and other factors affecting local demand and availability of funds. First National/Polk faces strong competition in the attraction of deposits (its primary source of lendable funds) and in the origination of loans. See "Competition." LENDING ACTIVITIES First National/Polk offers a range of lending services, including real estate, consumer and commercial loans, to individuals and small businesses and other organizations that are located in or conduct a substantial portion of their business in the Bank's market area. First National/Polk's total loans at September 30, 1999 and December 31, 1998 were $40.8 million, or 56% of total assets, and $40.1 million, or 54% of total assets, respectively. The interest rates charged on loans vary with the degree of risk, maturity, and amount of the loan, and are further subject to competitive pressures, money market rates, availability of funds, and government regulations. First National/Polk has no foreign loans or loans for highly leveraged transactions. 1 243 First National/Polk's loans are concentrated in three major areas: real estate loans, commercial loans, and consumer loans. At September 30, 1999, 69.7%, 12.1% and 18.2% and at December 31, 1998, 69.8%, 13.6%, and 17.7% of First National/Polk's loan portfolio consisted of real estate, commercial and consumer loans, respectively. In excess of 96% of First National/Polk's loans at September 30, 1999 and December 31, 1998, respectively, were made on a secured basis. As of September 30, 1999 and December 31, 1998, 75.3% and 75.4%, respectively of the loan portfolio consisted of loans secured by mortgages on real estate. First National/Polk's commercial loans include loans to individuals and small-to-medium sized businesses located primarily in Polk County for working capital, equipment purchases, and various other business purposes. A majority of First National/Polk's commercial loans are secured by equipment or similar assets, but these loans may also be made on an unsecured basis. Commercial loans may be made at variable- or fixed-interest rates. Commercial lines of credit are typically granted on a one-year basis, with loan covenants and monetary thresholds. Other commercial loans with terms or amortization schedules of longer than one year will normally carry interest rates which vary with the prime lending rate and will become payable in full and are generally refinanced in three to five years. First National/Polk's real estate loans are secured by mortgages and consist primarily of loans to individuals and businesses for the purchase, improvement of or investment in real estate and for the construction of single-family residential units or the development of single-family residential building lots. These real estate loans may be made at fixed- or variable-interest rates. First National/Polk generally does not make fixed-interest rate commercial real estate loans for terms exceeding five years. Loans in excess of five years generally have adjustable interest rates. First National/Polk's residential real estate loans generally are repayable in monthly installments based on up to a 30-year amortization schedule with variable-interest rates. First National/Polk's consumer loan portfolio consists primarily of loans to individuals for various consumer purposes, but includes some business purpose loans which are payable on an installment basis. The majority of these loans are for terms of less than five years and are secured by liens on various personal assets of the borrowers, but consumer loans may also be made on an unsecured basis. Consumer loans are made at fixed- and variable-interest rates, and are often based on up to a five-year amortization schedule. For additional information regarding First National/Polk's loan portfolio, see "First National/Polk's Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition." DEPOSIT ACTIVITIES Deposits are the major source of First National/Polk's funds for lending and other investment activities. First National/Polk considers the majority of its regular savings, demand, NOW and money market deposit accounts to be core deposits. These accounts comprised 61.9% 2 244 and 58.5% of First National/Polk's total deposits at September 30, 1999 and December 31, 1998, respectively. Approximately 38.1% and 41.5% of First National/Polk's deposits at September 30, 1999 and December 31, 1998 were certificates of deposit. Generally, First National/Polk attempts to maintain the rates paid on its deposits at a competitive level. Time deposits of $100,000 and over made up 5.1% of First National/Polk's total deposits at both September 30, 1999 and December 31, 1998. The majority of the deposits of First National/Polk are generated from Polk County. First National/Polk does not accept brokered deposits. For additional information regarding First National/Polk's deposit accounts, see "First National/Polk's Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition." EMPLOYEES At September 30, 1999, First National/Polk employed 32 full-time and two part-time employees. The employees are not represented by a collective bargaining unit. First National/Polk consider relations with its employees to be good. PROPERTIES The main office of First National/Polk is located at 7722 State Road 544 East, Winter Haven, Florida in a two-story building of approximately 12,000 square feet, which is owned by First National/Polk. First National/Polk also has a branch office of approximately 2,800 square feet in a one-story building located at 1191 Highway 27 North, Haines City, Florida, and a branch office of approximately 3,200 square feet in a one-story building located at 12600 U.S. Highway 27 N., Davenport, Florida. All of First National/Polk's branch offices are owned by it. LITIGATION In the ordinary course of operations, First National/Polk is a party to various legal proceedings. Management does not believe there is any proceeding pending against First National/Polk which, if determined adversely, would have a material adverse effect on the financial condition or results of operations of First National/Polk. MANAGEMENT Board of Directors. The Board of Directors of First National/Polk currently consists of 13 directors, each of whom holds office until the next annual meeting of First National/Polk shareholders. The following table sets forth certain information with respect to the directors of First National/Polk. 3 245
DIRECTOR OR OFFICER OF FIRST NATIONAL/POLK PRINCIPAL OCCUPATION AND BUSINESS NAME AND AGE SINCE EXPERIENCE DURING PAST FIVE YEARS - ------------ ---------------------- --------------------------------- James H. White, 73 1992 Chairman of the Board of First National/Polk, First National Bank of Osceola County, and Community National Bank of Pasco County Bruce A. Davis, 47 1992 President - Bruce A. Davis & Associates, Inc. (insurance agency) Terry W. Donley, 51 1992 President - Donley Citrus, Inc. (citrus harvesting and production) Bruce B. Ingram, 54 1992 President - Ingram Grove Service, Inc. (citrus harvesting and production) Jack A. Kuder, 71 1992 Citrus Grower Charlie N. Long, Jr., 68 1992 Owner - Central Park and Central Park II (mobile retirement home community) Edward D. Mathews, 65 1992 Owner - Sonny's Bar-B-Q (Haines City, Winter Haven & Bartow) (multiple franchise owner) Louis W. McKnight, 82 1992 President - Holly Hill Fruit Products Co., Inc. (fruit harvester, grower and processer) William K. Pou, Jr., 42 1992 Executive Vice President of Retail Operations - W. S. Badcock Corp. (retail furniture business) J. Thomas Rocker, 57 1992 Director - Arctic Services, Inc. (commercial insulation) Joy C. Sims, 57 1992 Community Leader
4 246
Ralph T. Stalnaker, Jr. 1992 President - Woodland Lakes Retirement Concepts, Inc. (mobile home retirement community) George H. Carefoot, 56 1992 President and Chief Executive Officer of First National Bank/Polk
Executive Officers. The following sets forth information regarding the executive officers of First National/Polk. The officers of First National/Polk serve at the pleasure of the Board of Directors.
PRINCIPAL OCCUPATION AND BUSINESS NAME AND AGE EXPERIENCE DURING PAST FIVE YEARS - ------------ --------------------------------- George H. Carefoot, 56 President and Chief Executive Officer Lynn C. Briske, 52 Operations - Vice President - Cashier Joyce W. Lovelace, 42 Retail Lending - Vice President
COMPENSATION AND BENEFITS The table below sets forth certain information with respect to compensation paid to Mr. George H. Carefoot (the President and Chief Executive Officer of First National/Polk) during the years presented. No other executive officer of First National/Polk received a total salary and bonus in excess of $100,000 in 1998.
ANNUAL COMPENSATION ------------------------------------------------- NAME AND OTHER ANNUAL ALL OTHER PRINCIPAL POSITION YEAR SALARY($) BONUS COMPENSATION COMPENSATION(1) - ------------------ ---- --------- ------ ------------ --------------- George H. Carefoot, 1998 $117,520 $8,500 -0- 4,700 President and Chief 1997 $113,000 $8,500 -0- 4,520 Executive Officer 1996 $107,069 $4,375 -0- 4,283 - ------------------
(1) Represents amounts contributed by First National/Polk to Mr. Carefoot's Section 401(k) savings plan accounts. Non-employee directors of First National/Polk receive directors fees of $200.00 for each Board and $75.00 for each committee meeting attended. 5 247 Savings Plan First National/Polk has a 401(k) savings plan covering substantially all employees of First National/Polk. Under the provisions of the plan, employees may contribute up to 15% of their compensation on a pre-tax basis, subject to limits specified in the Internal Revenue Code. First National/Polk may make, at the discretion of the Board of Directors, matching contributions up to 3% of the employee's annual compensation and within various limitations specified by the Code. Stock Option Plan First National/Polk has a Directors' Stock Option Plan and an Officers' and Employees' Stock Option Plan. Under the plans, options for an aggregate of 37,450 shares of First National/Polk Common Stock were outstanding as of the date of this Proxy Statement (including options for 24,000 shares held by Mr. Carefoot). The Plans provide that options are granted at prices equal to market value on the date of grant (as determined by the Board of Directors), and become exercisable over four years at the rate of 25% each year. The options remain exercisable up to 10 years from the date of grant. The exercise prices for the options range from $10.00 to $17.50 per share. MANAGEMENT AND PRINCIPAL STOCK OWNERSHIP Directors and Officers The following table sets forth the beneficial ownership of outstanding shares of First National/Polk Common Stock as of the date of this Proxy Statement by First National/Polk's current directors, and by current directors and executive officers as a group. Except as set forth below, management of First National/Polk is not aware of any individual or group that owns in excess of 5% of the outstanding shares of First National/Polk.
NAME OF INDIVIDUAL AMOUNT/NATURE OF PERCENT (AND ADDRESS OF 5% OWNER) BENEFICIAL OWNERSHIP(1) OF CLASS - ------------------------- ----------------------- -------- George H. Carefoot 25,000 (2) 5.00% 313 Hamilton Shore Drive Winter Haven, FL 33881 Bruce A. Davis 20,500 (3) 4.31% Terry W. Donley 13,750 2.89% Bruce B. Ingram 15,000 (4) 3.15%
6 248
Jack A. Kuder 18,425 (5) 3.87% Charlie N. Long, Jr. 14,300 (6) 3.01% Edward D. Mathews 21,050 (7) 4.43% Louis W. McKnight 21,025 (8) 4.42% William K. Pou, Jr. 17,500 (9) 3.68% J. Thomas Rocker 25,650 (10) 5.39% Joy C. Sims 16,000 (11) 3.36% Ralph T. Stalnaker, Jr. 14,000 (12) 2.94% James H. White 27,500 (12) 5.78% P. O. Box 188 Haines City, FL 33845-0188 All directors and executive 249,800 52.50% officers as a group (15 persons)
- ------------------------------ (1) Information related to beneficial ownership is based upon the information available to First National/Polk. (2) Includes options to acquire 24,000 shares. (3) Includes 15,000 shares held jointly with his spouse, 2,000 shares held jointly with his child, 1,500 shares held jointly with his mother, and 2,000 shares held by his company as to which shares he exercises voting and investment power. (4) Held jointly with his spouse. (5) Includes 17,925 shares held by his company as to which shares he exercises voting and investment power. (6) Consists of 12,800 shares held jointly with his spouse and 1,500 shares held by his retirement plan. (7) Consists of 15,000 shares held jointly with his spouse and 5,850 shares held by his company as to which shares he exercises voting and investment power. (8) Includes 10,000 shares held by his company as to which shares he exercises voting and investment power and 5,825 shares held by his retirement plan. (9) Includes 2,500 shares held by his spouse. (10) Includes 5,000 shares held by his spouse, 5,000 shares held jointly with his spouse, and 3,150 shares held by his retirement plan. (11) Includes 5,000 shares held jointly with her spouse. (12) Includes 11,500 shares held by his spouse, and 1,000 shares held jointly with his spouse. 7 249 FIRST NATIONAL / POLK MANAGEMENT'S DISCUSSION AND ANALYSIS THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS COVERS IMPORTANT FACTORS AFFECTING THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION OF FIRST NATIONAL / POLK FOR THE PERIODS SHOWN. FIRST NATIONAL / POLK'S FINANCIAL STATEMENTS SHOULD BE READ IN CONJUNCTION WITH THIS ANALYSIS. OVERVIEW First National / Polk is a national bank chartered February 21, 1992. It provides traditional deposit and lending products and services to its commercial and retail customers through three full service branches located within Polk County in central Florida. The company is a national bank and is subject to the supervision of the Office of the Comptroller of the Currency. At September 30, 1999, the Bank had total assets of $72.2 million, total loans of $40.2 million, total deposits of $65.1 million, and total shareholders' equity of $6.5 million. Net income for the nine months ended September 30, 1999 and for the year ended December 31, 1998, was $449,000 and $691,000 respectively, as compared with $485,000 and $548,000 for the nine months ended September 30, 1998 and for the year ended December 31, 1997, respectively. First National / Polk is located in the northwest corner of Polk county, which is primarily a retirement and agricultural community. It is the fastest growing area in Polk county. As Orlando is expanding, residential housing is spreading west on Interstate 4 extending into this area of the county. In addition, Walt Disney World is approximately ten miles from First National / Polk's closest branch, which makes First National / Polk's market a convenient commute for any of the thousands of Disney employees. At September 30, 1999 real estate loans were approximately 70% of total gross loans outstanding. Of this amount, more than half were residential real estate loans. Due to the demographics of the market, the concentration in real estate loans overall, and residential real estate loans in particular, is expected to continue. RESULTS OF OPERATIONS NET INCOME Nine Months Ended September 30, 1999, Compared to Nine Months Ended September 30, 1998 First National / Polk's net income for the nine month periods ended September 30, 1999 was $449,000 compared to $485,000 for the nine month period ending September 30, 1998. The net income per share for the periods ended September 30, 1999 and 1998 were $0.95 ($0.92 diluted) and $1.11 ($1.05 diluted). The per share income was negatively impacted due to the issuance of additional shares from the exercise of stock options. First National / Polk has a qualified stock option plan for it's employees, as well as a non qualified stock option plan for it's directors. First National / Polk's return on average assets ("ROA") and return on average equity ("ROE") for the nine month period ended September 30, 1999 was 0.80% and 9.42% as compared to the ROA and ROE of 0.93% and 12.06% for the nine month period ended September 30, 1998. The efficiency ratios for the two periods ended September 30, 1999 approximated 69% and 67% respectively. 8 250 There were positive improvements in net interest income of approximately $133,000 and in non interest income of approximately $68,000 in the nine month period ending September 30, 1999 as compared to the same period for 1998. These positive impacts were partially offset by the negative impacts resulting from a $24,000 increase in the loan loss provision, a $177,000 increase in non interest expense, and a $36,000 increase in income tax expense for the nine month period ending September 30, 1999, compared to the same period for 1998. The improvement in net interest margin was primarily due to a combination of increased interest earning assets and changes in interest bearing liabilities plus an increase in non interest bearing demand deposits. The increase in non interest expense is primarily due to an increase in compensation expense, insurance expenses/premiums and other related employee expenses. Year Ended December 31, 1998, Compared to Year Ended December 31, 1997 Net Income increased $143,000 or 26% to $691,000 in 1998 compared to $548,000 in 1997. Earnings per share increased $0.23 ($0.22 diluted) or 17% to $1.58 ($1.49 diluted) in 1998 compared to $1.35 ($1.27 dilutive) in 1997. ROA and ROE both increased to 0.99% and 12.66% in 1998 compared to 0.92% and 12.00% in 1997. The increase in earnings per share was negatively impacted, relative to the increase in net income, due to the issuance of additional shares related to the exercise of stock options, primarily in 1998. The increase in net income was due to an increase in net interest margin $286,000, a decrease in the loan loss provision $34,000, a decrease in income tax expense $6,000, and an increase in non interest income $65,000. These positive effects on net income were partially offset by an increase in non interest expense $248,000. NET INTEREST INCOME/MARGIN Net interest income consists of interest and fee income generated by earning assets, less interest expense. Nine Months Ended September 30, 1999, Compared to Nine Months Ended September 30, 1998 Net interest income increased $133,000 or 6% to $2,114,000 during the nine month period ended September 30, 1999 compared to $2,081,000 for the nine month period ended September 30, 1998. The $133,000 increase was a combination of a $27,000 decrease in interest income and a $160,000 decrease in interest expense. Average interest earning assets increased $4,825,000 to $68,458,000 during the nine month period ending September 30, 1999 compared to $63,633,000 for the nine month period ending September 30, 1998. Comparing these same two periods, yield on average interest earning assets decreased from 7.90% to 7.29%. The increase in volume had a positive effect on the change in interest income (+$301,000 volume variance), however, this was more than offset by the negative impact resulting from the 0.61% decrease in average yields (-$337,000 rate variance). The result was a $27,000 decrease in interest income. 9 251 Average interest bearing liabilities increased $2,248,000 to $57,194,000 during the nine month period ending September 30, 1999 compared to $54,946,000 for the nine month period ending September 30, 1998. Comparing these same two periods, the cost of average interest bearing liabilities decreased from 4.09% to 3.55%. Although there was an increase in volume, the resulting volume variance was a decrease of interest expense of approximately $10,000. The reason was because of the mixture of the components. Average balances of higher rate certificate of deposit accounts decreased, while lower cost deposits increased, thereby resulting in a decrease to interest expense. Refer to the tables Average Balances-Yields & Rates, and Analysis of Changes In Interest Income and Expenses below. The 0.54% decrease in average cost of interest bearing liabilities resulted in a decrease in interest expense (rate variance) of approximately $150,000. The result was a $160,000 decrease in interest expense. Year Ended December 31, 1998, Compared to Year Ended December 31, 1997 Net interest income increased $286,000 or 11.5% to $2,766,000 during 1998 compared to $2,346,000 for 1997. The $286,000 increase was a combination of a $559,000 increase in interest income and a $273,000 increase in interest expense. Average interest earning assets increased $9,816,000 to $63,969,000 during 1998 compared to $54,153,000 for 1997. Comparing these same two periods, the yield on average interest earning assets decreased from 7.95% to 7.62%. The increase in volume had a positive effect on the change in interest income (+$727,000 volume variance), however, this was partially offset by the negative impact resulting from the 0.33% decrease in average yields (-$156,000 rate variance). The result was a $571,000 increase in interest income. Average interest bearing liabilities increased $7,775,000 to $55,169,000 during 1998 compared to $47,394,000 for 1997. Comparing these same two periods, the cost of average interest bearing liabilities decreased from 4.13% to 4.05%. The increase in volume had an increasing effect on interest expense (+$104,000 volume variance). The increase in yield had an increasing effect on interest expense (+$169,000 rate variance). The result was a $273,000 increase in interest expense. 10 252 AVERAGE BALANCES - YIELDS & RATES (Dollars are in Thousands)
Nine Months Ended September 30, ------------------------------------------------------------- 1999 1998 ----------------------------- --------------------------- Average Interest Average Average Interest Average Balance Inc/Exp Rate(1) Balance Inc/Exp Rate(1) ------- -------- ------- ------- -------- ------- ASSETS: Federal Funds Sold $ 3,322 $ 119 4.79% $ 5,926 $ 241 5.44% Securities Available for Sale 25,522 1,004 5.26% 21,376 943 5.90% Loans (2) (5) 39,614 2,611 8.81% 36,331 2,577 9.48% ------- ------ ---- ------- ------ ---- TOTAL EARNING ASSETS $68,458 $3,734 7.29% $63,633 $3,761 7.90% All Other Assets 6,405 5,863 ------- ------- TOTAL ASSETS $74,863 $69,496 ======= ======= LIABILITIES & SHAREHOLDERS' EQUITY: Deposits: NOW & Money Markets $25,972 $ 514 2.65% $21,539 $ 455 2.82% Savings 4,700 47 1.34% 3,988 60 2.01% Time Deposits 26,138 947 4.84% 28,608 1,134 5.30% Short Term Borrowings 384 12 4.18% 811 31 5.11% ------- ------ ---- ------- ------ ---- TOTAL INTEREST BEARING LIABILITIES $57,194 $1,520 3.55% $54,946 $1,680 4.09% Demand Deposits 11,039 8,923 Other Liabilities 274 267 Shareholders' Equity 6,356 5,360 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $74,863 $69,496 ======= ======= NET INTEREST SPREAD (3) 3.74% 3.81% ==== ==== NET INTEREST INCOME $2,214 $2,081 ======= ======== NET INTEREST MARGIN (4) 4.32% 4.37% ==== ====
Years Ended December 31, ------------------------------------------------------------- 1998 1997 ----------------------------- --------------------------- Average Interest Average Average Interest Average Balance Inc/Exp Rate(1) Balance Inc/Exp Rate(1) ------- -------- ------- ------- -------- ------- ASSETS: Federal Funds Sold $ 5,462 $ 292 5.35% $ 3,637 $196 5.39% Securities Available for Sale 21,516 1,254 5.83% 17,975 1,097 6.10% Loans (2) (5) 36,991 3,452 9.33% 32,541 3,146 9.67% ------- ------ ---- ------- ------ ---- TOTAL EARNING ASSETS $63,969 $4,998 7.81% $54,153 $4,439 8.20% All Other Assets 5,932 5,320 ------- ------- TOTAL ASSETS $69,901 $59,473 ======= ======= LIABILITIES & SHAREHOLDERS' EQUITY: Deposits: NOW & Money Markets $21,948 $ 614 2.80% $13,953 $ 265 1.90% Savings 4,026 78 1.94% 3,015 60 1.99% Time Deposits 28,512 1,506 5.28% 30,015 1,614 5.38% Short Term Borrowings 683 34 4.98% 411 20 4.87% ------- ------ ---- ------- ------ ---- TOTAL INTEREST BEARING LIABILITIES $55,169 $2,232 4.05% $47,394 $1,959 4.13% Demand Deposits 9,000 7,251 Other Liabilities 276 260 Shareholders' Equity 5,456 4,568 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $69,901 $59,473 ======= ======= NET INTEREST SPREAD (3) 3.77% 4.06% ==== ==== NET INTEREST INCOME $2,766 $2,480 ====== ====== NET INTEREST MARGIN (4) 4.32% 4.58% ==== ====
(1) Nine month data presented on an annualized basis. (2) Interest income on average loans includes loan fee recognition of $88,000 and $96,000 for the nine month periods ended September 30 1999 and 1998, and $122,000 and $134,000 for the years ended December 31, 1998 and 1997. Generally, interest is not accrued on loans past due by more than 90 days. (3) Represents the average rate earned on interest earning assets minus the average rate paid on interest bearing liabilities. (4) Represents net interest income divided by total earning assets. (5) Loan balances are net of deferred fees/cost of origination and reserve for loan loss allowances. 11 253 ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSES (Dollars are in Thousands)
Net Change Net Change Sept 30, 1998 - 1999 Dec 31, 1998 - 1999 ---------------------------- ---------------------------- Net Net Volume(1) Rate (2) Change Volume (1) Rate (2) Change ---------------------------- ---------------------------- INTEREST INCOME Federal Funds sold $(106) $(16) $(122) $ 98 $(2) $ 96 Securities Available for Sale 183 (122) 61 216 (59) 157 Loans 233 (199) 34 430 (124) 306 ----- ----- ----- ----- ----- ----- TOTAL INTEREST INCOME $ 310 (337) $ (27) $ 745 $(186) $ 559 ===== ===== ===== ===== ===== ===== INTEREST EXPENSE Deposits NOW & Money Market Accounts $ 94 $ (35) $ 59 $ 152 $ 197 $ 349 Savings 11 (24) (13) 20 (2) 18 Time Deposits (98) (89) (187) (81) (27) (108) Short-Term Borrowings (16) (3) (19) 13 1 14 ----- ----- ----- ----- ----- ----- TOTAL INTEREST EXPENSE $ (10) $(150) $(160) $ 104 $ 169 $ 273 ----- ----- ----- ----- ----- ----- NET INTEREST INCOME $ 320 $(187) $ 133 $ 640 $(354) $ 286 ===== ===== ===== ===== ===== =====
(1) The volume variance reflects the change in the average balance outstanding multiplied by the actual average rate During the prior period. (2) The rate variance reflects the change in the actual average rate multiplied by the average balance outstanding during the current period. PROVISION FOR LOAN LOSSES Management's policy is to maintain the allowance for loan losses at a level sufficient to absorb inherent losses in the loan portfolio. The allowance is increased by the provision for loan losses, which is a charge to current period earnings, and net recoveries on prior period loan charge-offs. The allowance is decreased by net charge-offs. In determining the adequacy of the reserve for loan losses, management considers the conditions of individual borrowers, First National / Polk's historical loan loss experience, the general economic environment, and the overall portfolio composition. As these factors change, the level of loan loss provision changes. Nine Months Ended September 30, 1999, Compared to Nine Months Ended September 30, 1998 The provision for loan loss expense increased $24,000, or 62%, to $63,000 during the nine month period ending September 30, 1999, as compared to $39,000 for the comparable period in 1998, due to an increase in general lending activity. The increase is due primarily to net charge-offs of $115,000 during the nine month period ended September 30, 1999 compared to $1,000 in net charge-offs during the nine month period ended September 30, 1998. At September 30, 1999 the allowance for loan losses totaled $636,000 or 1.56% of total loans outstanding compared to $692,000 or 1.75% of total loans outstanding at September 30, 1998. Year Ended December 31, 1998, Compared to Year Ended December 31, 1997 The provision for loan loss expense decreased $34,000, or 47%, to $39,000 during 1998, as compared to $73,000 for 1997. The decrease was primarily due to a change in management's assessments of conditions of individual borrowers and the overall portfolio composition. At December 31, 1998 the provision for loan losses totaled $688,000 or 12 254 1.72% of total loans outstanding compared to $654,000 or 1.86% of total loans outstanding at December 31, 1997. Management believes that First National / Polk's allowance for loan losses at September 30, 1999. The following sets forth certain information on First National / Polk's allowance for loan losses for the periods presented. ACTIVITY IN ALLOWANCE FOR LOAN LOSSES (In Thousands of Dollars)
Nine Months Ended Years Ended Sept 30 Dec 31 ---------------------- ---------------------- 1999 1998 1998 1997 -------- -------- -------- -------- Balance at Beginning of Year $ 688 $ 654 $ 654 $ 613 Loans Charged-Off: Commercial, Financial & Agricultural (86) 0 0 0 Real Estate, Mortgage (25) 0 (5) (50) Consumer (6) (19) (19) (1) -------- -------- -------- -------- Total Loans Charged-Off $ (117) $ (19) $ (24) $ (51) -------- -------- -------- -------- Recoveries on Loans Previously Charged-Off: Commercial, Financial & Agricultural $ 0 $ 0 $ 0 $ 10 Real Estate, Mortgage 0 17 17 9 Consumer 2 1 2 0 -------- -------- -------- -------- Total Loan Recoveries $ 2 $ 18 $ 19 $ 19 -------- -------- -------- -------- Net Loans Charged-Off $ (115) $ (1) $ (5) $ (32) -------- -------- -------- -------- Provision for Loan Losses Charged to Expense $ 63 $ 39 $ 39 $ 73 -------- -------- -------- -------- Ending Balance $ 636 $ 692 $ 688 $ 654 ======== ======== ======== ======== Total Loans Outstanding $ 40,816 $ 39,465 $ 40,103 $ 35,151 Average Loans Outstanding $ 40,406 $ 38,598 $ 39,717 $ 34,968 Allowance for Loan Losses to Loans Outstanding 1.56% 1.75% 1.72% 1.86% Net Charge-offs to Average Loans Outstanding (annualized) 0.38% 0.00% 0.01% 0.09%
NON-INTEREST INCOME Nine Months Ended September 30, 1999, Compared to Nine Months Ended September 30, 1998 Non interest income for the nine months ended September 30, 1999 increased $68,000 or 34% to $267,000 as compared to $199,000 for the same period in 1998. Most of this increase ($31,000) was due to an increase in service fees from various deposit accounts. The remaining increase relates to increases in 13 255 ATM charges ($12,000), and other miscellaneous fees ($25,000). Year Ended December 31, 1998, Compared to Year Ended December 31, 1997 Non-interest income for 1998 increased by $65,000 or 31%, to $274,000 as compared to $209,000 for 1997. The net increase was comprised of a $54,000 increase in service fees on various deposit accounts and a $11,000 increase from other service charges and fees. NON-INTEREST EXPENSE Nine Months Ended September 30, 1999, Compared to Nine Months Ended September 30, 1998 Non-interest expense increased $177,000 (12%) for the nine months ended September 30, 1999, to $1,713,000 compared to $1,536,000 for the same period in 1998. The increase was a result of a $109,000 increase in compensation and related employee benefits, due to an increase of a net 3 full time equivalent employees along with normal salary increases. Medical and life insurance premiums and expenses contributed to this increase as well as the normal relationship of payroll taxes to gross payroll. Data processing service expense increased $37,000 primarily due to the Bank switching from manual check sorting and stuffing in house, to outsourcing this function with an automated processor. Occupancy expense increased $24,000 and the remaining non interest expense variances net to $7,000 as summarized in the table below - Non Interest Expenses. Year Ended December 31, 1998, Compared to Year Ended December 31, 1997 Non-interest expense increased $248,000 (14%) to $2,014,000 during 1998 compared to $1,766,000 for 1997. The increase was a result of a $85,000 increase in compensation and related employee benefits, due to changes in staffing along with normal salary increases. Medical and life insurance premiums and expenses have contributed to this increase as well as the normal relationship of payroll taxes to gross payroll. Data processing service expense increased $52,000 primarily due to the Bank switching from manual check sorting and stuffing in house, to outsourcing this function with an automated processor. Depreciation of premises and equipment increased $46,000 primarily due to the completion of the Bank's newest branch office building in the third quarter of 1997, as well as the replacement and addition of equipment partially related to year 2000 upgrades. Prior to moving into the permanent building, the branch office operated out of a temporary facility effective January 1997. Advertising and public relations increased $11,000, Director fees increased $10,000, Legal and Accounting increased $16,000 and the remaining non interest expense variances net to approximately $28,000. See Non Interest Expenses table below. 14 256 NON INTEREST EXPENSES (Dollars are in Thousands)
Nine months ended Year ended Sept 30 Dec 31 ------------------------------ ----------------------------- 1999 1998 Incr/(Decr) 1998 1997 Incr/(Decr) ------------------------------ ----------------------------- Salary, wages and employee benefits $770 $661 $109 $887 $802 $85 Occupancy expense 190 166 24 216 215 1 Depreciation of premises and equipment 164 166 (2) 213 167 46 Stationary and printing supplies 67 64 3 77 83 (6) Advertising and public relations 38 42 (4) 57 46 11 Data processing expense 169 132 37 185 133 52 Legal & professional fees 49 56 (7) 52 36 16 Other operating expenses 266 249 17 327 284 43 ---------------------------- ------------------------------ Total non interest expenses $1,713 $1,527 $177 $2,014 $1,766 $248 ---------------------------- ------------------------------
INCOME TAX PROVISION The income tax provision for the nine month period ended September 30, 1999 was $256,000, an effective tax rate of 36.3%, as compared to $220,000 for the nine month period ended September 30, 1998, an effective tax rate of 31.2%. The income tax provision for the year ended December 31, 1998, was $296,000, an effective tax rate of 30.0%, as compared to $302,000 for the year ended December 31, 1997, an effective tax rate of 35.5%. NET INCOME Net income for the years ended December 31, 1998, and 1997 was $691,000 and $548,000, respectively. Net income for the nine month periods ended September 30, 1999 and 1998 was $449,000 and $485,000 respectively. FINANCIAL CONDITION As of September 30, 1999, the First National / Polk had total assets of $72.2 million, compared to $73.8 million and $63.9 million as of December 31, 1998, and 1997, respectively. Net loans outstanding on September 30, 1999, were $40.2 million, compared to $39.4 million and $34.5 million as of December 31, 1998, and 1997, respectively. Loans Lending related income is the most important component of First National / Polk's net interest income and is the major contributor to profitability. The loan portfolio is the largest component of earning assets, and it generates the largest portion of revenues. The absolute volume of loans and the volume of loans as a percentage of earning assets is an important determinant of net interest margin as loans are expected to produce higher yields than securities and other earning assets. Average loans during the nine-month period ending September 30, 1999, were $39,614,000, or 57.9% of earning assets as compared to $36,991,000 or 57.8% of earning assets for December 31, 1998 and $32,541,000 or 60.1% of earning assets for December 31, 1997. This represented an average loan to average deposit ratio of 58.4%, 58.3%, and 60.0% for September 30, 1999, December 31, 1998, and December 31, 1997 respectively. As of September 30, 1999, First National / Polk had total loans net of deferred fees/costs of $40,816,000 as compared to $40,103,000 at December 31, 1998, an increase of $713,000, or 1.8%. The growth in loans in the nine-month period was mainly due to the general growth in the market and the 15 257 calling efforts of the loan officers. As of September 30, 1999, commercial, financial and agricultural loans totaled $4,928,000 or 12.1% of the loan portfolio. Real estate construction loans totaled $1,152,000 or 2.8% of the loan portfolio. Real estate mortgage loans totaled $27,298,000 or 66.9% of the loan portfolio. Installment and consumer loans totaled $7,438,000 or 18.2% of the loan portfolio. As of December 31, 1998, First National / Polk had total loans net of deferred fees/costs of $40,103,000 as compared to $35,151,000 at December 31, 1997, an increase of $4,952,000 or 14.1%. The growth was mainly due to general growth in the market and the calling efforts of the loan officers. As of December 31, 1998 commercial, financial and agricultural loans totaled $5,433,000 or 13.5% of the loan portfolio. Real estate construction loans totaled $1,801,000 or 4.5% of the loan portfolio. Real estate mortgage loans primarily consisted of singe family residential mortgages and totaled $25,692,000 or 64.1% of the loan portfolio. Installment and consumer loans totaled $7,177,000 or 17.9% of the loan portfolio. Loan concentrations are considered by management to exist where there are amounts loaned to multiple borrowers engaged in similar activities which collectively should be similarly impacted by economic or other conditions and when the total of such amounts would exceed 25% of total capital. Due to the lack of diversified industry in the markets served, First National / Polk has concentrations in geographic locations as well as in types of loans funded. The tables below provide a summary of the loan portfolio composition and maturities for the periods provided below. LOAN PORTFOLIO COMPOSITION (Dollars are in Thousands)
TYPES OF LOANS September 30, December 31, --------------------- --------------------- 1999 1998 1998 1997 -------- -------- -------- -------- Commercial, Financial & Agricultural $ 4,928 $ 4,928 $ 5,433 $ 3,962 Real Estate - Construction 1,152 2,521 1,801 1,563 Real Estate - Mortgage 27,298 24,919 25,692 23,109 Installment & Consumer Lines 7,438 7,097 7,177 6,517 -------- -------- -------- -------- Total Loans, Net of Deferred fees/costs $ 40,816 $ 39,465 $ 40,103 $ 35,151 Less: Allowance for Loan Losses (636) (692) (688) (654) -------- -------- -------- -------- Net Loans $ 40,180 $ 38,773 $ 39,415 $ 34,497 ======== ======== ======== ========
LOAN MATURITY SCHEDULE (Dollars are in Thousands) September 30, 1999 ---------------------------------------------------- 0 - 12 1 - 5 Over 5 Months Years Years Total ------- ------- ------- ------- All Loans other Than Construction $21,605 $12,401 $ 5,658 $39,664 Real Estate - Construction 1,152 0 0 1,152 ------- ------- ------- ------- Total $22,757 $12,401 $ 5,658 $40,816 ======= ======= ======= ======= Fixed Interest Rate $ 70 $ 4,291 $ 5,221 $ 9,582 Variable Interest Rate 22,687 8,110 437 31,234 ------- ------- ------- ------- Total $22,757 $12,401 $ 5,658 $40,816 ======= ======= ======= =======
December 31, 1998 ---------------------------------------------------- 0 - 12 1 - 5 Over 5 Months Years Years Total ------- ------- ------- ------- All Loans Other Than Construction $21,703 $11,520 $ 5,080 $38,303 Real Estate - Construction 1,800 0 0 1,800 ------- ------- ------- ------- Total $23,503 $11,520 $ 5,080 $40,103 ======= ======= ======= ======= Fixed Interest Rate $ 1,946 $ 6,789 $ 4,733 $13,468 Variable Interest Rate 21,557 4,731 347 26,635 ------- ------- ------- ------- Total $23,503 $11,520 $ 5,080 $40,103 ======= ======= ======= =======
16 258 Credit Quality First National / Polk maintains an allowance for loan losses to absorb inherent losses in the loan portfolio. The loans are charged against the allowance when management believes collection of the principal is unlikely. The allowance consists of amounts established for specific loans and is also based on historical loan loss experience. The specific reserve element is the result of a regular analysis of all loans and commitments based on credit rating classifications. The historical loan loss element represents a projection of possible future credit problems and is determined using loan loss experience of each loan type. Management also weighs general economic conditions based on knowledge of specific factors that may affect the collectibility of loans. First National / Polk is committed to the early recognition of possible problems and to maintaining a sufficient allowance. At September 30, 1999, the allowance for loan losses was $636,000, or 1.6% of total loans outstanding, net of unearned income, compared to $688,000, or 1.7% at December 31, 1998, and $654,000, or 1.9%, at December 31, 1997. Non-performing assets consist of non-accrual loans, loans past due 90 days or more and still accruing interest, and other real estate owned. Loans are placed on a non-accrual status when they are past due 90 days and management believes the borrower's financial condition, after giving consideration to economic conditions and collection efforts, is such that collection of interest is doubtful. When a loan is placed on non-accrual status, interest accruals cease and uncollected interest is reversed and charged against current income. Subsequent collections reduce the principal balance of the loan until the loan is returned to accrual status. Total non-performing assets as of September 30, 1999, increased $227,000, or 123%, to $411,000, compared to $184,000 on the same date in 1998. Non-performing loans, plus other real estate owned, as a percentage of total assets at September 30, 1999, and 1998, was .57% and .26%, respectively. The increase in non-performing assets was mainly attributable to the previous very low level and a series of recent defaults. Management believes that First National / Polk's allowance for loan losses was adequate at September 30, 1999. Total non-performing assets increased by $657,000 to $657,000 in 1998 from $-0- in 1997. Non-performing assets, as a percentage of total assets increased to .89% in 1998 from 0% in 1997. The increase in non-performing assets was mainly attributable to the previous very low level. Year end loans, net of deferred fees/costs and the allowance for loan losses, were $39,415,000 as compared to$34,497,000 in 1997, representing an increase of $4,918,000 or 14.3%. Management is continually analyzing its loan portfolio in an effort to recognize and resolve its problem assets as quickly and efficiently as possible. As of September 30, 1999, management believes that it has identified and adequately reserved for such problem assets. However, management recognizes that many factors can adversely impact various segments of its market. As such, management continuously focuses its attention on promptly identifying and managing potential problem loans as they arise. The tables below summarizes First National/Polk's non performing assets and allocation of allowance for loan losses for the periods provided 17 259 NON PERFORMING ASSETS (Dollars are in Thousands)
September 30, December 31, --------------------- --------------------- 1999 1998 1998 1997 ------ ------ ------ ------ Non-Accrual Loans $ 201 $ 184 $ 452 $ 0 Past Due Loans 90 Days or More and Still Accruing Interest 2 0 2 0 Other Real Estate Owned 208 0 203 0 ------ ------ ------ ------ Total Non-Performing Assets $ 411 $ 184 $ 657 $ 0 ====== ====== ====== ====== Percent of Total Assets 0.57% 0.26% 0.89% 0.00% ====== ====== ====== ====== Allowance for Loan Losses $ 636 $ 692 $ 688 $ 654 ====== ====== ====== ====== Allowance for Loan Losses to Nonperforming Loans 154.74% 376.09% 104.72% 0.00% ====== ====== ====== ======
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES (Dollars are in Thousands) September 30, 1999 December 31, 1998 December 31, 1997 ---------------------- ---------------------- ---------------------- Percent Percent Percent of of of Loans in Loans in Loans Each Each in Each Category Category Category to to to Amount Total Loans Amount Total Loans Amount Total Loans ------ ----------- ------ ----------- ------ ----------- Commercial, Financial & Agricultural $333 12% $410 14% $413 11% Real Estate Construction 63 3% 59 4% 42 4% Real Estate - Mortgage 139 67% 153 65% 148 67% Consumer 66 17% 66 17% 51 18% Unallocated 35 1% 0 0% 0 0% ---- ---- ---- ---- ---- ---- Total $636 100% $688 100% $654 100% ==== ==== ==== ==== ==== ====
Deposits and Funds Purchased Total deposits as of September 30, 1999, were $65,098,000 compared to $67,426,000 on December 31, 1998, a decrease of $2,328,000 or 3%, during the nine month period ended September 30, 1999. Total deposits for the year ended December 31, 1998, increased by $8,972,000 or 15.3%, as compared to total deposits of $58,454,000 at December 31, 1997. The Bank does not rely on purchased or brokered deposits as a source of funds. Instead, the generation of deposits within its market area, serves as the Bank's fundamental tool in providing a source of funds to be invested, primarily in loans. The tables below summarize selected deposit information for the periods indicated. SELECTED STATISTICAL INFORMATION FOR DEPOSITS (Dollars in Thousands)
September 30, December 31, ---------------- -------------------------------------- 1999 1998 1997 ---------------- -------------------------------------- Average Average Average Balance Rate Balance Rate Balance Rate ------- ---- ------- ---- ------- ---- Noninterest-bearing Demand deposits $11,039 0.00% $ 9,000 0.00% $ 7,251 0.00% Interest-bearing demand Deposits 25,972 2.80% 21,948 2.80% 13,953 1.90% Savings deposits 4,700 1.34% 4,026 1.94% 3,015 1.99% Time deposits 26,138 4.84% 28,512 5.28% 30,015 5.38% ------- ---- ------- ---- ------- ---- Total Average Deposits $67,849 2.97% $63,486 3.46% $54,234 3.58% ======= ==== ======= ==== ======= ====
18 260 MATURITY OF TIME DEPOSITS OF $100,000 OR MORE (Dollars are in Thousands)
Sept 30, 1999 Dec 31, 1998 ------------- ------------ Three Months or Less $ 946 $1,408 Three Through Six Months 1,091 990 Six Through Twelve Months 676 780 Over Twelve Months 544 428 ------ ------ Total $3,257 $3,606 ====== ======
Repurchase Agreements First National / Polk enters into agreements to repurchase ("repurchase agreements") under which the Bank pledges investment securities owned and under its control as collateral against the one-day agreements. The daily average balance of these agreements for the periods ended September 30, 1999 and 1998 was approximately $384,000 and $811,000, respectively. Interest expense for the same periods was approximately $12,000 and $31,000, respectively, resulting in an average rate paid of 4.26% and 5.03% for the nine-month periods ended September 30, 1999 and 1998, respectively. The daily average balance for the period ended December 31, 1998, and 1997 was approximately $683,000 and $411,000, respectively. Interest expense for these periods was approximately $34,000 and $20,000, respectively, resulting in an average rate paid of 4.97% and 4.91% for the years ended 1998 and 1997, respectively. SCHEDULE OF SHORT-TERM BORROWINGS (1) (dollars in thousands)
Maximum Average Weighted Outstanding Interest Rate Average at any Average during the Ending Interest Rate Month End Balance Year Balance at Year End ----------- ------- ------------- ------- ------------- NINE MONTHS ENDED September 30, 1999 $734 $384 4.26% $365 4.28% September 30, 1998 $1,161 $811 5.03% $261 4.86% YEAR ENDED DECEMBER 31, 1998 $1,161 $683 4.97% $255 4.85% 1997 $567 $411 4.91% $389 4.85% - -------------------------
(1) Consists of Securities sold under agreements to repurchase Securities First National / Polk accounts for investments at fair value except for those securities which the Bank has the positive intent and ability to hold to maturity. Investments to be held for indefinite periods of time and not intended to be held to maturity are classified as available for sale and are carried at fair value. Unrealized holding gains and losses are included as a separate component of stockholders' equity net of the effect of income taxes. Realized gains and losses on investment securities available for sale are computed using the specific identification method. 19 261 Securities that management has the intent and the Bank has the ability at the time of purchase or origination to hold until maturity are classified as investment securities held to maturity. Securities in this category are carried at amortized cost adjusted for accretion of discounts and amortization of premiums using the level yield method over the estimated life of the securities. If a security has a decline in fair value below its amortized cost that is other than temporary, then the security will be written down to its new cost basis by recording a loss in the statement of operations. First National / Polk does not engage in trading activities as defined in Statement of Financial Accounting Standard No. 115. First National / Polk 's available for sale portfolio was $23,182,000 at September 30, 1999, $23,810,000 at December 31, 1998, and $18,647,000 at December 31, 1997, 32%, 32% and 29% respectively of total assets. See the tables below for a summary of security type, maturity and average yield distributions. First National / Polk does not have any securities in it's held to maturity portfolio at September 30, 1999, December 31, 1998 and December 31, 1997. First National / Polk uses its securities portfolio primarily as a source of liquidity and a base from which to pledge assets for repurchase agreements and public deposits. When the company's liquidity position exceeds expected loan demand, other investments are considered by management as a secondary earnings alternative. Typically, management remains short-term (under 5 years) in its decision to invest in certain securities. As these investments mature, they will be used to meet cash needs or will be reinvested to maintain a desired liquidity position.. First National / Polk has designated it's securities as available for sale to provide flexibility, in case an immediate need for liquidity arises. The composition of the portfolio offers management full flexibility in managing its liquidity position and interest rate sensitivity, with the intent to minimize the adverse impact on its regulatory capital levels. The available for sale portfolio is carried at fair market value and had a net unrealized loss of approximately $74,000 on September 30, 1999, a net unrealized gain of approximately $110,000 on December 31, 1998 and a net unrealized gain of approximately $38,000 on December 31, 1997. First National / Polk invests primarily in direct obligations of the United States, obligations guaranteed as to the principal and interest by the United States and obligations of agencies of the United States. In addition, First National/Polk enters into federal funds transactions with its principal correspondent banks, and acts as a net seller of such funds. The Federal Reserve Bank also requires equity investments to be maintained by First National/Polk. The tables below summarize the maturity distribution of securities, weighted average yield by range of maturities, and distribution of securities for the periods provided. 20 262 MATURITY DISTRIBUTION OF INVESTMENT SECURITIES (Dollars are in Thousands)
September 30, 1999 December 31, 1998 December 31, 1997 ---------------------- -------------------- --------------------- Estimated Estimated Estimated AVAILABLE-FOR-SALE Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value --------- --------- --------- --------- ---------- --------- U.S. Treasury and U.S. Government Agency and Corporations and Obligations of State and Political Subdivisions: One Year or Less $18,122 $18,064 $ 8,649 $ 8,690 $12,974 $12,997 Over One Through Five Years 4,990 4,974 14,918 14,987 5,515 5,530 Over Five Through Ten Years 0 0 0 0 0 0 Over Ten Years 0 0 0 0 0 0 Federal Reserve Bank Stock 144 144 133 133 120 120 ------- ------- ------- ------- ------- ------- Total $23,256 $23,182 $23,700 $23,810 $18,609 $18,647 ======= ======= ======= ======= ======= ======= HELD-TO-MATURITY ------- ------- ------- ------- ------- ------- Total $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ======= ======= ======= ======= ======= =======
WEIGHTED AVERAGE YIELD BY RANGE OF MATURITIES (Average Yields on Securities Available for Sale Were Calculated Based on Amortized Cost)
Sept 30, 1999 Dec 31, 1998 Dec 31, 1997 ------------------------------------------------------------ One Year or Less 5.33% 5.75% 6.15% Over One Through Five Years 4.76% 5.37% 6.01% Over Five Through Ten Years 0.00% 0.00% 0.00% Over Ten Years 0.00% 0.00% 0.00%
DISTRIBUTION OF INVESTMENT SECURITIES (Dollars are in Thousands)
September 30, 1999 December 31, 1998 December 31, 1997 -------------------- -------------------- -------------------- Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value --------- ------- --------- ------- --------- ------- US Treasury Securities $12,536 $12,514 $ 8,535 $ 8,597 $14,487 $14,530 US Government Agencies 8,997 8,962 12,995 13,040 4,002 3,997 State, County, & Municipal 1,000 1,000 1,000 1,000 0 0 Mortgage-Backed Securities 579 562 1,037 1,040 0 0 Federal Reserve Bank Stock 144 144 133 133 120 120 ------- ------- ------- ------- ------- ------- Total $23,256 $23,182 $23,700 $23,810 $18,609 $18,647 ======= ======= ======= ======= ======= =======
Liquidity and Interest Rate Sensitivity Market and public confidence is the financial strength of First National / Polk and financial institutions in general, and will largely determine the institutions access to appropriate levels of liquidity. This confidence is significantly dependent on First National / Polk 's ability to maintain sound asset quality and appropriate levels of capital reserves. Liquidity is defined as the ability of First National / Polk to meet anticipated customer demands for funds under credit commitments and deposit withdrawals at a reasonable cost and on a timely basis. Management measures the Bank's liquidity position by giving consideration to both on- and off-balance sheet sources of and demands for funds on a daily and weekly basis. 21 263 Sources of liquidity include cash and cash equivalents, net of federal requirements to maintain reserves against deposit liabilities; investment securities eligible for pledging to secure borrowings from dealers and customers pursuant to securities sold under repurchase agreements; loan repayments; loan sales; deposits and certain interest rate-sensitive deposits; and borrowings under overnight federal fund lines available from correspondent banks. In addition to interest rate-sensitive deposits, First National / Polk's primary demand for liquidity is anticipated fundings under credit commitments to customers. Interest rate sensitivity refers to the responsiveness of interest-earning assets and interest-bearing liabilities to changes in market interest rates. The rate sensitive position, or gap, is the difference in the volume of rate-sensitive assets and liabilities, at a given time interval, including both floating rate instruments and instruments which are approaching maturity. The measurement of First National / Polk's interest rate sensitivity, or gap, is one of the principal techniques used in asset and liability management. Management generally attempts to maintain a balance between rate-sensitive assets and liabilities as the exposure period is lengthened to minimize the overall interest rate risks to the company The asset mix of the balance sheet is evaluated continually in terms of several variables: yield, credit quality, appropriate funding sources and liquidity. Management of the liability mix of the balance sheet focuses on expanding the various funding sources. First National / Polk's gap and liquidity positions are reviewed periodically by management to determine whether or not changes in policies and procedures are necessary to achieve financial goals. At September 30, 1999, approximately 77% of total gross loans were adjustable rate, 83% of total securities either reprice or mature in less than one year, and the remaining securities either reprice or mature in two years or less. Total deposit liabilities consisted of approximately $29,489,000 (45%) in NOW, Money Market Accounts and Savings, $24,793,000 (38%) in time deposits, and $10,816,000 (17%) in non interest bearing demand accounts. At December 31, 1998, approximately 66% of total gross loans were adjustable rate, 36% of total securities either reprice or mature in less than one year, and the remaining securities either reprice or mature in two years or less. Total deposit liabilities consisted of approximately $29,370,000 (44%) in NOW, Money Market Accounts and Savings, $27,989,000 (41%) in time deposits, and $10,066,000 (15%) in non interest bearing demand accounts. A rate sensitivity analysis is presented below as of September 30, 1999 and December 31, 1998. First National / Polk has prepared a table which presents the market risk associated with financial instruments held by the company. In the "Rate Sensitivity Analysis" table, rate sensitive assets and liabilities are shown by maturity or repricing periods, separating fixed and variable interest rates. The estimated fair value of each instrument category is also shown in the table. While these estimates of fair value are based on management's judgment of the most appropriate factors, there is no assurance that, were First National / Polk have to dispose of such instruments at December 31, 1998, and September 30, 1999, the estimated fair values would necessarily have been achieved at that date, since market values may differ depending on various circumstances. The estimated fair values at December 31, 1998, and September 30, 1999, should not necessarily be considered to apply at subsequent dates. 22 264 RATE SENSITIVITY ANALYSIS September 30, 1999 (Dollars are in Thousands)
Est. Fair 1 Year 2 Years 3 Years 4 Years 5 Years 5 Ys + TOTAL Value ------ ------- ------- ------- ------- ------- ------ -------- INTEREST EARNING ASSETS Loans Fixed Rate Loans $70 $68 $202 $1,714 $2,307 $5,221 $9,582 $ 9,615 Average Interest Rates 9.05% 9.40% 8.70% 9.15% 8.90% 8.45% 8.70% Variable Rate Loans 22,687 1,473 1,107 5,361 169 437 31,234 31,234 Average Interest Rates 8.43% 8.66% 8.63% 8.33% 9.35% 8.10% 8.43% Investment Securities (1) Fixed Rate Securities 18,096 4,016 0 0 0 0 22,112 22,038 Average Interest Rates 5.19% 4.76% 5.11% Variable Rate Securities 1,000 0 0 0 0 0 1,000 1,000 Average Interest Rates 5.51% 5.51% Federal Funds Sold 2,673 0 0 0 0 0 2,673 2673 Average Interest Rates 5.13% 5.36% Other Earning Assets (2) 144 0 0 0 0 0 144 144 Average Interest Rates 6.00% 6.00% ------- ------ ------ ------ ------ ------ ------- -------- Total Interest-Earning Assets $44,670 $5,557 $1,309 $7,075 $2,476 $5,658 $66,745 $ 66,704 6.88% 5.85% 8.64% 8.53% 8.92% 7.98% 7.19% ======= ====== ====== ====== ====== ====== ===== INTEREST BEARING LIABILITIES NOW Accounts $10,750 $0 $0 $0 $0 $0 $10,750 $10,750 Average Interest Rates 0.95% 0.95% Money Market Accounts 13,794 0 0 0 0 0 13,794 13,794 Average Interest Rates 4.33% 4.33% Savings Accounts 4,945 0 0 0 0 0 4,945 4,945 Average Interest Rates 1.19% 1.19% CDs $100,000 & Over 2,715 210 200 132 0 0 3,257 3,255 Average Interest Rates 4.34% 4.53% 6.25% 5.55% 4.52% CDs Under $100,000 16,126 3,593 1,405 264 138 0 21,526 21,535 Average Interest Rates 4.69% 4.74% 5.59% 5.19% 4.70% 4.63% Securities Sold Under Repurchase Agreements 365 0 0 0 0 0 365 365 Average Interest Rates 4.63% 4.63% ------- ------ ------ ------ ------ ------ ------- -------- Total Interest-Bearing Liabilities $48,695 $3,803 $1,605 $396 $138 $0 $54,637 $ 54,644 3.39% 4.73% 5.67% 5.31% 4.70% 3.58% ======= ====== ====== ====== ====== ====== ======
- -------------------------------- (1) Securities available for sale are shown at their amortized cost. (2) Represents interest earning Federal Reserve Bank Stock. 23 265 RATE SENSITIVITY ANALYSIS December 31, 1998 (Dollars are in Thousands)
Est. Fair 1 Year 2 Years 3 Years 4 Years 5 Years 5 Ys + TOTAL Value ------ ------- ------- ------- ------- ------- ------ -------- INTEREST EARNING ASSETS Loans Fixed Rate Loans $1,946 $921 $711 $2,211 $2,946 $4,733 $13,468 $13,874 Average Interest Rates 8.56% 9.56% 8.45% 8.93% 9.10% 9.26% 9.05% Variable Rate Loans 21,557 720 870 3,116 25 347 26,635 26,635 Average Interest Rates 8.30% 9.13% 9.30% 8.55% 8.80% 7.40% 8.37% Investment Securities (1) Fixed Rate Securities 7,516 15,051 0 0 0 0 22,567 22,677 Average Interest Rates 5.76% 5.36% 5.46% Variable Rate Securities 1,000 0 0 0 0 0 1,000 1,000 Average Interest Rates 5.77% 5.77% Federal Funds Sold 3,752 0 0 0 0 0 3,752 3752 Average Interest Rates 4.67% 4.67% Other Earning Assets (2) 133 0 0 0 0 0 133 133 Average Interest Rates 6.00% 6.00% ------- ------- ------ ------ ------ ------ ------- ------- Total Interest-Earning Assets $35,904 $16,692 $1,581 $5,327 $2,971 $5,080 $67,555 $68,071 7.30% 5.75% 8.92% 8.71% 9.10% 9.13% 7.28% ======= -====== ====== ====== ====== ====== ======= ======= INTEREST BEARING LIABILITIES NOW Accounts $13,006 $0 $0 $0 $0 $0 $13,006 $13,006 Average Interest Rates 1.42% 1.42% Money Market Accounts 12,072 0 0 0 0 0 12,072 12,072 Average Interest Rates 3.98% 3.98% Savings Accounts 4,293 0 0 0 0 0 4,293 4,293 Average Interest Rates 1.75% 1.75% CDs $100,000 & Over 3,179 100 0 200 127 0 3,606 3,661 Average Interest Rates 5.14% 5.25% 6.25% 5.55% 5.22% CDs Under $100,000 16,921 4,950 1,189 1,110 206 7 24,383 24,743 Average Interest Rates 4.94% 5.60% 5.45% 5.70% 5.22% 4.00% 5.13% Securities Sold Under Repurchase Agreement 255 0 0 0 0 0 255 255 Average Interest Rates 4.17% 4.17% ------- ------- ------ ------ ------ ------ ------- ------- Total Interest-Bearing Liabilities $49,726 $5,050 $1,189 $1,310 $333 $7 $57,615 $58,030 3.52% 5.59% 5.45% 5.78% 5.35% 4.00% 3.80% ======= ======= ====== ====== ====== ====== ======= =======
- -------------------------------- (1) Securities available for sale are shown at their amortized cost. (2) Represents interest earning Federal Reserve Bank Stock. 24 266 Primary Use of Funds Nine Month period ending September 30, 1999 The primary source of funds during the period included maturity/sale of investments ($628,000), decrease in federal funds sold and other cash items ($1,717,000), exercise of stock options net of tax benefit ($421,000) and net income ($449,000). The primary uses of funds during the period included a decrease in deposits ($2,328,000), an increase in net loans outstanding ($765,000), dividends paid ($86,000) and other miscellaneous net uses ($36,000). Twelve Month period ending December 31, 1998 The primary source of funds during the period included net growth in deposits ($8,972,000), exercise of stock options net of tax benefit ($320,000), net income ($691,000), and other miscellaneous net sources ($164,000). The primary uses of funds during the period included an increase in investments outstanding ($5,163,000), an increase in net loans outstanding ($4,918,000), and dividends paid ($66,000). CAPITAL RESOURCES Shareholders' equity at September 30, 1999, was $6,559,000, as compared to $5,697,000 at September 30, 1998. Shareholders' equity was $5,890,000 at December 31, 1998, as compared to $4,901,000 at December 31, 1997. The Comptroller has established risk-based capital requirements for national banks. These guidelines are intended to provide an additional measure of a bank's capital adequacy by assigning weighted levels of risk to asset categories. Banks are also required to systematically maintain capital against such "off- balance sheet" activities as loans sold with recourse, loan commitments, guarantees and standby letters of credit. These guidelines are intended to strengthen the quality of capital by increasing the emphasis on common equity and restricting the amount of loan loss reserves and other forms of equity such as preferred stock that may be included in capital. First National / Polk's goal is to maintain its current status as a "well-capitalized institution" as that term is defined by its regulators. Under the terms of the guidelines, banks must meet minimum capital adequacy based upon both total assets and risk adjusted assets. All banks are required to maintain a minimum ratio of total capital to risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to risk-weighted assets of 4%. Adherence to these guidelines has not had an adverse impact on First National / Polk. Selected capital ratios at December 31, 1998, and 1997 compared to September 30, 1999, were as follows: 25 267 CAPITAL RATIOS (Dollars are in Thousands)
Well Actual Capitalized ----------------- -------------- Excess Amount Ratio Amount Ratio Amount ------ ------ ----- ----- ------ AS OF SEPTEMBER 30, 1999: Total Capital: (to Risk Weighted Assets): $7,012 18.1% $3,874 10.0% $3,138 Tier 1 Capital: (to Risk Weighted Assets): $6,526 16.8% $2,325 6.0% $4,201 Tier 1 Capital: (to Average Assets): $6,526 8.9% $3,668 5.0% $2,858 AS OF DECEMBER 31, 1998: Total Capital: (to Risk Weighted Assets): $6,315 16.1% $3,934 10.0% $2,381 Tier 1 Capital: (to Risk Weighted Assets): $5,821 14.8% $2,360 6.0% $3,461 Tier 1 Capital: (to Average Assets): $5,821 8.2% $3,555 5.0% $2,266 AS OF DECEMBER 31, 1997: Total Capital: (to Risk Weighted Assets): $5,301 15.7% $3,377 10.0% $1,924 Tier 1 Capital: (to Risk Weighted Assets): $4,876 14.4% $2,026 6.0% $2,850 Tier 1 Capital: (to Average Assets): $4,876 7.6% $3,195 5.0% $1,681
EFFECTS OF INFLATION AND CHANGING PRICES The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on the performance of a financial institution than the effects of general levels of inflation. Although interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services, increases in inflation generally have resulted in increased interest rates. In addition, inflation affects financial institutions' increased cost of goods and services purchased, the cost of salaries and benefits, occupancy expense, and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings, and shareholders' equity. Commercial and other loan originations and refinancings tend to slow as interest rates increase, and can reduce First National / Polk's earnings from such activities. ACCOUNTING PRONOUNCEMENTS On January 1, 1998, the Bank adopted SFAS No. 130, "Reporting Comprehensive Income." 26 268 SFAS No. 130 provides new accounting and reporting standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements. The adoption of this standard did not have a material impact on reported results of operations of the Bank. In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The statement establishes accounting and reporting standards for derivative instruments (including certain derivative instruments imbedded in other contracts). The statement is effective for fiscal years beginning after June 15, 1999. The financial impact of the adoption of this statement has not been determined. However, the effect of the adoption of the statement is not expected to be material. In June 1999, the FASB issued SFAS No. 137, which delays implementation of SFAS No. 133 for one year. Quarterly Financial Information The following table sets forth, for the periods indicated, certain consolidated quarterly financial information for the Bank. This information is derived from First National / Polk's unaudited financial statements which include, in the opinion of management, all normal recurring adjustments which management considers necessary for a fair presentation of the results for such periods. This information should be read in conjunction with First National / Polk's Financial Statements included elsewhere in this Prospectus. The results for any quarter are not necessarily indicative of results for future periods. SELECTED QUARTERLY DATA
(Dollars in Thousands except for per share data) 1999 1998 1997 - -------------------------- -------------------- ------------------------- ------------------------- 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q -------------------- ------------------------- ------------------------- Net Interest Income $739 $757 $718 $684 $703 $690 $689 $639 $616 $643 $582 Provision for Loan Losses 6 28 29 0 0 19 20 3 10 30 30 -------------------- ------------------------- ------------------------- Net Interest Income after after provision for loan losses $733 $729 $689 $684 $703 $671 $669 $636 $606 $613 $552 Other Income (excluding Security transactions) $86 $90 $91 $76 $72 $65 $61 $55 $56 $48 $50 Securities gains (losses), net $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Other expenses $567 $574 $572 $478 $527 $516 $493 $411 $446 $452 $457 -------------------- ------------------------- ------------------------- Income before income Tax expense $252 $245 $208 $282 $248 $220 $237 $280 $216 $209 $145 Income tax expense $92 $90 $76 $38 $91 $80 $87 $100 $77 $74 $51 -------------------- ------------------------- ------------------------- Net Income $160 $155 $132 $244 $157 $140 $150 $180 $139 $135 $94 ==================== ========================= ========================= Basic earnings per common share $0.34 $0.33 $0.28 $0.55 $0.36 $0.32 $0.34 $0.44 $0.34 $0.33 $0.23 Diluted earnings per common share $0.33 $0.31 $0.27 $0.52 $0.34 $0.30 $0.32 $0.41 $0.32 $0.31 $0.22
27 269 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 607.0850, Florida Statutes, grants a corporation the power to indemnify its directors, officers, employees, and agents for various expenses incurred resulting from various actions taken by its directors, officers, employees, or agents on behalf of the corporation. In general, if an individual acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe the action was unlawful, then the corporation has the power to indemnify said individual who was or is a party to any proceeding (including, in the absence of an adjudication of liability (unless the court otherwise determines), any proceeding by or in the right of the corporation) against liability expenses, including counsel fees, incurred in connection with such proceeding, including any appeal thereof (and, as to actions by or in the right of the corporation, against expenses and amounts paid in settlement not exceeding, in the judgment of the board of directors, the estimated expense of litigating the proceeding to conclusion, actually and reasonably incurred in connection with the defense or settlement of such proceeding, including any appeal thereof). To the extent that a director, officer, employee, or agent has been successful on the merits or otherwise in defense of any proceeding, he shall be indemnified against expenses actually and reasonably incurred by him in connection therewith. The term "proceeding" includes any threatened, pending, or completed action, suit, or other type of proceeding, whether civil, criminal, administrative, or investigative and whether formal or informal. Any indemnification in connection with the foregoing, unless pursuant to a determination by a court, shall be made by the corporation upon a determination that indemnification is proper in the circumstances because the individual has met the applicable standard of conduct. The determination shall be made (i) by the board of directors by a majority vote of a quorum consisting of directors who are not parties to such proceeding; (ii) by majority vote of a committee duly designated by the board of directors consisting solely of two or more directors not at the time parties to the proceeding; (iii) by independent legal counsel selected by the board of directors or such committee; or (iv) by the shareholders by a majority vote of a quorum consisting of shareholders who are not parties to such proceeding. Evaluation of the reasonableness of expenses and authorization of indemnification shall be made in the same manner as the determination that indemnification is permissible. However, if the determination of permissibility is made by independent legal counsel, then the directors or the committee shall evaluate the reasonableness of expenses and may authorize indemnification. Expenses incurred by an officer or director in defending a civil or criminal proceeding may be paid by the corporation in advance of the final disposition of the proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay such amount if he is ultimately found not to be entitled to indemnification by the corporation. Expenses incurred by other employees and agents may be paid in advance upon such terms or conditions that the board of directors deems appropriate. Section 607.0850 also provides that the indemnification and advancement of expenses provided pursuant to that Section are not exclusive, and a corporation may make any other or further indemnification or advancement of expenses of any of its directors, officers, employees, or agents, under any bylaw, agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. However, indemnification or II-1 270 advancement of expenses may not be made if a judgment or other final adjudication established that the individual's actions, or omissions to act, were material to the cause of action so adjudicated and constitute (i) a violation of the criminal law (unless the individual had reasonable cause to believe his conduct was lawful or had no reasonable cause to believe his conduct was unlawful); (ii) a transaction from which the individual derived an improper personal benefit; (iii) in the case of a director, a circumstance under which the liability provisions of Section 607.0834 are applicable; or (iv) willful misconduct or a conscious disregard for the best interests of the corporation in a proceeding by or in the right of the corporation to procure a judgment in its favor in a proceeding by or in the right of a shareholder. Indemnification and advancement of expenses shall continue as, unless otherwise provided when authorized or ratified, to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such person, unless otherwise provided when authorized or ratified. Section 607.0850 further provides that unless the corporation's articles of incorporation provide otherwise, then notwithstanding the failure of a corporation to provide indemnification, and despite any contrary determination of the board or of the shareholders in the specific case, a director, officer, employee, or agent of the corporation who is or was a party to a proceeding may apply for indemnification or advancement of expenses, or both, to the court conducting the proceeding, to the circuit court, or to another court of competent jurisdiction. On receipt of an application, the court, after giving any notice that it considers necessary, may order indemnification and advancement of expenses, including expenses incurred in seeking court-ordered indemnification or advancement of expenses, if it determines that (i) the individual is entitled to mandatory indemnification under Section 607.0850 (in which case the court shall also order the corporation to pay the director reasonable expenses incurred in obtaining court-ordered indemnification or advancement of expenses); (ii) the individual is entitled to indemnification or advancement of expenses, or both, by virtue of the exercise by the corporation of its power under Section 607.0850; or (iii) the individual is fairly and reasonably entitled to indemnification or advancement of expenses, or both, in view of all the relevant circumstances, regardless of whether the person met the standard of conduct set forth in Section 607.0850. Further, a corporation is granted the power to purchase and maintain indemnification insurance. Article VI of the Bylaws of the Company provides for indemnification of the Company's officers and directors and advancement of expenses. The text of the indemnification provision contained in the such Bylaws is set forth in Exhibit 3.2 to this Registration Statement. Among other things, indemnification is granted to each person who is or was a director, officer or employee of the Company and each person who is or was serving at the request of the Company as a director, officer, employee or agent of another corporation to the full extent authorized by law. Article VI of the Company's Bylaws also sets forth certain conditions in connection with any advancement of expenses and provision by the Company of any other indemnification rights and remedies. The Company also is authorized to purchase insurance on behalf of any person against liability asserted whether or not the Company would have the power to indemnify such person under the Bylaws. II-2 271 ITEM 21. EXHIBITS AND FINANCIAL SCHEDULES (a) EXHIBITS
2.1 - Agreement to Merge between Centerstate Banks of Florida, First National Bank of Osceola County and First Interim National Bank of Osceola County (attached as Appendix A to the proxy statement/prospectus) 2.2 - Agreement to Merge between Centerstate Banks of Florida, First National Bank of Polk County and First Interim National Bank of Polk County 2.3 - Agreement to Merge between Centerstate Banks of Florida, Community National Bank of Pasco County and Community Interim National Bank of Pasco County 3.1 - Articles of Incorporation of Centerstate Banks of Florida, Inc. 3.2 - Bylaws of Centerstate Banks of Florida 4.1 - Specimen Stock Certificate of Centerstate Banks of Florida 5 - Legal Opinion of Smith, Mackinnon, Greeley, Bowdoin, Edwards, Brownlee & Marks, P.A. with respect to the validity of the Common Stock being offered hereby 8 - Tax Opinion of KPMG LLP 10.1 - Centerstate Banks of Florida Stock Option Plan 21 - Subsidiaries of Centerstate Banks of Florida 23.1 - Consent of KPMG LLP 23.2 - Consent of Allen C. Ewing & Co. 23.3 - Consent of Smith, Mackinnon, Greeley, Bowdoin, Edwards, Brownlee & Marks, P.A. (included in Exhibit 5) 23.4 - Consent of Dwight Darby & Company 23.5 - Consent of Graham & Cottrill, P.A. 23.6 - G. T. Nunez & Associates 23.7 - Consent of KPMG LLP 24 - Power of Attorney (included with signature pages to this Registration Statement) 27.1 - Financial Data Schedule 27.2 - Financial Data Schedule 99.1 - Notice of Special Meeting of First National Bank of Osceola County Shareholders 99.2 - Proxy of First National Bank of Osceola County
II-3 272 (b) FINANCIAL STATEMENTS (1) Financial Statements are included in the proxy statement/prospectus; see "Index to Financial Statements" in the Prospectus. Schedules are omitted for the reason that they are not required or are not applicable, or the required information is shown in the financial statements or notes thereto. ITEM 22. UNDERTAKINGS The undersigned Registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this Registration Statement, by any person or party who is deemed to be an underwriter within the meaning of the Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. The Registrant undertakes that every prospectus (i) that is filed pursuant to the immediately preceding paragraph, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Securities Act of 1933 and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the Registration Statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned Registrant will (1) file, during any period in which it offers or sells securities, a post- effective amendment to this Registration Statement to (i) include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the Registration Statement; and (iii) include any additional or changed information on the plan of distribution; (2) for determining liability under the Securities Act, treat each post-effective amendment as a new Registration Statement of the securities offered, and the offering of securities at that time to be the initial bona fide offering; and (3) file a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the provisions described in Item 20, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-4 273 The undersigned Registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Registration Statement, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the Registration Statement through the date of responding to the request. The undersigned Registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective. II-5 274 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed in its behalf by the undersigned, thereunto duly authorized, in Winter Haven, Florida, on January 20, 2000. CENTERSTATE BANKS OF FLORIDA, INC. /s/ James H. White --------------------------------- James H. White Chairman, President and Chief Executive Officer /s/ James J. Antal --------------------------------- James J. Antal Senior Vice President and Chief Financial Officer (principal financial officer and proposed accounting officer) POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints James H. White and G. Robert Blanchard, Sr., for himself and not for one another, and each and either of them and his substitutes, a true and lawful attorney in his name, place and stead, in any and all capacities, to sign his name to any and all amendments to this Registration Statement, including post-effective amendments, and to cause the same to be filed with the Securities and Exchange Commission, granting unto said attorneys and each of them full power of substitution and full power and authority to do and perform any act and thing necessary and proper to be done in the premises, as fully to all intents and purposes as the undersigned could do if personally present, and each of the undersigned for himself hereby ratifies and confirms all that said attorneys or any one of them shall lawfully do or cause to be done by virtue hereof. In accordance with the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates stated.
Signature Title Date --------- ----- ---- /s/ James H. White Director January 20, 2000 - ---------------------------- James H. White
II-6 275
/s/ G. Robert Blanchard, Sr. Director January 20, 2000 - ---------------------------- G. Robert Blanchard, Sr. /s/ James H. Bingham Director January 20, 2000 - ---------------------------- James H. Bingham /s/ Terry W. Donley Director January 20, 2000 - ---------------------------- Terry W. Donley /s/ W. Bryan Judge, Jr. Director January 20, 2000 - ---------------------------- W. Bryan Judge, Jr. /s/ Samuel L. Lupfer, IV Director January 20, 2000 - ---------------------------- Samuel L. Lupfer, IV /s/ J. Thomas Rocker Director January 20, 2000 - ---------------------------- J. Thomas Rocker
II-7 276
INDEX TO EXHIBITS Exhibit Number Exhibit - ------- ---------------------------------------------------------------- 2.1 - Agreement to Merge between Centerstate Banks of Florida, First National Bank of Osceola County and First Interim National Bank of Osceola County (attached as Appendix A to the proxy statement/prospectus) 2.2 - Agreement to Merge between Centerstate Banks of Florida, First National Bank of Polk County and First Interim National Bank of Polk County 2.3 - Agreement to Merge between Centerstate Banks of Florida, Community National Bank of Pasco County and Community Interim National Bank of Pasco County 3.1 - Articles of Incorporation of Centerstate Banks of Florida, Inc. 3.2 - Bylaws of Centerstate Banks of Florida 4.1 - Specimen Stock Certificate of Centerstate Banks of Florida 5 - Legal Opinion of Smith, Mackinnon, Greeley, Bowdoin, Edwards, Brownlee & Marks, P.A. with respect to the validity of the Common Stock being offered hereby 8 - Tax Opinion of KPMG LLP 10.1 - Centerstate Banks of Florida Stock Option Plan 21 - Subsidiaries of Centerstate Banks of Florida 23.1 - Consent of KPMG LLP 23.2 - Consent of Allen C. Ewing & Co. 23.3 - Consent of Smith, Mackinnon, Greeley, Bowdoin, Edwards, Brownlee & Marks, P.A. (included in Exhibit 5) 23.4 - Consent of Dwight Darby & Company 23.5 - Consent of Graham & Cottrill, P.A. 23.6 - G. T. Nunez & Associates 23.7 - Consent of KPMG LLP 24 - Power of Attorney (included with signature pages to this Registration Statement) 27.1 - Financial Data Schedule 27.2 - Financial Data Schedule
277 99.1 - Notice of Special Meeting of First National Bank of Osceola County Shareholders 99.2 - Proxy of First National Bank of Osceola County
EX-2.2 2 AGREEMENT TO MERGE WITH POLK COUNTY 1 Exhibit 2.2 AGREEMENT TO MERGE AMONG FIRST NATIONAL BANK OF POLK COUNTY CENTERSTATE BANKS OF FLORIDA, INC. AND FIRST INTERIM NATIONAL BANK OF POLK COUNTY 2 TABLE OF CONTENTS
Page ---- ARTICLE I - THE MERGER.......................................................2 Section 1.1 Consummation of Merger; Closing Date.......................2 Section 1.2 Effect of Merger...........................................2 Section 1.3 Further Assurances.........................................3 Section 1.4 Directors and Officers.....................................3 Section 1.5 Name of Surviving Bank.....................................3 Section 1.6 Capitalization of Surviving Bank...........................3 Section 1.7 Articles of Association and Bylaws.........................3 Section 1.8 Absence of Trust Powers....................................3 ARTICLE II - CONVERSION OF SHARES............................................4 Section 2.1 Manner of Conversion of First National/Polk Shares.........4 Section 2.2 First National/Polk Stock Options and Related Matters......4 Section 2.3 Fractional Shares..........................................5 Section 2.4 Effectuating Conversion....................................5 Section 2.5 Laws of Escheat............................................6 Section 2.6 CBF Shares.................................................6 Section 2.7 FINB Shares................................................6 ARTICLE III - REPRESENTATIONS AND WARRANTIES OF FIRST NATIONAL/POLK.....................................7 Section 3.1 Representations and Warranties of First National/Polk......7 (a) Organization, Qualification, and Corporate Power...........7 (b) Capitalization.............................................7 (c) First National/Polk Subsidiaries...........................8 (d) Authorization of Transaction...............................8 (e) Noncontravention...........................................8 (f) Financial Statements.......................................9 (g) Undisclosed Liabilities....................................9 (h) Brokers' Fees..............................................9 (i) Taxes.....................................................10 (j) Allowance for Loan or Credit Losses.......................10 (k) Properties; Insurance.....................................10 (1) Material Contracts........................................11 (m) Material Contract Defaults................................11 (n) Compliance with Laws......................................11 (o) Employee Benefit Plans....................................12 (p) Legal Proceedings.........................................13 (q) Absence of Certain Changes or Events......................13 (r) Reports...................................................14 (s) Statements True and Correct...............................14 (t) Environmental Matters.....................................14 (u) Labor Matters.............................................15
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Page ---- ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF CBF..........................16 Section 4.1 Representations and Warranties of CBF.....................16 (a) Organization, Qualification, and Corporate Power..........16 (b) Capitalization............................................16 (c) CBF Subsidiaries..........................................17 (d) Authorization of Transaction..............................17 (e) Noncontravention..........................................17 (f) Statements True and Correct...............................17 ARTICLE V - COVENANTS AND AGREEMENTS........................................18 Section 5.1 Covenants.................................................18 (a) Current Information.......................................18 (b) Regulatory Matters and Approvals..........................18 (c) Tax Opinion...............................................19 (d) Conduct of Business Prior to the Effective Time of the Merger....................................19 (e) Forbearance...............................................20 (f) Issuance of Securities....................................21 (g) No Acquisitions...........................................21 (h) Other Actions.............................................21 (i) Government Filings........................................22 (j) Tax-Free Reorganization Treatment.........................22 (k) Full Access...............................................22 (1) Notice of Material Adverse Developments...................22 (m) Exclusivity...............................................22 (n) Filings with the Offices..................................23 (o) Press Releases............................................23 (p) Agreements of Affiliates..................................23 (q) Miscellaneous Agreements and Consents.....................23 (r) Indemnification...........................................24 (s) Fairness Opinions.........................................24 (t) Employee Benefit Plans....................................24 ARTICLE VI - CONDITIONS TO THE OBLIGATIONS OF FIRST NATIONAL/POLK AND CBF..............................25 Section 6.1 Conditions to Obligation to Close.........................25 (a) Conditions to Obligation of CBF...........................25 (b) Conditions to Obligation of First National/Polk...........26 ARTICLE VII - TERMINATION...................................................27 Section 7.1 Termination...............................................27 (a) Termination of Agreement..................................27 (b) Effect of Termination.....................................28
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Page ---- ARTICLE VIII - MISCELLANEOUS................................................28 Section 8.1 Miscellaneous.............................................28 (a) Survival..................................................28 (b) No Third Party Beneficiaries..............................28 (c) Entire Agreement..........................................28 (d) Successors and Assigns....................................28 (e) Counterparts..............................................29 (f) Headings..................................................29 (g) Notices...................................................29 (h) Governing Law.............................................29 (i) Amendments and Waivers....................................29 (j) Severability..............................................30 (k) Expenses..................................................30 (l) Construction..............................................30 (m) Incorporation of Exhibits and Schedules...................30 (n) Jurisdiction and Venue....................................30 (o) Remedies Cumulative.......................................31
5 AGREEMENT TO MERGE AMONG FIRST NATIONAL BANK OF POLK COUNTY, CENTERSTATE BANKS OF FLORIDA, INC. AND FIRST INTERIM NATIONAL BANK OF POLK COUNTY This Agreement to Merge (the "Agreement") is dated as of the 10th day of December, 1999 by and among FIRST NATIONAL BANK OF POLK COUNTY, a national banking association ("First National/Polk") and CENTERSTATE BANKS OF FLORIDA, INC., a Florida corporation ("CBF"); to be joined in by FIRST INTERIM NATIONAL BANK OF POLK COUNTY, an interim national banking association to be organized as a wholly-owned subsidiary of CBF under the laws of the United States and to become a party to this Agreement upon its organization ("FINB"). First National/Polk, CBF and FINB are individually referred to in this Agreement as a "Party" and collectively as the "Parties." BACKGROUND The respective Boards of Directors of First National/Polk and CBF deem it in the best interests of First National/Polk and CBF, respectively, and of their respective shareholders, that First National/Polk and FINB merge pursuant to this Agreement in a transaction that qualifies as a reorganization pursuant to Section 368(a) of the Internal Revenue Code of 1986 (the "Internal Revenue Code") (the "Merger"), and the Boards of Directors of the Parties have approved this Agreement and the Merger, which provides for CBF to issue shares of its common stock to the shareholders of First National/Polk, as herein provided. This Agreement is between (A) First National/Polk, being located at 7722 SR 544 East, City of Haines City, County of Polk, in the State of Florida, with a capital of $6,479,543, consisting of (i) 2,378,125 shares of common stock divided into 475,625 shares of common stock, each of $5.00 par value, (ii) surplus of $2,422,422, and (iii) undivided profits of $1,678,996 as of September 30, 1999, acting pursuant to a resolution of its board of directors, adopted by the vote of a majority of its directors, pursuant to the authority given by and in accordance with the provisions of the Act of November 7, 1918, as amended (12 U.S.C. 215(a)); (B) CBF, which has been organized for purposes of serving as a bank holding company for First National/Polk and other banks; and (C) FINB, to be located at 7722 SR 544 East, Winter Haven, Florida 33881, with a capital of $100,000, divided into 1,000 shares of common stock, each of $100 par value, surplus of $20,000, and no undivided profits, acting pursuant to a resolution to be adopted by its Board of Directors, and by the vote of a majority of its directors, pursuant to the authority given by and in accordance with the provisions of the Act of November 7, 1918, as amended (12 U.S.C. 215(a)). NOW, THEREFORE, in consideration of the premises and the mutual covenants, representations, warranties and agreements herein contained, the Parties agree as follows: 1 6 ARTICLE I THE MERGER Section 1.1 Consummation of Merger; Closing Date. (a) Subject to the provisions hereof, First National/Polk shall be merged with and into FINB (which has heretofore and shall hereinafter be referred to as the "Merger"), under the charter of First National/Polk, pursuant to 12 U.S.C. ss.215a of the National Bank Act, and FINB shall be the surviving corporation (sometimes hereinafter referred to as "Surviving Bank" when reference is made to it after the Effective Time of the Merger (as defined below)). The name of the Surviving Bank shall be First National Bank of Polk County, and the business of the Surviving Bank shall be that of a national banking association. The Merger shall become effective on the date and at the time set forth in the Certificate of Merger relating to the Merger issued by the Office of the Comptroller of the Currency (the "OCC") (such time is hereinafter referred to as the "Effective Time of the Merger"). Subject to the terms and conditions hereof, unless otherwise agreed upon by First National/Polk and CBF, the Effective Time of the Merger shall occur on the 10th business day following the later to occur of (i) the effective date (including the expiration of any applicable waiting period) of the last required Consent (as defined below) of any Regulatory Authority (as defined below) having authority over the transactions contemplated pursuant to this Agreement, (ii) the date on which the shareholders of First National/Polk approve the transactions contemplated by this Agreement, and (iii) the date of the satisfaction or waiver of all other conditions precedent to the transactions contemplated by this Agreement. As used in this Agreement, "Consent" shall mean a consent, approval, authorization, waiver, clearance, exemption or similar affirmation by any person pursuant to any contract, permit, law, regulation or order, and "Regulatory Authorities" shall mean, collectively, the OCC, the Florida Department of Banking and Finance (the "Florida Department"), the Office of Thrift Supervision ("OTS"), the Federal Trade Commission (the "FTC"), the United States Department of Justice (the "Justice Department"), the Board of Governors of the Federal Reserve System (the "FRB"), the Federal Deposit Insurance Corporation (the "FDIC"), the National Association of Securities Dealers, Inc., all national securities exchanges and the Securities and Exchange Commission (the "SEC"). (b) The closing of the Merger (the "Closing") shall take place at such location as the Parties hereto shall determine at 10:00 a.m. local time on the day that the Effective Time of the Merger occurs, or such other date, time and place as the Parties may agree (the "Closing Date"). Subject to the provisions of this Agreement, at the Closing there shall be delivered to each of the Parties hereto the opinions, certificates and other documents and instruments required to be so delivered pursuant to this Agreement. (c) After the Effective Time of the Merger, the business of the Surviving Bank shall be conducted at its main office which shall be located at 7722 SR 544 East, Winter Haven, FL 33881, and at its legally established branches. Section 1.2 Effect of Merger. At the Effective Time of the Merger, First National/Polk shall be merged with and into FINB, under the charter of First National/Polk, and the separate existence of First National/Polk shall cease. The Surviving Bank shall be that of a national banking association. Except as otherwise provided in this Agreement, the Surviving Bank shall have all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a banking association organized under the laws of the United States and shall thereupon and thereafter possess all other privileges, immunities and franchises of a private, as well as of a public nature, of each of the constituent corporations. All property (real, personal and mixed) and all debts on whatever account, including subscriptions to shares, and all choses in action, all and every other interest, of or belonging to or due to each of the constituent corporations so merged shall be taken and deemed to be transferred to and vested in the Surviving Bank without further act or deed. The 2 7 title to any real estate, or any interest therein, vested in any of the constituent corporations shall not revert or be in any way impaired by reason of the Merger. Except as otherwise provided in this Agreement, the Surviving Bank shall thenceforth be responsible and liable for all the liabilities and obligations of each of the constituent corporations so merged and any claim existing or action or proceeding pending by or against either of the constituent corporations may be prosecuted as if the Merger had not taken place or the Surviving Bank may be substituted in its place. Neither the rights of creditors nor any liens upon the property of any constituent corporation shall be impaired by the Merger. Section 1.3 Further Assurances. From and after the Effective Time of the Merger, as and when requested by the Surviving Bank, the officers and directors of First National/Polk last in office shall execute and deliver or cause to be executed and delivered in the name of First National/Polk such deeds and other instruments and take or cause to be taken such further or other actions as shall be necessary in order to vest or perfect in or confirm of record or otherwise to the Surviving Bank title to and possession of all of the property, interests, assets, rights, privileges, immunities, powers, franchises and authority of First National/Polk. Section 1.4 Directors and Officers. From and after the Effective Time of the Merger and until their successors shall be duly elected and qualified, James H. Bingham, G. Robert Blanchard, Sr., Terry W. Donley, W. Bryan Judge, Jr., Samuel L. Lupfer, IV, J. Thomas Rocker and James H. White shall serve as the CBF Board of Directors (or, if any one or more of such Directors is unwilling or unable to serve as a Director of CBF, such substitute Director as the then remaining directors of CBF shall determine). From and after the Effective Time of the Merger and until their successors shall be duly elected and qualified, the directors and executive officers of the Surviving Bank shall consist of those individuals who were serving as directors and executive officers, respectively, of First National/Polk as of the Effective Time of the Merger. The names and addresses of the Directors and executive officers of the Surviving Bank are attached hereto as Schedule 1.4. From and after the Effective Time of the Merger and until their successors shall be duly elected and qualified: James H. White shall serve as Chairman of the Board, President and Chief Executive Officer, G. Robert Blanchard, Sr. shall serve as Vice Chairman of the Board, and George H. Carefoot shall serve as Secretary. Section 1.5 Name of Surviving Bank. The name of the Surviving Bank shall be First National Bank of Polk County. Section 1.6 Capitalization of Surviving Bank. As of the Effective Time of the Merger, the Surviving Bank shall have 5,000,000 shares of common stock, par value $5.00 per share, authorized of which 475,625 shares shall be issued and outstanding (plus shares of First National/Polk common stock issued after September 30, 1999), all of which shall be owned by CBF. The Surviving Bank shall have no other classes of capital stock authorized or outstanding. As of the Effective Time of the Merger, the capital, surplus and retained earnings of the Surviving Bank shall be as set forth on Schedule 1.6. Preferred stock shall not be issued by the Surviving Bank. Section 1.7 Articles of Association and Bylaws. The Articles of Association and Bylaws under which the Surviving Bank will operate are attached hereto as Schedule 1.7. Section 1.8 Absence of Trust Powers. The Surviving Bank shall not have trust powers. 3 8 ARTICLE II CONVERSION OF SHARES Section 2.1 Manner of Conversion of First National/Polk Shares. Subject to the provisions hereof, as of the Effective Time of the Merger and by virtue of the Merger and without any further action on the part of the holder of any shares of common stock of First National/Polk, par value $5.00 per share (the "First National/Polk Shares"): (a) All First National/Polk Shares which are held by First National/Polk as treasury stock, if any, shall be canceled and retired and no consideration shall be paid or delivered in exchange therefor. (b) Subject to the terms and conditions of this Agreement, including, without limitation, Section 2.3 hereof and except with regard to Dissenting First National/Polk Shares (as hereinafter defined), each First National/Polk Share outstanding immediately prior to the Effective Time of the Merger shall be converted into the right to receive 1.62 shares of common stock of CBF, par value $.01 per share (the "CBF Shares"). The applicable amount of CBF Shares issuable in the Merger for each First National/Polk Share pursuant to this Section, as may be adjusted as provided herein, shall be hereinafter referred to as the "Conversion Ratio." The Conversion Ratio, including the number of CBF Shares issuable in the Merger, shall be subject to an appropriate adjustment in the event of any stock split, reverse stock split, dividend payable in CBF Shares, reclassification or similar distribution whereby CBF issues CBF Shares or any securities convertible into or exchangeable for CBF Shares without receiving any consideration in exchange therefor, provided that the record date of such transaction is a date after the date of this Agreement and prior to the Effective Time of the Merger. (c) Each outstanding First National/Polk Share, the holder of which has perfected dissenters' rights in accordance with the provisions of the National Bank Act (the "Dissent Provisions") and has not effectively withdrawn or lost such holder's right to such appraisal (the "Dissenting First National/Polk Shares"), shall not be converted into or represent a right to receive the CBF Shares issuable in the Merger but the holder thereof shall be entitled only to such rights as are granted by the Dissent Provisions. First National/Polk shall give CBF prompt notice upon receipt by First National/Polk of any written objection to the Merger and any written demands for payment of the fair or appraised value of First National/Polk Shares, and of withdrawals of such demands, and any other instruments provided to First National/Polk pursuant to the Dissent Provisions (any shareholder duly making such demand being hereinafter called a "Dissenting Shareholder"). Each Dissenting Shareholder who becomes entitled, pursuant to the Dissent Provisions, to payment of fair value of any First National/Polk Shares held by such Dissenting Shareholder shall receive payment therefor from the Surviving Bank (but only after the amount thereof shall have been agreed upon or at the times and in the amounts required by the Dissent Provisions) and all of such Dissenting Shareholder's First National/Polk Shares shall be canceled. If any Dissenting Shareholder shall have failed to perfect or shall have effectively withdrawn or lost such right to demand payment of fair or appraised value, the First National/Polk Shares held by such Dissenting Shareholder shall thereupon be deemed to have been converted into the right to receive the consideration to be issued in the Merger as provided by this Agreement. Section 2.2 First National/Polk Stock Options and Related Matters. As of the Effective Time of the Merger, all rights with respect to the First National/Polk Shares issuable pursuant to the exercise of stock purchase options ("First National/Polk Options") granted by First National/Polk and which are outstanding at the Effective Time of Merger shall be converted into options for CBF Shares (the "Merger Options") in compliance with any restrictions contained in the plan or 4 9 agreement, if any, under which such First National/Polk Options were issued. Each holder of a First National/Polk Option shall have the right to acquire as of the Effective Time of the Merger a number of CBF Shares equal to the product (rounded up to the next whole share) of (i) the number of First National/Polk Shares covered by such First National/Polk Option immediately prior to the Effective Time of the Merger and (ii) the Conversion Ratio; and the exercise price per share of the CBF Shares at which such First National/Polk Option is exercisable shall be an amount (rounded up to the next whole cent) computed by dividing (i) the exercise price per share of the First National/Polk Shares at which such First National/Polk Option is exercisable immediately prior to the Effective Time of the Merger by (ii) the Conversion Ratio. Section 2.3 Fractional Shares. Notwithstanding any other provision of this Agreement, each holder of First National/Polk Shares converted pursuant to the Merger who would otherwise have been entitled to receive a fraction of a CBF Share (after taking into account all certificates delivered by such holder), shall receive, in lieu thereof, cash (without interest) in an amount equal to such fractional part of such CBF Share, multiplied by the book value per First National/Polk Share as of the end of the calendar month immediately preceding or occurring on the Effective Time of the Merger. No such holder shall be entitled to dividends, voting rights or any other rights as a shareholder in respect of any fractional share. Section 2.4 Effectuating Conversion. (a) CBF, or such other institution as CBF may designate, shall serve as the exchange agent (the "Exchange Agent"). The Exchange Agent may employ sub-agents in connection with performing its duties. After the Effective Time of the Merger, CBF shall cause the Exchange Agent to deliver the consideration to be paid by CBF for the First National/Polk Shares, along with the appropriate cash payment in lieu of fractional interests in CBF Shares. As promptly as practicable after the Effective Time of the Merger, the Exchange Agent shall send or cause to be sent to each former holder of record of First National/Polk Shares transmittal materials (the "Letter of Transmittal") for use in exchanging their certificates formerly representing First National/Polk Shares for the consideration provided for in this Agreement. The Letter of Transmittal shall contain instructions with respect to the surrender of certificates representing First National/Polk Shares and the receipt of the consideration contemplated by this Agreement and shall require each holder of First National/Polk Shares to transfer good and marketable title to such First National/Polk Shares to CBF, free and clear of all liens, claims and encumbrances. (b) At the Effective Time of the Merger, the stock transfer books of First National/Polk shall be closed as to holders of First National/Polk Shares immediately prior to the Effective Time of the Merger and no transfer of First National/Polk Shares by any such holder shall thereafter be made or recognized and each outstanding certificate formerly representing First National/Polk Shares shall, without any action on the part of any holder thereof, no longer represent First National/Polk Shares. If, after the Effective Time of the Merger, certificates are properly presented to CBF, such certificates shall be exchanged for the consideration contemplated by this Agreement into which the First National/Polk Shares represented thereby were converted in the Merger. (c) In the event that any holder of First National/Polk Shares is unable to deliver the certificate which represents such holder's First National/Polk Shares, CBF, in the absence of actual notice that any First National/Polk Shares theretofore represented by any such certificate have been acquired by a bona fide purchaser, may, in its discretion, deliver to such holder the consideration contemplated by this Agreement and the amount of cash representing fractional CBF Shares to which such holder is entitled in accordance with the provisions of this Agreement upon the presentation of all of the following: 5 10 (i) An affidavit or other evidence to the reasonable satisfaction of CBF that any such certificate has been lost, wrongfully taken or destroyed; (ii) Such security or indemnity as may be reasonably requested by CBF to indemnify and hold CBF harmless; and (iii) Evidence to the satisfaction of CBF that such holder is the owner of the First National/Polk Shares theretofore represented by each certificate claimed by such holder to be lost, wrongfully taken or destroyed and that such holder is the person who would be entitled to present each such certificate for exchange pursuant to this Agreement. (d) In the event that the delivery of the consideration contemplated by this Agreement and the amount of cash representing fractional CBF Shares are to be made to a person other than the person in whose name any certificate representing First National/Polk Shares surrendered is registered, such certificate so surrendered shall be properly endorsed (or accompanied by an appropriate instrument of transfer), with the signature(s) appropriately guaranteed, and otherwise in proper form for transfer, and the person requesting such delivery shall pay any transfer or other taxes required by reason of the delivery to a person other than the registered holder of such certificate surrendered or establish to the satisfaction of CBF that such tax has been paid or is not applicable. (e) No holder of First National/Polk Shares shall be entitled to receive any dividends or distributions declared or made with respect to the CBF Shares with a record date before the Effective Time of the Merger. Neither the consideration contemplated by this Agreement, any amount of cash representing fractional CBF Shares nor any dividend or other distribution with respect to CBF Shares where the record date thereof is on or after the Effective Time of the Merger shall be paid to the holder of any unsurrendered certificate or certificates representing First National/Polk Shares as provided for by this Agreement. Subject to applicable laws, following surrender of any such certificate or certificates, there shall be paid to the holder of the certificate or certificates then representing CBF Shares issued in the Merger, without interest at the time of such surrender, the consideration contemplated by this Agreement, the amount of any cash representing fractional CBF Shares and the amount of any dividends or other distributions with respect to CBF Shares to which such holder is entitled as a holder of CBF Shares. Section 2.5 Laws of Escheat. If any of the consideration due or other payments to be paid or delivered to the holders of First National/Polk Shares is not paid or delivered within the time period specified by any applicable laws concerning abandoned property, escheat or similar laws, and if such failure to pay or deliver such consideration occurs or arises out of the fact that such property is not claimed by the proper owner thereof, CBF shall be entitled to dispose of any such consideration or other payments in accordance with applicable laws concerning abandoned property, escheat or similar laws. Any other provision of this Agreement notwithstanding, none of First National/Polk, CBF, FINB, the Surviving Bank, nor any other person acting on their behalf shall be liable to a holder of First National/Polk Shares for any amount paid or property delivered in good faith to a public official pursuant to and in accordance with any applicable abandoned property, escheat or similar law. Section 2.6 CBF Shares. The one CBF Share issued and outstanding at the Effective Time of the Merger shall be cancelled and thus shall not be outstanding after the Merger. Section 2.7 FINB Shares. The shares of FINB common stock, par value $100 per share, issued and outstanding at the Effective Time of the Merger shall be converted as a result of, and upon the Effective Time of the Merger, into 475,625 shares of common stock, each of $5.00 par 6 11 value (plus shares of First National/Polk Shares issued by First National/Polk after September 30, 1999). ARTICLE III REPRESENTATIONS AND WARRANTIES OF FIRST NATIONAL/POLK Section 3.1 Representations and Warranties of First National/Polk. First National/Polk represents and warrants to CBF that the statements contained in this Article III are correct and complete as of the date of this Agreement and shall be correct and complete as of the Closing Date (as though made then and as though the Closing Date were substituted for the date of this Agreement throughout this Article III), except (i) representations and warranties which are confined to a specified date shall speak only as of such date, (ii) as expressly contemplated by this Agreement, or (iii) as set forth in the disclosure schedule prepared by First National/Polk and delivered to CBF prior to the date of this Agreement (the "First National/Polk Disclosure Schedule"). The First National/Polk Disclosure Schedule has been arranged in paragraphs corresponding to the numbered and lettered paragraphs contained in this Article III. (a) Organization, Qualification, and Corporate Power. First National/Polk is a national banking association duly organized, validly existing, and in good standing under the laws of the United States. First National/Polk is duly authorized to engage in the business of banking in Florida as an insured bank under the Federal Deposit Insurance Act, as amended (the "FDIA"). First National/Polk is duly authorized to conduct business and is in good standing under the laws of each jurisdiction in which the nature of its business or the ownership or leasing of its properties requires such qualification except where the lack of such qualification would not have a material adverse effect on its (i) business, financial condition or results of operations, or (ii) ability to consummate the transactions contemplated by this Agreement (together, its "Condition"); it being understood and agreed that, for purposes of this Agreement, a material adverse effect on the Condition of a Party shall not include a decline in results of operations resulting from any change in law, rule, regulation or GAAP which impacts banks or bank holding companies generally in a substantially similar manner. First National/Polk has full corporate power and authority to carry on the businesses in which it is engaged and to own and use the properties owned and used by it. True and complete copies of the Articles of Association and the Bylaws of First National/Polk are attached hereto as Schedule 3(a). First National/Polk has in effect all federal, state, local and foreign governmental, regulatory and other authorizations, permits and licenses necessary for it to own or lease its properties and assets and to carry on its business as now conducted, the absence of which, individually or in the aggregate, would have a material adverse effect on the Condition of First National/Polk. (b) Capitalization. The authorized capital stock of First National/Polk consists of 5,000,000 First National/Polk Shares, of which 475,625 First National/Polk Shares are issued and outstanding on the date of this Agreement. There are no other classes of capital stock of First National/Polk authorized. First National/Polk holds no First National/Polk Shares as treasury stock. All of the issued and outstanding First National/Polk Shares have been duly authorized and are validly issued, fully paid and nonassessable. None of the outstanding First National/Polk Shares has been issued in violation of any preemptive rights of the current or past stockholders of First National/Polk. Except with respect to the 37,450 First National/Polk Shares issuable pursuant to the First National/Polk Options, there are no outstanding or authorized options, warrants, rights, contracts, calls, puts, rights to subscribe, conversion rights, or other agreements or commitments to which First National/Polk is a party or which are binding upon First National/Polk or, to the Knowledge of First National/Polk, any other party providing for the issuance, voting, transfer, 7 12 disposition, or acquisition of any of the capital stock of First National/Polk. There are no outstanding or authorized stock appreciation, phantom stock or similar rights with respect to First National/Polk. For purposes of this Agreement, the term "Knowledge" means actual knowledge after reasonable investigation of the Chairman, President, Chief Financial Officer, Chief Accounting Officer or any Executive or Senior Vice President of such Party. (c) First National/Polk Subsidiaries. First National/Polk has no Subsidiary or Subsidiaries. For purposes of this Agreement, the term "Subsidiary" means all those corporations, associations or other entities of which the entity in question owns or controls 5% or more of the outstanding equity securities either directly or through an unbroken chain of entities as to each of which 5% or more of the outstanding equity securities is owned directly or indirectly by its parent; provided, however, there shall not be included any such entity acquired through foreclosure, any such entity which owns or operates an automatic teller machine interchange network, any such entity the equity securities of which are owned or controlled in a fiduciary capacity or any such entity which is a general industry association or group. (d) Authorization of Transaction. First National/Polk has full power and authority (including full corporate power and authority) to execute and deliver this Agreement and to perform its obligations hereunder; provided, however, that First National/Polk cannot consummate the Merger unless and until all requisite approvals are received from the Regulatory Authorities and the approval of the shareholders of First National/Polk has been obtained. Subject to the foregoing sentence, (i) this Agreement has been duly executed and delivered by First National/Polk and this Agreement constitutes a valid and binding agreement of First National/Polk, enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency and other similar laws affecting creditors' rights generally, general equitable principles and the discretion of courts in granting equitable remedies, (ii) the performance by First National/Polk of its obligations under this Agreement and the consummation of the Merger and the other transactions provided for under this Agreement have been or will be duly and validly authorized by all necessary corporate action on the part of First National/Polk, and (iii) the Board of Directors of First National/Polk has approved the execution, delivery and performance of this Agreement and the consummation of the Merger and the other transactions provided for under this Agreement. Other than to or from the Regulatory Authorities or to or from the Internal Revenue Service ("IRS") or the Pension Benefit Guaranty Corporation ("PBGC") with respect to any employee benefit plans, First National/Polk does not need to give any notice to, make any filing with, or obtain any authorization, consent or approval of any government or governmental agency in order for the Parties to consummate the transactions contemplated by this Agreement, except where the failure to give notice, to file, or to obtain any authorization, consent, or approval would not have a material adverse effect on the Condition of First National/Polk. (e) Noncontravention. Neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (i) subject to the receipt of the approvals contemplated in Section 3(d) above, violate any statute, regulation, rule, judgment, order, decree, stipulation, injunction, charge, or other restriction of any government, governmental agency, or court to which First National/Polk is subject or any provision of the Articles of Association or Bylaws of First National/Polk or (ii) with the passing of time or the giving of notice or both, conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require any notice under any contract, lease, sublease, license, franchise, permit, indenture, agreement or mortgage for borrowed money, instrument of indebtedness, Security Interest, or other obligation to which First National/Polk is a party or by which it is bound or to which any of its assets is subject (or result in the imposition of any Security Interest upon any of its assets) except where the violation, conflict, breach, default, acceleration, termination, modification, cancellation, failure to give notice, or Security Interest would 8 13 not have a material adverse effect on the Condition of First National/Polk. For purposes of this Agreement, the term "Security Interest" means any mortgage, pledge, security interest, encumbrance, charge, or other lien, other than (a) mechanics, materialmen, and similar liens, (b) liens for taxes not yet due and payable or for taxes that the taxpayer is contesting in good faith through appropriate proceedings, (c) liens arising under workers compensation, unemployment insurance, social security, retirement, and similar legislation, (d) liens on goods in transit incurred pursuant to documentary letters of credit, (e) purchase money liens and liens securing rental payments under capital lease arrangements, and (f) other liens arising in the Ordinary Course of Business and not incurred in connection with the borrowing of money. For purposes of this Agreement, the term "Ordinary Course of Business" means the ordinary course of business consistent with past custom and practice (including with respect to quantity and frequency). (f) Financial Statements. First National/Polk has delivered to CBF prior to the execution of this Agreement copies of the following financial statements of First National/Polk (collectively referred to herein as the "First National/Polk Financial Statements"): (i) audited balance sheets of First National/Polk at December 31, 1998 and 1997, and the related statements of (A) income, (B) shareholders' equity and (C) cash flows for the years then ended and the notes thereto as reported upon by its independent certified public accountants, and (ii) unaudited balance sheet of First National/Polk at September 30, 1999, and the related unaudited statements of (A) income and (B) shareholders' equity for the period then ended. The First National/Polk Financial Statements (as of the dates thereof and for the periods covered thereby): (i) have been prepared from the books and records of First National/Polk, which in all material respects account for those transactions which in accordance with good business practices and applicable banking and other legal requirements are required to be accounted for, and (ii) present fairly in all material respects the financial position and the results of operations and cash flows of First National/Polk as of the dates and for the periods indicated, in accordance with GAAP, applied on a basis consistent with prior periods except as disclosed in the notes thereto or, in the case of unaudited quarterly statements, subject to normal recurring year-end adjustments that are not material and the absence of certain footnote and cash flow information. (g) Undisclosed Liabilities. First National/Polk has no liability (whether known or unknown, whether absolute or contingent, whether liquidated or unliquidated, and whether due or to become due), including any liability for taxes, except for (i) liabilities for future disbursements on letters of credit, lines of credit and similar instruments or unfunded loan commitments, (ii) liabilities accrued or reserved against in the balance sheet dated as of September 30, 1999 included in the First National/Polk Financial Statements or reflected in the notes thereto, and (iii) liabilities which have arisen after September 30, 1999 in the Ordinary Course of Business or in connection with the transactions provided for in this Agreement (none of which relates to any breach of contract, breach of warranty, tort, infringement, or violation of law or arose out of any charge, complaint, action, suit, proceeding, hearing, investigation, claim, or demand and none of which, individually or in the aggregate, materially and adversely affect the Condition of First National/Polk). Since September 30, 1999, First National/Polk has not incurred or paid any obligation or liability which would be material to the Condition of First National/Polk, except in the Ordinary Course of Business. (h) Brokers' Fees. Neither First National/Polk nor any of its officers, directors or employees, has any liability or obligation to pay any fees or commissions to, or has employed, any broker, finder, or agent with respect to the transactions contemplated by this Agreement. 9 14 (i) Taxes. (i) All federal, state, local and foreign tax returns required to be filed by or on behalf of First National/Polk have been timely filed or requests for extensions have been timely filed, granted and have not expired, for periods ending on or before September 30, 1999, and all such returns filed are true, complete and accurate in all material respects. First National/Polk has timely paid or caused to be paid all taxes shown to be due on such tax returns. There is no audit, examination, deficiency or refund litigation or matter in controversy with respect to any taxes currently pending involving First National/Polk. All material tax, interest, additions, and penalties due with respect to completed and settled examinations or concluded litigation have been paid, accrued or provided for. (ii) First National/Polk has not executed an extension or waiver of any statute of limitations on the assessment or collection of any material tax due that is currently in effect. (iii) Adequate provision for any federal, state, local or foreign taxes due or to become due for First National/Polk for any period or periods through and including September 30, 1999, has been made and is reflected on the September 30, 1999 financial statements included in the First National/Polk Financial Statements. (iv) Deferred taxes of First National/Polk have been provided for in the First National/Polk Financial Statements in accordance with GAAP, subject in the case of interim financial statements to normal recurring year-end adjustments. (v) All taxes which First National/Polk is required by law to withhold or to collect for payment have been duly withheld and collected, and have been paid to the proper governmental entity or are being withheld by First National/Polk, except where the failure of any of which, individually or in the aggregate, would not have a material adverse effect on the Condition of First National/Polk. (j) Allowance for Loan or Credit Losses. The allowance for loan or credit losses ("Allowance") shown on the balance sheet of First National/Polk as of September 30, 1999 included in the First National/Polk Financial Statements was, and the Allowance shown on the balance sheets of First National/Polk as of dates subsequent to the execution of this Agreement will to the Knowledge of First National/Polk be, in each case as of the dates thereof, adequate to provide for losses relating to or inherent in the loan and lease portfolios (including accrued interest receivable) of First National/Polk and other extensions of credit (including letters of credit and commitments to make loans or extend credit) by First National/Polk, except where the failure of the Allowance to be so adequate would not have a material adverse effect on the Condition of First National/Polk. (k) Properties; Insurance. First National/Polk has good and marketable title free and clear of all material liens, encumbrances, charges, defaults or equities of whatever character to all of the properties and assets, tangible or intangible, reflected in the First National/Polk Financial Statements, except for liens disclosed in such Financial Statements, those arising in the Ordinary Course of Business after September 30, 1999 or liens which are not reasonably likely to have, individually or in the aggregate, a material adverse effect on the Condition of First National/Polk. All buildings, and all fixtures, equipment and other property and assets which are material to its business and which are held under leases or subleases by First National/Polk are held under valid instruments enforceable in accordance with their respective terms (except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and except that the availability of the equitable remedy of specific performance or 10 15 injunctive relief is subject to the discretion of the court before which any proceedings may be brought). The real property owned and used as facilities by First National/Polk has never been used for the handling, treatment, storage or disposal of any hazardous or toxic substance as defined under any applicable state or federal law. All policies of fire, theft, liability and other insurance maintained with respect to the assets or businesses of First National/Polk, and the fidelity bonds in effect as to which First National/Polk is a named insured, are described in Schedule 3(k) hereto. Substantially all of First National/Polk's equipment in regular use has been well maintained and is in good and serviceable condition, reasonable wear and tear excepted. (1) Material Contracts. Neither First National/Polk nor any of its assets, businesses or operations as of the date of this Agreement is a party to, or is bound or affected by, or receives benefits under, any of the following (whether written or oral and excluding agreements for the extension of credit by First National/Polk made in the Ordinary Course of Business): (i) any employment agreement or understanding (including any understandings or obligations with respect to severance or termination pay liabilities or fringe benefits) with any present or former officer, director, or employee, including in any such person's capacity as a consultant (other than those which are terminable at will without any further amount being payable thereunder), (ii) any other agreement with any officer, director, employee, or affiliate, (iii) any agreement with any labor union, (iv) any agreement which limits the ability of First National/Polk to compete in any line of business or which involves any restriction of the geographical area in which First National/Polk may carry on its business (other than as may be required by law or applicable regulatory authorities), or (v) any agreement, contract, arrangement or commitment with annual payments aggregating $20,000 or more. (m) Material Contract Defaults. First National/Polk is not in default, and has not received any written notice or has any Knowledge that any other party is in default, in any material respect under any contract, lease, sublease, license, franchise, permit, indenture, agreement, or mortgage for borrowed money, or instrument of indebtedness (except, as to the foregoing, extensions of credit by First National/Polk in the Ordinary Course of Business), and there has not occurred any event that with the lapse of time or the giving of notice or both would constitute such a default. (n) Compliance with Laws. (i) First National/Polk is in compliance in all respects with all laws, regulations, reporting and licensing requirements and orders applicable to its business or to its employees conducting its business, with any Regulatory Agreements (as hereinafter defined) applicable to First National/Polk, and with its internal policies and procedures, except where the breach or violation of any of which, individually or in the aggregate, would not have a material adverse effect on the Condition of First National/Polk. (ii) First National/Polk has not received any written notification or communication from any Regulatory Authorities (A) asserting that First National/Polk is not in substantial compliance with any of the statutes, regulations, or ordinances which such Regulatory Authority enforces which as a result of such noncompliance would have a material adverse effect on the Condition of First National/Polk, (B) threatening to revoke any license, franchise, permit or governmental authorization which is material to the Condition of First National/Polk, (C) requiring or threatening to require First National/Polk, or indicating that First National/Polk may be required, to enter into or be subject to a cease and desist order, agreement, memorandum of understanding or any other agreement or undertaking (or to cause its Board of Directors to adopt any resolutions) restricting or limiting or purporting to restrict or limit in any manner the operations of First National/Polk, including, without limitation, any restriction on the payment of dividends, or (D) directing, restricting or limiting, or purporting to direct, restrict or limit in any manner the operations 11 16 of First National/Polk, including, without limitation, any restriction on the payment of dividends (any such notice, communication, order, agreement, memorandum, resolutions or undertaking described in this sentence herein referred to as a "Regulatory Agreement"). First National/Polk has not consented to, entered into, agreed to enter into, or been made subject to, any Regulatory Agreement. First National/Polk has no Knowledge that any Regulatory Authority is considering imposing on First National/Polk any Regulatory Agreement. (o) Employee Benefit Plans. (i) The First National/Polk Disclosure Schedule lists every pension, retirement, profit-sharing, deferred compensation, stock option, employee stock ownership, severance pay, vacation, bonus or other incentive plan, any other written or unwritten employee program, arrangement, agreement or understanding, whether arrived at through collective bargaining or otherwise, any medical, vision, dental or other health plan, any life insurance plan, any golden parachute or other executive compensation plan, or any other employee benefit plan or fringe benefit plan, including, without limitation, any "employee benefit plan" as that term is defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") (a "Benefit Plan" or, collectively, "Benefit Plans"), currently or expected to be adopted, maintained by, sponsored in whole or in part by, or contributed to by First National/Polk or any ERISA Affiliate (as herein defined) for the benefit of its employees, retirees, dependents, spouses, directors, independent contractors or other beneficiaries and under which any of its employees, retirees, dependents, spouses, directors, independent contractors or other beneficiaries are eligible to participate (collectively, the "First National/Polk Benefit Plans"). No First National/Polk Benefit Plan is or has been a multi-employer plan within the meaning of Section 3(37) and Section 4001(a)(3) of ERISA. For purposes of this Section 4(o), the term "ERISA Affiliate" means each trade or business (whether or not incorporated) which together with First National/Polk is treated as a single employer under Section 414(b), (c), (m) or (o) of the Internal Revenue Code. (ii) True, correct and complete copies of all written First National/Polk Benefit Plans and descriptions of all unwritten First National/Polk Benefit Plans listed in the First National/Polk Disclosure Schedule and all trust agreements or other funding arrangements, including insurance contracts, all amendments thereto and, where applicable, with respect to any such plans or plan amendments, all determination letters, rulings, opinion letters, information letters, or advisory opinions issued by the IRS or the United States Department of Labor after December 31, 1974, annual reports or returns, audited or unaudited financial statements, actuarial valuations, and summary annual reports for the most recent three plan years, the most recent summary plan descriptions and any material modifications thereto, have previously been delivered to CBF or will be attached to the First National/Polk Disclosure Schedule. (iii) All the First National/Polk Benefit Plans and the related trusts are in material compliance with, and have been administered in material compliance with, the provisions of ERISA, the provisions of the Internal Revenue Code and all other applicable laws, rules and regulations and collective bargaining agreements. Any required governmental approvals for the First National/Polk Benefit Plans have been obtained, including, but not limited to, favorable determination letters on the qualification of the ERISA Plans and tax exemption of related trusts, as applicable, under the Internal Revenue Code, and all such governmental approvals continue in full force and effect. To the Knowledge of First National/Polk, neither First National/Polk nor any administrator or fiduciary of any First National/Polk Benefit Plan or agent or delegate of any of the foregoing has engaged in any transaction or acted or failed to act in any manner which could subject First National/Polk, CBF or any affiliate thereof to any direct or indirect liability for a breach of any fiduciary, co-fiduciary or other duty under ERISA. To the Knowledge of First National/Polk, no oral or written representation or communication with respect to any aspect of the First National/Polk 12 17 Benefit Plans has been made to employees of First National/Polk prior to the Effective Time of the Merger which is not in accordance with the written or otherwise pre-existing terms and provisions of such First National/Polk Benefit Plans in effect at the time of such communication. There are no unresolved claims or disputes under the terms of, or in connection with, the First National/Polk Benefit Plans and no action, legal or otherwise, has been commenced with respect to any claim under the terms of, or in connection with, the First National/Polk Benefit Plans. (iv) To the Knowledge of First National/Polk, no "party in interest" (as defined in Section 3(14) of ERISA) or "disqualified person" (as defined in Section 4975(e)(2) of the Internal Revenue Code) of any First National/Polk Benefit Plan has engaged in any "prohibited transaction" (within the meaning of Section 4975(c) of the Internal Revenue Code or Section 406 of ERISA). There has been no (A) "reportable event" (as defined in Section 4043 of ERISA), or event described in Section 4062(e) or Section 4063(a) of ERISA, or (B) termination or partial termination, withdrawal or partial withdrawal with respect to any of the ERISA Plans which: (1) First National/Polk maintains or contributes to or has maintained or contributed to or was required to maintain or contribute to for the benefit of employees of First National/Polk; or (2) which has been maintained or contributed to or was required to be maintained or contributed to by any member of a controlled group of trades or business as defined in ERISA Section 4001(a)(14) which has, since January 1, 1975, included First National/Polk. (v) For any given ERISA Plan relating to First National/Polk, all assets of such plan are carried at their fair market value, to the extent required by the plan document and applicable law, and the fair market value of such plan's assets equals or exceeds the present value of all benefits (whether vested or not) accrued to date by all present or former participants in such plan. No First National/Polk Benefit Plan is subject to the rules of the PBGC. (vi) As of the Effective Time, First National/Polk will not have any material current or future liability under any First National/Polk Benefit Plan that was not reflected in the First National/Polk Financial Statements. (vii) No First National/Polk Benefit Plan provides for welfare benefits (as defined in ERISA Section 3(1)) to employees after retirement other than as may be required by Section 601 et seq. of ERISA. (viii)Each First National/Polk Benefit Plan may be terminated by the Surviving Bank in its sole discretion on or after the Closing Date without liability of any kind or description arising from either such termination or any action attributable to the Surviving Bank. (ix) The execution of, or performance of the transactions contemplated by, this Agreement will not create, accelerate or increase any obligations under the First National/Polk Benefit Plans, and will not require or cause to be payable any payment which is or would be an "excess parachute payment" under Section 28OG of the Internal Revenue Code. (p) Legal Proceedings. There are no actions, suits or proceedings instituted or pending or, to the Knowledge of First National/Polk, threatened (or unasserted but considered probable of assertion and which if asserted would have at least a reasonable probability of an unfavorable outcome) against First National/Polk, or against any property, asset, interest or right of First National/Polk, that have a reasonable probability either individually or in the aggregate of having a material adverse effect on the Condition of First National/Polk. (q) Absence of Certain Changes or Events. Since September 30, 1999, the businesses of First National/Polk has been operated only in the ordinary course consistent with past 13 18 practices and since such date there has not been, occurred or arisen: (i) any damage, destruction, loss or casualty whether or not covered by insurance which has had or is reasonably likely to have a material adverse effect on the Condition of First National/Polk; (ii) any declaration, setting aside or payment of any dividend or distribution (whether in cash, stock or property) in respect of the First National/Polk Shares or any redemption or other acquisition of the First National/Polk Shares by First National/Polk or any split, combination or reclassification of First National/Polk Shares declared or made; (iii) any extraordinary losses required by GAAP to be disclosed as such that have been suffered and not adequately reserved against, whether or not in the Ordinary Course of Business; (iv) any material assets mortgaged, pledged or subjected to any lien, charge or other encumbrance; (v) any agreement to do any of the foregoing; or (vi) any other event, development or condition of any character including any change in results of operations, financial condition, method of accounting or accounting practices, nature of business, or manner of conducting the business of First National/Polk that has had, or is reasonably likely to have, a material adverse effect on the Condition of First National/Polk. (r) Reports. Since September 30, 1999, First National/Polk has filed all reports and statements, together with any amendments required to be made with respect thereto, that it was required to file with any Regulatory Authority. Each such report and statement, including the financial statements, exhibits and schedules thereto, at the time of filing thereof complied in all material respects with the laws and rules and regulations applicable to it and did not contain any untrue statement of material fact or omit to state any material fact necessary to make the statements made, in the light of the circumstances under which they were made, not misleading. (s) Statements True and Correct. No representation or warranty made by First National/Polk in this Agreement, no written statement or certificate included in an Exhibit or Schedule by First National/Polk in connection with this Agreement, and no written statement or certificate to be furnished by First National/Polk to CBF pursuant to this Agreement contains any untrue statement of material fact or omits to state a material fact necessary to make the statements made, in the light of the circumstances under which they were made, not misleading. None of the information supplied or to be supplied by First National/Polk for inclusion in the definitive proxy materials to be mailed to First National/Polk shareholders in connection with the Special First National/Polk Meeting (as defined in Section 5(b)(iii)), or in any other documents to be filed with any Regulatory Authority in connection with the transactions contemplated hereby, will at the respective time such documents are filed fail to comply in all material respects with the laws and rules and regulations applicable to First National/Polk, contain any untrue statement of a material fact, or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. All documents that First National/Polk is responsible for filing with any Regulatory Authority in connection with the Merger will comply as to form in all material respects with the provisions of applicable law. (t) Environmental Matters. (i) To the Knowledge of First National/Polk, the Participation Facilities, and the Loan Properties (each as hereinafter defined) are, and have been, in compliance with all applicable laws, rules, regulations, standards and requirements of the United States Environmental Protection Agency ("EPA") and of state and local agencies with jurisdiction over pollution or protection of the environment, except for violations which, either individually or in the aggregate, do not or would not result in a material adverse effect on the Condition of First National/Polk. (ii) To the Knowledge of First National/Polk, there is no suit, claim, action or proceeding, pending or threatened, before any court, governmental agency or board or other forum in which First National/Polk or any Participation Facility has been or, with respect to threatened 14 19 proceedings, may be, named as a defendant (A) for alleged noncompliance (including by any predecessor), with any environmental law, rule or regulation or (B) relating to the release into the environment of any Hazardous Material (as hereinafter defined) or oil whether or not occurring at or on a site owned, leased or operated by First National/Polk or any Participation Facility except as would not, either individually or in the aggregate, result in a material adverse effect on the Condition of First National/Polk. (iii) To the Knowledge of First National/Polk, there is no suit, claim, action or proceeding, pending or threatened, before any court, governmental agency or board or other forum in which any Loan Property has been or, with respect to threatened proceedings, may be, named as a defendant (A) for alleged noncompliance (including by any predecessor) with any environmental law, rule or regulation or (B) relating to the release into the environment of any Hazardous Material or oil whether or not occurring at or on a site owned, leased or operated by a Loan Property, except where such noncompliance or release does not or would not result, either individually or in the aggregate, in a material adverse effect on the Condition of First National/Polk. (iv) To the Knowledge of First National/Polk, there is no reasonable basis for any suit, claim, action or proceeding as described in subsection (ii) or (iii) of this Section 3(t) except as would not, individually or in the aggregate, have a material adverse effect on the Condition of First National/Polk. (v) During the period of (A) First National/Polk's ownership or operation of any of its current properties, (B) First National/Polk's participation in the management of any Participation Facilities, or (C) First National/Polk's holding of a Security Interest in a Loan Property, to the Knowledge of First National/Polk, there has been no release of Hazardous Material or oil in, on, under or affecting such properties, except where such release does not or would not result, either individually or in the aggregate, in a material adverse effect on the Condition of First National/Polk. Prior to the period of (A) First National/Polk's ownership or operation of any of its current properties, (B) First National/Polk's participation in the management of any Participation Facility, or (C) First National/Polk holding of a Security Interest in a Loan Property, to the Knowledge of First National/Polk, there was no release of Hazardous Material or oil in, on, under or affecting any such property, Participation Facility or Loan Property, except where such release does not or would not result, either individually or in the aggregate, in a material adverse effect on the condition of First National/Polk. (vi) The following definitions apply for purposes of this Section 3(t): (A) "Loan Property" means any real property in which First National/Polk holds a Security Interest and, where required by the context, said term means the owner or operator of such property; (B) "Participation Facility" means any facility in which First National/Polk participates in the management and where required by the context, said term means the owner or operator of such property; and (C) "Hazardous Material" means any pollutant, contaminant, or hazardous substance under the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. ss.9601 et seq. or any similar state law. (u) Labor Matters. First National/Polk is not a party to, or bound by, any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor organization, nor is it the subject of any material proceeding asserting that it has committed an unfair labor practice or seeking to compel it to bargain with any labor organization as to wages or conditions of employment nor is there any strike or other labor dispute involving it pending or, to its Knowledge, threatened, any of which would have, individually or in the aggregate, a material adverse effect on the Condition of First National/Polk. 15 20 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF CBF Section 4.1 Representations and Warranties of CBF. CBF represents and warrants to First National/Polk that the statements contained in this Article IV are correct and complete as of the date of this Agreement and shall be correct and complete as of the Closing Date (as though made then and as though the Closing Date were substituted for the date of this Agreement throughout this Article IV), except (i) representations and warranties which are confined to a specified date shall speak only as of such date, (ii) as expressly contemplated by this Agreement, or (iii) as set forth in the disclosure schedule prepared by CBF and delivered to First National/Polk prior to the date of this Agreement (the "CBF Disclosure Schedule"). The CBF Disclosure Schedule has been arranged in paragraphs corresponding to the numbered and lettered paragraphs contained in this Article IV. (a) Organization, Qualification, and Corporate Power. CBF is a corporation duly organized, validly existing, and in good standing under the laws of Florida. CBF is duly authorized to conduct business and is in good standing under the laws of each jurisdiction in which the nature of its business or the ownership or leasing of its properties requires such qualification except where the lack of such qualification would not have a material adverse effect on its Condition. CBF has full corporate power and authority to carry on the business in which it is engaged and to own and use the properties owned and used by it. True and complete copies of the Articles of Incorporation and the Bylaws of CBF are attached hereto as Schedule 4(a). CBF has in effect all federal, state, local and foreign governmental, regulatory and other authorizations, permits and licenses necessary for it to own or lease its properties and assets and to carry on its business as now conducted, the absence of which, individually or in the aggregate, would have a material adverse effect on the Condition of CBF on a consolidated basis. As of the Effective Time of the Merger, FINB (i) will be an interim national banking association duly organized, validly existing and in good standing under the laws of the United States (ii) will have the corporate power and authority to own or lease all of its properties and assets and to carry on its business as proposed to be conducted pursuant to this Agreement, and (iii) will be licensed or qualified to do business in each jurisdiction which the nature of the business conducted or to be conducted by FINB, or the character or location or the properties and assets owned or leased by FINB, make such licensing or qualification necessary, except where the failure to be so licensed or qualified (or steps necessary to cure such failure) would not have a material adverse effect on the Condition of CBF on a consolidated basis. FINB, as of the Effective Time of the Merger, will have in effect all federal, state, local and foreign governmental, regulatory or other authorizations, permits and licenses necessary for it to own or lease its properties and assets and to carry on its business as proposed to be conducted, the absence of which, either individually or in the aggregate, would have a material adverse effect on the Condition of CBF on a consolidated basis. (b) Capitalization. The authorized capital stock of CBF consists of (i) 20,000,000 CBF Shares, of which one CBF Share is issued and outstanding on the date of this Agreement, and (ii) 5,000,000 shares of preferred stock, $.01 par value, none of which are issued and outstanding on the date of this Agreement. There are no other classes of capital stock of CBF authorized. CBF holds no CBF Shares as treasury stock. All of the issued and outstanding CBF Shares have been duly authorized and are validly issued, fully paid and nonassessable. None of the outstanding CBF Shares has been issued in violation of any preemptive rights of the current or past stockholders of CBF. There are no outstanding or authorized options, warrants, rights, contracts, calls, puts, rights to subscribe, conversion rights, or other agreements or commitments to which CBF is a party or which are binding upon CBF or, to the Knowledge of CBF, any other party providing for the issuance, voting, transfer, disposition, or acquisition of any of the capital stock of CBF. 16 21 There are no outstanding or authorized stock appreciation, phantom stock or similar rights with respect to CBF. (c) CBF Subsidiaries. Except for FINB (and other interim national banking associations organized to facilitate consummation of the mergers referred to in Sections 6(a)(xiii) and 6(b)(xi)), which at the Effective Time of the Merger will be organized as a wholly-owned subsidiary of CBF, CBF has no Subsidiary or Subsidiaries. (d) Authorization of Transaction. CBF has full power and authority (including full corporate power and authority) to execute and deliver this Agreement and to perform its obligations hereunder; provided, however, that CBF cannot consummate the Merger unless and until all requisite approvals are received from the Regulatory Authorities. Subject to the foregoing sentence, (i) this Agreement has been duly executed and delivered by CBF and this Agreement constitutes a valid and binding agreement of CBF, enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency and other similar laws affecting creditors' rights generally, general equitable principles and the discretion of courts in granting equitable remedies, (ii) the performance by CBF of its obligations under this Agreement and the consummation of the Merger and the other transactions provided for under this Agreement have been or will be duly and validly authorized by all necessary corporate action on the part of CBF, and (iii) the Board of Directors of CBF has approved the execution, delivery and performance of this Agreement and the consummation of the Merger and the other transactions provided for under this Agreement. Other than to or from the Regulatory Authorities or to or from the IRS or the PBGC with respect to any employee benefit plans, CBF does not need to give any notice to, make any filing with, or obtain any authorization, consent or approval of any government or governmental agency in order for the Parties to consummate the transactions contemplated by this Agreement, except where the failure to give notice, to file, or to obtain any authorization, consent, or approval would not have a material adverse effect on the Condition of CBF on a consolidated basis. (e) Noncontravention. Neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (i) subject to the receipt of the approvals contemplated in Section 4(d) above, violate any statute, regulation, rule, judgment, order, decree, stipulation, injunction, charge, or other restriction of any government, governmental agency, or court to which CBF is subject or any provision of the Articles of Incorporation or Bylaws of CBF or (ii) with the passing of time or the giving of notice or both, conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require any notice under any contract, lease, sublease, license, franchise, permit, indenture, agreement or mortgage for borrowed money, instrument of indebtedness, Security Interest, or other obligation to which CBF is a party or by which it is bound or to which any of its assets is subject (or result in the imposition of any Security Interest upon any of its assets) except where the violation, conflict, breach, default, acceleration, termination, modification, cancellation, failure to give notice, or Security Interest would not have a material adverse effect on the Condition of CBF on a consolidated basis. (f) Statements True and Correct. No representation or warranty made by CBF in this Agreement, no written statement or certificate included in an Exhibit or Schedule by CBF in connection with this Agreement, and no written statement or certificate to be furnished by CBF to First National/Polk pursuant to this Agreement contains any untrue statement of material fact or omits to state a material fact necessary to make the statements made, in the light of the circumstances under which they were made, not misleading. None of the information supplied or to be supplied by CBF for inclusion in the definitive proxy materials to be mailed to First National/Polk shareholders in connection with the Special First National/Polk Meeting (as defined in Section 5(b)(iii)), or in any other documents to be filed with any Regulatory Authority in connection with 17 22 the transactions contemplated hereby, will at the respective time such documents are filed fail to comply in all material respects with the laws and rules and regulations applicable to CBF, contain any untrue statement of a material fact, or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. All documents that CBF is responsible for filing with any Regulatory Authority in connection with the Merger will comply as to form in all material respects with the provisions of applicable law. ARTICLE V COVENANTS AND AGREEMENTS Section 5.1 Covenants. Except as otherwise set forth in the Disclosure Schedules, the Parties agree as follows with respect to the period from and after the execution of this Agreement until the earlier of the consummation of the transactions contemplated by this Agreement or the termination of this Agreement: (a) Current Information. During the period from the date of this Agreement to the Effective Time of the Merger, each Party shall, and shall cause its representatives to, confer on a regular and frequent basis with representatives of the other. Within twenty (20) days after the end of each calendar month beginning after the date of this Agreement, each of First National/Polk and CBF shall deliver to the other copies of their respective unaudited balance sheets and statements of income, and any other financial or statistical information submitted by management to the Board of Directors of First National/Polk or CBF (other than information provided to a Board of Directors specifically in connection with its consideration of the Merger, this Agreement, and the transactions contemplated hereby) for or in the preceding fiscal month. All such financial statements shall be prepared in accordance with the books and records of such Party, shall be complete and accurate in all material respects, shall present fairly the financial position and the results of operations of that Party as of and for the periods indicated, and shall be prepared in accordance with GAAP, subject to normal recurring year-end adjustments and the absence of certain footnote information in the unaudited statements. (b) Regulatory Matters and Approvals. (i) Bank Regulatory Matters. CBF and First National/Polk shall cause to be promptly prepared and filed with the FRB, the FDIC, and the OCC, applications for their approval of the Merger and with any other Regulatory Authority having jurisdiction any other applications for approvals or Consents which may be necessary for the consummation of the Merger. The Parties shall provide copies of all such applications and notices to the others for review prior to submission or filing with the appropriate Regulatory Authorities. Each Party agrees to promptly review and provide any comments on such applications and notices to the others. Each Party shall use its best efforts to take or cause to be taken all actions necessary for such applications and notices to be approved and shall provide the others with copies of all correspondence and notices to or from such agencies concerning such applications and notices. No Consent obtained which is necessary to consummate the transactions contemplated by this Agreement shall be conditioned or restricted in a manner which in the reasonable judgment of a Party would (A) unduly impair or restrict the operations, or would have a material adverse effect on the Condition, of CBF or the Surviving Bank, or (B) render consummation of the Merger unduly burdensome; provided, that such Party has used its reasonable efforts (it being understood that such reasonable efforts shall not include the threatening or commencement of any litigation) to cause such conditions or restrictions to be removed or modified as appropriate. 18 23 (ii) Definitive Proxy Materials. First National/Polk shall prepare a proxy statement which shall consist of the First National/Polk definitive proxy materials relating to the Special First National/Polk Meeting (the "Proxy Statement"). The Proxy Statement shall contain the affirmative recommendation of the Board of Directors of First National/Polk in favor of the adoption of this Agreement and the approval of the Merger. CBF shall provide to First National/Polk such information and assistance in connection with the preparation of the Proxy Statement as First National/Polk may reasonably request. First National/Polk shall not be liable for any untrue statement of a material fact or omission to state a material fact in the Proxy Statement made in reliance upon, or in conformity with, information furnished to First National/Polk by CBF for use therein. In connection with the Special First National/Polk Meeting, the Parties shall file the proxy statement with such Regulatory Agencies as may be required by law in order for such materials to be furnished to First National/Polk shareholders in connection with such meeting. (iii) Shareholder Approvals. First National/Polk shall call a special meeting of its shareholders (the "Special First National/Polk Meeting") and mail to them the Proxy Statement (as soon as reasonably practicable following a determination by First National/Polk and CBF that such special meeting should be called) in order that First National/Polk shareholders may consider and vote upon the adoption of this Agreement and the approval of the Merger in accordance with applicable law. CBF, as sole shareholder of FINB, agrees to vote in favor of adoption of this Agreement and approval of the Merger. (iv) Securities Act Matters. CBF will prepare and file with the SEC a Registration Statement under the Securities Act in connection with the CBF Shares to be issued to First National/Polk shareholders in the Merger. First National/Polk and CBF shall each promptly furnish all information concerning it and the holders of its outstanding shares as the other may reasonably request from time to time in connection with the preparation of the Registration Statement. The Parties shall use their reasonable efforts to cause the Registration Statement to become effective under the Securities Act as soon as reasonably practicable after the filing thereof and to take any action required to be taken under applicable state, Blue Sky or securities laws in connection with the issuance of the CBF Shares upon consummation of the Merger. (v) Other Governmental Matters. Subject to the last sentence of Section 5(b)(i), each of the Parties shall take any additional action that may be necessary, proper, or advisable in connection with any other notice to, filings with, and authorizations, consents, and approvals of governments and governmental agencies that it may be required to give, make or obtain in connection with the transactions contemplated by this Agreement. (c) Tax Opinion. On or before the date the Proxy Statement is mailed to First National/Polk shareholders, First National/Polk and CBF shall each use all reasonable efforts to obtain a written opinion from an accounting or law firm selected by First National/Polk and CBF, to the effect that the exchange of First National/Polk Shares, to the extent exchanged for CBF Shares as contemplated herein, shall not give rise to gain or loss to the holders of such First National/Polk Shares, or gain or loss to CBF with respect to such exchange (except to the extent of any cash paid in lieu of fractional shares), and accordingly, the Merger will constitute a tax-free reorganization within the meaning of Section 368(a) of the Internal Revenue Code (the "Tax Opinion"). The Tax Opinion shall be reasonably satisfactory to each of First National/Polk and CBF in form and substance. (d) Conduct of Business Prior to the Effective Time of the Merger. During the period from the date of this Agreement to the Effective Time of the Merger, except as set forth in the First National/Polk or CBF Disclosure Schedules, or with the prior written consent of the other Parties, or as expressly contemplated or permitted by this Agreement, each of First National/Polk 19 24 and CBF shall (i) conduct its business in, and only in, the usual, regular and ordinary course consistent with past practices, (ii) use its reasonable best efforts to maintain and preserve intact its business organization, employees and advantageous business relationships and retain the services of its officers and key employees, and (iii) take no action which would materially adversely affect or delay the ability of any Party to obtain any necessary approvals of any Regulatory Authority or other governmental authority required for the transactions contemplated hereby or to perform its covenants and agreements under this Agreement. (e) Forbearance. During the period from the date of this Agreement to the Effective Time of the Merger, except as set forth in the First National/Polk or CBF Disclosure Schedules, or except as expressly contemplated or permitted by this Agreement, no Party shall, or permit its Subsidiaries to, without the prior written consent of the other Parties: (i) Other than in the Ordinary Course of Business, incur any indebtedness for borrowed money (other than short-term indebtedness incurred to refinance short-term indebtedness; it being understood and agreed that incurrence of indebtedness in the Ordinary Course of Business shall include, without limitation, the creation of deposit liabilities, purchases of federal funds, sales of certificates of deposit and entering into repurchase agreements), assume, guarantee, endorse or otherwise as an accommodation become responsible for the obligations of any other individual, corporation or other entity, or make any loan or advance other than in the Ordinary Course of Business; (ii) Adjust, split, combine or reclassify any capital stock; make, declare or pay any dividend (except in accordance with past practice) or make any other distribution on, or directly or indirectly redeem, purchase or otherwise acquire, any shares of its capital stock or any securities or obligations convertible into or exchangeable for any shares of its capital stock, or, grant any stock options or stock appreciation rights or grant any individual, corporation or other entity any right to acquire any shares of its capital stock; (iii) Sell, transfer, mortgage, encumber or otherwise dispose of any of its material properties or assets to any individual, corporation or other entity, or cancel, release or assign any material indebtedness to any such person or any claims held by any such person, except (A) in the Ordinary Course of Business, or (B) as set forth in a Disclosure Schedule pursuant to contracts or agreements in force at the date of this Agreement; (iv) Except for transactions in the Ordinary Course of Business, make any material investment in, either by purchase of stock or securities, contributions to capital, property transfers, or purchase of property or assets, any other individual, corporation or other entity; (v) Except for transactions in the Ordinary Course of Business, enter into or terminate any material contract or agreement, or make any change in any of its material leases or contracts, other than renewals of contracts and leases without material adverse changes of terms; (vi) Increase in any material manner the compensation or fringe benefits of any of its employees or pay any bonus or pension or retirement allowance not required by any existing plan or agreement to any such employees, or become a party to, amend or commit itself to any pension, retirement, profit-sharing or welfare benefit plan or agreement or employment agreement with or for the benefit of any employee, other than in the Ordinary Course of Business (except that First National/Polk may amend the stock option plans pursuant to which the First National/Polk Options were issued to provide that the First National/Polk Options shall not terminate as a result of the Merger); with the understanding that entering into any new employment contracts, 20 25 or renewing or amending any existing employment contracts, shall be deemed outside the Ordinary Course of Business; (vii) Amend its Articles of Incorporation, Articles of Association, or its bylaws; (viii) Enter into any new line of business; (ix) Change its lending, investment, asset/liability management or other material banking policies in any respect which is material, including without limitation, policies and procedures relating to calculating and funding the Allowance; (x) Incur or commit to any capital expenditure or any obligations or liabilities in connection therewith other than capital expenditures and obligations or liabilities incurred or committed to in the Ordinary Course of Business; (xi) Change its methods of accounting in effect at December 31, 1998, except as required by generally accepted accounting principles, or its fiscal year; or (xii) Agree to, or make any commitment to, take any of the actions prohibited by this Section 5(e). (f) Issuance of Securities. Except as set forth in a Disclosure Schedule or as contemplated by this Agreement, no Party shall or shall permit any of its Subsidiaries to issue, deliver or sell, or authorize or propose the issuance, delivery or sale of, any shares of its capital stock of any class, any voting debt or any securities convertible into or exercisable for or any rights, warrants or options to acquire, any such shares or voting debt, or enter into any agreement with respect to any of the foregoing, other than (i) the issuance of First National/Polk Shares, pursuant to outstanding First National/Polk Options, in each case as in effect on the date of this Agreement and in each case in accordance with their present terms; (ii) the issuance of CBF Shares pursuant to outstanding CBF Options or CBF Warrants, in each case as in effect on the date of this Agreement and in each case in accordance with their present terms; (iii) issuances by a Subsidiary of its capital stock to its parent; and (iv) the issuance by a Party of any shares of its capital stock in a transaction approved by the Parties pursuant to Section 5(g). (g) No Acquisitions. Other than acquisitions which may be mutually agreed upon in writing by the Parties, no Party shall or shall permit any of its Subsidiaries to acquire or agree to acquire, by merging or consolidation with or by purchasing a substantial equity interest in, or by purchasing a substantial portion of the assets, or assuming a substantial portion of the liabilities of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof or otherwise acquire or agree to acquire any assets in each case which are material, individually or in the aggregate, to such Party and its Subsidiaries taken as a whole; provided, however, that the foregoing shall not prohibit (i) internal reorganizations, consolidations or dissolutions involving only existing Subsidiaries, (ii) foreclosure and other acquisitions related to previously contracted debt, in each case in the Ordinary Course of Business, (iii) acquisitions of control by First National/Polk in its fiduciary capacity, (iv) investments made by small business investment corporations, acquisitions of financial assets and merchant banking activities, in each case in the Ordinary Course of Business, or (v) the creation of new Subsidiaries organized to conduct or continue activities otherwise permitted by this Agreement. (h) Other Actions. No Party shall or shall permit any of its Subsidiaries to take any action that, or fail to take any action the failure of which, results in any of its representations and 21 26 warranties set forth in this Agreement being or becoming untrue in any material respect, or in any of the conditions set forth in this Agreement not being satisfied or in a violation of any provision of this Agreement which would adversely affect the ability of any of them to obtain any of the Regulatory Approvals, except in every case as may be required by applicable law. (i) Government Filings. Each Party shall file all reports, applications and other documents required to be filed with the appropriate bank regulators between the date hereof and the Effective Time of the Merger and shall make available to the other Party copies of all such reports promptly after the same are filed. (j) Tax-Free Reorganization Treatment. No Party shall take or cause to be taken any action, whether before or after the Effective Time of the Merger, which would disqualify the Merger as a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code. (k) Full Access. Each Party shall and shall cause each of its Subsidiaries to permit representatives of the others to have full access at all reasonable times, and in a manner so as not to interfere with the normal business operations of such Party and its Subsidiaries, to all premises, properties, books, records, contracts, tax records, and documents of or pertaining to each of such Party and its Subsidiaries. Each Party agrees to furnish any other Party and its advisers with such financial operating data and other information with respect to its business, properties and employees as such Party shall, from time to time, reasonably request. No investigation by a Party shall affect the representations and warranties of any other Party to this Agreement, and each such representation and warranty shall survive any such investigation. (1) Notice of Material Adverse Developments. Each Party shall give prompt written notice to the other Parties of any material adverse effect on its Condition, or any material adverse development affecting the assets, liabilities, business, financial condition, operations, results of operations, or future prospects of such Party and its Subsidiaries taken as a whole, including without limitation (i) any material change in its business or operations, (ii) any material complaints, investigations or hearings (or communications indicating that the same may be contemplated) of any Regulatory Authority, (iii) the institution or the threat of material litigation involving such Party, or (iv) any event or condition that might be reasonably expected to cause any of such Party's representations and warranties set forth herein not to be true and correct in all material respects as of the Closing Date. Each Party shall also give prompt written notice to the other Parties of any other material adverse development affecting the ability of such Party to consummate the transactions contemplated by this Agreement. Any such notices shall be accompanied by copies of any and all pertinent documents, correspondence and similar papers relevant to a complete understanding of such material adverse development, which shall be promptly updated as necessary. CBF shall have 20 business days after First National/Polk gives any written notice pursuant to this Section 5(l) within which to exercise any right CBF may have to terminate this Agreement pursuant to Section 7(a)(iv) below by reason of the material adverse development, and First National/Polk likewise shall have 20 business days after CBF gives any written notice pursuant to this Section 5(l) within which to exercise any right First National/Polk may have to terminate this Agreement pursuant to Section 7(a)(iii) below by reason of the material adverse development. Unless one of the Parties terminates this Agreement within the aforementioned period, the written notice of a material development shall be deemed to have amended the Disclosure Schedule, to have qualified the representations and warranties contained herein, and to have cured any misrepresentation or breach of warranty that otherwise might have existed hereunder by reason of the material adverse development. (m) Exclusivity. Except as specifically permitted or contemplated by this Agreement, the Parties shall not (and shall not cause or permit any of their Subsidiaries to) solicit, 22 27 initiate, encourage, entertain, consider, or participate in the negotiation, discussion or submission of any proposal or offer from any person (other than a Party) relating to any (i) liquidation, dissolution, or recapitalization, (ii) merger or consolidation, (iii) acquisition or purchase of 25% or more of securities or assets, or (iv) similar transaction or business combination involving any of the Parties and/or its Subsidiaries, or their respective assets (the foregoing transactions referred to in subclauses (i) through (iv), inclusive, are referred to in this Agreement as an "Acquisition Proposal"); provided, however, that each Party shall be entitled to entertain, consider, and participate in negotiations and discussions regarding, and furnish any information with respect to, any effort or attempt by any person to do or seek to do any of the foregoing to the extent that the Board of Directors of such Party determines in good faith, based upon the written advice of its legal counsel, that the failure to so consider or participate in such negotiations or discussions would be inconsistent with the fiduciary obligations of the directors of such Party to the shareholders of such Party. The Party shall give all of the other Parties prompt notice of any such negotiations and discussions. Each Party shall notify others immediately if any person (other than a Party) makes any proposal, offer, inquiry, or contact with respect to any Acquisition Proposal. (n) Filings with the Offices. Upon the terms and subject to the conditions of this Agreement, the Parties shall execute and file any and all documents in connection with the Merger for filing with any Federal and state offices. (o) Press Releases. Each Party shall consult with each other as to the form and substance of any press release or other public disclosure materially related to this Agreement, the Merger or any other transaction contemplated hereby; provided, however, that any Party may make any public disclosure it believes in good faith is required by law or regulation. (p) Agreements of Affiliates. First National/Polk shall deliver to CBF a letter identifying all persons whom First National/Polk believes to be, at the time the Merger is submitted to a vote of the First National/Polk shareholders, "affiliates" of First National/Polk for purposes of Rule 145 under the Securities Act. First National/Polk shall use its best efforts to cause each person who is identified as an "affiliate" in the letter referred to above to deliver to CBF prior to the Effective Time of the Merger a written agreement providing that each such person shall agree not to sell, transfer or otherwise dispose of the CBF Shares to be received by such person in the Merger, except in compliance with the applicable provisions of the Securities Act and until such time as the financial results covering at least 30 days of combined operations of CBF and First National/Polk have been published within the meaning of Section 201.01 of the SEC's Codification of Financial Reporting Policies. Prior to the Effective Time of the Merger, First National/Polk shall amend and supplement such letter and use its reasonable best efforts to cause each additional person who is identified as an "affiliate" to execute a written agreement as set forth in this Section 5(p). (q) Miscellaneous Agreements and Consents. Subject to the terms and conditions of this Agreement, each of the Parties hereto agrees to use its respective best efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement as expeditiously as reasonably practicable, including, without limitation, using their respective reasonable best efforts to lift or rescind any injunction or restraining order or other order adversely affecting the ability of the Parties to consummate the transactions contemplated hereby. Each Party shall, and shall cause each of their respective Subsidiaries to, use their reasonable best efforts to obtain all approvals and Consents of all third parties and Regulatory Authorities necessary or, in the reasonable opinion of any Party, desirable for the consummation of the transactions contemplated by this Agreement. No Consent obtained which is necessary to consummate the transactions contemplated by this Agreement shall be conditioned or restricted in a manner which in the reasonable judgment of a Party would (A) unduly impair or restrict the 23 28 operations, or would have a material adverse effect on the Condition, of CBF or the Surviving Bank, or (B) render consummation of the Merger unduly burdensome; provided, that such Party has used its reasonable efforts (it being understood that such reasonable efforts shall not include the threatening or commencement of any litigation) to cause such conditions or restrictions to be removed or modified as appropriate. (r) Indemnification. (i) After the Effective Time of the Merger, CBF shall cause the Surviving Bank to indemnify, defend and hold harmless the present and former officers, directors, employees and agents of First National/Polk (each, an "Indemnified Party") after the Effective Time of the Merger against all losses, expenses, claims, damages or liabilities arising out of actions or omissions occurring on or prior to the Effective Time of the Merger (including, without limitation, the transactions contemplated by this Agreement) to the full extent then permitted under, and in accordance with the terms and conditions of, the Florida Business Corporation Act and by the Articles of Association and Bylaws of First National/Polk as in effect on the date hereof, including provisions relating to advances of expenses incurred in the defense of any action or suit. CBF shall cause the Surviving Bank to apply such rights of indemnification in good faith and to the fullest extent permitted by applicable law. (ii) If the Surviving Bank or any of its successors or assigns (A) shall consolidate with or merge into any other corporation or entity and shall not be the continuing or surviving corporation or entity of such consolidation or merger, or (B) shall transfer all or substantially all of its properties and assets to any individual, corporation or other entity, then and in each such case, CBF shall cause the Surviving Bank to cause proper provision to be made so that the successors and assigns of the Surviving Bank shall assume the obligations set forth in this Section 5(r). (s) Fairness Opinions. On or before 10 days prior to the date of the Proxy Statement, (i) First National/Polk shall use all reasonable efforts to obtain an opinion from a firm selected by it that the terms of the Merger are fair to First National/Polk shareholders from a financial point of view (the "First National/Polk Fairness Opinion"), and (ii) CBF shall have the right to obtain an opinion from a firm selected by it that the terms of the Merger are fair to CBF shareholders from a financial point of view (the "CBF Fairness Opinion"). (t) Employee Benefit Plans. First National/Polk and CBF shall use their best efforts to coordinate the conversion of each First National/Polk Benefit Plan into similar plans of the Surviving Bank, to the extent similar plans are maintained by the Surviving Bank, and to make available for eligibility for First National/Polk employees all benefit plans and policies maintained by the Surviving Bank following the Effective Time of the Merger with such employees receiving credit for past service with a Party prior to the Effective Time of the Merger for purposes of eligibility for participation, vesting, and years of service, under such benefit plans and policies. 24 29 ARTICLE VI CONDITIONS TO THE OBLIGATIONS OF FIRST NATIONAL/POLK AND CBF Section 6.1 Conditions to Obligation to Close. (a) Conditions to Obligation of CBF. The obligation of CBF to consummate the transactions to be performed by it in connection with the Closing are subject to satisfaction of the following conditions: (i) This Agreement and the Merger shall have received the requisite approval of the shareholders of First National/Polk and the number of Dissenting First National/Polk Shares shall not exceed 5% of the number of First National/Polk Shares issued and outstanding immediately prior to the Effective Time of the Merger; (ii) The Parties shall have procured all approvals, authorizations and Consents specified in Section 5(b) above and the Disclosure Schedules, including but not limited to all necessary consents, authorizations and approvals of Regulatory Authorities which, with respect to those from the Regulatory Authorities, shall not contain provisions which (A) unduly impair or restrict the operations, or would have a material adverse effect on the Condition, of CBF or the Surviving Bank, or (B) render consummation of the Merger unduly burdensome, in each case as determined in the reasonable discretion of CBF; (iii) The representations and warranties set forth in Article III above shall be true and correct in all material respects at and as of the Closing Date; (iv) First National/Polk shall have performed and complied in all material respects with all its covenants required to be complied with hereunder through the Closing; (v) No action, suit, or proceeding shall be pending or threatened before any court or quasi-judicial or administrative agency of any federal, state, local, or foreign jurisdiction wherein an unfavorable judgment, order, decree, stipulation, injunction, or charge could (A) prevent consummation of any of the transactions contemplated by this Agreement, (B) cause any of the transactions contemplated by this Agreement to be rescinded following consummation, or (C) affect adversely the right after the Effective Time of the Merger of the Surviving Bank to own, operate, or control substantially all of the assets and operations of First National/Polk and/or CBF to own, operate, or control substantially all of the assets and operations of the Surviving Bank (and no such judgment, order, decree, stipulation, injunction, or charge shall be in effect); (vi) The shareholders' equity of First National/Polk on the last day of the calendar month immediately preceding the Closing Date, as determined in accordance with GAAP before any adjustments required pursuant to Statement of Financial Accounting Standards No. 115 ("FAS 115"), shall not be less than the amount set forth in the September 30,1999 First National/Polk Financial Statements; (vii) First National/Polk shall have delivered to CBF a certificate (without qualification as to knowledge or materiality or otherwise) to the effect that each of the conditions specified above in Section 6(a)(i) through (vi) is satisfied in all respects; (viii) All actions to be taken by First National/Polk in connection with consummation of the transactions contemplated hereby and all certificates, opinions, instruments, 25 30 and other documents required to effect the transactions contemplated hereby shall be reasonably satisfactory in form and substance to CBF; (ix) CBF shall have received the Tax Opinion in a form reasonably satisfactory to CBF; (x) CBF shall have received the CBF Fairness Opinion; (xi) CBF shall have received a letter, dated as of the Effective Time of the Merger, from an accounting firm selected by CBF and First National/Polk to the effect that the Merger will qualify for pooling-of-interests accounting treatment if closed and consummated in accordance with this Agreement; and (xii) CBF shall close simultaneously with the Effective Time of the Merger the acquisitions by CBF of First National Bank of Osceola County and Community National Bank of Pasco County. CBF may waive any condition specified in this Section 6(a) if it executes a writing so stating at or prior to the Closing. (b) Conditions to Obligation of First National/Polk. The obligations of First National/Polk to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following conditions: (i) This Agreement and the Merger shall have received the requisite approval of the shareholders of First National/Polk and the number of Dissenting First National/Polk Shares shall not exceed 5% of the number of First National/Polk Shares issued and outstanding immediately prior to the Effective Time of the Merger; (ii) The Parties shall have procured all of the third party approvals, authorizations and consents specified in Section 5(b) above, and the Disclosure Schedules, including but not limited to all necessary consents, authorizations and approvals of Regulatory Authorities which, with respect to those from the Regulatory Authorities, shall not contain provisions which (A) unduly impair or restrict the operations, or would have a material adverse effect on the Condition, of CBF or the Surviving Bank, or (B) render consummation of the Merger unduly burdensome, in each case as determined in the reasonable discretion of First National/Polk; (iii) The representations and warranties set forth in Article IV above shall be true and correct in all material respects at and as of the Closing Date; (iv) CBF shall have performed and complied in all material respects with all its covenants required to be complied with hereunder through the Closing; (v) No action, suit, or proceeding shall be pending or threatened before any court or quasi-judicial or administrative agency of any federal, state, local, or foreign jurisdiction wherein an unfavorable judgment, order, decree, stipulation, injunction, or charge could (A) prevent consummation of any of the transactions contemplated by this Agreement, (B) cause any of the transactions contemplated by this Agreement to be rescinded following consummation, or (C) affect adversely the right after the Effective Time of the Merger of the Surviving Bank, to own, operate, or control substantially all of the assets and operations of First National/Polk (and no such judgment, order, decree, stipulation, injunction or charge shall be in effect); 26 31 (vi) CBF shall have delivered to First National/Polk a certificate (without qualification as to knowledge or materiality or otherwise) to the effect that each of the conditions specified in Section 6(b)(i) through (vii) is satisfied in all respects; (v) All actions to be taken by CBF in connection with consummation of the transactions contemplated hereby and all certificates, opinions, instruments, and other documents required to effect the transactions contemplated hereby shall be reasonably satisfactory in form and substance to First National/Polk; (vi) First National/Polk shall have received the Tax Opinion in a form reasonably satisfactory to First National/Polk; and (vii) CBF shall close simultaneously with the Effective Time of the Merger the acquisitions by CBF of First National Bank of Osceola County and Community National Bank of Pasco County. First National/Polk may waive any condition specified in this Section 6(b) if it executes a writing so stating at or prior to the Closing. ARTICLE VII TERMINATION Section 7.1 Termination. (a) Termination of Agreement. Any of the Parties may terminate this Agreement with the prior authorization of its Board of Directors (whether before or after approval of its or any other Party's shareholders) as provided below: (i) The Parties may terminate this Agreement by mutual written consent at any time prior to the Effective Time of the Merger; (ii) CBF may terminate this Agreement by giving written notice to First National/Polk at any time prior to the Effective Time of the Merger in the event First National/Polk is in breach, and First National/Polk may terminate this Agreement by giving written notice to CBF at any time prior to the Effective Time of the Merger in the event CBF or FINB is in breach, of any representation, warranty, or covenant contained in this Agreement in any material respect. Each Party shall have the right to cure any such breach, if such breach is capable of being cured, within 15 days after receipt of written notice of such breach or within any such longer period mutually agreed to in writing by the Parties hereto ("Cure Period"); provided, however, that in no event shall the Cure Period extend beyond December 31, 2000; (iii) If a material adverse development shall have occurred affecting the Condition of CBF on a consolidated basis, First National/Polk may terminate this Agreement by giving written notice to CBF; (iv) If a material adverse development shall have occurred affecting the Condition of First National/Polk, CBF may terminate this Agreement by giving written notice to First National/Polk; 27 32 (v) First National/Polk and CBF each may terminate this Agreement by giving written notice to the other Party at any time after (i) the First National/Polk Special Meeting in the event this Agreement or the Merger fails to receive the requisite First National/Polk shareholder approval, or (ii) the denial, and any final appeal or rehearing thereof (or if any denial by such authority is not appealed within the time limit for appeal), of any approval from a Regulatory Authority necessary to permit the Parties to consummate the Merger and the transactions contemplated by this Agreement or if any Consent shall be conditioned or restricted in the manner provided in the last sentence of Section 5(b)(i); and (vi) Any Party may terminate this Agreement by giving written notice to the other Parties at any time after December 31, 2000 if the Effective Time of the Merger has not yet then occurred and such termination was approved by a two-thirds vote of such Party's full Board of Directors. (b) Effect of Termination. If any Party terminates this Agreement pursuant to Section 7(a) above, all obligations of the Parties hereunder shall terminate without any liability of any Party to any other Party (except for any liability of any Party then in breach); provided, however, that the confidentiality provisions contained in Section 5(k) above, and the expense provisions in 8(k) below, shall survive any such termination. ARTICLE VIII MISCELLANEOUS Section 8.1 Miscellaneous. (a) Survival. None of the representations, warranties, and covenants of the Parties (other than the provisions in Article II above concerning issuance of CBF Shares and the provisions in Section 5(r) above concerning insurance and indemnification) shall survive the Effective Time of the Merger. (b) No Third Party Beneficiaries. This Agreement shall not confer any rights or remedies upon any person other than the Parties and their respective successors and permitted assigns; provided, however, that (i) the provisions in Article II above concerning issuance of CBF Shares are intended for the benefit of First National/Polk shareholders and (ii) the provisions in Section 5(r) above concerning insurance and indemnification are intended for the benefit of the individuals specified and their respective legal representatives. (c) Entire Agreement. This Agreement (including the documents referred to herein) constitutes the entire agreement among the Parties and supersedes any prior understandings, agreements, or representations by or among the Parties, written or oral, that may have related in any way to the subject matter hereof. (d) Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Parties named herein and their respective successors and permitted assigns. No Party may assign either this Agreement or any of its rights, interests, or obligations hereunder without the prior written approval of the other Parties. 28 33 (e) Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (f) Headings. The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. (g) Notices. All notices, requests, consents and other communications required or permitted under this Agreement shall be in writing (including telex and telegraphic communication) and shall be (as elected by the person giving such notice) hand delivered by messenger or courier service, delivered by facsimile transmission, or mailed (airmail if international) by registered or certified mail (postage prepaid), return receipt requested, addressed to: If to CBF or FINB: James H. White Chairman of the Board, President and Chief Executive Officer Centerstate Banks of Florida, Inc. 7722 State Road 544 East Winter Haven, Florida 33881 Facsimile: (941) 421-6663 If to First National/Polk: George H. Carefoot President and Chief Executive Officer First National Bank of Polk County 7722 SR 544 East Winter Haven, Florida 33881 Facsimile: (407) 421-6663 and, in all cases, with copies to: John P. Greeley, Esquire Smith, Mackinnon, Greeley, Bowdoin, Edwards, Brownlee & Marks, P.A. 255 S. Orange Avenue, Suite 800 Orlando, FL 32801 Facsimile: (407) 843-2448 or to such other address as any Party may designate by notice complying with the terms of this Section. Each such notice shall be deemed delivered (a) on the date delivered if by hand delivery; (b) on the date of transmission with confirmed answer back if by telex, facsimile or other telegraphic method; and (c) on the date upon which the return receipt is signed or delivery is refused or the notice is designated by the postal authorities as not deliverable, as the case may be, if mailed. (h) Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Florida without regard to principles of conflict of laws. (i) Amendments and Waivers. To the extent permitted by law, the Parties may amend any provision of this Agreement at any time prior to the Effective Time of the Merger by a subsequent writing signed by each of the Parties upon the approval of their respective Boards of Directors; provided, however, that after approval of this Agreement by a Party's shareholders, there shall be made no amendment in the Conversion Ratio in a manner that adversely affects the 29 34 economic value of the Merger to such shareholders without their further approval. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by all of the Parties. No waiver by any Party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. (j) Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the remaining terms and provision hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. If the final judgment of a court of competent jurisdiction declares that any term or provision hereof is invalid or unenforceable, the Parties agree that the court making the termination of invalidity or unenforceability shall have the power to reduce the scope, duration, or area of the term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provisions with a term or provisions that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified after the expiration of the time within which the judgment may be appealed. (k) Expenses. Each Party shall bear its own expenses in connection with the negotiation and execution of this Agreement and the implementation and effectiveness of the Merger. Notwithstanding the foregoing, if any legal action or other proceeding is brought for the enforcement of this Agreement, or because of an alleged dispute, breach, default or misrepresentation in connection with any provision of this Agreement, the successful or prevailing Party or Parties shall be entitled to recover reasonable attorneys' fees, sales and use taxes, court costs and all expenses even if not taxable as court costs (including, without limitation, all such fees, taxes, costs and expenses incident to arbitration, appellate, bankruptcy and post-judgment proceedings), incurred in that action or proceeding, in addition to any other relief to which such Party or Parties may be entitled. Attorneys' fees shall include, without limitation, paralegal fees, investigative fees, administrative costs, sales and use taxes and all other charges billed by the attorney to the prevailing Party. (l) Construction. The language used in this Agreement shall be deemed to be the language chosen by the Parties hereto to express their mutual intent, and no rule of strict construction shall be applied against any Party. Any reference to any federal, state, local or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context otherwise requires. (m) Incorporation of Exhibits and Schedules. The Exhibits and Schedules identified in this Agreement are incorporated herein by reference and made a part hereof. (n) Jurisdiction and Venue. The Parties acknowledge that a substantial portion of negotiations and anticipated performance and execution of this Agreement occurred or shall occur in Polk County, Florida, and that, therefore, without limiting the jurisdiction or venue of any other federal or state courts, each of the Parties irrevocably and unconditionally (a) agrees that any suit, action or legal proceeding arising out of or relating to this Agreement may be brought in a state or federal court of record in Polk County; (b) consents to the jurisdiction of each such Court in any suit, action or proceeding; (c) waives any objection which it may have to the laying of venue of any such suit, action or proceeding in any of such courts; and (d) agrees that service of any court paper may be effected on such Party by mail, as provided in this Agreement, or in such other manner as may be provided under applicable laws or court rules in said state. 30 35 (o) Remedies Cumulative. Except as otherwise expressly provided herein, no remedy herein conferred upon any Party is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or otherwise. No single or partial exercise by any Party of any right, power or remedy hereunder shall preclude any other or further exercise thereof. IN WITNESS WHEREOF, the Parties hereto have executed this Agreement and have affixed their respective seals as of the date first above written, each by its President and Chief Executive Officer and attested to by its Cashier or Secretary, pursuant to a resolution of its Board of Directors, acting by a majority. CENTERSTATE BANKS OF FLORIDA, INC. FIRST NATIONAL BANK OF POLK COUNTY /s/ James H. White /s/ George H. Carefoot - ------------------------------------ ------------------------------------- James H. White, Chairman of the Board George H. Carefoot President and Chief Executive Officer President and Chief Executive Officer Attest: Attest: /s/ George H. Carefoot /s/ Lynn C. Briske - ------------------------------------ ------------------------------------- George H. Carefoot, Secretary Lynn C. Briske, Cashier STATE OF FLORIDA COUNTY OF POLK The foregoing instrument was acknowledged before me this 10th day of December, 1999, by James H. White and George H. Carefoot, Chairman of the Board, President and Chief Executive Officer, and Secretary, respectively, of Centerstate Banks of Florida, Inc. /s/ John P. Greeley ------------------------------------- Printed Name: /s/ John P. Greeley ------------------------ Notary Public, State of Florida Personally Known [X] or Produced Identification [_] Type of Identification Produced ------------------------------------------------ 31 36 STATE OF FLORIDA COUNTY OF POLK The foregoing instrument was acknowledged before me this 10th day of December, 1999, by George H. Carefoot and Lynn C. Briske, President and Chief Executive Officer, and Cashier, respectively, of First National Bank of Polk County. /s/ Dorothy Pogue ------------------------------------- Printed Name: /s/ Dorothy Pogue ------------------------ Notary Public, State of Florida Personally Known |X| or Produced Identification |_| Type of Identification Produced ------------------------------------------------ 32 37 JOINDER First Interim National Bank of Polk County hereby joins in the foregoing Agreement, undertakes that it be bound thereby and that it will duly perform all the acts and things therein referred or provided to be done by it. IN WITNESS WHEREOF, First Interim National Bank of Polk County has caused this undertaking to be made by its duly authorized officers as of this ____ day of _____________, ______. FIRST INTERIM NATIONAL BANK OF POLK COUNTY ------------------------------------- George H. Carefoot President and Chief Executive Officer Attest: ------------------------------------- Lynn C. Briske, Cashier STATE OF FLORIDA COUNTY OF POLK The foregoing instrument was acknowledged before me this _____ day of __________, _____, by George H. Carefoot and Lynn C. Briske, President and Chief Executive Officer, and Cashier, respectively, of First Interim National Bank of Polk County. ------------------------------------- Printed Name: ------------------------ Notary Public, State of Florida Personally Known [_] or Produced Identification [_] Type of Identification Produced ------------------------------------------------ 33 38 SCHEDULE 1.4 TO AGREEMENT TO MERGE NAMES AND ADDRESSES OF DIRECTORS AND EXECUTIVE OFFICERS OF SURVIVING BANK DIRECTORS EXECUTIVE OFFICERS George H. Carefoot George H. Carefoot 313 Hamilton Shore Drive 313 Hamilton Shore Drive Winter Haven, FL 33881 Winter Haven, FL 33881 Bruce A. Davis Lynn C. Briske P. O. Box 622 702 Pinnacle Drive Haines City, FL 33845 Haines City, FL 33844 Terry W. Donley Joyce W. Lovelace 2235 Crump Road 13 Pine Forest Circle Winter Haven, FL 33881 Haines City, FL 33844 Bruce B. Ingram James H. White 7400 State Rd 544 P. O. Box 188 Winter Haven, FL 33881 Haines City, FL 33845-0188 Jack A. Kuder 11000 Placiado Rd. Placiado, FL 33946 Charlie N. Long, Jr. 270 Lakeview Blvd. Lake Alfred, FL 33850 Edward D. Mathews 1000 US Hwy 27 N Haines City, FL 33844 Louis W. McKnight P. O. Box 708 Davenport, FL 33837 William K. Pou, Jr. P. O. Box 904 Mulberry, FL 33860 J. Thomas Rocker 2740 Sequoyah Drive Haines City, FL 33844 Joy C. Sims 415 Dyson Road Haines City, FL 33844 39 Ralph T. Stalnaker, Jr. 15 Canterbury Drive Haines City, FL 33844 James H. White P.O. Box 188 Haines City, FL 33845-0188 40 SCHEDULE 1.6 TO AGREEMENT TO MERGE CAPITALIZATION OF SURVIVING BANK The capital stock, capital surplus and retained earnings of the Surviving Bank shall be the following amounts adjusted, however, for earnings and expenses and shares issued between September 30, 1999 and the Effective Time of the Merger: Common Stock, $5.00 par value; 5,000,000 shares authorized; 475,625 shares issued and outstanding $2,378,125 Capital surplus 2,422,422 Net unrealized gains/losses on securities held as available-for-sale (46,329) Retained earnings 1,725,325 ---------- Total Shareholders' Equity $6,479,543 ========== EX-2.3 3 AGREEMENT TO MERGE WITH PASCO COUNTY 1 Exhibit 2.3 AGREEMENT TO MERGE AMONG COMMUNITY NATIONAL BANK OF PASCO COUNTY CENTERSTATE BANKS OF FLORIDA, INC. AND COMMUNITY INTERIM NATIONAL BANK OF PASCO COUNTY 2 TABLE OF CONTENTS
Page ---- ARTICLE I - THE MERGER.......................................................2 Section 1.1 Consummation of Merger; Closing Date.......................2 Section 1.2 Effect of Merger...........................................2 Section 1.3 Further Assurances.........................................3 Section 1.4 Directors and Officers.....................................3 Section 1.5 Name of Surviving Bank.....................................3 Section 1.6 Capitalization of Surviving Bank...........................3 Section 1.7 Articles of Association and Bylaws.........................3 Section 1.8 Absence of Trust Powers....................................3 ARTICLE II - CONVERSION OF SHARES............................................4 Section 2.1 Manner of Conversion of Community National Bank Shares....4 Section 2.2 Community National Bank Stock Options and Related Matters..4 Section 2.3 Fractional Shares..........................................5 Section 2.4 Effectuating Conversion....................................5 Section 2.5 Laws of Escheat............................................6 Section 2.6 CBF Shares.................................................6 Section 2.7 CINB Shares................................................6 ARTICLE III - REPRESENTATIONS AND WARRANTIES OF COMMUNITY NATIONAL BANK....................................7 Section 3.1 Representations and Warranties of Community National Bank..7 (a) Organization, Qualification, and Corporate Power...........7 (b) Capitalization.............................................7 (c) Community National Bank Subsidiaries.......................8 (d) Authorization of Transaction...............................8 (e) Noncontravention...........................................8 (f) Financial Statements.......................................9 (g) Undisclosed Liabilities....................................9 (h) Brokers' Fees..............................................9 (i) Taxes.....................................................10 (j) Allowance for Loan or Credit Losses.......................10 (k) Properties; Insurance.....................................10 (1) Material Contracts........................................11 (m) Material Contract Defaults................................11 (n) Compliance with Laws......................................11 (o) Employee Benefit Plans....................................12 (p) Legal Proceedings.........................................14 (q) Absence of Certain Changes or Events......................14 (r) Reports...................................................14 (s) Statements True and Correct...............................14 (t) Environmental Matters.....................................15 (u) Labor Matters.............................................16
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Page ---- ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF CBF..........................16 Section 4.1 Representations and Warranties of CBF.....................16 (a) Organization, Qualification, and Corporate Power..........16 (b) Capitalization............................................17 (c) CBF Subsidiaries..........................................17 (d) Authorization of Transaction..............................17 (e) Noncontravention..........................................17 (f) Statements True and Correct...............................18 ARTICLE V - COVENANTS AND AGREEMENTS........................................18 Section 5.1 Covenants.................................................18 (a) Current Information.......................................18 (b) Regulatory Matters and Approvals..........................19 (c) Tax Opinion...............................................20 (d) Conduct of Business Prior to the Effective Time of the Merger...........................................20 (e) Forbearance...............................................20 (f) Issuance of Securities....................................21 (g) No Acquisitions...........................................22 (h) Other Actions.............................................22 (i) Government Filings........................................22 (j) Tax-Free Reorganization Treatment.........................22 (k) Full Access...............................................22 (1) Notice of Material Adverse Developments...................22 (m) Exclusivity...............................................23 (n) Filings with the Offices..................................23 (o) Press Releases............................................23 (p) Agreements of Affiliates..................................23 (q) Miscellaneous Agreements and Consents.....................24 (r) Indemnification...........................................24 (s) Fairness Opinions.........................................24 (t) Employee Benefit Plans....................................25 ARTICLE VI - CONDITIONS TO THE OBLIGATIONS OF COMMUNITY NATIONAL BANK AND CBF...........................25 Section 6.1 Conditions to Obligation to Close.........................25 (a) Conditions to Obligation of CBF...........................25 (b) Conditions to Obligation of Community National Bank.......26 ARTICLE VII - TERMINATION...................................................27 Section 7.1 Termination...............................................27 (a) Termination of Agreement..................................27 (b) Effect of Termination.....................................28
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Page ---- ARTICLE VIII - MISCELLANEOUS................................................28 Section 8.1 Miscellaneous.............................................28 (a) Survival..................................................28 (b) No Third Party Beneficiaries..............................28 (c) Entire Agreement..........................................29 (d) Successors and Assigns....................................29 (e) Counterparts..............................................29 (f) Headings..................................................29 (g) Notices...................................................29 (h) Governing Law.............................................30 (i) Amendments and Waivers....................................30 (j) Severability..............................................30 (k) Expenses..................................................30 (l) Construction..............................................31 (m) Incorporation of Exhibits and Schedules...................31 (n) Jurisdiction and Venue....................................31 (o) Remedies Cumulative.......................................31
5 AGREEMENT TO MERGE AMONG COMMUNITY NATIONAL BANK OF PASCO COUNTY, CENTERSTATE BANKS OF FLORIDA, INC. AND COMMUNITY INTERIM NATIONAL BANK OF PASCO COUNTY This Agreement to Merge (the "Agreement") is dated as of the 10th day of December, 1999 by and among COMMUNITY NATIONAL BANK OF PASCO COUNTY, a national banking association ("Community National Bank") and CENTERSTATE BANKS OF FLORIDA, INC., a Florida corporation ("CBF"); to be joined in by COMMUNITY INTERIM NATIONAL BANK OF PASCO COUNTY, an interim national banking association to be organized as a wholly-owned subsidiary of CBF under the laws of the United States and to become a party to this Agreement upon its organization ("CINB"). Community National Bank, CBF and CINB are individually referred to in this Agreement as a "Party" and collectively as the "Parties." BACKGROUND The respective Boards of Directors of Community National Bank and CBF deem it in the best interests of Community National Bank and CBF, respectively, and of their respective shareholders, that Community National Bank and CINB merge pursuant to this Agreement in a transaction that qualifies as a reorganization pursuant to Section 368(a) of the Internal Revenue Code of 1986 (the "Internal Revenue Code") (the "Merger"), and the Boards of Directors of the Parties have approved this Agreement and the Merger, which provides for CBF to issue shares of its common stock to the shareholders of Community National Bank, as herein provided. This Agreement is between (A) Community National Bank, being located at 6930 Gall Boulevard, City of Zephyrhills, County of Pasco, in the State of Florida, with a capital of $7,834,175, consisting of (i) 2,434,175 shares of common stock divided into 486,835 shares of common stock, each of $5.00 par value, (ii) surplus of $2,557,000, and (iii) undivided profits of $2,843,000 as of September 30, 1999, acting pursuant to a resolution of its board of directors, adopted by the vote of a majority of its directors, pursuant to the authority given by and in accordance with the provisions of the Act of November 7, 1918, as amended (12 U.S.C. 215(a)); (B) CBF, which has been organized for purposes of serving as a bank holding company for Community National Bank and other banks; and (C) CINB, to be located at 6930 Gall Boulevard, Zephyrhills, FL 33541-2513, with a capital of $100,000, divided into 1,000 shares of common stock, each of $100 par value, surplus of $20,000, and no undivided profits, acting pursuant to a resolution to be adopted by its Board of Directors, and by the vote of a majority of its directors, pursuant to the authority given by and in accordance with the provisions of the Act of November 7, 1918, as amended (12 U.S.C. 215(a)). NOW, THEREFORE, in consideration of the premises and the mutual covenants, representations, warranties and agreements herein contained, the Parties agree as follows: 1 6 ARTICLE I THE MERGER Section 1.1 Consummation of Merger; Closing Date. (a) Subject to the provisions hereof, Community National Bank shall be merged with and into CINB (which has heretofore and shall hereinafter be referred to as the "Merger"), under the charter of Community National Bank, pursuant to 12 U.S.C. ss.215a of the National Bank Act, and CINB shall be the surviving corporation (sometimes hereinafter referred to as "Surviving Bank" when reference is made to it after the Effective Time of the Merger (as defined below)). The name of the Surviving Bank shall be Community National Bank of Pasco County, and the business of the Surviving Bank shall be that of a national banking association. The Merger shall become effective on the date and at the time set forth in the Certificate of Merger relating to the Merger issued by the Office of the Comptroller of the Currency (the "OCC") (such time is hereinafter referred to as the "Effective Time of the Merger"). Subject to the terms and conditions hereof, unless otherwise agreed upon by Community National Bank and CBF, the Effective Time of the Merger shall occur on the 10th business day following the later to occur of (i) the effective date (including the expiration of any applicable waiting period) of the last required Consent (as defined below) of any Regulatory Authority (as defined below) having authority over the transactions contemplated pursuant to this Agreement, (ii) the date on which the shareholders of Community National Bank approve the transactions contemplated by this Agreement, and (iii) the date of the satisfaction or waiver of all other conditions precedent to the transactions contemplated by this Agreement. As used in this Agreement, "Consent" shall mean a consent, approval, authorization, waiver, clearance, exemption or similar affirmation by any person pursuant to any contract, permit, law, regulation or order, and "Regulatory Authorities" shall mean, collectively, the OCC, the Florida Department of Banking and Finance (the "Florida Department"), the Office of Thrift Supervision ("OTS"), the Federal Trade Commission (the "FTC"), the United States Department of Justice (the "Justice Department"), the Board of Governors of the Federal Reserve System (the "FRB"), the Federal Deposit Insurance Corporation (the "FDIC"), the National Association of Securities Dealers, Inc., all national securities exchanges and the Securities and Exchange Commission (the "SEC"). (b) The closing of the Merger (the "Closing") shall take place at such location as the Parties hereto shall determine at 10:00 a.m. local time on the day that the Effective Time of the Merger occurs, or such other date, time and place as the Parties may agree (the "Closing Date"). Subject to the provisions of this Agreement, at the Closing there shall be delivered to each of the Parties hereto the opinions, certificates and other documents and instruments required to be so delivered pursuant to this Agreement. (c) After the Effective Time of the Merger, the business of the Surviving Bank shall be conducted at its main office which shall be located at 6930 Gall Boulevard, Zephyrhills, FL 33541-2513, and at its legally established branches. Section 1.2 Effect of Merger. At the Effective Time of the Merger, Community National Bank shall be merged with and into CINB, under the charter of Community National Bank, and the separate existence of Community National Bank shall cease. The Surviving Bank shall be that of a national banking association. Except as otherwise provided in this Agreement, the Surviving Bank shall have all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a banking association organized under the laws of the United States and shall thereupon and thereafter possess all other privileges, immunities and franchises of a private, as well as of a public nature, of each of the constituent corporations. All property (real, personal and mixed) and all debts on whatever account, including subscriptions to shares, and all choses in action, all and every other interest, of or belonging to or due to each of the constituent corporations so merged shall 2 7 be taken and deemed to be transferred to and vested in the Surviving Bank without further act or deed. The title to any real estate, or any interest therein, vested in any of the constituent corporations shall not revert or be in any way impaired by reason of the Merger. Except as otherwise provided in this Agreement, the Surviving Bank shall thenceforth be responsible and liable for all the liabilities and obligations of each of the constituent corporations so merged and any claim existing or action or proceeding pending by or against either of the constituent corporations may be prosecuted as if the Merger had not taken place or the Surviving Bank may be substituted in its place. Neither the rights of creditors nor any liens upon the property of any constituent corporation shall be impaired by the Merger. Section 1.3 Further Assurances. From and after the Effective Time of the Merger, as and when requested by the Surviving Bank, the officers and directors of Community National Bank last in office shall execute and deliver or cause to be executed and delivered in the name of Community National Bank such deeds and other instruments and take or cause to be taken such further or other actions as shall be necessary in order to vest or perfect in or confirm of record or otherwise to the Surviving Bank title to and possession of all of the property, interests, assets, rights, privileges, immunities, powers, franchises and authority of Community National Bank. Section 1.4 Directors and Officers. From and after the Effective Time of the Merger and until their successors shall be duly elected and qualified, James H. Bingham, G. Robert Blanchard, Sr., Terry W. Donley, W. Bryan Judge, Jr., Samuel L. Lupfer, IV, J. Thomas Rocker and James H. White shall serve as the CBF Board of Directors (or, if any one or more of such Directors is unwilling or unable to serve as a Director of CBF, such substitute Director as the then remaining directors of CBF shall determine). From and after the Effective Time of the Merger and until their successors shall be duly elected and qualified, the directors and executive officers of the Surviving Bank shall consist of those individuals who were serving as directors and executive officers, respectively, of Community National Bank as of the Effective Time of the Merger. The names and addresses of the Directors and executive officers of the Surviving Bank are attached hereto as Schedule 1.4. From and after the Effective Time of the Merger and until their successors shall be duly elected and qualified: James H. White shall serve as Chairman of the Board, President and Chief Executive Officer, G. Robert Blanchard, Sr. shall serve as Vice Chairman of the Board, and George H. Carefoot shall serve as Secretary. Section 1.5 Name of Surviving Bank. The name of the Surviving Bank shall be Community National Bank of Pasco County. Section 1.6 Capitalization of Surviving Bank. As of the Effective Time of the Merger, the Surviving Bank shall have 509,900 shares of common stock, par value $5.00 per share, authorized of which 486,835 shares shall be issued and outstanding (plus shares of Community National Bank common stock issued after September 30, 1999), all of which shall be owned by CBF. The Surviving Bank shall have no other classes of capital stock authorized or outstanding. As of the Effective Time of the Merger, the capital, surplus and retained earnings of the Surviving Bank shall be as set forth on Schedule 1.6. Preferred stock shall not be issued by the Surviving Bank. Section 1.7 Articles of Association and Bylaws. The Articles of Association and Bylaws under which the Surviving Bank will operate are attached hereto as Schedule 1.7. Section 1.8 Absence of Trust Powers. The Surviving Bank shall not have trust powers. 3 8 ARTICLE II CONVERSION OF SHARES Section 2.1 Manner of Conversion of Community National Bank Shares. Subject to the provisions hereof, as of the Effective Time of the Merger and by virtue of the Merger and without any further action on the part of the holder of any shares of common stock of Community National Bank, par value $5.00 per share (the "Community National Bank Shares"): (a) All Community National Bank Shares which are held by Community National Bank as treasury stock, if any, shall be canceled and retired and no consideration shall be paid or delivered in exchange therefor. (b) Subject to the terms and conditions of this Agreement, including, without limitation, Section 2.3 hereof and except with regard to Dissenting Community National Bank Shares (as hereinafter defined), each Community National Bank Share outstanding immediately prior to the Effective Time of the Merger shall be converted into the right to receive 2.02 shares of common stock of CBF, par value $.01 per share (the "CBF Shares"). The applicable amount of CBF Shares issuable in the Merger for each Community National Bank Share pursuant to this Section, as may be adjusted as provided herein, shall be hereinafter referred to as the "Conversion Ratio." The Conversion Ratio, including the number of CBF Shares issuable in the Merger, shall be subject to an appropriate adjustment in the event of any stock split, reverse stock split, dividend payable in CBF Shares, reclassification or similar distribution whereby CBF issues CBF Shares or any securities convertible into or exchangeable for CBF Shares without receiving any consideration in exchange therefor, provided that the record date of such transaction is a date after the date of this Agreement and prior to the Effective Time of the Merger. (c) Each outstanding Community National Bank Share, the holder of which has perfected dissenters' rights in accordance with the provisions of the National Bank Act (the "Dissent Provisions") and has not effectively withdrawn or lost such holder's right to such appraisal (the "Dissenting Community National Bank Shares"), shall not be converted into or represent a right to receive the CBF Shares issuable in the Merger but the holder thereof shall be entitled only to such rights as are granted by the Dissent Provisions. Community National Bank shall give CBF prompt notice upon receipt by Community National Bank of any written objection to the Merger and any written demands for payment of the fair or appraised value of Community National Bank Shares, and of withdrawals of such demands, and any other instruments provided to Community National Bank pursuant to the Dissent Provisions (any shareholder duly making such demand being hereinafter called a "Dissenting Shareholder"). Each Dissenting Shareholder who becomes entitled, pursuant to the Dissent Provisions, to payment of fair value of any Community National Bank Shares held by such Dissenting Shareholder shall receive payment therefor from the Surviving Bank (but only after the amount thereof shall have been agreed upon or at the times and in the amounts required by the Dissent Provisions) and all of such Dissenting Shareholder's Community National Bank Shares shall be canceled. If any Dissenting Shareholder shall have failed to perfect or shall have effectively withdrawn or lost such right to demand payment of fair or appraised value, the Community National Bank Shares held by such Dissenting Shareholder shall thereupon be deemed to have been converted into the right to receive the consideration to be issued in the Merger as provided by this Agreement. Section 2.2 Community National Bank Stock Options and Related Matters. As of the Effective Time of the Merger, all rights with respect to the Community National Bank Shares issuable pursuant to the exercise of stock purchase options ("Community National Bank Options") granted by Community National Bank, and which are outstanding at the Effective Time of Merger shall be converted into options for CBF Shares (the "Merger Options") in compliance with any 4 9 restrictions contained in the plan or agreement, if any, under which such Community National Bank Options were issued. Each holder of a Community National Bank Option shall have the right to acquire as of the Effective Time of the Merger a number of CBF Shares equal to the product (rounded up to the next whole share) of (i) the number of Community National Bank Shares covered by such Community National Bank Option immediately prior to the Effective Time of the Merger and (ii) the Conversion Ratio; and the exercise price per share of the CBF Shares at which such Community National Bank Option is exercisable shall be an amount (rounded up to the next whole cent) computed by dividing (i) the exercise price per share of the Community National Bank Shares at which such Community National Bank Option is exercisable immediately prior to the Effective Time of the Merger by (ii) the Conversion Ratio. Section 2.3 Fractional Shares. Notwithstanding any other provision of this Agreement, each holder of Community National Bank Shares converted pursuant to the Merger who would otherwise have been entitled to receive a fraction of a CBF Share (after taking into account all certificates delivered by such holder), shall receive, in lieu thereof, cash (without interest) in an amount equal to such fractional part of such CBF Share, multiplied by the book value per Community National Bank Share as of the end of the calendar month immediately preceding or occurring on the Effective Time of the Merger. No such holder shall be entitled to dividends, voting rights or any other rights as a shareholder in respect of any fractional share. Section 2.4 Effectuating Conversion. (a) CBF, or such other institution as CBF may designate, shall serve as the exchange agent (the "Exchange Agent"). The Exchange Agent may employ sub-agents in connection with performing its duties. After the Effective Time of the Merger, CBF shall cause the Exchange Agent to deliver the consideration to be paid by CBF for the Community National Bank Shares, along with the appropriate cash payment in lieu of fractional interests in CBF Shares. As promptly as practicable after the Effective Time of the Merger, the Exchange Agent shall send or cause to be sent to each former holder of record of Community National Bank Shares transmittal materials (the "Letter of Transmittal") for use in exchanging their certificates formerly representing Community National Bank Shares for the consideration provided for in this Agreement. The Letter of Transmittal shall contain instructions with respect to the surrender of certificates representing Community National Bank Shares and the receipt of the consideration contemplated by this Agreement and shall require each holder of Community National Bank Shares to transfer good and marketable title to such Community National Bank Shares to CBF, free and clear of all liens, claims and encumbrances. (b) At the Effective Time of the Merger, the stock transfer books of Community National Bank shall be closed as to holders of Community National Bank Shares immediately prior to the Effective Time of the Merger and no transfer of Community National Bank Shares by any such holder shall thereafter be made or recognized and each outstanding certificate formerly representing Community National Bank Shares shall, without any action on the part of any holder thereof, no longer represent Community National Bank Shares. If, after the Effective Time of the Merger, certificates are properly presented to CBF, such certificates shall be exchanged for the consideration contemplated by this Agreement into which the Community National Bank Shares represented thereby were converted in the Merger. (c) In the event that any holder of Community National Bank Shares is unable to deliver the certificate which represents such holder's Community National Bank Shares, CBF, in the absence of actual notice that any Community National Bank Shares theretofore represented by any such certificate have been acquired by a bona fide purchaser, may, in its discretion, deliver to such holder the consideration contemplated by this Agreement and the amount of cash representing fractional CBF Shares to which such holder is entitled in accordance with the provisions of this Agreement upon the presentation of all of the following: 5 10 (i) An affidavit or other evidence to the reasonable satisfaction of CBF that any such certificate has been lost, wrongfully taken or destroyed; (ii) Such security or indemnity as may be reasonably requested by CBF to indemnify and hold CBF harmless; and (iii) Evidence to the satisfaction of CBF that such holder is the owner of the Community National Bank Shares theretofore represented by each certificate claimed by such holder to be lost, wrongfully taken or destroyed and that such holder is the person who would be entitled to present each such certificate for exchange pursuant to this Agreement. (d) In the event that the delivery of the consideration contemplated by this Agreement and the amount of cash representing fractional CBF Shares are to be made to a person other than the person in whose name any certificate representing Community National Bank Shares surrendered is registered, such certificate so surrendered shall be properly endorsed (or accompanied by an appropriate instrument of transfer), with the signature(s) appropriately guaranteed, and otherwise in proper form for transfer, and the person requesting such delivery shall pay any transfer or other taxes required by reason of the delivery to a person other than the registered holder of such certificate surrendered or establish to the satisfaction of CBF that such tax has been paid or is not applicable. (e) No holder of Community National Bank Shares shall be entitled to receive any dividends or distributions declared or made with respect to the CBF Shares with a record date before the Effective Time of the Merger. Neither the consideration contemplated by this Agreement, any amount of cash representing fractional CBF Shares nor any dividend or other distribution with respect to CBF Shares where the record date thereof is on or after the Effective Time of the Merger shall be paid to the holder of any unsurrendered certificate or certificates representing Community National Bank Shares as provided for by this Agreement. Subject to applicable laws, following surrender of any such certificate or certificates, there shall be paid to the holder of the certificate or certificates then representing CBF Shares issued in the Merger, without interest at the time of such surrender, the consideration contemplated by this Agreement, the amount of any cash representing fractional CBF Shares and the amount of any dividends or other distributions with respect to CBF Shares to which such holder is entitled as a holder of CBF Shares. Section 2.5 Laws of Escheat. If any of the consideration due or other payments to be paid or delivered to the holders of Community National Bank Shares is not paid or delivered within the time period specified by any applicable laws concerning abandoned property, escheat or similar laws, and if such failure to pay or deliver such consideration occurs or arises out of the fact that such property is not claimed by the proper owner thereof, CBF shall be entitled to dispose of any such consideration or other payments in accordance with applicable laws concerning abandoned property, escheat or similar laws. Any other provision of this Agreement notwithstanding, none of Community National Bank, CBF, CINB, the Surviving Bank, nor any other person acting on their behalf shall be liable to a holder of Community National Bank Shares for any amount paid or property delivered in good faith to a public official pursuant to and in accordance with any applicable abandoned property, escheat or similar law. Section 2.6 CBF Shares. The one CBF Share issued and outstanding at the Effective Time of the Merger shall be cancelled and thus shall not be outstanding after the Merger. Section 2.7 CINB Shares. The shares of CINB common stock, par value $100 per share, issued and outstanding at the Effective Time of the Merger shall be converted as a result of, and upon the Effective Time of the Merger, into 486,835 shares of common stock, each of $5.00 par 6 11 value (plus shares of Community National Bank Shares issued by Community National Bank after September 30, 1999). ARTICLE III REPRESENTATIONS AND WARRANTIES OF COMMUNITY NATIONAL BANK Section 3.1 Representations and Warranties of Community National Bank. Community National Bank represents and warrants to CBF that the statements contained in this Article III are correct and complete as of the date of this Agreement and shall be correct and complete as of the Closing Date (as though made then and as though the Closing Date were substituted for the date of this Agreement throughout this Article III), except (i) representations and warranties which are confined to a specified date shall speak only as of such date, (ii) as expressly contemplated by this Agreement, or (iii) as set forth in the disclosure schedule prepared by Community National Bank and delivered to CBF prior to the date of this Agreement (the "Community National Bank Disclosure Schedule"). The Community National Bank Disclosure Schedule has been arranged in paragraphs corresponding to the numbered and lettered paragraphs contained in this Article III. (a) Organization, Qualification, and Corporate Power. Community National Bank is a national banking association duly organized, validly existing, and in good standing under the laws of the United States. Community National Bank is duly authorized to engage in the business of banking in Florida as an insured bank under the Federal Deposit Insurance Act, as amended (the "FDIA"). Community National Bank is duly authorized to conduct business and is in good standing under the laws of each jurisdiction in which the nature of its business or the ownership or leasing of its properties requires such qualification except where the lack of such qualification would not have a material adverse effect on its (i) business, financial condition or results of operations, or (ii) ability to consummate the transactions contemplated by this Agreement (together, its "Condition"); it being understood and agreed that, for purposes of this Agreement, a material adverse effect on the Condition of a Party shall not include a decline in results of operations resulting from any change in law, rule, regulation or GAAP which impacts banks or bank holding companies generally in a substantially similar manner. Community National Bank has full corporate power and authority to carry on the businesses in which it is engaged and to own and use the properties owned and used by it. True and complete copies of the Articles of Association and the Bylaws of Community National Bank are attached hereto as Schedule 3(a). Community National Bank has in effect all federal, state, local and foreign governmental, regulatory and other authorizations, permits and licenses necessary for it to own or lease its properties and assets and to carry on its business as now conducted, the absence of which, individually or in the aggregate, would have a material adverse effect on the Condition of Community National Bank. (b) Capitalization. The authorized capital stock of Community National Bank consists of 509,900 Community National Bank Shares, of which 486,835 Community National Bank Shares are issued and outstanding on the date of this Agreement. There are no other classes of capital stock of Community National Bank authorized. Community National Bank holds no Community National Bank Shares as treasury stock. All of the issued and outstanding Community National Bank Shares have been duly authorized and are validly issued, fully paid and nonassessable. None of the outstanding Community National Bank Shares has been issued in violation of any preemptive rights of the current or past stockholders of Community National Bank. Except with respect to the 5,750 Community National Bank Shares issuable pursuant to the Community National Bank Options, there are no outstanding or authorized options, warrants, rights, contracts, calls, puts, rights to subscribe, conversion rights, or other agreements or commitments to which Community National Bank is a party or which are binding upon Community National Bank or, to the Knowledge 7 12 of Community National Bank, any other party providing for the issuance, voting, transfer, disposition, or acquisition of any of the capital stock of Community National Bank. There are no outstanding or authorized stock appreciation, phantom stock or similar rights with respect to Community National Bank. For purposes of this Agreement, the term "Knowledge" means actual knowledge after reasonable investigation of the Chairman, President, Chief Financial Officer, Chief Accounting Officer or any Executive or Senior Vice President of such Party. (c) Community National Bank Subsidiaries. Community National Bank has no Subsidiary or Subsidiaries. For purposes of this Agreement, the term "Subsidiary" means all those corporations, associations or other entities of which the entity in question owns or controls 5% or more of the outstanding equity securities either directly or through an unbroken chain of entities as to each of which 5% or more of the outstanding equity securities is owned directly or indirectly by its parent; provided, however, there shall not be included any such entity acquired through foreclosure, any such entity which owns or operates an automatic teller machine interchange network, any such entity the equity securities of which are owned or controlled in a fiduciary capacity or any such entity which is a general industry association or group. (d) Authorization of Transaction. Community National Bank has full power and authority (including full corporate power and authority) to execute and deliver this Agreement and to perform its obligations hereunder; provided, however, that Community National Bank cannot consummate the Merger unless and until all requisite approvals are received from the Regulatory Authorities and the approval of the shareholders of Community National Bank has been obtained. Subject to the foregoing sentence, (i) this Agreement has been duly executed and delivered by Community National Bank and this Agreement constitutes a valid and binding agreement of Community National Bank, enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency and other similar laws affecting creditors' rights generally, general equitable principles and the discretion of courts in granting equitable remedies, (ii) the performance by Community National Bank of its obligations under this Agreement and the consummation of the Merger and the other transactions provided for under this Agreement have been or will be duly and validly authorized by all necessary corporate action on the part of Community National Bank, and (iii) the Board of Directors of Community National Bank has approved the execution, delivery and performance of this Agreement and the consummation of the Merger and the other transactions provided for under this Agreement. Other than to or from the Regulatory Authorities or to or from the Internal Revenue Service ("IRS") or the Pension Benefit Guaranty Corporation ("PBGC") with respect to any employee benefit plans, Community National Bank does not need to give any notice to, make any filing with, or obtain any authorization, consent or approval of any government or governmental agency in order for the Parties to consummate the transactions contemplated by this Agreement, except where the failure to give notice, to file, or to obtain any authorization, consent, or approval would not have a material adverse effect on the Condition of Community National Bank. (e) Noncontravention. Neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (i) subject to the receipt of the approvals contemplated in Section 3(d) above, violate any statute, regulation, rule, judgment, order, decree, stipulation, injunction, charge, or other restriction of any government, governmental agency, or court to which Community National Bank is subject or any provision of the Articles of Association or Bylaws of Community National Bank or (ii) with the passing of time or the giving of notice or both, conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require any notice under any contract, lease, sublease, license, franchise, permit, indenture, agreement or mortgage for borrowed money, instrument of indebtedness, Security Interest, or other obligation to which Community National Bank is a party or by which it is bound or to which any of its assets is subject (or result in the imposition of any Security Interest upon any of its assets) except where the 8 13 violation, conflict, breach, default, acceleration, termination, modification, cancellation, failure to give notice, or Security Interest would not have a material adverse effect on the Condition of Community National Bank. For purposes of this Agreement, the term "Security Interest" means any mortgage, pledge, security interest, encumbrance, charge, or other lien, other than (a) mechanics, materialmen, and similar liens, (b) liens for taxes not yet due and payable or for taxes that the taxpayer is contesting in good faith through appropriate proceedings, (c) liens arising under workers compensation, unemployment insurance, social security, retirement, and similar legislation, (d) liens on goods in transit incurred pursuant to documentary letters of credit, (e) purchase money liens and liens securing rental payments under capital lease arrangements, and (f) other liens arising in the Ordinary Course of Business and not incurred in connection with the borrowing of money. For purposes of this Agreement, the term "Ordinary Course of Business" means the ordinary course of business consistent with past custom and practice (including with respect to quantity and frequency). (f) Financial Statements. Community National Bank has delivered to CBF prior to the execution of this Agreement copies of the following financial statements of Community National Bank (collectively referred to herein as the "Community National Bank Financial Statements"): (i) audited balance sheets of Community National Bank at December 31, 1998 and 1997, and the related statements of (A) income, (B) shareholders' equity and (C) cash flows for the years then ended and the notes thereto as reported upon by its independent certified public accountants, and (ii) unaudited balance sheet of Community National Bank at September 30, 1999, and the related unaudited statements of (A) income and (B) shareholders' equity for the period then ended. The Community National Bank Financial Statements (as of the dates thereof and for the periods covered thereby): (i) have been prepared from the books and records of Community National Bank, which in all material respects account for those transactions which in accordance with good business practices and applicable banking and other legal requirements are required to be accounted for, and (ii) present fairly in all material respects the financial position and the results of operations and cash flows of Community National Bank as of the dates and for the periods indicated, in accordance with GAAP, applied on a basis consistent with prior periods except as disclosed in the notes thereto or, in the case of unaudited quarterly statements, subject to normal recurring year-end adjustments that are not material and the absence of certain footnote and cash flow information. (g) Undisclosed Liabilities. Community National Bank has no liability (whether known or unknown, whether absolute or contingent, whether liquidated or unliquidated, and whether due or to become due), including any liability for taxes, except for (i) liabilities for future disbursements on letters of credit, lines of credit and similar instruments or unfunded loan commitments, (ii) liabilities accrued or reserved against in the balance sheet dated as of September 30, 1999 included in the Community National Bank Financial Statements or reflected in the notes thereto, and (iii) liabilities which have arisen after September 30, 1999 in the Ordinary Course of Business or in connection with the transactions provided for in this Agreement (none of which relates to any breach of contract, breach of warranty, tort, infringement, or violation of law or arose out of any charge, complaint, action, suit, proceeding, hearing, investigation, claim, or demand and none of which, individually or in the aggregate, materially and adversely affect the Condition of Community National Bank). Since September 30, 1999, Community National Bank has not incurred or paid any obligation or liability which would be material to the Condition of Community National Bank, except in the Ordinary Course of Business. (h) Brokers' Fees. Neither Community National Bank nor any of its officers, directors or employees, has any liability or obligation to pay any fees or commissions to, or has 9 14 employed, any broker, finder, or agent with respect to the transactions contemplated by this Agreement. (i) Taxes. (i) All federal, state, local and foreign tax returns required to be filed by or on behalf of Community National Bank have been timely filed or requests for extensions have been timely filed, granted and have not expired, for periods ending on or before September 30, 1999, and all such returns filed are true, complete and accurate in all material respects. Community National Bank has timely paid or caused to be paid all taxes shown to be due on such tax returns. There is no audit, examination, deficiency or refund litigation or matter in controversy with respect to any taxes currently pending involving Community National Bank. All material tax, interest, additions, and penalties due with respect to completed and settled examinations or concluded litigation have been paid, accrued or provided for. (ii) Community National Bank has not executed an extension or waiver of any statute of limitations on the assessment or collection of any material tax due that is currently in effect. (iii) Adequate provision for any federal, state, local or foreign taxes due or to become due for Community National Bank for any period or periods through and including September 30, 1999, has been made and is reflected on the September 30, 1999 financial statements included in the Community National Bank Financial Statements. (iv) Deferred taxes of Community National Bank have been provided for in the Community National Bank Financial Statements in accordance with GAAP, subject in the case of interim financial statements to normal recurring year-end adjustments. (v) All taxes which Community National Bank is required by law to withhold or to collect for payment have been duly withheld and collected, and have been paid to the proper governmental entity or are being withheld by Community National Bank, except where the failure of any of which, individually or in the aggregate, would not have a material adverse effect on the Condition of Community National Bank. (j) Allowance for Loan or Credit Losses. The allowance for loan or credit losses ("Allowance") shown on the balance sheet of Community National Bank as of September 30, 1999 included in the Community National Bank Financial Statements was, and the Allowance shown on the balance sheets of Community National Bank as of dates subsequent to the execution of this Agreement will to the Knowledge of Community National Bank be, in each case as of the dates thereof, adequate to provide for losses relating to or inherent in the loan and lease portfolios (including accrued interest receivable) of Community National Bank and other extensions of credit (including letters of credit and commitments to make loans or extend credit) by Community National Bank, except where the failure of the Allowance to be so adequate would not have a material adverse effect on the Condition of Community National Bank. (k) Properties; Insurance. Community National Bank has good and marketable title free and clear of all material liens, encumbrances, charges, defaults or equities of whatever character to all of the properties and assets, tangible or intangible, reflected in the Community National Bank Financial Statements, except for liens disclosed in such Financial Statements, those arising in the Ordinary Course of Business after September 30, 1999 or liens which are not reasonably likely to have, individually or in the aggregate, a material adverse effect on the Condition of Community National Bank. All buildings, and all fixtures, equipment and other property and 10 15 assets which are material to its business and which are held under leases or subleases by Community National Bank are held under valid instruments enforceable in accordance with their respective terms (except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and except that the availability of the equitable remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceedings may be brought). The real property owned and used as facilities by Community National Bank has never been used for the handling, treatment, storage or disposal of any hazardous or toxic substance as defined under any applicable state or federal law. All policies of fire, theft, liability and other insurance maintained with respect to the assets or businesses of Community National Bank, and the fidelity bonds in effect as to which Community National Bank is a named insured, are described in Schedule 3(k) hereto. Substantially all of Community National Bank's equipment in regular use has been well maintained and is in good and serviceable condition, reasonable wear and tear excepted. (1) Material Contracts. Neither Community National Bank nor any of its assets, businesses or operations as of the date of this Agreement is a party to, or is bound or affected by, or receives benefits under, any of the following (whether written or oral and excluding agreements for the extension of credit by Community National Bank made in the Ordinary Course of Business): (i) any employment agreement or understanding (including any understandings or obligations with respect to severance or termination pay liabilities or fringe benefits) with any present or former officer, director, or employee, including in any such person's capacity as a consultant (other than those which are terminable at will without any further amount being payable thereunder), (ii) any other agreement with any officer, director, employee, or affiliate, (iii) any agreement with any labor union, (iv) any agreement which limits the ability of Community National Bank to compete in any line of business or which involves any restriction of the geographical area in which Community National Bank may carry on its business (other than as may be required by law or applicable regulatory authorities), or (v) any agreement, contract, arrangement or commitment with annual payments aggregating $20,000 or more. (m) Material Contract Defaults. Community National Bank is not in default, and has not received any written notice or has any Knowledge that any other party is in default, in any material respect under any contract, lease, sublease, license, franchise, permit, indenture, agreement, or mortgage for borrowed money, or instrument of indebtedness (except, as to the foregoing, extensions of credit by Community National Bank in the Ordinary Course of Business), and there has not occurred any event that with the lapse of time or the giving of notice or both would constitute such a default. (n) Compliance with Laws. (i) Community National Bank is in compliance in all respects with all laws, regulations, reporting and licensing requirements and orders applicable to its business or to its employees conducting its business, with any Regulatory Agreements (as hereinafter defined) applicable to Community National Bank, and with its internal policies and procedures, except where the breach or violation of any of which, individually or in the aggregate, would not have a material adverse effect on the Condition of Community National Bank. (ii) Community National Bank has not received any written notification or communication from any Regulatory Authorities (A) asserting that Community National Bank is not in substantial compliance with any of the statutes, regulations, or ordinances which such Regulatory Authority enforces which as a result of such noncompliance would have a material adverse effect on the Condition of Community National Bank, (B) threatening to revoke any license, franchise, permit or governmental authorization which is material to the Condition of Community 11 16 National Bank, (C) requiring or threatening to require Community National Bank, or indicating that Community National Bank may be required, to enter into or be subject to a cease and desist order, agreement, memorandum of understanding or any other agreement or undertaking (or to cause its Board of Directors to adopt any resolutions) restricting or limiting or purporting to restrict or limit in any manner the operations of Community National Bank, including, without limitation, any restriction on the payment of dividends, or (D) directing, restricting or limiting, or purporting to direct, restrict or limit in any manner the operations of Community National Bank, including, without limitation, any restriction on the payment of dividends (any such notice, communication, order, agreement, memorandum, resolutions or undertaking described in this sentence herein referred to as a "Regulatory Agreement"). Community National Bank has not consented to, entered into, agreed to enter into, or been made subject to, any Regulatory Agreement. Community National Bank has no Knowledge that any Regulatory Authority is considering imposing on Community National Bank any Regulatory Agreement. (o) Employee Benefit Plans. (i) The Community National Bank Disclosure Schedule lists every pension, retirement, profit-sharing, deferred compensation, stock option, employee stock ownership, severance pay, vacation, bonus or other incentive plan, any other written or unwritten employee program, arrangement, agreement or understanding, whether arrived at through collective bargaining or otherwise, any medical, vision, dental or other health plan, any life insurance plan, any golden parachute or other executive compensation plan, or any other employee benefit plan or fringe benefit plan, including, without limitation, any "employee benefit plan" as that term is defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") (a "Benefit Plan" or, collectively, "Benefit Plans"), currently or expected to be adopted, maintained by, sponsored in whole or in part by, or contributed to by Community National Bank or any ERISA Affiliate (as herein defined) for the benefit of its employees, retirees, dependents, spouses, directors, independent contractors or other beneficiaries and under which any of its employees, retirees, dependents, spouses, directors, independent contractors or other beneficiaries are eligible to participate (collectively, the "Community National Bank Benefit Plans"). No Community National Bank Benefit Plan is or has been a multi-employer plan within the meaning of Section 3(37) and Section 4001(a)(3) of ERISA. For purposes of this Section 4(o), the term "ERISA Affiliate" means each trade or business (whether or not incorporated) which together with Community National Bank is treated as a single employer under Section 414(b), (c), (m) or (o) of the Internal Revenue Code. (ii) True, correct and complete copies of all written Community National Bank Benefit Plans and descriptions of all unwritten Community National Bank Benefit Plans listed in the Community National Bank Disclosure Schedule and all trust agreements or other funding arrangements, including insurance contracts, all amendments thereto and, where applicable, with respect to any such plans or plan amendments, all determination letters, rulings, opinion letters, information letters, or advisory opinions issued by the IRS or the United States Department of Labor after December 31, 1974, annual reports or returns, audited or unaudited financial statements, actuarial valuations, and summary annual reports for the most recent three plan years, the most recent summary plan descriptions and any material modifications thereto, have previously been delivered to CBF or will be attached to the Community National Bank Disclosure Schedule. (iii) All the Community National Bank Benefit Plans and the related trusts are in material compliance with, and have been administered in material compliance with, the provisions of ERISA, the provisions of the Internal Revenue Code and all other applicable laws, rules and regulations and collective bargaining agreements. Any required governmental approvals for the Community National Bank Benefit Plans have been obtained, including, but not limited to, favorable determination letters on the qualification of the ERISA Plans and tax exemption of related 12 17 trusts, as applicable, under the Internal Revenue Code, and all such governmental approvals continue in full force and effect. To the Knowledge of Community National Bank, neither Community National Bank nor any administrator or fiduciary of any Community National Bank Benefit Plan or agent or delegate of any of the foregoing has engaged in any transaction or acted or failed to act in any manner which could subject Community National Bank, CBF or any affiliate thereof to any direct or indirect liability for a breach of any fiduciary, co-fiduciary or other duty under ERISA. To the Knowledge of Community National Bank, no oral or written representation or communication with respect to any aspect of the Community National Bank Benefit Plans has been made to employees of Community National Bank prior to the Effective Time of the Merger which is not in accordance with the written or otherwise pre-existing terms and provisions of such Community National Bank Benefit Plans in effect at the time of such communication. There are no unresolved claims or disputes under the terms of, or in connection with, the Community National Bank Benefit Plans and no action, legal or otherwise, has been commenced with respect to any claim under the terms of, or in connection with, the Community National Bank Benefit Plans. (iv) To the Knowledge of Community National Bank, no "party in interest" (as defined in Section 3(14) of ERISA) or "disqualified person" (as defined in Section 4975(e)(2) of the Internal Revenue Code) of any Community National Bank Benefit Plan has engaged in any "prohibited transaction" (within the meaning of Section 4975(c) of the Internal Revenue Code or Section 406 of ERISA). There has been no (A) "reportable event" (as defined in Section 4043 of ERISA), or event described in Section 4062(e) or Section 4063(a) of ERISA, or (B) termination or partial termination, withdrawal or partial withdrawal with respect to any of the ERISA Plans which: (1) Community National Bank maintains or contributes to or has maintained or contributed to or was required to maintain or contribute to for the benefit of employees of Community National Bank; or (2) which has been maintained or contributed to or was required to be maintained or contributed to by any member of a controlled group of trades or business as defined in ERISA Section 4001(a)(14) which has, since January 1, 1975, included Community National Bank. (v) For any given ERISA Plan relating to Community National Bank, all assets of such plan are carried at their fair market value, to the extent required by the plan document and applicable law, and the fair market value of such plan's assets equals or exceeds the present value of all benefits (whether vested or not) accrued to date by all present or former participants in such plan. No Community National Bank Benefit Plan is subject to the rules of the PBGC. (vi) As of the Effective Time, Community National Bank will not have any material current or future liability under any Community National Bank Benefit Plan that was not reflected in the Community National Bank Financial Statements. (vii) No Community National Bank Benefit Plan provides for welfare benefits (as defined in ERISA Section 3(1)) to employees after retirement other than as may be required by Section 601 et seq. of ERISA. (viii) Each Community National Bank Benefit Plan may be terminated by the Surviving Bank in its sole discretion on or after the Closing Date without liability of any kind or description arising from either such termination or any action attributable to the Surviving Bank. (ix) The execution of, or performance of the transactions contemplated by, this Agreement will not create, accelerate or increase any obligations under the Community National Bank Benefit Plans, and will not require or cause to be payable any payment which is or would be an "excess parachute payment" under Section 28OG of the Internal Revenue Code. 13 18 (p) Legal Proceedings. There are no actions, suits or proceedings instituted or pending or, to the Knowledge of Community National Bank, threatened (or unasserted but considered probable of assertion and which if asserted would have at least a reasonable probability of an unfavorable outcome) against Community National Bank, or against any property, asset, interest or right of Community National Bank, that have a reasonable probability either individually or in the aggregate of having a material adverse effect on the Condition of Community National Bank. (q) Absence of Certain Changes or Events. Since September 30, 1999, the businesses of Community National Bank has been operated only in the ordinary course consistent with past practices and since such date there has not been, occurred or arisen: (i) any damage, destruction, loss or casualty whether or not covered by insurance which has had or is reasonably likely to have a material adverse effect on the Condition of Community National Bank; (ii) any declaration, setting aside or payment of any dividend or distribution (whether in cash, stock or property) in respect of the Community National Bank Shares or any redemption or other acquisition of the Community National Bank Shares by Community National Bank or any split, combination or reclassification of Community National Bank Shares declared or made; (iii) any extraordinary losses required by GAAP to be disclosed as such that have been suffered and not adequately reserved against, whether or not in the Ordinary Course of Business; (iv) any material assets mortgaged, pledged or subjected to any lien, charge or other encumbrance; (v) any agreement to do any of the foregoing; or (vi) any other event, development or condition of any character including any change in results of operations, financial condition, method of accounting or accounting practices, nature of business, or manner of conducting the business of Community National Bank that has had, or is reasonably likely to have, a material adverse effect on the Condition of Community National Bank. (r) Reports. Since September 30, 1999, Community National Bank has filed all reports and statements, together with any amendments required to be made with respect thereto, that it was required to file with any Regulatory Authority. Each such report and statement, including the financial statements, exhibits and schedules thereto, at the time of filing thereof complied in all material respects with the laws and rules and regulations applicable to it and did not contain any untrue statement of material fact or omit to state any material fact necessary to make the statements made, in the light of the circumstances under which they were made, not misleading. (s) Statements True and Correct. No representation or warranty made by Community National Bank in this Agreement, no written statement or certificate included in an Exhibit or Schedule by Community National Bank in connection with this Agreement, and no written statement or certificate to be furnished by Community National Bank to CBF pursuant to this Agreement contains any untrue statement of material fact or omits to state a material fact necessary to make the statements made, in the light of the circumstances under which they were made, not misleading. None of the information supplied or to be supplied by Community National Bank for inclusion in the definitive proxy materials to be mailed to Community National Bank shareholders in connection with the Special Community National Bank Meeting (as defined in Section 5(b)(iii)), or in any other documents to be filed with any Regulatory Authority in connection with the transactions contemplated hereby, will at the respective time such documents are filed fail to comply in all material respects with the laws and rules and regulations applicable to Community National Bank, contain any untrue statement of a material fact, or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. All documents that Community National Bank is responsible for filing with any Regulatory Authority in connection with the Merger will comply as to form in all material respects with the provisions of applicable law. 14 19 (t) Environmental Matters. (i) To the Knowledge of Community National Bank, the Participation Facilities, and the Loan Properties (each as hereinafter defined) are, and have been, in compliance with all applicable laws, rules, regulations, standards and requirements of the United States Environmental Protection Agency ("EPA") and of state and local agencies with jurisdiction over pollution or protection of the environment, except for violations which, either individually or in the aggregate, do not or would not result in a material adverse effect on the Condition of Community National Bank. (ii) To the Knowledge of Community National Bank, there is no suit, claim, action or proceeding, pending or threatened, before any court, governmental agency or board or other forum in which Community National Bank or any Participation Facility has been or, with respect to threatened proceedings, may be, named as a defendant (A) for alleged noncompliance (including by any predecessor), with any environmental law, rule or regulation or (B) relating to the release into the environment of any Hazardous Material (as hereinafter defined) or oil whether or not occurring at or on a site owned, leased or operated by Community National Bank or any Participation Facility except as would not, either individually or in the aggregate, result in a material adverse effect on the Condition of Community National Bank. (iii) To the Knowledge of Community National Bank, there is no suit, claim, action or proceeding, pending or threatened, before any court, governmental agency or board or other forum in which any Loan Property has been or, with respect to threatened proceedings, may be, named as a defendant (A) for alleged noncompliance (including by any predecessor) with any environmental law, rule or regulation or (B) relating to the release into the environment of any Hazardous Material or oil whether or not occurring at or on a site owned, leased or operated by a Loan Property, except where such noncompliance or release does not or would not result, either individually or in the aggregate, in a material adverse effect on the Condition of Community National Bank. (iv) To the Knowledge of Community National Bank, there is no reasonable basis for any suit, claim, action or proceeding as described in subsection (ii) or (iii) of this Section 3(t) except as would not, individually or in the aggregate, have a material adverse effect on the Condition of Community National Bank. (v) During the period of (A) Community National Bank's ownership or operation of any of its current properties, (B) Community National Bank's participation in the management of any Participation Facilities, or (C) Community National Bank's holding of a Security Interest in a Loan Property, to the Knowledge of Community National Bank, there has been no release of Hazardous Material or oil in, on, under or affecting such properties, except where such release does not or would not result, either individually or in the aggregate, in a material adverse effect on the Condition of Community National Bank. Prior to the period of (A) Community National Bank's ownership or operation of any of its current properties, (B) Community National Bank's participation in the management of any Participation Facility, or (C) Community National Bank holding of a Security Interest in a Loan Property, to the Knowledge of Community National Bank, there was no release of Hazardous Material or oil in, on, under or affecting any such property, Participation Facility or Loan Property, except where such release does not or would not result, either individually or in the aggregate, in a material adverse effect on the condition of Community National Bank. (vi) The following definitions apply for purposes of this Section 3(t): (A) "Loan Property" means any real property in which Community National Bank holds a Security 15 20 Interest and, where required by the context, said term means the owner or operator of such property; (B) "Participation Facility" means any facility in which Community National Bank participates in the management and where required by the context, said term means the owner or operator of such property; and (C) "Hazardous Material" means any pollutant, contaminant, or hazardous substance under the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. ss.9601 et seq. or any similar state law. (u) Labor Matters. Community National Bank is not a party to, or bound by, any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor organization, nor is it the subject of any material proceeding asserting that it has committed an unfair labor practice or seeking to compel it to bargain with any labor organization as to wages or conditions of employment nor is there any strike or other labor dispute involving it pending or, to its Knowledge, threatened, any of which would have, individually or in the aggregate, a material adverse effect on the Condition of Community National Bank. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF CBF Section 4.1 Representations and Warranties of CBF. CBF represents and warrants to Community National Bank that the statements contained in this Article IV are correct and complete as of the date of this Agreement and shall be correct and complete as of the Closing Date (as though made then and as though the Closing Date were substituted for the date of this Agreement throughout this Article IV), except (i) representations and warranties which are confined to a specified date shall speak only as of such date, (ii) as expressly contemplated by this Agreement, or (iii) as set forth in the disclosure schedule prepared by CBF and delivered to Community National Bank prior to the date of this Agreement (the "CBF Disclosure Schedule"). The CBF Disclosure Schedule has been arranged in paragraphs corresponding to the numbered and lettered paragraphs contained in this Article IV. (a) Organization, Qualification, and Corporate Power. CBF is a corporation duly organized, validly existing, and in good standing under the laws of Florida. CBF is duly authorized to conduct business and is in good standing under the laws of each jurisdiction in which the nature of its business or the ownership or leasing of its properties requires such qualification except where the lack of such qualification would not have a material adverse effect on its Condition. CBF has full corporate power and authority to carry on the business in which it is engaged and to own and use the properties owned and used by it. True and complete copies of the Articles of Incorporation and the Bylaws of CBF are attached hereto as Schedule 4(a). CBF has in effect all federal, state, local and foreign governmental, regulatory and other authorizations, permits and licenses necessary for it to own or lease its properties and assets and to carry on its business as now conducted, the absence of which, individually or in the aggregate, would have a material adverse effect on the Condition of CBF on a consolidated basis. As of the Effective Time of the Merger, CINB (i) will be an interim national banking association duly organized, validly existing and in good standing under the laws of the United States (ii) will have the corporate power and authority to own or lease all of its properties and assets and to carry on its business as proposed to be conducted pursuant to this Agreement, and (iii) will be licensed or qualified to do business in each jurisdiction which the nature of the business conducted or to be conducted by CINB, or the character or location or the properties and assets owned or leased by CINB, make such licensing or qualification necessary, except where the failure to be so licensed or qualified (or steps necessary to cure such failure) would not have a material 16 21 adverse effect on the Condition of CBF on a consolidated basis. CINB, as of the Effective Time of the Merger, will have in effect all federal, state, local and foreign governmental, regulatory or other authorizations, permits and licenses necessary for it to own or lease its properties and assets and to carry on its business as proposed to be conducted, the absence of which, either individually or in the aggregate, would have a material adverse effect on the Condition of CBF on a consolidated basis. (b) Capitalization. The authorized capital stock of CBF consists of (i) 20,000,000 CBF Shares, of which one CBF Share is issued and outstanding on the date of this Agreement, and (ii) 5,000,000 shares of preferred stock, $.01 par value, none of which are issued and outstanding on the date of this Agreement. There are no other classes of capital stock of CBF authorized. CBF holds no CBF Shares as treasury stock. All of the issued and outstanding CBF Shares have been duly authorized and are validly issued, fully paid and nonassessable. None of the outstanding CBF Shares has been issued in violation of any preemptive rights of the current or past stockholders of CBF. There are no outstanding or authorized options, warrants, rights, contracts, calls, puts, rights to subscribe, conversion rights, or other agreements or commitments to which CBF is a party or which are binding upon CBF or, to the Knowledge of CBF, any other party providing for the issuance, voting, transfer, disposition, or acquisition of any of the capital stock of CBF. There are no outstanding or authorized stock appreciation, phantom stock or similar rights with respect to CBF. (c) CBF Subsidiaries. Except for CINB (and other interim banking associations organized to facilitate consummation of the merger referred to in Sections 6(a)(xiii) and 6(b)(xi)), which at the Effective Time of the Merger will be organized as a wholly-owned subsidiary of CBF, CBF has no Subsidiary or Subsidiaries. (d) Authorization of Transaction. CBF has full power and authority (including full corporate power and authority) to execute and deliver this Agreement and to perform its obligations hereunder; provided, however, that CBF cannot consummate the Merger unless and until all requisite approvals are received from the Regulatory Authorities. Subject to the foregoing sentence, (i) this Agreement has been duly executed and delivered by CBF and this Agreement constitutes a valid and binding agreement of CBF, enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency and other similar laws affecting creditors' rights generally, general equitable principles and the discretion of courts in granting equitable remedies, (ii) the performance by CBF of its obligations under this Agreement and the consummation of the Merger and the other transactions provided for under this Agreement have been or will be duly and validly authorized by all necessary corporate action on the part of CBF, and (iii) the Board of Directors of CBF has approved the execution, delivery and performance of this Agreement and the consummation of the Merger and the other transactions provided for under this Agreement. Other than to or from the Regulatory Authorities or to or from the IRS or the PBGC with respect to any employee benefit plans, CBF does not need to give any notice to, make any filing with, or obtain any authorization, consent or approval of any government or governmental agency in order for the Parties to consummate the transactions contemplated by this Agreement, except where the failure to give notice, to file, or to obtain any authorization, consent, or approval would not have a material adverse effect on the Condition of CBF on a consolidated basis. (e) Noncontravention. Neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (i) subject to the receipt of the approvals contemplated in Section 4(d) above, violate any statute, regulation, rule, judgment, order, decree, stipulation, injunction, charge, or other restriction of any government, governmental agency, or court to which CBF is subject or any provision of the Articles of Incorporation or Bylaws of CBF or (ii) with the passing of time or the giving of notice or both, conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, 17 22 terminate, modify, or cancel, or require any notice under any contract, lease, sublease, license, franchise, permit, indenture, agreement or mortgage for borrowed money, instrument of indebtedness, Security Interest, or other obligation to which CBF is a party or by which it is bound or to which any of its assets is subject (or result in the imposition of any Security Interest upon any of its assets) except where the violation, conflict, breach, default, acceleration, termination, modification, cancellation, failure to give notice, or Security Interest would not have a material adverse effect on the Condition of CBF on a consolidated basis. (f) Statements True and Correct. No representation or warranty made by CBF in this Agreement, no written statement or certificate included in an Exhibit or Schedule by CBF in connection with this Agreement, and no written statement or certificate to be furnished by CBF to Community National Bank pursuant to this Agreement contains any untrue statement of material fact or omits to state a material fact necessary to make the statements made, in the light of the circumstances under which they were made, not misleading. None of the information supplied or to be supplied by CBF for inclusion in the definitive proxy materials to be mailed to Community National Bank shareholders in connection with the Special Community National Bank Meeting (as defined in Section 5(b)(iii)), or in any other documents to be filed with any Regulatory Authority in connection with the transactions contemplated hereby, will at the respective time such documents are filed fail to comply in all material respects with the laws and rules and regulations applicable to CBF, contain any untrue statement of a material fact, or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. All documents that CBF is responsible for filing with any Regulatory Authority in connection with the Merger will comply as to form in all material respects with the provisions of applicable law. ARTICLE V COVENANTS AND AGREEMENTS Section 5.1 Covenants. Except as otherwise set forth in the Disclosure Schedules, the Parties agree as follows with respect to the period from and after the execution of this Agreement until the earlier of the consummation of the transactions contemplated by this Agreement or the termination of this Agreement: (a) Current Information. During the period from the date of this Agreement to the Effective Time of the Merger, each Party shall, and shall cause its representatives to, confer on a regular and frequent basis with representatives of the other. Within twenty (20) days after the end of each calendar month beginning after the date of this Agreement, each of Community National Bank and CBF shall deliver to the other copies of their respective unaudited balance sheets and statements of income, and any other financial or statistical information submitted by management to the Board of Directors of Community National Bank or CBF (other than information provided to a Board of Directors specifically in connection with its consideration of the Merger, this Agreement, and the transactions contemplated hereby) for or in the preceding fiscal month. All such financial statements shall be prepared in accordance with the books and records of such Party, shall be complete and accurate in all material respects, shall present fairly the financial position and the results of operations of that Party as of and for the periods indicated, and shall be prepared in accordance with GAAP, subject to normal recurring year-end adjustments and the absence of certain footnote information in the unaudited statements. 18 23 (b) Regulatory Matters and Approvals. (i) Bank Regulatory Matters. CBF and Community National Bank shall cause to be promptly prepared and filed with the FRB, the FDIC, and the OCC, applications for their approval of the Merger and with any other Regulatory Authority having jurisdiction any other applications for approvals or Consents which may be necessary for the consummation of the Merger. The Parties shall provide copies of all such applications and notices to the others for review prior to submission or filing with the appropriate Regulatory Authorities. Each Party agrees to promptly review and provide any comments on such applications and notices to the others. Each Party shall use its best efforts to take or cause to be taken all actions necessary for such applications and notices to be approved and shall provide the others with copies of all correspondence and notices to or from such agencies concerning such applications and notices. No Consent obtained which is necessary to consummate the transactions contemplated by this Agreement shall be conditioned or restricted in a manner which in the reasonable judgment of a Party would (A) unduly impair or restrict the operations, or would have a material adverse effect on the Condition, of CBF or the Surviving Bank, or (B) render consummation of the Merger unduly burdensome; provided, that such Party has used its reasonable efforts (it being understood that such reasonable efforts shall not include the threatening or commencement of any litigation) to cause such conditions or restrictions to be removed or modified as appropriate. (ii) Definitive Proxy Materials. Community National Bank shall prepare a proxy statement which shall consist of the Community National Bank definitive proxy materials relating to the Special Community National Bank Meeting (the "Proxy Statement"). The Proxy Statement shall contain the affirmative recommendation of the Board of Directors of Community National Bank in favor of the adoption of this Agreement and the approval of the Merger. CBF shall provide to Community National Bank such information and assistance in connection with the preparation of the Proxy Statement as Community National Bank may reasonably request. Community National Bank shall not be liable for any untrue statement of a material fact or omission to state a material fact in the Proxy Statement made in reliance upon, or in conformity with, information furnished to Community National Bank by CBF for use therein. In connection with the Special Community National Bank Meeting, the Parties shall file the proxy statement with such Regulatory Agencies as may be required by law in order for such materials to be furnished to Community National Bank shareholders in connection with such meeting. (iii) Shareholder Approvals. Community National Bank shall call a special meeting of its shareholders (the "Special Community National Bank Meeting") and mail to them the Proxy Statement (as soon as reasonably practicable following a determination by Community National Bank and CBF that such special meeting should be called) in order that Community National Bank shareholders may consider and vote upon the adoption of this Agreement and the approval of the Merger in accordance with applicable law. CBF, as sole shareholder of CINB, agrees to vote in favor of adoption of this Agreement and approval of the Merger. (iv) Securities Act Matters. CBF will prepare and file with the SEC a Registration Statement under the Securities Act in connection with the CBF Shares to be issued to Community National Bank shareholders in the Merger. Community National Bank and CBF shall each promptly furnish all information concerning it and the holders of its outstanding shares as the other may reasonably request from time to time in connection with the preparation of the Registration Statement. The Parties shall use their reasonable efforts to cause the Registration Statement to become effective under the Securities Act as soon as reasonably practicable after the filing thereof and to take any action required to be taken under applicable state, Blue Sky or securities laws in connection with the issuance of the CBF Shares upon consummation of the Merger. 19 24 (v) Other Governmental Matters. Subject to the last sentence of Section 5(b)(i), each of the Parties shall take any additional action that may be necessary, proper, or advisable in connection with any other notice to, filings with, and authorizations, consents, and approvals of governments and governmental agencies that it may be required to give, make or obtain in connection with the transactions contemplated by this Agreement. (c) Tax Opinion. On or before the date the Proxy Statement is mailed to Community National Bank shareholders, Community National Bank and CBF shall each use all reasonable efforts to obtain a written opinion from an accounting or law firm selected by Community National Bank and CBF, to the effect that the exchange of Community National Bank Shares, to the extent exchanged for CBF Shares as contemplated herein, shall not give rise to gain or loss to the holders of such Community National Bank Shares, or gain or loss to CBF with respect to such exchange (except to the extent of any cash paid in lieu of fractional shares), and accordingly, the Merger will constitute a tax-free reorganization within the meaning of Section 368(a) of the Internal Revenue Code (the "Tax Opinion"). The Tax Opinion shall be reasonably satisfactory to each of Community National Bank and CBF in form and substance. (d) Conduct of Business Prior to the Effective Time of the Merger. During the period from the date of this Agreement to the Effective Time of the Merger, except as set forth in the Community National Bank or CBF Disclosure Schedules, or with the prior written consent of the other Parties, or as expressly contemplated or permitted by this Agreement, each of Community National Bank and CBF shall (i) conduct its business in, and only in, the usual, regular and ordinary course consistent with past practices, (ii) use its reasonable best efforts to maintain and preserve intact its business organization, employees and advantageous business relationships and retain the services of its officers and key employees, and (iii) take no action which would materially adversely affect or delay the ability of any Party to obtain any necessary approvals of any Regulatory Authority or other governmental authority required for the transactions contemplated hereby or to perform its covenants and agreements under this Agreement. (e) Forbearance. During the period from the date of this Agreement to the Effective Time of the Merger, except as set forth in the Community National Bank or CBF Disclosure Schedules, or except as expressly contemplated or permitted by this Agreement, no Party shall, or permit its Subsidiaries to, without the prior written consent of the other Parties: (i) Other than in the Ordinary Course of Business, incur any indebtedness for borrowed money (other than short-term indebtedness incurred to refinance short-term indebtedness; it being understood and agreed that incurrence of indebtedness in the Ordinary Course of Business shall include, without limitation, the creation of deposit liabilities, purchases of federal funds, sales of certificates of deposit and entering into repurchase agreements), assume, guarantee, endorse or otherwise as an accommodation become responsible for the obligations of any other individual, corporation or other entity, or make any loan or advance other than in the Ordinary Course of Business; (ii) Adjust, split, combine or reclassify any capital stock; make, declare or pay any dividend (except in accordance with past practice) or make any other distribution on, or directly or indirectly redeem, purchase or otherwise acquire, any shares of its capital stock or any securities or obligations convertible into or exchangeable for any shares of its capital stock, or, grant any stock options or stock appreciation rights or grant any individual, corporation or other entity any right to acquire any shares of its capital stock; (iii) Sell, transfer, mortgage, encumber or otherwise dispose of any of its material properties or assets to any individual, corporation or other entity, or cancel, release or assign 20 25 any material indebtedness to any such person or any claims held by any such person, except (A) in the Ordinary Course of Business, or (B) as set forth in a Disclosure Schedule pursuant to contracts or agreements in force at the date of this Agreement; (iv) Except for transactions in the Ordinary Course of Business, make any material investment in, either by purchase of stock or securities, contributions to capital, property transfers, or purchase of property or assets, any other individual, corporation or other entity; (v) Except for transactions in the Ordinary Course of Business, enter into or terminate any material contract or agreement, or make any change in any of its material leases or contracts, other than renewals of contracts and leases without material adverse changes of terms; (vi) Increase in any material manner the compensation or fringe benefits of any of its employees or pay any bonus or pension or retirement allowance not required by any existing plan or agreement to any such employees, or become a party to, amend or commit itself to any pension, retirement, profit-sharing or welfare benefit plan or agreement or employment agreement with or for the benefit of any employee, other than in the Ordinary Course of Business (except that Community National Bank may amend the stock option plans pursuant to which the Community National Bank Options were issued to provide that the Community National Bank Options shall not terminate as a result of the Merger); with the understanding that entering into any new employment contracts, or renewing or amending any existing employment contracts, shall be deemed outside the Ordinary Course of Business; (vii) Amend its Articles of Incorporation, Articles of Association, or its bylaws; (viii) Enter into any new line of business; (ix) Change its lending, investment, asset/liability management or other material banking policies in any respect which is material, including without limitation, policies and procedures relating to calculating and funding the Allowance; (x) Incur or commit to any capital expenditure or any obligations or liabilities in connection therewith other than capital expenditures and obligations or liabilities incurred or committed to in the Ordinary Course of Business; (xi) Change its methods of accounting in effect at December 31, 1998, except as required by generally accepted accounting principles, or its fiscal year; or (xii) Agree to, or make any commitment to, take any of the actions prohibited by this Section 5(e). (f) Issuance of Securities. Except as set forth in a Disclosure Schedule or as contemplated by this Agreement, no Party shall or shall permit any of its Subsidiaries to issue, deliver or sell, or authorize or propose the issuance, delivery or sale of, any shares of its capital stock of any class, any voting debt or any securities convertible into or exercisable for or any rights, warrants or options to acquire, any such shares or voting debt, or enter into any agreement with respect to any of the foregoing, other than (i) the issuance of Community National Bank Shares, pursuant to outstanding Community National Bank Options, in each case as in effect on the date of this Agreement and in each case in accordance with their present terms; (ii) the issuance of CBF Shares pursuant to outstanding CBF Options or CBF Warrants, in each case as in effect on the date of this Agreement and in each case in accordance with their present terms; (iii) issuances by a 21 26 Subsidiary of its capital stock to its parent; and (iv) the issuance by a Party of any shares of its capital stock in a transaction approved by the Parties pursuant to Section 5(g). (g) No Acquisitions. Other than acquisitions which may be mutually agreed upon in writing by the Parties, no Party shall or shall permit any of its Subsidiaries to acquire or agree to acquire, by merging or consolidation with or by purchasing a substantial equity interest in, or by purchasing a substantial portion of the assets, or assuming a substantial portion of the liabilities of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof or otherwise acquire or agree to acquire any assets in each case which are material, individually or in the aggregate, to such Party and its Subsidiaries taken as a whole; provided, however, that the foregoing shall not prohibit (i) internal reorganizations, consolidations or dissolutions involving only existing Subsidiaries, (ii) foreclosure and other acquisitions related to previously contracted debt, in each case in the Ordinary Course of Business, (iii) acquisitions of control by Community National Bank in its fiduciary capacity, (iv) investments made by small business investment corporations, acquisitions of financial assets and merchant banking activities, in each case in the Ordinary Course of Business, or (v) the creation of new Subsidiaries organized to conduct or continue activities otherwise permitted by this Agreement. (h) Other Actions. No Party shall or shall permit any of its Subsidiaries to take any action that, or fail to take any action the failure of which, results in any of its representations and warranties set forth in this Agreement being or becoming untrue in any material respect, or in any of the conditions set forth in this Agreement not being satisfied or in a violation of any provision of this Agreement which would adversely affect the ability of any of them to obtain any of the Regulatory Approvals, except in every case as may be required by applicable law. (i) Government Filings. Each Party shall file all reports, applications and other documents required to be filed with the appropriate bank regulators between the date hereof and the Effective Time of the Merger and shall make available to the other Party copies of all such reports promptly after the same are filed. (j) Tax-Free Reorganization Treatment. No Party shall take or cause to be taken any action, whether before or after the Effective Time of the Merger, which would disqualify the Merger as a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code. (k) Full Access. Each Party shall and shall cause each of its Subsidiaries to permit representatives of the others to have full access at all reasonable times, and in a manner so as not to interfere with the normal business operations of such Party and its Subsidiaries, to all premises, properties, books, records, contracts, tax records, and documents of or pertaining to each of such Party and its Subsidiaries. Each Party agrees to furnish any other Party and its advisers with such financial operating data and other information with respect to its business, properties and employees as such Party shall, from time to time, reasonably request. No investigation by a Party shall affect the representations and warranties of any other Party to this Agreement, and each such representation and warranty shall survive any such investigation. (1) Notice of Material Adverse Developments. Each Party shall give prompt written notice to the other Parties of any material adverse effect on its Condition, or any material adverse development affecting the assets, liabilities, business, financial condition, operations, results of operations, or future prospects of such Party and its Subsidiaries taken as a whole, including without limitation (i) any material change in its business or operations, (ii) any material complaints, investigations or hearings (or communications indicating that the same may be contemplated) of any Regulatory Authority, (iii) the institution or the threat of material litigation involving such Party, or (iv) any event or condition that might be reasonably expected to cause any of such Party's 22 27 representations and warranties set forth herein not to be true and correct in all material respects as of the Closing Date. Each Party shall also give prompt written notice to the other Parties of any other material adverse development affecting the ability of such Party to consummate the transactions contemplated by this Agreement. Any such notices shall be accompanied by copies of any and all pertinent documents, correspondence and similar papers relevant to a complete understanding of such material adverse development, which shall be promptly updated as necessary. CBF shall have 20 business days after Community National Bank gives any written notice pursuant to this Section 5(l) within which to exercise any right CBF may have to terminate this Agreement pursuant to Section 7(a)(iv) below by reason of the material adverse development, and Community National Bank likewise shall have 20 business days after CBF gives any written notice pursuant to this Section 5(l) within which to exercise any right Community National Bank may have to terminate this Agreement pursuant to Section 7(a)(iii) below by reason of the material adverse development. Unless one of the Parties terminates this Agreement within the aforementioned period, the written notice of a material development shall be deemed to have amended the Disclosure Schedule, to have qualified the representations and warranties contained herein, and to have cured any misrepresentation or breach of warranty that otherwise might have existed hereunder by reason of the material adverse development. (m) Exclusivity. Except as specifically permitted or contemplated by this Agreement, the Parties shall not (and shall not cause or permit any of their Subsidiaries to) solicit, initiate, encourage, entertain, consider, or participate in the negotiation, discussion or submission of any proposal or offer from any person (other than a Party) relating to any (i) liquidation, dissolution, or recapitalization, (ii) merger or consolidation, (iii) acquisition or purchase of 25% or more of securities or assets, or (iv) similar transaction or business combination involving any of the Parties and/or its Subsidiaries, or their respective assets (the foregoing transactions referred to in subclauses (i) through (iv), inclusive, are referred to in this Agreement as an "Acquisition Proposal"); provided, however, that each Party shall be entitled to entertain, consider, and participate in negotiations and discussions regarding, and furnish any information with respect to, any effort or attempt by any person to do or seek to do any of the foregoing to the extent that the Board of Directors of such Party determines in good faith, based upon the written advice of its legal counsel, that the failure to so consider or participate in such negotiations or discussions would be inconsistent with the fiduciary obligations of the directors of such Party to the shareholders of such Party. The Party shall give all of the other Parties prompt notice of any such negotiations and discussions. Each Party shall notify others immediately if any person (other than a Party) makes any proposal, offer, inquiry, or contact with respect to any Acquisition Proposal. (n) Filings with the Offices. Upon the terms and subject to the conditions of this Agreement, the Parties shall execute and file any and all documents in connection with the Merger for filing with any Federal and state offices. (o) Press Releases. Each Party shall consult with each other as to the form and substance of any press release or other public disclosure materially related to this Agreement, the Merger or any other transaction contemplated hereby; provided, however, that any Party may make any public disclosure it believes in good faith is required by law or regulation. (p) Agreements of Affiliates. Community National Bank shall deliver to CBF a letter identifying all persons whom Community National Bank believes to be, at the time the Merger is submitted to a vote of the Community National Bank shareholders, "affiliates" of Community National Bank for purposes of Rule 145 under the Securities Act. Community National Bank shall use its best efforts to cause each person who is identified as an "affiliate" in the letter referred to above to deliver to CBF prior to the Effective Time of the Merger a written agreement providing that each such person shall agree not to sell, transfer or otherwise dispose of the CBF 23 28 Shares to be received by such person in the Merger, except in compliance with the applicable provisions of the Securities Act and until such time as the financial results covering at least 30 days of combined operations of CBF and Community National Bank have been published within the meaning of Section 201.01 of the SEC's Codification of Financial Reporting Policies. Prior to the Effective Time of the Merger, Community National Bank shall amend and supplement such letter and use its reasonable best efforts to cause each additional person who is identified as an "affiliate" to execute a written agreement as set forth in this Section 5(p). (q) Miscellaneous Agreements and Consents. Subject to the terms and conditions of this Agreement, each of the Parties hereto agrees to use its respective best efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement as expeditiously as reasonably practicable, including, without limitation, using their respective reasonable best efforts to lift or rescind any injunction or restraining order or other order adversely affecting the ability of the Parties to consummate the transactions contemplated hereby. Each Party shall, and shall cause each of their respective Subsidiaries to, use their reasonable best efforts to obtain all approvals and Consents of all third parties and Regulatory Authorities necessary or, in the reasonable opinion of any Party, desirable for the consummation of the transactions contemplated by this Agreement. No Consent obtained which is necessary to consummate the transactions contemplated by this Agreement shall be conditioned or restricted in a manner which in the reasonable judgment of a Party would (A) unduly impair or restrict the operations, or would have a material adverse effect on the Condition, of CBF or the Surviving Bank, or (B) render consummation of the Merger unduly burdensome; provided, that such Party has used its reasonable efforts (it being understood that such reasonable efforts shall not include the threatening or commencement of any litigation) to cause such conditions or restrictions to be removed or modified as appropriate. (r) Indemnification. (i) After the Effective Time of the Merger, CBF shall cause the Surviving Bank to indemnify, defend and hold harmless the present and former officers, directors, employees and agents of Community National Bank (each, an "Indemnified Party") after the Effective Time of the Merger against all losses, expenses, claims, damages or liabilities arising out of actions or omissions occurring on or prior to the Effective Time of the Merger (including, without limitation, the transactions contemplated by this Agreement) to the full extent then permitted under, and in accordance with the terms and conditions of, the Florida Business Corporation Act and by the Articles of Association and Bylaws of Community National Bank as in effect on the date hereof, including provisions relating to advances of expenses incurred in the defense of any action or suit. CBF shall cause the Surviving Bank to apply such rights of indemnification in good faith and to the fullest extent permitted by applicable law. (ii) If the Surviving Bank or any of its successors or assigns (A) shall consolidate with or merge into any other corporation or entity and shall not be the continuing or surviving corporation or entity of such consolidation or merger, or (B) shall transfer all or substantially all of its properties and assets to any individual, corporation or other entity, then and in each such case, CBF shall cause the Surviving Bank to cause proper provision to be made so that the successors and assigns of the Surviving Bank shall assume the obligations set forth in this Section 5(r). (s) Fairness Opinions. On or before 10 days prior to the date of the Proxy Statement, (i) Community National Bank shall use all reasonable efforts to obtain an opinion from a firm selected by it that the terms of the Merger are fair to Community National Bank shareholders 24 29 from a financial point of view (the "Community National Bank Fairness Opinion"), and (ii) CBF shall have the right to obtain an opinion from a firm selected by it that the terms of the Merger are fair to CBF shareholders from a financial point of view (the "CBF Fairness Opinion"). (t) Employee Benefit Plans. Community National Bank and CBF shall use their best efforts to coordinate the conversion of each Community National Bank Benefit Plan into similar plans of the Surviving Bank, to the extent similar plans are maintained by the Surviving Bank, and to make available for eligibility for Community National Bank employees all benefit plans and policies maintained by the Surviving Bank following the Effective Time of the Merger with such employees receiving credit for past service with a Party prior to the Effective Time of the Merger for purposes of eligibility for participation, vesting, and years of service, under such benefit plans and policies. ARTICLE VI CONDITIONS TO THE OBLIGATIONS OF COMMUNITY NATIONAL BANK AND CBF Section 6.1 Conditions to Obligation to Close. (a) Conditions to Obligation of CBF. The obligation of CBF to consummate the transactions to be performed by it in connection with the Closing are subject to satisfaction of the following conditions: (i) This Agreement and the Merger shall have received the requisite approval of the shareholders of Community National Bank and the number of Dissenting Community National Bank Shares shall not exceed 5% of the number of Community National Bank Shares issued and outstanding immediately prior to the Effective Time of the Merger; (ii) The Parties shall have procured all approvals, authorizations and Consents specified in Section 5(b) above and the Disclosure Schedules, including but not limited to all necessary consents, authorizations and approvals of Regulatory Authorities which, with respect to those from the Regulatory Authorities, shall not contain provisions which (A) unduly impair or restrict the operations, or would have a material adverse effect on the Condition, of CBF or the Surviving Bank, or (B) render consummation of the Merger unduly burdensome, in each case as determined in the reasonable discretion of CBF; (iii) The representations and warranties set forth in Article III above shall be true and correct in all material respects at and as of the Closing Date; (iv) Community National Bank shall have performed and complied in all material respects with all its covenants required to be complied with hereunder through the Closing; (v) No action, suit, or proceeding shall be pending or threatened before any court or quasi-judicial or administrative agency of any federal, state, local, or foreign jurisdiction wherein an unfavorable judgment, order, decree, stipulation, injunction, or charge could (A) prevent consummation of any of the transactions contemplated by this Agreement, (B) cause any of the transactions contemplated by this Agreement to be rescinded following consummation, or (C) affect adversely the right after the Effective Time of the Merger of the Surviving Bank to own, operate, or control substantially all of the assets and operations of Community National Bank and/or CBF to 25 30 own, operate, or control substantially all of the assets and operations of the Surviving Bank (and no such judgment, order, decree, stipulation, injunction, or charge shall be in effect); (vi) The shareholders' equity of Community National Bank on the last day of the calendar month immediately preceding the Closing Date, as determined in accordance with GAAP before any adjustments required pursuant to Statement of Financial Accounting Standards No. 115 ("FAS 115"), shall not be less than the amount set forth in the September 30, 1999 Community National Bank Financial Statements; (vii) Community National Bank shall have delivered to CBF a certificate (without qualification as to knowledge or materiality or otherwise) to the effect that each of the conditions specified above in Section 6(a)(i) through (vi) is satisfied in all respects; (viii) All actions to be taken by Community National Bank in connection with consummation of the transactions contemplated hereby and all certificates, opinions, instruments, and other documents required to effect the transactions contemplated hereby shall be reasonably satisfactory in form and substance to CBF; (ix) CBF shall have received the Tax Opinion in a form reasonably satisfactory to CBF; (x) CBF shall have received the CBF Fairness Opinion; (xi) CBF shall have received a letter, dated as of the Effective Time of the Merger, from an accounting firm selected by CBF and Community National Bank to the effect that the Merger will qualify for pooling-of-interests accounting treatment if closed and consummated in accordance with this Agreement; and (xii) CBF shall close simultaneously with the Effective Time of the Merger the acquisitions by CBF of First National Bank of Polk County and First National Bank of Osceola County. CBF may waive any condition specified in this Section 6(a) if it executes a writing so stating at or prior to the Closing. (b) Conditions to Obligation of Community National Bank. The obligations of Community National Bank to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following conditions: (i) This Agreement and the Merger shall have received the requisite approval of the shareholders of Community National Bank and the number of Dissenting Community National Bank Shares shall not exceed 5% of the number of Community National Bank Shares issued and outstanding immediately prior to the Effective Time of the Merger; (ii) The Parties shall have procured all of the third party approvals, authorizations and consents specified in Section 5(b) above, and the Disclosure Schedules, including but not limited to all necessary consents, authorizations and approvals of Regulatory Authorities which, with respect to those from the Regulatory Authorities, shall not contain provisions which (A) unduly impair or restrict the operations, or would have a material adverse effect on the Condition, of CBF or the Surviving Bank, or (B) render consummation of the Merger unduly burdensome, in each case as determined in the reasonable discretion of Community National Bank; 26 31 (iii) The representations and warranties set forth in Article IV above shall be true and correct in all material respects at and as of the Closing Date; (iv) CBF shall have performed and complied in all material respects with all its covenants required to be complied with hereunder through the Closing; (v) No action, suit, or proceeding shall be pending or threatened before any court or quasi-judicial or administrative agency of any federal, state, local, or foreign jurisdiction wherein an unfavorable judgment, order, decree, stipulation, injunction, or charge could (A) prevent consummation of any of the transactions contemplated by this Agreement, (B) cause any of the transactions contemplated by this Agreement to be rescinded following consummation, or (C) affect adversely the right after the Effective Time of the Merger of the Surviving Bank, to own, operate, or control substantially all of the assets and operations of Community National Bank (and no such judgment, order, decree, stipulation, injunction or charge shall be in effect); (vi) CBF shall have delivered to Community National Bank a certificate (without qualification as to knowledge or materiality or otherwise) to the effect that each of the conditions specified in Section 6(b)(i) through (vii) is satisfied in all respects; (vii) All actions to be taken by CBF in connection with consummation of the transactions contemplated hereby and all certificates, opinions, instruments, and other documents required to effect the transactions contemplated hereby shall be reasonably satisfactory in form and substance to Community National Bank; (viii) Community National Bank shall have received the Tax Opinion in a form reasonably satisfactory to Community National Bank; and (ix) CBF shall close simultaneously with the Effective Time of the Merger the acquisitions by CBF of First National Bank of Polk County and First National Bank of Osceola County. Community National Bank may waive any condition specified in this Section 6(b) if it executes a writing so stating at or prior to the Closing. ARTICLE VII TERMINATION Section 7.1 Termination. (a) Termination of Agreement. Any of the Parties may terminate this Agreement with the prior authorization of its Board of Directors (whether before or after approval of its or any other Party's shareholders) as provided below: (i) The Parties may terminate this Agreement by mutual written consent at any time prior to the Effective Time of the Merger; (ii) CBF may terminate this Agreement by giving written notice to Community National Bank at any time prior to the Effective Time of the Merger in the event Community National Bank is in breach, and Community National Bank may terminate this Agreement by giving written notice to CBF at any time prior to the Effective Time of the Merger in 27 32 the event CBF or CINB is in breach, of any representation, warranty, or covenant contained in this Agreement in any material respect. Each Party shall have the right to cure any such breach, if such breach is capable of being cured, within 15 days after receipt of written notice of such breach or within any such longer period mutually agreed to in writing by the Parties hereto ("Cure Period"); provided, however, that in no event shall the Cure Period extend beyond December 31, 2000; (iii) If a material adverse development shall have occurred affecting the Condition of CBF on a consolidated basis, Community National Bank may terminate this Agreement by giving written notice to CBF; (iv) If a material adverse development shall have occurred affecting the Condition of Community National Bank, CBF may terminate this Agreement by giving written notice to Community National Bank; (v) Community National Bank and CBF each may terminate this Agreement by giving written notice to the other Party at any time after (i) the Community National Bank Special Meeting in the event this Agreement or the Merger fails to receive the requisite Community National Bank shareholder approval, or (ii) the denial, and any final appeal or rehearing thereof (or if any denial by such authority is not appealed within the time limit for appeal), of any approval from a Regulatory Authority necessary to permit the Parties to consummate the Merger and the transactions contemplated by this Agreement or if any Consent shall be conditioned or restricted in the manner provided in the last sentence of Section 5(b)(i); and (vi) Any Party may terminate this Agreement by giving written notice to the other Parties at any time after December 31, 2000 if the Effective Time of the Merger has not yet then occurred and such termination was approved by a two-thirds vote of such Party's full Board of Directors. (b) Effect of Termination. If any Party terminates this Agreement pursuant to Section 7(a) above, all obligations of the Parties hereunder shall terminate without any liability of any Party to any other Party (except for any liability of any Party then in breach); provided, however, that the confidentiality provisions contained in Section 5(k) above, and the expense provisions in 8(k) below, shall survive any such termination. ARTICLE VIII MISCELLANEOUS Section 8.1 Miscellaneous. (a) Survival. None of the representations, warranties, and covenants of the Parties (other than the provisions in Article II above concerning issuance of CBF Shares and the provisions in Section 5(r) above concerning insurance and indemnification) shall survive the Effective Time of the Merger. (b) No Third Party Beneficiaries. This Agreement shall not confer any rights or remedies upon any person other than the Parties and their respective successors and permitted assigns; provided, however, that (i) the provisions in Article II above concerning issuance of CBF Shares are intended for the benefit of Community National Bank shareholders and (ii) the provisions 28 33 in Section 5(r) above concerning insurance and indemnification are intended for the benefit of the individuals specified and their respective legal representatives. (c) Entire Agreement. This Agreement (including the documents referred to herein) constitutes the entire agreement among the Parties and supersedes any prior understandings, agreements, or representations by or among the Parties, written or oral, that may have related in any way to the subject matter hereof. (d) Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Parties named herein and their respective successors and permitted assigns. No Party may assign either this Agreement or any of its rights, interests, or obligations hereunder without the prior written approval of the other Parties. (e) Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (f) Headings. The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. (g) Notices. All notices, requests, consents and other communications required or permitted under this Agreement shall be in writing (including telex and telegraphic communication) and shall be (as elected by the person giving such notice) hand delivered by messenger or courier service, delivered by facsimile transmission, or mailed (airmail if international) by registered or certified mail (postage prepaid), return receipt requested, addressed to: If to CBF or CINB: James H. White Chairman of the Board, President and Chief Executive Officer Centerstate Banks of Florida, Inc. 7722 State Road 544 East Winter Haven, Florida 33881 Facsimile: (941) 421-6663 If to Community National Bank: James S. Stalnaker, Jr. President and Chief Executive Officer Community National Bank of Pasco County 6930 Gall Boulevard Zephyrhills, FL 33541-2513 Facsimile: (813) 783-3599 29 34 and, in all cases, with copies to: John P. Greeley, Esquire Smith, Mackinnon, Greeley, Bowdoin, Edwards, Brownlee & Marks, P.A. 255 S. Orange Avenue, Suite 800 Orlando, FL 32801 Facsimile: (407) 843-2448 or to such other address as any Party may designate by notice complying with the terms of this Section. Each such notice shall be deemed delivered (a) on the date delivered if by hand delivery; (b) on the date of transmission with confirmed answer back if by telex, facsimile or other telegraphic method; and (c) on the date upon which the return receipt is signed or delivery is refused or the notice is designated by the postal authorities as not deliverable, as the case may be, if mailed. (h) Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Florida without regard to principles of conflict of laws. (i) Amendments and Waivers. To the extent permitted by law, the Parties may amend any provision of this Agreement at any time prior to the Effective Time of the Merger by a subsequent writing signed by each of the Parties upon the approval of their respective Boards of Directors; provided, however, that after approval of this Agreement by a Party's shareholders, there shall be made no amendment in the Conversion Ratio in a manner that adversely affects the economic value of the Merger to such shareholders without their further approval. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by all of the Parties. No waiver by any Party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. (j) Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the remaining terms and provision hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. If the final judgment of a court of competent jurisdiction declares that any term or provision hereof is invalid or unenforceable, the Parties agree that the court making the termination of invalidity or unenforceability shall have the power to reduce the scope, duration, or area of the term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provisions with a term or provisions that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified after the expiration of the time within which the judgment may be appealed. (k) Expenses. Each Party shall bear its own expenses in connection with the negotiation and execution of this Agreement and the implementation and effectiveness of the Merger. Notwithstanding the foregoing, if any legal action or other proceeding is brought for the enforcement of this Agreement, or because of an alleged dispute, breach, default or misrepresentation in connection with any provision of this Agreement, the successful or prevailing Party or Parties shall be entitled to recover reasonable attorneys' fees, sales and use taxes, court costs and all expenses even if not taxable as court costs (including, without limitation, all such fees, taxes, costs and expenses incident to arbitration, appellate, bankruptcy and post-judgment proceedings), incurred in that action or proceeding, in addition to any other relief to which such Party or Parties 30 35 may be entitled. Attorneys' fees shall include, without limitation, paralegal fees, investigative fees, administrative costs, sales and use taxes and all other charges billed by the attorney to the prevailing Party. (l) Construction. The language used in this Agreement shall be deemed to be the language chosen by the Parties hereto to express their mutual intent, and no rule of strict construction shall be applied against any Party. Any reference to any federal, state, local or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context otherwise requires. (m) Incorporation of Exhibits and Schedules. The Exhibits and Schedules identified in this Agreement are incorporated herein by reference and made a part hereof. (n) Jurisdiction and Venue. The Parties acknowledge that a substantial portion of negotiations and anticipated performance and execution of this Agreement occurred or shall occur in Polk County, Florida, and that, therefore, without limiting the jurisdiction or venue of any other federal or state courts, each of the Parties irrevocably and unconditionally (a) agrees that any suit, action or legal proceeding arising out of or relating to this Agreement may be brought in a state or federal court of record in Polk County; (b) consents to the jurisdiction of each such Court in any suit, action or proceeding; (c) waives any objection which it may have to the laying of venue of any such suit, action or proceeding in any of such courts; and (d) agrees that service of any court paper may be effected on such Party by mail, as provided in this Agreement, or in such other manner as may be provided under applicable laws or court rules in said state. (o) Remedies Cumulative. Except as otherwise expressly provided herein, no remedy herein conferred upon any Party is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or otherwise. No single or partial exercise by any Party of any right, power or remedy hereunder shall preclude any other or further exercise thereof. IN WITNESS WHEREOF, the Parties hereto have executed this Agreement and have affixed their respective seals as of the date first above written, each by its President and Chief Executive Officer and attested to by its Cashier or Secretary, pursuant to a resolution of its Board of Directors, acting by a majority. CENTERSTATE BANKS OF FLORIDA, INC. COMMUNITY NATIONAL BANK OF PASCO COUNTY /s/ James H. White /s/ James S. Stalnaker, Jr. - ------------------------------------ ------------------------------------ James H. White, Chairman of the Board James S. Stalnaker, Jr. President and Chief Executive Officer President and Chief Executive Officer Attest: Attest: /s/ George H. Carefoot /s/ Elizabeth J. Bowen - ------------------------------------ ------------------------------------ George H. Carefoot, Secretary Elizabeth J. Bowen, Cashier 31 36 STATE OF FLORIDA COUNTY OF POLK The foregoing instrument was acknowledged before me this 10th day of December, 1999, by James H. White and George H. Carefoot, Chairman of the Board, President and Chief Executive Officer, and Secretary, respectively, of Centerstate Banks of Florida, Inc. /s/ John P. Greeley ------------------------------------ Printed Name: /s/ John P. Greeley Notary Public, State of Florida Personally Known [X] or Produced Identification [ ] Type of Identification Produced ______________________________________________ STATE OF FLORIDA COUNTY OF PASCO The foregoing instrument was acknowledged before me this 10th day of December, 1999, by James S. Stalnaker, Jr. and Elizabeth J. Bowen, President and Chief Executive Officer, and Cashier, respectively, of Community National Bank of Pasco County. /s/ John P. Greeley ------------------------------------ Printed Name: /s/ John P. Greeley Notary Public, State of Florida Personally Known [X] or Produced Identification [ ] Type of Identification Produced ______________________________________________ 32 37 JOINDER Community Interim National Bank of Pasco County hereby joins in the foregoing Agreement, undertakes that it be bound thereby and that it will duly perform all the acts and things therein referred to provided to be done by it. IN WITNESS WHEREOF, Community Interim National Bank of Pasco County has caused this undertaking to be made by its duly authorized officers as of this ____ day of _____________, ______. COMMUNITY INTERIM NATIONAL BANK OF PASCO COUNTY ------------------------------------- James S. Stalnaker, Jr. President and Chief Executive Officer Attest: ------------------------------------- Elizabeth J. Bowen, Cashier STATE OF FLORIDA COUNTY OF PASCO The foregoing instrument was acknowledged before me this _____ day of __________, _____, by James S. Stalnaker, Jr., and Elizabeth J. Bowen, President and Chief Executive Officer, and Cashier, respectively, of Community Interim National Bank of Pasco County. ____________________________________ Printed Name: ______________________ Notary Public, State of Florida Personally Known [ ] or Produced Identification [ ] Type of Identification Produced ______________________________________________ 33 38 SCHEDULE 1.4 TO AGREEMENT TO MERGE NAMES AND ADDRESSES OF DIRECTORS AND EXECUTIVE OFFICERS OF SURVIVING BANK DIRECTORS EXECUTIVE OFFICERS - --------- ------------------ James H. Bingham James S. Stalnaker, Jr. P. O. Box 1681 35124 Sidesaddle Trail Dade City, FL 33526 Dade City, FL 33523 G. Robert Blanchard, Sr. Timothy A. Pierson 1414 Swan Ave., Suite 201 36549 Laurel Oak Lane Tampa, FL 33606 Dade City, FL 33525 Pavitar S. Cheema Elizabeth J. Bowen 38023 Medical Center Dr. 40037 Sunburst Drive Zephyhills, FL 33541 Dade City, FL 33525 Emory R. Guess Linda A. Jones 103 CR 532C 7133 Peninsula Drive Bushnell, FL 33513 New Port Richey, FL 34652 Larry S. Hersch Thomas M. Ward P. O. Box 1046 6439 Huntington Drive Dade City, FL 33526 Zephyrhills, FL 33541 Michael R. Langley James H. White 10392 CR 561A P. O. Box 188 Clermont, FL 34711 Haines City, FL 33845-0188 Carol Madill Lockey 3909 Northampton Way Tampa, FL 33624 Jean M. Murphy 6941 Murphy Rd. Zephyrhills, FL 33540 Ronald E. Oakley P. O. Box 4170 Lake Wales, FL 33853 James S. Stalnaker, Jr. 35124 Sidesaddle Trail Dade City, FL 33523 James H. White P. O. Box 188 Haines City, FL 33845-0188 39 SCHEDULE 1.6 TO AGREEMENT TO MERGE CAPITALIZATION OF SURVIVING BANK The capital stock, capital surplus and retained earnings of the Surviving Bank shall be the following amounts adjusted, however, for earnings and expenses and shares issued between September 30, 1999 and the Effective Time of the Merger:
Common Stock, $5.00 par value; 509,900 shares authorized; 486,835 shares issued and outstanding $2,434,175 Capital surplus 2,557,000 Net unrealized gains/losses on securities held as available-for-sale (35,000) Retained earnings 2,878,000 ---------- Total Shareholders' Equity $7,834,175 ==========
EX-3.1 4 ARTICLES OF INCORPORATION 1 EXHIBIT 3.1 ARTICLES OF INCORPORATION OF CENTERSTATE BANKS OF FLORIDA, INC. The undersigned, being of legal age and desiring to form a corporation (hereinafter referred to as the "Corporation") pursuant to the provisions of the Florida Business Corporation Act, as amended (such Act, as amended from time to time, is hereinafter referred to as the "Act"), executes the following Articles of Incorporation. ARTICLE I Name The name of the Corporation is Centerstate Banks of Florida, Inc. ARTICLE II Duration This Corporation shall commence its existence immediately upon the filing of these Articles of Incorporation and shall have perpetual duration unless sooner dissolved according to law. ARTICLE III Purpose and General Powers The general purpose of the Corporation shall be the transaction of any and all lawful business for which corporations may be incorporated under the Act. The Corporation shall have all of the powers enumerated in the Act and all such other powers as are not specifically prohibited to corporations for profit under the laws of the State of Florida. 2 ARTICLE IV Capital Stock A. Number and Class of Shares Authorized; Par Value. The Corporation is authorized to issue the following shares of capital stock: (1) Common Stock. The aggregate number of shares of common stock (referred to in these Articles of Incorporation as "Common Stock") which the Corporation shall have authority to issue is 20,000,000 with a par value of $0.01 per share. (2) Preferred Stock. The aggregate number of shares of preferred stock (referred to in these Articles of Incorporation as "Preferred Stock") which the Corporation shall have authority to issue is 5,000,000 with a par value of $.01 per share. B. Description of Remaining Shares of Preferred Stock. The terms, preferences, limitations and relative rights of the shares of Preferred Stock are as follows: (1) Dividends on the outstanding shares of Preferred Stock shall be declared and paid or set apart for payment before any dividends shall be declared and paid or set apart for payment on the outstanding shares of Common Stock with respect to the same quarterly period. Dividends on any shares of Preferred Stock shall be cumulative only if and to the extent determined by resolution of the Board of Directors, as provided below. In the event of any liquidation, dissolution, or winding up of the affairs of the Corporation, whether voluntary or involuntary, the outstanding shares of Preferred Stock shall have preference and priority over the outstanding shares of Common Stock for payment of the amount, if any, to which shares of each outstanding series of Preferred Stock may be entitled in accordance with the terms and rights thereof and each holder of Preferred Stock shall be entitled to be paid in full such amount, or have a sum sufficient for the payment in full set aside, before any such payments shall be made to the holders of Common stock. (2) The Board of Directors is expressly authorized at any time and from time to time to provide for the issuance of shares of Preferred Stock in one or more series, with such voting powers, full or limited (including, by way of illustration and not limitation, in excess of one vote per share), or without voting powers, and with such designations, preferences and relative participating, option or other rights, qualifications, limitations or restrictions, as shall be fixed and determined in the resolution or resolutions providing for the issuance thereof adopted by the Board of Directors, and as are not stated and expressed in these Articles of Incorporation or any amendment hereto, including (but without limiting the generality of the foregoing) the following: 2 3 (a) The distinctive designation of such series and the number of shares which shall constitute such series, which number may be increased (except where otherwise provided by the Board of Directors in creating such series) or decreased (but not below the number of shares thereof then outstanding) from time to time by resolution of the Board of Directors; and (b) The rate and manner of payment of dividends payable on shares of such series, including the dividend rate, date of declaration and payment, whether dividends shall be cumulative, and the conditions upon which and the date from which such dividends shall be cumulative; and (c) Whether shares of such series shall be redeemed, the time or times when, and the price or prices at which, shares of such series shall be redeemable, the redemption price, the terms and conditions of redemption, and the sinking fund provisions, if any, for the purchase or redemption of such shares; and (d) The amount payable on shares of such series and the rights of holders of such shares in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation; and (e) The rights, if any, of the holders of shares of such series to convert such shares into, or exchange such shares for, shares of Common Stock, other securities, or shares of any other class or series of Preferred Stock and the terms and conditions of such conversion or exchange; and (f) The voting rights, if any, and whether full or limited, of the shares of such series, which may include no voting rights, one vote per share, or such higher number of votes per share as may be designated by the Board of Directors; and (g) The preemptive or preferential rights, if any, of the holders of shares of such series to subscribe for, purchase, receive, or otherwise acquire any part of any new or additional issue of stock of any class, whether now or hereafter authorized, or of any bonds, debentures, notes, or other securities of the Corporation, whether or not convertible into shares of stock with the Corporation. (3) Except in respect of the relative rights and preferences that may be provided by the Board of Directors as hereinbefore provided, all shares of Preferred Stock shall be identical, and each share of a series shall be identical in all respects with the other shares of the same series. When payment of the consideration for which shares of Preferred Stock are to be issued shall have been received by the Corporation, such shares shall be deemed to be fully paid and nonassessable. 3 4 C. Common Stock Voting Rights. Each record holder of Common Stock shall be entitled to one vote for each share held. Holders of Common Stock shall have no cumulative voting rights in any election of directors of the Corporation. D. Preemptive Rights. Holders of Common Stock shall not have as a matter of right any preemptive or preferential right to subscribe for, purchase, receive, or otherwise acquire any part of any new or additional issue of stock of any class, whether now or hereafter authorized, or of any bonds, debentures, notes, or other securities of the Corporation, whether or not convertible into shares of stock of the Corporation. ARTICLE V Initial Registered Office and Agent; Principal Place of Business The initial registered office of this Corporation shall be located at the City of Winter Haven, County of Polk and State of Florida, and its address there shall be, at present, 7722 SR 544 East, Winter Haven, FL 33881, and the initial registered agent of the Corporation at that address shall be James H. White. The Corporation may change its registered agent or the location of its registered office, or both, from time to time without amendment of these Articles of Incorporation. The principal place of business and the mailing address of the Corporation shall be: 7722 SR 544 East, Winter Haven, FL 33881. ARTICLE VI Initial Board of Directors The initial Board of Directors of the Corporation shall consist of one director. The name and street address of the initial director of this Corporation is: James H. White 7722 SR 544 East Winter Haven, FL 33881 4 5 The number of Directors of this Corporation shall be the number from time to time fixed by the Shareholders, or by the Directors, in accordance with the terms and conditions of the Bylaws, but at no time shall said number of Directors be less than one. ARTICLE VII Incorporator The name and street address of the person signing these Articles of Incorporation as Incorporator are: James H. White 7722 SR 544 East Winter Haven, FL 33881 ARTICLE VIII Bylaws The power to adopt, alter, amend or repeal bylaws shall be vested in the Board of Directors. ARTICLE IX Amendment This Corporation reserves the right to amend or repeal any provisions contained in these Articles of Incorporation, or any amendment hereto, and any right conferred upon the shareholders is subject to this reservation. ARTICLE X Headings and Captions The headings or captions of these various Articles of Incorporation are inserted for convenience and none of them shall have any force or effect, and the interpretation of the various articles shall not be influenced by any of said headings or captions. 5 6 IN WITNESS WHEREOF, the undersigned does hereby make and file these Articles of Incorporation declaring and certifying that the facts stated herein are true, and hereby subscribes thereto and hereunto sets his hand and seal this 7th day of September, 1999. /s/ James H. White ----------------------------- James H. White STATE OF FLORIDA COUNTY OF POLK The foregoing instrument was acknowledged before me this 7th day of September, 1999, by JAMES H. WHITE. /s/ Barbara McHugh ----------------------------- Printed Name: Barbara McHugh Notary Public, State of Florida Personally Known [X] or Produced Identification [ ] Type of Identification Produced ___________________________________________ 6 7 CERTIFICATE DESIGNATING PLACE OF BUSINESS FOR THE SERVICE OF PROCESS WITHIN FLORIDA AND REGISTERED AGENT UPON WHOM PROCESS MAY BE SERVED In compliance with Sections 48.091 and 607.0501, Florida Statutes, the following is submitted: Centerstate Banks of Florida, Inc. (the "Corporation") desiring to organize as a domestic corporation or qualify under the laws of the State of Florida has named and designated James H. White as its Registered Agent to accept service of process within the State of Florida with its registered office located at 7722 SR 544 East, Winter Haven, FL 33881. ACKNOWLEDGMENT Having been named as Registered Agent for the Corporation at the place designated in this Certificate, I hereby agree to act in this capacity; and I am familiar with and accept the obligations relating to service as a registered agent, as the same may apply to the Corporation; and I further agree to comply with the provisions of Florida Statutes, Section 48.091 and all other statutes, all as the same may apply to the Corporation relating to the proper and complete performance of my duties as Registered Agent. Dated this 7th day of September, 1999 /s/ James H. White -------------------------------- James H. White, Registered Agent 7 EX-3.2 5 BYLAWS OF CENTERSTATE BANKS OF FLORIDA 1 Exhibit 3.2 BYLAWS OF CENTERSTATE BANKS OF FLORIDA, INC. 2 TABLE OF CONTENTS
Section Caption Page ARTICLE I - Meeting of Shareholders.............................. 1 Section 1 Annual Meeting................................................... 1 Section 2 Special Meetings................................................. 1 Section 3 Place............................................................ 1 Section 4 Notice of Meeting................................................ 1 Section 5 Notice of Adjourned Meetings..................................... 2 Section 6 Waiver of Notice................................................. 2 Section 7 Record Date...................................................... 2 Section 8 Shareholders' List for Meeting................................... 2 Section 9 Voting Entitlement of Shares..................................... 3 Section 10 Proxies.......................................................... 3 Section 11 Shareholder Quorum and Voting.................................... 4 Section 12 Voting Trusts.................................................... 4 Section 13 Shareholders' Agreements......................................... 4 ARTICLE II - Directors........................................... 5 Section 1 General Powers................................................... 5 Section 2 Qualifications of Directors...................................... 5 Section 3 Number........................................................... 5 Section 4 Election and Term................................................ 5 Section 5 Vacancy on Board................................................. 5 Section 6 Removal of Directors by Shareholders............................. 5 Section 7 Compensation..................................................... 5 Section 8 Presumption of Assent............................................ 5 Section 9 Directors' Meetings.............................................. 6 Section 10 Notice of Meetings............................................... 6 Section 11 Waiver of Notice................................................. 6 Section 12 Quorum and Voting................................................ 6 Section 13 Action by Directors Without a Meeting............................ 6 Section 14 Adjournments..................................................... 6 Section 15 Participation by Conference Telephone............................ 6
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Section Caption Page ARTICLE III - Board Committees................................... 7 Section 1 Standing Committees.............................................. 7 Section 2 Audit Committee.................................................. 7 Section 3 Compensation Committee........................................... 7 Section 4 Loan Committee................................................... 7 Section 5 Other Committees................................................. 7 Section 6 Alternate Member Vacancies....................................... 7 Section 7 Prohibited Committee Actions..................................... 7 Section 8 Tenure.......................................................... 8 Section 9 Meetings........................................................ 9 Section 10 Quorum.......................................................... 9 Section 11 Action Without a Meeting........................................ 9 Section 12 Procedures...................................................... 9 Section 13 Limitation...................................................... 9 ARTICLE IV - Officers............................................ 9 Section 1 Officers, Election and Terms of Office........................... 9 Section 2 Resignation and Removal of Officers.............................. 10 Section 3 Vacancies........................................................ 10 Section 4 Chief Executive Officer.......................................... 10 Section 5 Chairman of the Board............................................ 10 Section 6 Vice Chairman.................................................... 11 Section 7 President........................................................ 11 Section 8 Vice President................................................... 11 Section 9 Secretary........................................................ 11 Section 10 Treasurer........................................................ 12 Section 11 Delegation of Duties............................................. 12 ARTICLE V - Stock Certificates................................... 12 Section 1 Issuance......................................................... 12 Section 2 Signatures; Form................................................. 12 Section 3 Transfer of Stock................................................ 13 Section 4 Lost Certificates................................................ 14 ARTICLE VI - Indemnification..................................... 14 Section 1 Definitions...................................................... 14 Section 2 Indemnification of Officers, Directors, Employees and Agents................................................... 15
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Section Caption Page ARTICLE VII - General Provisions................................. 18 Section 1 Fiscal Year...................................................... 18 Section 2 Seal............................................................. 18 Section 3 Amendment of Bylaws.............................................. 18 CERTIFICATE OF ADOPTION.......................................... 18
ii 5 BYLAWS OF CENTERSTATE BANKS OF FLORIDA, INC. ARTICLE I Meeting of Shareholders Section 1. Annual Meeting. The annual meeting of the shareholders of the Corporation shall be held following the end of the Corporation's fiscal year at such time as shall be determined by the Board of Directors. The annual meeting shall be held for the election of directors of the Corporation and the transaction of any business which may be brought before the meeting. The annual meeting of the shareholders for any year shall be held no later than thirteen months after the last preceding annual meeting of shareholders. The failure to hold the annual meeting at the time stated shall not affect the validity of any corporate action and shall not work a forfeiture of or dissolution of the Corporation. Annual meetings shall be held at the Corporation's principal office unless stated otherwise in the notice of the annual meeting. Section 2. Special Meetings. Special meetings of the shareholders shall be held when directed by the Chairman of the Board, the President, or the Board of Directors, or when requested in writing by the holders of not less than one-third of all the votes entitled to be cast on any issue proposed to be considered at the proposed special meeting. Shareholders should sign, date, and deliver to the Corporation's Secretary one or more written demands for the meeting describing the purpose or purposes for which it is to be held. A meeting requested by shareholders shall be called for a date not less than ten nor more than sixty days after the request is made. The call for the meeting shall be issued by the Secretary, unless the Chairman of the Board, the President, the Board of Directors, or shareholders requesting the calling of the meeting shall designate another person to do so. Section 3. Place. Meetings of shareholders may be held either within or without the State of Florida. Unless otherwise directed by the Board of Directors, meetings of the shareholders shall be held at the principal offices of the Corporation in the State of Florida. Section 4. Notice of Meeting. The Corporation shall notify shareholders in writing of the date, time, and place of each annual and special shareholders' meeting no fewer than ten or more than sixty days before the meeting date. Notice of a shareholders' meeting may be communicated or delivered to any shareholder in person, or by teletype, telegraph or other form of electronic communication, or by mail, by or at the direction of the Chairman of the Board, the President, the Secretary, or the officer or persons calling the meeting. If notice is mailed, it shall be deemed to be delivered when deposited in the United States mail, addressed to the shareholder at his address as it appears on the stock transfer books of the Corporation, with postage thereon prepaid. 6 Section 5. Notice of Adjourned Meetings. When an annual or special shareholders' meeting is adjourned to a different date, time or place, notice need not be given of the new date, time or place if the new date, time or place is announced at the meeting before an adjournment is taken, and any business may be transacted at the adjourned meeting that might have been transacted on the original date of the meeting. If, however, after the adjournment the Board of Directors fixes a new record date for the adjourned meeting, a notice of the adjourned meeting must be given to persons who are shareholders as of the new record date who are entitled to notice of the meeting. Section 6. Waiver of Notice. A shareholder may waive any notice required by the Articles of Incorporation or Bylaws before or after the date and time stated in the notice. The waiver must be in writing, be signed by the shareholder entitled to the notice, and be delivered to the Corporation for inclusion in the minutes or filing with the corporate records. Attendance by a shareholder at a meeting waives objection to lack of notice or defective notice of the meeting, unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting. Section 7. Record Date. For the purpose of determining the shareholders entitled to notice of a shareholders' meeting, to demand a special meeting, to vote, or to take any other action, the Board of Directors may fix the record date for any such determination of shareholders. The record date for determining shareholders entitled to demand a special meeting is the date the first shareholder delivers his demand to the Corporation. The record date for determining shareholders entitled to take action without a meeting is the date the first signed written consent is delivered to the Corporation under Section 4 of this Article. A record date for purposes of this Section may not be more than seventy days before the meeting or action requiring a determination of shareholders. If the stock transfer books are not closed and no record date is fixed for the determination of shareholders entitled to notice or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this Section, such determination shall apply to any adjournment thereof, unless the Board of Directors fixes a new record date for the adjourned meeting. Section 8. Shareholders' List for Meeting. After fixing a record date for a meeting, the Corporation shall prepare an alphabetical list of the names of all its shareholders who are entitled to notice of a shareholders' meeting, arranged by voting group with the address of, and the number and class and series, if any, of shares held by each. The shareholders' list shall be available for inspection by any shareholder for a period of ten days prior to the meeting or such shorter time as exists between the record date and the meeting and continuing through the meeting at the Corporation's principal office, at a place identified in the meeting notice in the city where the 2 7 meeting will be held, or at the office of the Corporation's transfer agent or registrar. A shareholder or his agent or attorney is entitled on written demand to inspect the list, during regular business hours and at the shareholder's expense, during the period it is available for inspection. The Corporation shall make the shareholders' list available at the meeting, and any shareholder or his agent or attorney is entitled to inspect the list at any time during the meeting or any adjournment. Section 9. Voting Entitlement of Shares. Except as provided otherwise in the Articles of Incorporation or herein, each outstanding share, regardless of class, is entitled to one vote on each matter submitted to vote at a meeting of the shareholders. Shares standing in the name of another corporation, domestic or foreign, may be voted by such officer, agent, or proxy as the bylaws of the corporate shareholder may prescribe or, in the absence of any applicable provision, by such person as the board of directors of the corporate shareholder may designate. In the absence of any such designation or in case of conflicting designation by the corporate shareholder, the Chairman of the Board, the President, any Vice President, the Secretary, and the Treasurer of the corporate shareholder, in that order, shall be presumed to be fully authorized to vote such shares. Shares entitled to vote which are held by an administrator, executor, guardian, personal representative, or conservator may be voted by him, either in person or by proxy, without a transfer of such shares into his name. Shares standing in the name of a trustee may be voted by him, either in person or by proxy, but no trustee shall be entitled to vote shares held by him without a transfer of such shares into his name or the name of his nominee. Shares held by or under the control of a receiver, a trustee in bankruptcy proceedings, or an assignee for the benefit of creditors may be voted by him without the transfer thereof into his name. Nothing herein contained shall prevent trustees or other fiduciaries holding shares registered in the name of a nominee from causing such shares to be voted by such nominee as the trustee or other fiduciary may direct. Such nominee may vote shares as directed by a trustee or other fiduciary without the necessity of transferring the shares to the name of the trustee or other fiduciary. Section 10. Proxies. A shareholder, other person entitled to vote on behalf of a shareholder pursuant to law, or attorney in fact, may vote the shareholder's shares in person or by proxy. A shareholder may appoint a proxy to vote or otherwise act for him by signing an appointment form, either personally or by his attorney in fact. An executed telegram or cablegram appearing to have been transmitted by such person, or a photographic, photostatic, telecopy or equivalent reproduction of an appointment form is a sufficient appointment form. An appointment of a proxy is effective when received by the Secretary or other officer authorized to tabulate votes and is valid for up to eleven months unless a longer period is expressly provided in the appointment form. 3 8 The death or incapacity of a shareholder appointing a proxy does not affect the right of the Corporation to accept the proxy's authority unless notice of the death or incapacity is received by the Secretary or other officer or agent authorized to tabulate votes before the proxy exercises his authority under the appointment. Section 11. Shareholder Quorum and Voting. A majority of the votes entitled to be cast on the matter by the voting group, constitutes a quorum of that voting group at a meeting of shareholders. If a quorum exists, action on a matter (other than the election of directors) by a voting group is approved if the votes cast within the voting group favoring the action exceed the votes cast opposing the action, unless the Articles of Incorporation or applicable law requires a greater number of affirmative votes. After a quorum has been established at a shareholders' meeting, a subsequent withdrawal of shareholders, so as to reduce the number of shares entitled to vote at the meeting below the number required for a quorum, shall not affect the validity of any action taken at the meeting or any adjournment thereof. Section 12. Voting Trusts. One or more shareholders may create a voting trust, conferring on a trustee the right to vote or otherwise act for them, by signing an agreement setting out the provisions of the trust (which may include anything consistent with its purpose) and transferring their shares to the trustee. When a voting trust agreement is signed, the trustee shall prepare a list of the names and addresses of all owners of beneficial interests in the trust, together with the number and class of shares each transferred to the trust, and deliver copies of the list and agreement to the Corporation's principal office. After filing a copy of the list and agreement in the Corporation's principal office, such copy shall be open to inspection by any shareholder of the Corporation or any beneficiary of the trust under the agreement during business hours. A voting trust is valid for not more than ten years after its effective date, provided that all or some of the parties to a voting trust may extend it for additional terms of not more than ten years each by signing an extension agreement and obtaining the voting trustee's written consent to the extension. An extension is valid for the period set forth therein, up to ten years, from the date the first shareholder signs the extension agreement. The voting trustee must deliver copies of the extension agreement and list of beneficial owners to the Corporation's principal office. An extension agreement binds only those parties signing it. Section 13. Shareholders' Agreements. Two or more shareholders may provide for the manner in which they will vote their shares by signing an agreement for that purpose. When a shareholders' agreement is signed, the shareholders parties thereto shall deliver copies of the agreement to the Corporation's principal office. After filing a copy of the agreement in the Corporation's principal office, such copy shall be open to inspection by any shareholder of the Corporation, or any party to the agreement during business hours. 4 9 ARTICLE II Directors Section 1. General Powers. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be managed under the direction of its Board of Directors. Section 2. Qualifications of Directors. Directors must be natural persons who are eighteen years of age or older but need not be residents of this state or shareholders of the Corporation. Section 3. Number. The Board of Directors of the Corporation as of the date of adoption of these Bylaws shall consist of seven members. The number of directors may be increased or decreased from time to time by action of the Board of Directors, but no decrease shall have the effect of shortening the terms of any incumbent director. Directors are elected at each annual meeting of shareholders. Section 4. Election and Term. At the first annual meeting of shareholders and at each annual meeting thereafter, the shareholders shall elect directors to hold office until the next succeeding annual meeting. Each director shall hold office for the term for which such director is elect and until such director's successor shall have been elected and qualified or until such director's earlier resignation, removal from office, or death. Section 5. Vacancy on Board. Any vacancy occurring on the Board of Directors, including a vacancy from an increase in the number of directors, may be filled by the affirmative vote of a majority of the remaining directors, though less than a quorum of the Board of Directors. A director elected to fill a vacancy shall hold office only until the next election of directors by the shareholders. Section 6. Removal of Directors by Shareholders. The shareholders may remove one or more directors with or without cause. A director may be so removed by the shareholders at a meeting of shareholders, provided the notice of the meeting states that the purpose, or one of the purposes, of the meeting is removal of the director with cause. Section 7. Compensation. The Board of Directors shall have authority to fix the compensation of directors. Section 8. Presumption of Assent. A director of the Corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless such director votes against such action or abstains from voting in respect thereto because of an asserted conflict of interest. Section 9. Directors' Meetings. The Board of Directors may hold regular or special meetings in or out of the state. Meetings of the Board of Directors may be called at any time by the 5 10 Chairman of the Board, by the President, or by directors constituting at least one-fourth of the full Board of Directors. Section 10. Notice of Meetings. Regular meetings of the Board of Directors may be held without notice of the date, time, place or purpose of the meetings. Special meetings of the Board of Directors must be preceded by at least two days' notice of the date, time and place of the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. Section 11. Waiver of Notice. Notice of a meeting of the Board of Directors need not be given to any director who signs a waiver of notice either before or after the meeting. Attendance of a director at a meeting shall constitute a waiver of notice of such meeting and waiver of any and all objections to the place of the meeting, the time of the meeting, or the manner in which it has been called or convened, except when a director states, at the beginning of the meeting or promptly upon arrival at the meeting, any objection to the transaction of business because the meeting is not lawfully called or convened. Section 12. Quorum and Voting. A majority of the number of directors fixed by these Bylaws shall constitute a quorum for the transaction of business. If a quorum is present when a vote is taken, the affirmative vote of a majority of directors present is the act of the Board of Directors. Section 13. Action by Directors Without a Meeting. Any action required or permitted by law to be taken at a Board of Directors' meeting or committee meeting may be taken without a meeting if action is taken by all members of the Board or the committee. The action must be evidenced by one or more written consents describing the action taken and signed by each director or committee member. Action taken shall be effective when the last director signs the consent, unless the consent specifies a different effective date. The consent signed shall have the effect of a meeting vote and may be described as such in any document. Section 14. Adjournments. A majority of the directors present, whether or not a quorum exists, may adjourn any meeting of the Board of Directors to another time and place. Notice of any such adjourned meeting shall be given to the directors who were not present at the time of the adjournment and, unless the time and place of the adjourned meeting are announced at the time of the adjournment, to the other directors. Section 15. Participation by Conference Telephone. Members of the Board of Directors may participate in a meeting of such Board by means of a conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. 6 11 ARTICLE III Board Committees Section 1. Standing Committees. The Board of Directors shall have and maintain as standing committees of the Board an Audit Committee, a Compensation Committee and a Loan Committee. The Board of Directors shall at the annual meeting following the Corporation's annual meeting of shareholders and may at such other times as the Board may determine, elect the members of each such committee, all of whom shall be directors of the Corporation, designate one of the members of each such committee as chairman of the committee, and prescribe the duties of each committee, which duties shall be consistent with these Bylaws. Section 2. Audit Committee. The Audit Committee shall consist of not less than two directors, none of whom shall be officers or employees of the Corporation or any direct or indirect subsidiary or affiliate of the Corporation. The Audit Committee shall select and approve the terms and scope of engagement of the independent certified accountants of the Corporation and shall have such other duties as may from time to time be prescribed by the Board of Directors. The independent auditor of the Corporation, if any, shall report directly to the Audit Committee. Section 3. Compensation Committee. The Compensation Committee shall consist of not less than two directors. The Compensation Committee shall serve as the Board committee responsible for administering any compensation and benefit plans of the Corporation and shall have such other duties as may from time to time be prescribed by the Board of Directors. Section 4. Loan Committee. The Loan Committee shall consist of not less than two directors. The Loan Committee shall have the power to establish and approve such loans, policies and procedures relating to the lending operations of any direct and indirect subsidiary or affiliate of the Corporation as determined in accordance with such guidelines established by the Board of Directors from time to time. Section 5. Other Committees. The Board of Directors may by resolution establish such other committees composed of directors as they may determine to be necessary or appropriate for the conduct of the business of the Corporation and may prescribe the composition, duties, and procedures thereof. Section 6. Alternate Member Vacancies. The Board of Directors may designate one or more directors as alternate members of any committee, and such alternate members may act in the place and stead of any absent member or members at any meeting of such committee. The Board of Directors may fill any vacancy or vacancies occurring in any committee. Section 7. Prohibited Committee Actions. Notwithstanding any other provision of these Bylaws, no committee of the Board of Directors shall have the authority to: (a) Approve or recommend to shareholders actions or proposals required by law, the Articles of Incorporation, or these Bylaws to be approved by the shareholders. 7 12 (b) Fill vacancies on the Board of Directors or any committee thereof. (c) Adopt, amend, or repeal the Bylaws. (d) Authorize or approve the reacquisition of any shares of capital stock of the Corporation unless pursuant to a general formula or method specified by the Board of Directors. (e) Authorize or approve the issuance or sale or contract for the sale of shares of capital stock, or determine the designation and relative rights, preferences, and limitations of a voting group except that the Board of Directors may authorize a committee (or a senior executive officer of the Corporation) to do so within limits specifically prescribed by the Board of Directors. (f) Declare any dividend or distribution on the capital stock of the Corporation, whether in cash or in kind. (g) Authorize or approve any stock split, reverse stock split, or other recapitalization of any class of capital stock of the Corporation. (h) Authorize or approve any agreement or plan providing for a merger, acquisition, consolidation, or other business combination involving the Corporation. (i) Authorize or approve the sale of all or substantially all of the assets of the Corporation. (j) Authorize or approve any transaction in which any member of such committee has any material beneficial interest. (k) Authorize or approve any action described in Article II, Section 16, of these Bylaws. (l) Repeal or revoke any of the foregoing. Section 8. Tenure. Each committee member shall hold office until the next annual meeting of the Board of Directors following his appointment and until a successor is designated, provided that any member of a committee may be removed at any time with or without cause by resolution adopted by a majority of the full Board of Directors. Any member of a committee may resign from the committee at any time by giving written notice to the Chairman of the Board or Secretary of the Corporation. Unless otherwise specified therein, such resignation shall take effect upon receipt and acceptance of such resignation shall not be necessary to make it effective. Section 9. Meetings. Regular meetings of a committee may be held without notice at such times and places as the committee or the Board of Directors may fix from time to time by resolution. Special meetings of a committee may be called by the Chairman of the Board, by the President, by the Chairman of the Committee, or by a majority of the members of the committee. 8 13 Special meetings of a committee must be preceded by at least 24 hours notice of the date, time and place of the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the committee need be specified in the notice or waiver of notice of such meeting. Notice of a meeting of a committee need not be given to any member who signs a waiver of notice either before or after the meeting. Attendance of a member at a committee meeting shall constitute a waiver of notice of such meeting and waiver of any and all objections to the place of the meeting, the time of the meeting, or the manner in which it has been called or convened, except when a director states, at the beginning of the meeting or promptly upon arrival at the meeting, any objection to the transaction of business because the meeting is not lawfully called or convened. Section 10. Quorum. A majority of the members of a committee shall constitute a quorum for the transaction of business at any meeting thereof, and action by the committee must be authorized by the affirmative vote of a majority of the members at the meeting at which such action is taken. Section 11. Action Without a Meeting. Any action required or permitted to be taken by a committee at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the members of the committee. Section 12. Procedures. Each committee may fix its own rules of procedure which shall not be inconsistent with law or the Articles of Incorporation or Bylaws of the Corporation, and shall keep regular minutes of its proceedings and report the same to the Board of Directors at the Board meeting next following the date the proceedings shall have occurred. Section 13. Limitation. Neither the designation of any committee of the Board of Directors, the delegation thereto of authority, nor any action by such committee pursuant to such authority shall alone constitute compliance by any member of the Board of Directors not a member of the committee in question with his responsibility to act in good faith, in a manner he or she reasonably believes to be in the best interest of the Corporation, and with such care as an ordinarily prudent person in a like position would use under similar circumstances. ARTICLE IV Officers Section 1. Officers, Election and Terms of Office. The principal officers of the Corporation shall consist of a Chief Executive Officer, a President, a Chairman of the Board, one or more Vice Chairmen of the Board, a President, one or more Vice Presidents, a Secretary, and a Treasurer, each of whom shall be elected by the Board of Directors at the first meeting of directors immediately following the annual meeting of shareholders of the Corporation, and shall hold his or her respective office at the pleasure of the Board of Directors or until the time of the next succeeding meeting of the Board following the annual meeting of the shareholders. The Board of Directors shall have the power to elect or appoint, for such term as it may see fit, such other officers and assistant officers and agents as it may deem necessary, and to prescribe such duties for them to perform as it may deem advisable. Any two or more offices may be held by the same person. 9 14 Failure to elect a Chairman of the Board, Vice Chairman of the Board, President, Vice President, Secretary or Treasurer shall not affect the existence of the Corporation. Section 2. Resignation and Removal of Officers. An officer may resign at any time by delivering notice to the Corporation. A resignation is effective when the notice is delivered unless the notice specifies a later effective date. If a resignation is made effective at a later date and the Corporation accepts the future effective date, the Board of Directors may fill the pending vacancy before the effective date if the Board of Directors provides that the successor does not take office until the effective date. The Board of Directors may remove any officer at any time with or without cause. Any officer or assistant officer, if appointed by another officer, may likewise be removed by such officer. Removal of any officer shall be without prejudice to the contract rights, if any, of the person so removed; however, election or appointment of an officer or agent shall not of itself create contract rights. Section 3. Vacancies. Any vacancy, however occurring, in any office may be filled by the Board of Directors. Section 4. Chief Executive Officer. The Board of Directors shall designate a Chief Executive Officer. The Chief Executive Officer shall preside at all meetings of the shareholders of the Corporation. Such person shall serve as the Chief Executive Officer of the Corporation and, subject to the provisions of these Bylaws and any limitations imposed by the Board of Directors, shall have general charge of the business, affairs, and property of the Corporation and general supervision over its other officers, agents, and employees. The Chief Executive Officer shall have the power and authority to execute contracts, deeds, notes, mortgages, bonds, and other instruments and documents in the name of the Corporation and on its behalf, subject, however, to any limitations imposed by the Board of Directors. The Chief Executive Officer shall report to the Board of Directors. Unless otherwise expressly provided by the Board of Directors, the Chief Executive Officer shall perform the duties and exercise the powers of the Chairman of the Board during any absence or disability of such officer. Section 5. Chairman of the Board. The Board of Directors shall appoint one of its members to be Chairman of the Board. The Chairman of the Board shall preside at all meetings of the Board of Directors and shall generally have and perform such other duties as may from time to time be conferred or assigned by the Board of Directors. Section 6. Vice Chairman. The Board of Directors may appoint one or more of its members to be Vice Chairmen of the Board. In the absence of the Chairman, the Vice Chairman (in such order of seniority as may be determined by the Board of Directors, if any) shall preside at any meeting of the shareholders and the Board of Directors, unless the Board of Directors shall designate a Chairman Pro Tem for such purposes. The Vice Chairman shall have the power and authority to execute contracts, deeds, notes, mortgages, bonds, and other instruments and documents in the name of the Corporation and on its behalf, subject, however, to any limitations imposed by the Board of Directors. The Vice Chairman of the Board shall also have and may 10 15 exercise such further executive powers and duties as from time to time may be conferred upon or assigned by the Board of Directors or, in the absence of such action by the Board, by the Chief Executive Officer. The Vice Chairman shall report to the Chief Executive Officer. Section 7. President. Subject to the provisions of these Bylaws and any limitations imposed by the Board of Directors, the President shall have such general executive powers as usually pertain to such office or as may be properly required by the Board of Directors. The President shall have the power and authority to sign certificates evidencing the capital stock of the Corporation and execute contracts, deeds, notes, mortgages, bonds, and other instruments and documents in the name of the Corporation and on its behalf, subject, however, to any limitations imposed by the Board of Directors. If the offices of Chief Executive Officer and President are ever separated, then the President shall report to the Chief Executive Officer. The President shall, unless otherwise expressly provided by the Board of Directors, perform the duties and exercise the powers of the Chief Executive Officer during any disability of the Chief Executive Officer. Section 8. Vice President. One or more Vice Presidents may be designated by that title or such additional title or titles as the Board of Directors may determine. A Vice President shall have the powers and perform such duties as may be delegated to such Vice President by the Board of Directors, or, in the absence of such action by the Board, then by the Chief Executive Officer, the Chairman of the Board or the President. Each Executive Vice President will report to the President and Chief Executive Officer. A Vice President (in such order of seniority as may be determined by the Board of Directors, if any) shall, except as may be expressly limited by action of the Board of Directors, perform the duties and exercise the powers of the President during the absence or disability of the President. Each Vice President shall at all times have the power to sign all certificates of stock, execute all contracts, deeds, notes, mortgages, bonds and other instruments and documents in the name of the Corporation and on its behalf, subject to any limitations imposed by the Board of Directors. A Vice President also shall have such powers and perform such duties as usually pertain to such office or as may be properly required by the Board of Directors. Section 9. Secretary. The Secretary shall keep the minutes of all meetings of the shareholders and the Board of Directors in a book or books to be kept for such purposes, and also, when so requested, the minutes of all meetings of committees in a book or books to be kept for such purposes. The Secretary shall attend to giving and serving of all notices, and such Secretary shall have charge of all books and papers of the Corporation, except those hereinafter directed to be in charge of the Treasurer, or except as otherwise expressly directed by the Board of Directors. The Secretary shall keep the stock certificate book or books. The Secretary shall be the custodian of the seal of the Corporation. The Secretary shall sign with the Chief Executive Officer all certificates of stock as the Secretary of the Corporation and as Secretary affix or cause to be affixed thereto the seal of the Corporation. The Secretary may sign as Secretary of the Corporation, with the President in the name of the Corporation and on its behalf, all contracts, deeds, mortgages, bonds, notes and other papers, instruments and documents, except as otherwise expressly provided by the Board of Directors, and as such, the Secretary shall affix the seal of the Corporation thereto when required thereby. Under the direction of the Board of Directors, the Chairman of the Board, any Vice Chairman of the Board, or the President, the Secretary shall perform all the duties usually pertaining 11 16 to the office of Secretary or the Chief Executive Officer, and such Secretary shall perform such other duties as may be prescribed by the Board of Directors. If at any time any person or persons shall be designated as an Assistant Secretary of the Corporation, the Secretary may delegate to such Assistant Secretary such duties and powers as the Secretary may deem proper. Section 10. Treasurer. The Treasurer shall have the custody of all the funds and securities of the Corporation except as may be otherwise provided by the Board of Directors, and the Treasurer shall make such disposition of the funds and other assets of the Corporation as such Treasurer may be directed by the Board of Directors. The Treasurer shall keep or cause to be kept a record of all money received and paid out, and all vouchers and receipts given therefor, and all other financial transactions of the Corporation. The Treasurer shall have general charge of all financial books, vouchers and papers belonging to the Corporation or pertaining to its business. The Treasurer shall perform such other duties as are usually incident by law or otherwise to the office of the Treasurer, and as such Treasurer may be directed or required by the Board of Directors or the Chief Executive Officer. If at any time any person shall be designated as Comptroller of the Corporation, the Treasurer may delegate to such Comptroller such duties and powers as the Treasurer may deem proper. Section 10. Delegation of Duties. In the case of the absence or disability of any officer of the Corporation, or in case of a vacancy in any office or for any other reason that the Board of Directors may deem sufficient, the Board of Directors, except as otherwise provided by law, may delegate the powers or duties of any officer during the period of such officer's absence or disability to any other officer or to any director. ARTICLE V Stock Certificates Section 1. Issuance. Every holder of shares in the Corporation shall be entitled to have a certificate, representing all shares to which such holder is entitled. No certificate shall be issued for any share until such share is fully paid. Section 2. Signatures; Form. Certificates representing shares in the Corporation shall be signed by the President or a Vice President and the Secretary or an Assistant Secretary and may be sealed with the seal of the Corporation or a facsimile thereof. The signatures of the President and the Secretary may be facsimiles if the certificate is manually signed on behalf of a transfer agent or a registrar, other than the Corporation itself or an employee of the Corporation. In case any officer who signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer at the date of its issuance. Every certificate representing shares which are restricted as to the sale, disposition or other transfer of such shares shall state that such shares are restricted as to transfer and shall set forth or fairly summarize such restrictions upon the certificate. Alternatively, each 12 17 certificate may state conspicuously that the Corporation will furnish to any shareholder upon request and without charge a full statement of such restrictions. Section 3. Transfer of Stock. Shares of stock of the Corporation shall be transferred on the books of the Corporation only upon surrender to the Corporation of the certificate or certificates representing the shares to be transferred accompanied by an assignment in writing of such shares properly executed by the shareholder of record or his duly authorized attorney in fact and with all taxes on the transfer having been paid. The Corporation may refuse any requested transfer until furnished evidence satisfactory to it that such transfer is proper. Upon the surrender of a certificate for transfer of stock, such certificate shall be marked on its face "Canceled." The Board of Directors may make such additional rules concerning the issuance, transfer and registration of stock as it deems appropriate. If any holder of any stock of the Corporation shall have entered into an agreement with any other holder of any stock of the Corporation or with the Corporation, or both, relating to a sale or sales or transfer of any shares of stock of the Corporation, or wherein or whereby any restriction or condition is imposed or placed upon or in connection with the sale or transfer of any share of stock of the Corporation, and if a duly executed or certified copy thereof shall have been filed with the Secretary of the Corporation, none of the shares of stock covered by such agreement or to which it relates, of any such contracting shareholder, shall be transferred upon the books of the Corporation until there has been filed with the Secretary of the Corporation evidence satisfactory to the Secretary of the Corporation of compliance with such agreement, and any evidence of any kind or quality, of compliance with the terms of such agreement which the Secretary deems satisfactory or sufficient shall be conclusive upon all parties interested; provided, however, that neither the Corporation nor any director, officer, employee or transfer agent thereof shall be liable for transferring or effecting or permitting the transfer of any such shares of stock contrary to or inconsistent with the terms of any such agreement, in the absence of proof of willful disregard thereof or fraud, bad faith or gross negligence on the part of the party to be charged; provided, further, that the certificate of the Secretary, under the seal of the Corporation, bearing the date of its issuance by the Secretary, certifying that such an agreement is or is not on file with the Secretary, shall be conclusive as to such fact so certified for a period of five days from the date of such certificate, with respect to the rights of any innocent purchaser or transferee for value of any such shares without actual notice of the existence of any restrictive agreement. Section 4. Lost Certificates. Any shareholder claiming a certificate of stock to be lost or destroyed shall make affidavit or affirmation of the fact and the fact that such shareholder is the owner and holder thereof, and give notice of the loss or destruction of same in such manner as the Board of Directors may require, and shall give the Corporation a bond of indemnity in form, and with one or more sureties satisfactory to the Board of Directors, payable as may be required by the Board of Directors to protect the Corporation and any person injured by the issuance of the new certificate from any liability or expense which it or they may incur by reason of the original certificate remaining outstanding, whereupon the President or a Vice President and the Secretary or an Assistant Secretary may cause to be issued a new certificate in the same tenor as the one alleged to be lost or destroyed, but always subject to approval of the Board of Directors. 13 18 ARTICLE VI Indemnification Section 1. Definitions. For purposes of this Article VI, the following terms shall have the meanings hereafter ascribed to them: (a) "agent" includes a volunteer. (b) "Corporation" includes, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger, so that any person who is or was a director, officer, employee, or agent of a constituent corporation, or is or was serving at the request of a constituent corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, is in the same position with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (c) "expenses" includes counsel fees, including those for appeal. (d) "liability" includes obligations to pay a judgment, settlement, penalty, fine (including an excise tax assessed with respect to any employee benefit plan), and expenses actually and reasonably incurred with respect to a proceeding. (e) "proceeding" includes any threatened, pending, or completed action, suit, or other type of proceeding, whether civil, criminal, administrative, or investigative and whether formal or informal. (f) "serving at the request of the Corporation" includes any service as a director, officer, employee, or agent of the Corporation that imposes duties on such persons, including duties relating to an employee benefit plan and its participants or beneficiaries. (f) "not opposed to the best interest of the Corporation" describes the actions of a person who acts in good faith and in a manner he reasonably believes to be in the best interests of the participants and beneficiaries of an employee benefit plan. (g) "other enterprises" includes employee benefit plans. Section 2. Indemnification of Officers, Directors, Employees and Agents. (a) The Corporation shall have power to indemnify any person who was or is a party to any proceeding (other than an action by, or in the right of, the Corporation), by reason of the fact that he is or was a director, officer, employee, or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise against liability incurred in 14 19 connection with such proceeding, including any appeal thereof, if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any proceeding by judgment, order, settlement, or conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in, or not opposed to, the best interests of the Corporation or, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (b) The Corporation shall have power to indemnify any person, who was or is a party to any proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, or other enterprise, against expenses and amounts paid in settlement not exceeding, in the judgment of the Board of Directors, the estimated expense of litigating the proceeding to conclusion, actually and reasonably incurred in connection with the defense or settlement of such proceeding, including any appeal thereof. Such indemnification shall be authorized if such person acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation, except that no indemnification shall be made in respect of any claim, issue, or matter as to which such person shall have been adjudged to be liable unless, and only to the extent that, the court in which such proceeding was brought, or any other court of competent jurisdiction, shall determine upon application that, despite the adjudication of liability but in view of all circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper. (c) To the extent that a director, officer, employee, or agent of the Corporation has been successful on the merits or otherwise in the defense of any proceeding referred to in subsection (a) or subsection (b), or in the defense of any claim, issue, or matter therein, he shall be indemnified against expenses actually and reasonably incurred by him in connection therewith. (d) Any indemnification under subsection (a) or subsection (b), unless pursuant to a determination by a court, shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee, or agent is proper in the circumstances because he has met the applicable standard of conduct set forth herein. Such determination shall be made: 1. By the Board of Directors by a majority vote of a quorum consisting of directors who are not parties to such proceeding; 2. If such a quorum is not obtainable or, even if obtainable, by majority vote of a committee duly designated by the Board of Directors (in which directors who are parties may participate) consisting solely of two or more directors not at the time parties to the proceeding; 15 20 3. By independent legal counsel: a. Selected by the Board of Directors prescribed in subsection (d)(1) or the committee prescribed in subsection (d)(2); b. If a quorum of the directors cannot be obtained for subsection (d)(1) and a committee cannot be designated for subsection (d)(2), selected by majority vote of the full Board of Directors (in which directors who are parties may participate); or 4. By the shareholders by a majority vote of a quorum consisting of shareholders who were not parties to such proceeding or, if no such quorum is obtainable, by a majority vote of shareholders who were not parties to such proceeding. (e) Evaluation of the reasonableness of expenses and authorization of indemnification shall be made in the same manner as the determination that indemnification is permissible. However, if the determination of permissibility is made by independent legal counsel, persons designated by independent legal counsel shall evaluate the reasonableness of expenses and may authorize indemnification. (f) Expenses incurred by an officer or director in defending a civil or criminal proceeding may be paid by the Corporation in advance of the final disposition of such proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if he is ultimately found not to be entitled to indemnification by the Corporation pursuant to this section. Expenses incurred by other employees and agents may be paid in advance upon such terms or conditions that the Board of Directors deems appropriate. (g) The indemnification and advancement of expenses provided pursuant to this Article are not exclusive, and the Corporation may make any other or further indemnification or advancement of expenses of any of its directors, officers, employees, or agents, under any bylaw, agreement, vote of shareholders, or disinterested directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. However, indemnification or advancement of expenses shall not be made to or on behalf of any director, officer, employee, or agent if a judgment or other final adjudication establishes that his actions, or omissions to act, were material to the cause of action so adjudicated and constitute: 1. A violation of the criminal law, unless the director, officer, employee, or agent had reasonable cause to believe his conduct was lawful or had no reasonable cause to believe his conduct was unlawful; 2. A transaction from which the director, officer, employee, or agent derived an improper personal benefit; 3. In the case of a director, a circumstance under which the liability provisions of Section 607.0834, Florida Statutes, are applicable; or 16 21 4. Willful misconduct or a conscious disregard for the best interests of the Corporation in a proceeding by or in the right of the Corporation to procure a judgment in its favor or in a proceeding by or in the right of a shareholder. (h) Indemnification and advancement of expenses as provided in this Article shall continue as, unless otherwise provided when authorized or ratified, to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person, unless otherwise provided when authorized or ratified. (i) Notwithstanding the failure of the Corporation to provide indemnification, and despite any contrary determination of the Board of Directors or of the shareholders in the specific case, a director, officer, employee or agent of the Corporation who is or was a party to a proceeding may apply for indemnification or advancement of expenses, or both, to the court conducting the proceeding, to the Circuit Court, or to another court of competent jurisdiction. On receipt of an application, the court, after giving any notice that it considers necessary, may order indemnification and advancement of expenses, including expenses incurred in seeking court-ordered indemnification or advancement of expenses, if it determines that: 1. The director, officer, employee or agent is entitled to mandatory indemnification, in which case the court shall also order the Corporation to pay the director reasonable expenses incurred in obtaining court-ordered indemnification or advancement of expenses; 2. The director, officer, employee or agent is entitled to indemnification or advancement of expenses, or both, by virtue of the exercise by the Corporation of its power; or 3. The director, officer, employee or agent is fairly and reasonably entitled to indemnification or advancement of expenses, or both, in view of all the relevant circumstances, regardless of whether such person met the standard of conduct set forth herein. ARTICLE VII General Provisions Section 1. Fiscal Year. The fiscal year of the Corporation shall begin on the first day of January and end on the last day of December in each year. Section 2. Seal. The Board of Directors in its discretion may adopt a seal for the Corporation in such form as may be determined from time to time by the Board of Directors. Section 3. Amendment of Bylaws. The Board of Directors shall have the power to appeal, alter, amend, and rescind these Bylaws. 17 22 CERTIFICATE OF ADOPTION I hereby certify that the foregoing Bylaws were duly adopted at a meeting of the Board of Directors held on September 29, 1999. /s/ James H. White ---------------------------------------------- James H. White Chairman, President and Chief Executive Officer 18 EX-4.1 6 SPEIMEN STOCK CERTIFICATE 1 Exhibit 4.1 (FORM OF STOCK CERTIFICATE - FRONT SIDE) NUMBER SHARES CENTERSTATE BANKS OF FLORIDA, INC. ORGANIZED UNDER THE [CUSIP] LAWS OF THE STATE OF FLORIDA SEE REVERSE FOR CERTAIN DEFINITIONS THIS IS TO CERTIFY That __________________________________ is the owner of ___ FULLY PAID SHARES OF COMMON STOCK, $.01 PAR VALUE PER SHARE, OF CENTERSTATE BANKS OF FLORIDA, INC. transferable only on the books of the Corporation by the holders hereof in person or by attorney duly authorized upon surrender of this certificate duly endorsed or assigned. This certificate and the shares represented hereby are subject to the laws of the State of Florida and to the Articles of Incorporation and Bylaws of the Corporation as now or hereafter amended. This certificate is not paid until countersigned by the Transfer Agent and the Registrar. WITNESS, the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: SECRETARY PRESIDENT (SEAL) COUNTERSIGNED AND REGISTERED:__________________________________________________ TRANSFER AGENT AND REGISTRAR By: _______________________________ AUTHORIZED OFFICER (FORM OF STOCK CERTIFICATE - BACK SIDE) 2 The Corporation is authorized to issue more than one class of stock, including a class of preferred stock which may be issued in one or more series. The Corporation will furnish to any stockholder, upon written request and without charge, a full statement of the designations, rights, preferences, and limitations of the shares of each class authorized to be issued and, with respect to the issuance of any preferred stock to be issued in series, the relative rights and preferences between the shares of each series as far as the rights and preferences have been fixed and determined and the authority of the Board of Directors to fix and determine the relative rights and preferences of subsequent series. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT - _______ Custodian ___________ TEN ENT - as tenants by the entireties (Cust) (Minor) JT TEN - as joint tenants with right of under Uniform Gifts to Minors survivorship and not as tenants Act __________________ in common (State) Additional abbreviations may also be used though not in the above list. For value received, ________________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE _________________________ _________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ _________ shares of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint _____________________________ Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated ______________________ 3 NOTICE: THE SIGNATURE(S) OF THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. EX-5 7 LEGAL OPINION OF SMITH,MACKINNON,GREELEY 1 EXHIBIT 5 January 17, 2000 Centerstate Banks of Florida, Inc. 7722 SR 544 East Winter Haven, Florida 33881 Gentlemen: This opinion is issued in connection with the filing by Centerstate Banks of Florida, Inc. (the "Company") with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act"), of a Registration Statement on Form S-4, as amended (the "Registration Statement"), with respect to the offer and sale of shares of common stock, par value $.01 per share, of the Company (the "Shares") pursuant to an Agreement to Merge among First National Bank of Osceola County, Centerstate Banks of Florida, Inc. and First Interim National Bank of Osceola County (the "Agreement"). We have examined the originals, or certified, conformed or reproduction copies, of such records, agreements, instruments and documents as we have deemed relevant or necessary as the basis for the opinion hereinafter expressed. In all such examinations, we have assumed the genuineness of all signatures on original or certified copies and the conformity to original or certified copies of all copies submitted to us as conformed or reproduction copies. As to various questions of fact relevant to such opinion, we have relied upon, and assumed the accuracy of, certificates and oral or written statements and other information of or from public officials, officers or representatives of the Company, and others. Based upon the foregoing and subject to the limitations set forth herein, we are of the opinion that the Shares, when issued, delivered and paid for in accordance with the Registration Statement, the Articles of Incorporation of the Company, and the Agreement will be legally issued, fully paid and nonassessable Shares of common stock of the Company. The opinion expressed herein is limited to the laws of the State of Florida. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to this firm under the caption "Legal Opinion" in the Prospectus forming a 2 Centerstate Banks of Florida, Inc. January 17, 2000 Page 25 __________________________________ part of the Registration Statement. In giving this consent, we do not hereby admit that we are in the category of persons whose consent is required under Section 7 of the Act. Very truly yours, SMITH, MACKINNON, GREELEY, BOWDOIN, EDWARDS, BROWNLEE & MARKS, P.A. /s/ John P. Greeley -------------------------------------------- By: John P. Greeley EX-8 8 TAX OPINION OF KPMG LLP 1 EXHIBIT 8 January 12, 2000 Board of Directors First National Bank of Osceola County 920 North Bermuda Ave. Kissimmee, FL Ladies and Gentlemen: You have requested the opinion of KPMG LLP (KPMG) regarding certain federal income tax consequences of the proposed merger of First National Bank of Osceola County ("First National/Osceola") with and into First Interim National Bank of Osceola County, ("FINB"), a wholly owned subsidiary of Centerstate Banks of Florida, Inc., ("CBF"), for stock of CBF (the "Merger"). Specifically, you have requested us to opine that the form and substance of the Merger will constitute a reorganization under sections 368(a)(1)(A) and 368(a)(2)(D)1 and to opine on certain federal income tax consequences to CBF, FINB, First National/Osceola, and the shareholders of First National/Osceola resulting from the Merger. SCOPE OF THE OPINION You have submitted for our consideration certain facts and representations as to the Merger, which are specifically described below, and a copy of the Agreement to Merge by and among CBF, FINB, and First National/Osceola dated as of December 10, 1999 (the "Agreement"). Capitalized terms not otherwise defined herein are intended to have the same meaning as used in the Agreement. Our opinion is based upon the FACTS AND REPRESENTATIONS set forth in this letter, as well as the information contained in the Agreement. If any fact or representation is not entirely complete or accurate, it is imperative that we be informed immediately in writing because the incompleteness or inaccuracy could cause us to change our opinion. We have not reviewed all the legal documents necessary to effectuate the steps to be undertaken and we assume that all steps will be effectuated under state and federal law and will be consistent with the Agreement submitted to us. The opinion contained herein is rendered only with respect to the enumerated holdings set forth herein under the heading OPINION, and KPMG expresses no opinion with respect to any other legal, federal, state, or local tax aspect of the Merger. This opinion is not binding upon the Internal Revenue Service, any tax authority or any court, and no assurance can be given that a position contrary to that expressed herein will not be asserted by a tax authority and ultimately sustained by a court. In rendering our opinion, we are relying upon the relevant provisions of the Internal Revenue Code of 1986, as amended, the regulations thereunder, - -------------- 1 All section references are to the Internal Revenue Code of 1986, as amended, and the regulations thereunder, unless otherwise indicated. 2 First National/Osceola January 12, 2000 Page 2 and judicial and administrative interpretations thereof, which are subject to change or modification by subsequent legislative, regulatory, administrative, or judicial decisions. Any such changes, which can be retroactive in effect, could also have an effect on the validity of our opinion. We assume no duty to inform you of any changes in our opinion due to changes in law and changes in facts that occur subsequent to the issuance of this letter. FACTS AND REPRESENTATIONS First National/Osceola is a national banking association located at 920 North Bermuda Avenue, city of Kissimmee, County of Osceola, in the State of Florida, with a capital of $8,399,367, consisting of (i) 2,555,875 shares of common stock divided into 511,175 shares of common stock each, of $5,00 par value, (ii) surplus of $2,634,579, and (iii) undivided profits of $3,208,913 as of September 30, 1999. CBF, is a Florida Corporation which has been organized for purposes of serving as a bank holding company for First National/Osceola and other banks. FINB is an interim national banking association, to be located at 920 North Bermuda Avenue, city of Kissimmee, County of Osceola, in the State of Florida, with a capital of $100,000, divided into 1,000 shares of common stock, each of $100 par value, surplus of $20,000, and no undivided profits. CBF, FINB, and First National/Osceola represent to KPMG that the following transactions will be undertaken for valid corporate business purposes: I. First National/Osceola will merge with and into FINB under the charter of First National/Osceola pursuant to 12 U.S.C.ss.215a of the National Bank Act (as previously defined, the "Merger"). Pursuant to the Merger, the separate existence of First National/Osceola shall cease and FINB shall be the Surviving Bank. The Surviving Bank shall have all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a banking association organized under the laws of the United States and shall thereupon and thereafter possess all other privileges, immunities and franchises of a private, as well as of a public nature, of each of the constituent corporations. All property (real, personal and mixed) and all debts on whatever account, including subscriptions to shares, and all chooses in action, all and every other interest, of or belonging to or due to each of the constituent corporations so merged shall be taken and deemed to be transferred to and vested in the Surviving Bank without further act or deed. II. At the Effective Time, by virtue of the Merger, each issued and outstanding share of First National/Osceola Common Stock (other than shares as to which dissenters' rights have been 3 First National/Osceola January 12, 2000 Page 3 perfected) will be converted into 2.00 shares of CBF Common Stock, subject to adjustment as specified in Section 2.1 of the Agreement. If options to acquire First National/Osceola Common Stock which are exercisable at the date of the Agreement, or become exercisable prior to Closing, are exercised prior to the Closing, the shares of First National/Osceola Common Stock issued on such exercise will be converted to the right to receive shares of CBF at the Closing. III. In lieu of issuing fractional shares of CBF Common Stock, holders of First National/Osceola Common Stock entitled to a fractional share of CBF Common Stock as a result of the above exchange ratio will receive an amount in cash as provided in Section 2.3 of the Agreement. IV. Holders of First National/Osceola Common Stock that take such steps as are necessary to dissent to the Merger and that are entitled to payment for their shares will be paid the value of such shares pursuant to the Dissent Provisions of the National Bank Act. The following additional representations have been made to KPMG by CBF and First National/Osceola in connection with the Merger. It is expressly understood and agreed that KPMG has not independently verified the completeness and accuracy of any of the following representations and that KPMG is relying on these representations in rendering the opinions contained herein. 1. The fair market value of the CBF Common Stock and cash, if any, received by each First National/Osceola shareholder pursuant to the Merger will be approximately equal to the fair market value of First National/Osceola Common Stock surrendered in the Merger. 2. First National/Osceola has not made any distributions to its stockholders or redeemed any of its stock prior to, and in connection with, the Merger. 3. FINB will acquire at least 90 percent of the fair market value of the net assets and at least 70 percent of the fair market value of the gross assets held by First National/Osceola immediately prior to the transaction. For purposes of this representation, amounts paid by First National/Osceola to dissenters, amounts paid by First National/Osceola to shareholders who receive cash or other property, First National/Osceola assets used to pay its reorganization expenses and all redemptions and distributions (except for regular, normal dividends) made by First National/Osceola immediately preceding the transfer, will be included as assets of First National/Osceola held immediately prior to the transaction. 4. Prior to the transaction, CBF will be in control of FINB within the meaning of section 368(c). 5. Following the transaction, FINB will not issue additional shares of its stock that would result in CBF losing control of FINB within the meaning of section 368(c). 4 First National/Osceola January 12, 2000 Page 4 6. Neither CBF nor a person related to CBF (nor any person acting on behalf of, as agent for, or as a nominee of CBF or a person related to CBF) has a plan or intention to reacquire any of CBF Common Stock issued in the Merger. For this purpose, a related person is as defined in section 1.368-1(e)(3) of the Treasury Regulations. 7. CBF has no plan or intention to liquidate FINB; to merge FINB with and into another corporation; to sell or otherwise dispose of the stock of FINB; or to cause FINB to sell or otherwise dispose of any of the assets of First National/Osceola acquired in the transaction, except for dispositions made in the ordinary course of business or transfers described in section 368(a)(2)(C). 8. The liabilities of First National/Osceola assumed by FINB and the liabilities, if any, to which the transferred assets of First National/Osceola are subject were incurred by First National/Osceola in the ordinary course of its business. 9. Following the Merger, FINB will continue the historic business of First National/Osceola or use a significant portion of First National/Osceola historic business assets in its business. 10. CBF, FINB, First National/Osceola, and the shareholders of First National/Osceola will pay their respective expenses, if any, incurred in connection with the Merger. 11. There is no intercorporate indebtedness existing between CBF and First National/Osceola or between FINB and First National/Osceola that was issued, acquired, or will be settled at a discount. 12. No two parties to the Merger are investment companies as defined in sections 368(a)(2)(F)(iii) and (iv). 13. First National/Osceola is not under the jurisdiction of a court in a Title 11 or similar case within the meaning of section 368(a)(3)(A). 14. The fair market value of the assets of First National/Osceola transferred to FINB will equal or exceed the sum of the liabilities assumed by FINB plus the amount of liabilities, if any, to which the transferred assets are subject. 15. No stock of FINB will be issued in the transaction. 16. The payment of cash in lieu of fractional shares of CBF Common Stock is solely for the purpose of avoiding the expense and inconvenience to CBF of issuing fractional shares and does not represent separately bargained-for consideration. The total cash that will be paid in the Merger to the First National/Osceola shareholders instead of issuing fractional shares of CBF Common Stock will not exceed one percent of the total consideration that will be issued in the Merger to the First National/Osceola shareholders in exchange for their shares of First National/Osceola Common Stock. The fractional share interests of each First 5 First National/Osceola January 12, 2000 Page 5 National/Osceola shareholder will be aggregated, and no First National/Osceola shareholder will receive cash in an amount equal to or greater than the value of one full share of CBF Common Stock. 17. None of the compensation received by any shareholder-employees of First National/Osceola will be separate consideration for, or allocable to, any of their shares of First National/Osceola Common Stock. None of the shares of CBF Common Stock received by any shareholder-employees will be separate consideration for, or allocable to, any employment agreement; and the compensation paid to any shareholder-employees will be for services actually rendered and will be commensurate with amounts paid to third parties bargaining at arm's-length for similar services. OPINIONS Based solely upon the Agreement and the above FACTS AND REPRESENTATIONS, and subject to the above SCOPE OF THE OPINION, it is the opinion of KPMG that: 1. Provided the merger of First National/Osceola with and into FINB qualifies as a statutory merger pursuant to the National Bank Act, the acquisition by FINB of all of the assets of First National/Osceola solely in exchange for CBF Common Stock and the assumption by FINB of the liabilities of First National/Osceola plus the liabilities to which First National/Osceola assets may be subject, will qualify as a reorganization under sections 368(a)(1)(A) and 368(a)(2)(D). First National/Osceola, CBF, and FINB will each be a party to reorganization within the meaning of section 368(b). 2. No gain or loss will be recognized by First National/Osceola on the transfer of substantially all of its assets to FINB in the Merger in exchange for CBF Common Stock and the assumption by FINB of the liabilities of First National/Osceola plus the liabilities to which First National/Osceola assets may be subject. Sections 361(a) and 357(a). 3. No gain or loss will be recognized by either CBF or FINB upon the acquisition by FINB of all of the assets of First National/Osceola in the Merger in exchange for CBF Common Stock and the assumption by FINB of the liabilities of First National/Osceola plus the liabilities to which First National/Osceola assets may be subject. Sections 1032(a); Reg. section 1.1032-2. 4. The basis of the assets of First National/Osceola received by FINB in the Merger will be the same in the hands of FINB as the basis of such assets in the hands of First National/Osceola immediately prior to the Merger. Section 362(b). 5. The holding period of the assets of First National/Osceola received by FINB in the Merger will, in each instance, include the period during which such assets were held by First National/Osceola immediately prior to the Merger. Section 1223(2). 6 First National/Osceola January 12, 2000 Page 6 6. No gain or loss will be recognized by a shareholder of First National/Osceola upon the receipt of solely CBF Common Stock (including any fractional share interest to which the shareholder may be entitled) in exchange for shares of First National/Osceola Common Stock in the Merger. Section 354(a)(1). 7. The basis of the CBF Common Stock received by a shareholder of First National/Osceola (including any fractional share interest to which the shareholder may be entitled) will equal the basis of the First National/Osceola Common Stock surrendered in exchange therefor. Section 358(a)(1). 8. The holding period of the CBF Common Stock received by a shareholder of First National/Osceola (including any fractional share interest to which the shareholder may be entitled) will include the holding period of First National/Osceola Common Stock surrendered in exchange therefor, provided the First National/Osceola Common Stock was held by the shareholder as a capital asset on the date of the Merger. Section 1223(1). 9. The payment of cash to First National/Osceola shareholders in lieu of fractional share interests of CBF Common Stock will be treated as if the fractional shares were distributed as part of the Merger and then were redeemed by CBF. These cash payments should be treated as distributions in full payment in exchange for the stock redeemed, as provided in section 302(a). Rev. Rul. 66-365, 1966-2 C.B. 116. 10. Where a First National/Osceola shareholder exercises statutory dissenters' rights and receives cash for all of his or her First National/Osceola Common Stock, such cash will be treated as having been received by the shareholder as a distribution in redemption of his or her stock subject to the provisions and limitations of section 302. 11. The tax attributes of First National/Osceola enumerated in section 381(c) will be taken into account by CBF and FINB following the Merger. Section 381(a)(2). These tax attributes will, however, be subject to the provisions and limitations of sections 381, 382, 383, and 384 and the regulations thereunder. Very truly yours, KMPG LLP Thomas W. Avent, Jr. Partner EX-10.1 9 CENTERSTATE BANKS STOCK OPTION PLAN 1 Exhibit 10.1 CENTERSTATE BANKS OF FLORIDA, INC. OFFICERS' AND EMPLOYEES' STOCK OPTION PLAN ARTICLE I Definitions As used herein, the following terms have the meanings hereinafter set forth unless the context clearly indicates to the contrary: (a) "Board" or "Board of Directors" shall mean the board of directors of the Company. (b) "Change of Control" shall mean (i) the acquisition, other than from the Company, by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 35% or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Company Voting Securities"), provided, however, that any acquisition by the Company or any of its subsidiaries, or any employee benefit plan (or related trust) of the Company or its subsidiaries, or any corporation with respect to which, following such acquisition, more than 50% of the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by the individuals and entities who were the beneficial owners of the Company Voting Securities immediately prior to such acquisition in substantially the same proportion as their ownership, immediately prior to such acquisition, of the Company Voting Securities shall not constitute a Change of Control; or (ii) individuals who, as of the date hereof, constitute the Board (as of the date hereof the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purposes, any such individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the Directors of the Company (as such terms are used in Rule 14a- 11 of Regulation 14A promulgated under the Exchange Act); or (iii) approval by the shareholders of the Company of a reorganization, merger or consolidation, in each case, with respect to which the individuals and entities who were the beneficial owners of the Company Voting Securities immediately prior to such reorganization, merger or consolidation do not, following such reorganization, merger or consolidation, beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such reorganization, merger or consolidation, or a complete liquidation or dissolution of the Company or of the sale or other disposition of all or substantially all of the assets of the Company. 2 (c) "Code" shall mean the Internal Revenue Code of 1986, as amended, unless otherwise specifically provided herein. (d) "Company" shall mean Centerstate Banks of Florida, Inc., a Florida corporation, and its successors. (e) "Disinterested Person" shall have the meaning attributable to such term in Rule 16b-3 under the Securities Exchange Act of 1934, or any successor provision thereto. (f) "Employee" shall mean any individual who is employed with the Company or any of its Subsidiaries as an officer or employee. (g) "Incentive Stock Option" shall have the meaning given to it by Section 422 of the Code. (h) "Nonstatutory Stock Option" shall mean any Option granted by the Company pursuant to this Plan which is not an Incentive Stock Option. (i) "Option" shall mean an option to purchase Stock granted by the Company pursuant to the provisions of this Plan. (j) "Option Price" shall mean the purchase price of each share of Stock subject to Option, as defined in Section 5.2 hereof. (k) "Optionee" shall mean an Employee who has received an Option granted by the Company hereunder. (l) "Plan" shall mean this Centerstate Banks of Florida, Inc. Officers' and Employees' Stock Option Plan. (m) "Service" shall mean the tenure of an individual as an Employee of the Company or any of its Subsidiaries or any predecessor (including tenure with a corporation or other entity prior to the date that it became a Subsidiary). (n) "Stock" shall mean the common stock of the Company, par value $.01 per share, or, in the event that the outstanding shares of Stock are hereafter changed into or exchanged for shares of a different class of stock or securities of the Company or some other corporation, such other stock or securities. (o) "Stock Option Agreement" shall mean the agreement between the Company and the Optionee under which the Optionee may purchase Stock pursuant to the Plan. (p) "Stock Option Committee" shall mean the committee administering the Plan, pursuant to Article III hereof. 2 3 (q) "Subsidiary" shall mean any corporation or other entity which qualifies as a subsidiary of a corporation under the definition of "subsidiary corporation" contained in Section 424(f) of the Code. ARTICLE II The Plan 2.1 Name. This plan shall be known as the "Centerstate Banks of Florida, Inc. Officers' and Employees' Stock Option Plan." 2.2 Purpose. The purpose of the Plan is to advance the interests of the Company and its shareholders by affording to Employees an opportunity to acquire or increase their proprietary interest in the Company by the grant of Options to such Employees under the terms set forth herein. By encouraging such Employees to become owners of Stock of the Company, the Company seeks to motivate, retain, and attract those highly competent individuals upon whose judgment, initiative, leadership, and continued efforts the success of the Company and its Subsidiaries in large measure depends. 2.3 Effective Date. The Plan shall become effective on September 29, 1999 (which is the same date the Plan was adopted by the Company's shareholders and Board of Directors). 2.4 Participants. Only Employees of the Company and its Subsidiaries shall be eligible to receive Options under the Plan. ARTICLE III Plan Administration 3.1 Stock Option Committee. This Plan shall be administered by the Compensation Committee of the Board of Directors of the Company (the "Stock Option Committee"), which shall consist of at least two members of the Board who are Disinterested Persons and who are each an "outside director" (as such term is used in Treasury Regulation Section 1.162-27(e)(3)) during the time that they serve on such Stock Option Committee. 3.2 Power of the Stock Option Committee. The Stock Option Committee shall have full authority and discretion: (a) to determine, consistent with the provisions of this Plan, which of the Employees will be granted Options to purchase any shares of Stock which may be issued and sold hereunder as provided in Section 4.1 hereof, the times at which Options shall be granted, and the number of shares of Stock covered by each Option; (b) to determine the Option Price (subject to Section 5.2 hereof) and other terms and provisions of each respective Stock Option Agreement, which need not be identical; (c) to determine whether the Options granted pursuant to this Plan shall be Incentive Stock Options or Nonstatutory Stock Options; (d) to construe and interpret the Plan; and 3 4 (e) to make all other determinations and take all other actions deemed necessary or advisable for the proper administration of the Plan. All such actions and determinations shall be conclusively binding upon all persons for all purposes. Unless otherwise indicated by the Stock Option Committee, Options granted pursuant to this Plan shall be Incentive Stock Options. ARTICLE IV Shares of Stock Subject to Plan 4.1 Limitations. Subject to adjustment pursuant to the provisions of Section 4.3 hereof, the number of shares of Stock which may be issued and sold hereunder pursuant to Stock Option Agreements shall not exceed Three Hundred Sixty Five Thousand (365,000) shares. Shares subject to Options which terminate or expire prior to exercise shall be available for future Options. 4.2 Options Granted Under Plan. Shares of Stock with respect to which an Option granted hereunder shall have been exercised shall not again be available for Option hereunder. If Options granted hereunder shall terminate for any reason without being wholly exercised, then the Stock Option Committee shall have the discretion to grant new Options to Optionees hereunder covering the number of shares to which such terminated Options related. 4.3 Stock Adjustments; Mergers. Notwithstanding Section 4.1, in the event the outstanding shares of Stock are increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of any other corporation by reason of any merger, sale of stock, consolidation, liquidation, recapitalization, reclassification, stock split up, combination of shares, or stock dividend, the total number of shares set forth in Section 4.1 shall be proportionately and appropriately adjusted by the Board. If the Company continues in existence, the number and kind of shares that are subject to any Option and the Option Price per share shall be proportionately and appropriately adjusted without any change in the aggregate price to be paid therefor upon exercise of the Option. If the Company will not remain in existence or a majority of its Stock will be purchased or acquired by a single purchaser or group of purchasers acting together, then the Board may (i) declare that all Options shall terminate 30 days after the Board gives written notice to all Optionees of their immediate right to exercise all Options then outstanding (without regard to limitations on exercise otherwise contained in the Options), or (ii) notify all Optionees that all Options granted under the Plan shall apply with appropriate adjustments as determined by the Board to the securities of the successor corporation to which holders of the numbers of shares subject to such Options would have been entitled, or (iii) some combination of aspects of (i) and (ii). The determination by the Board as to the terms of any of the foregoing adjustments shall be conclusive and binding. Any fractional shares resulting from any of the foregoing adjustments under this section shall be disregarded and eliminated. 4.4 Change of Control. Upon a Change of Control, all Options granted under the Plan shall become exercisable immediately notwithstanding the provisions of the respective Option agreements regarding exercisability. 4 5 ARTICLE V Options 5.1 Option Grant and Agreement. Each Option granted hereunder shall be evidenced by minutes of a meeting of the Stock Option Committee authorizing the same and by a written Stock Option Agreement dated as of the date of grant and executed by the Company and the Optionee, which Stock Option Agreement shall set forth such terms and conditions as may be determined by the Stock Option Committee to be consistent with the Plan and shall indicate whether the Option that it evidences is intended to be an Incentive Stock Option or a Nonstatutory Stock Option. 5.2 Option Price. The Option Price of each share of Stock subject to Option shall not be less than the fair market value of the Stock on the date of grant. If the Stock is traded on a national securities exchange or on the NASDAQ National Market System ("NMS") at the date of grant, then the fair market value of the Stock on the date of grant shall be equal to the closing price of such Stock as quoted on such exchange or market as of the trading day immediately preceding the effective date of such grant. If the Stock is not traded on a national securities exchange or the NMS at the date of grant, then the fair market value of the Stock on the date of grant shall be determined in good faith by the Board of Directors using any reasonable method, which shall include consideration of market quotations to the extent available. 5.3 Option Exercise. Options may be exercised in whole or in part from time to time with respect to whole shares only, within the period permitted for the exercise thereof. Notwithstanding any other provision in this Plan, no option granted under the Plan may be exercised more than ten (10) years after the date on which it is granted. Options shall be exercised by: (i) written notice of intent to exercise the Option with respect to a specific number of shares of Stock which is delivered by hand delivery or registered or certified mail, return receipt requested, to the Company at its principal office; and (ii) payment in full to the Company at such office of the amount of the Option Price for the number of shares of Stock with respect to which the Option is then being exercised. Payment of the Option Price shall be made in cash, certified check, cashier's check, or personal check (and if made by personal check the shares of Stock issued upon exercise of the Option shall be held by the Company until the check has cleared); provided, however, that if at the time of exercise of the Option the Stock is traded on a national securities exchange or on the NMS, all or part of the Option Price may also be paid by delivery to the Company of shares of Stock previously acquired by the Optionee, which shall be valued for such purpose at the closing price of such Stock as quoted on such exchange or market as of the trading day immediately preceding the date of exercise. In addition to and at the time of payment of the Option Price, the Optionee shall, if and to the extent requested by the Company, pay to the Company in cash the full amount of all federal, state, and local withholding or other employment taxes, if any, applicable to the taxable income of the Optionee resulting from such exercise, and any sales, transfer, or similar taxes imposed with respect to the issuance or transfer of shares of Stock in connection with such exercise. 5.4 Nontransferability of Option. No Option shall be transferred by an Optionee otherwise than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act, or the rules 5 6 thereunder (a "Qualified Domestic Order"). During the lifetime of an Optionee, the Option shall be exercisable only by the Optionee or the Optionee's legal guardian or personal representative. 5.5 Effect of Death, Disability, Retirement, or Other Termination of Service. (a) If an Optionee's Service with the Company and its Subsidiaries shall be terminated for "cause," as defined in Section 5.5(b) hereof, then no Options held by such Optionee, which are unexercised in whole or in part, may be exercised on or after the date on which such Optionee is first notified in writing by the Company of such termination for cause. (b) For purposes of this Section 5.5, termination for "cause" shall mean termination for the Optionee's personal dishonesty, willful misconduct, breach of fiduciary duty involving personal profit, violation of any law, rule, or regulation (other than traffic violations or similar offenses) affecting the Company or its Subsidiaries, violation of any agreement or order with any bank regulatory agency, failure by the Optionee after receipt of written notice from the Company to perform Optionee's stated duties with the Company or its Subsidiaries, or such other circumstances as the Company and/or its Subsidiaries determines as resulting in the Optionee's termination of employment for "cause." (c) If an Optionee's Service with the Company and its Subsidiaries shall be terminated for any reason other than for cause (as defined in Section 5.5(b) hereof) and other than normal or early retirement at or after age fifty-five (55) or the disability (as defined in Section 5.5(f) hereof) or death of the Optionee, then: (i) no Options held by such Optionee which are unexercised in whole or in part may be exercised on or after the effective date of such termination or, if later, ten (10) days after the date that the Optionee, if terminated by the Company and its Subsidiaries, receives written notice of termination; and (ii) the Stock Option Committee may, but shall not be obligated to, allow the Optionee to exercise within such time any or all of the Options, if any, held by the Optionee which would not yet otherwise be exercisable. (d) If an Optionee's Service with the Company and its Subsidiaries shall be terminated by reason of normal or early retirement at or after age fifty-five (55), then the Optionee shall have the right to exercise the Optionee's Options for ninety (90) days after the date of such termination, but only to the extent that such Options were exercisable at the date of such termination; provided, however, that the Stock Option Committee may, but shall not be obligated to, allow such Optionee to exercise within such time any or all of the Options, if any, held by the Optionee which would not yet otherwise be exercisable. (e) If an Optionee's Service with the Company and its Subsidiaries shall be terminated by reason of the death or disability (as defined in Section 5.5(f) 6 7 hereof) of the Optionee, then the personal representative or administrator of the estate of the Optionee or the person or persons to whom an Option granted hereunder shall have been validly transferred by the personal representative or administrator pursuant to the Optionee's will or the laws of descent and distribution, as the case may be, shall have the right to exercise all of the Optionee's Options for ninety (90) days after the date of such termination, including any Options not yet otherwise exercisable as of the date of such termination. (f) For purposes of this Section 5.5, the terms "disability" and "disabled" shall have the meaning set forth in the principal disability insurance policy or similar program then maintained by the Company on behalf of Employees or, if no such policy or program is then in existence, the meaning then used by the United States Government in determining persons eligible to receive disability payments under the social security system of the United States. (g) No transfer of an Option by the Optionee by will, the laws of descent and distribution, or a Qualified Domestic Order shall be effective to bind the Company unless the Company shall have been furnished with written notice thereof and an authenticated copy of the will or the Qualified Domestic Order and/or such other evidence as the Company may deem necessary to establish the validity of the transfer and the acceptance by the transferee or transferees of the terms and conditions of such Option. 5.6 Rights as Shareholder. An Optionee or a transferee of an Option shall have no rights as a shareholder with respect to any shares of Stock subject to such Option prior to the purchase of such shares by exercise of such Option as provided herein. 5.7 Investment Intent. Upon or prior to the exercise of all or any portion of an Option, the Optionee shall furnish to the Company in writing such information or assurances as, in the Company's opinion, may be necessary to enable it to comply fully with the Securities Act of 1933, as amended, and the rules and regulations thereunder and any other applicable statutes, rules, and regulations. Without limiting the foregoing, if a registration statement is not in effect under the Securities Act of 1933, as amended, with respect to the shares of Stock to be issued upon exercise of an Option, the Company shall have the right to require, as a condition to the exercise of such Option, that the Optionee represent to the Company in writing that the shares to be received upon exercise of such Option will be acquired by the Optionee for investment and not with a view to distribution and that the Optionee agree, in writing, that such shares will not be disposed of except pursuant to an effective registration statement, unless the Company shall have received an opinion of counsel reasonably acceptable to it to the effect that such disposition is exempt from the registration requirements of the Securities Act of 1933, as amended. The Company shall have the right to endorse on certificates representing shares of Stock issued upon exercise of an Option such legends referring to the foregoing representations and restrictions or any other applicable restrictions on resale or disposition as the Company, in its discretion, shall deem appropriate. 7 8 ARTICLE VI Incentive Stock Options 6.1 Requirements. All Incentive Stock Options granted pursuant to the terms of this Plan shall be subject to the additional limitations and restrictions as set forth in the Code and in this Article VI. Any Option granted pursuant to this Plan which does not fulfill all of the provisions of this Article VI shall not be an Incentive Stock Option and thus shall be a Nonstatutory Stock Option. 6.2 Grant Period. All Incentive Stock Options granted hereunder must be granted within ten (10) years from the Effective Date set forth in Section 2.3 which represents the earlier of: (a) the date the Plan was adopted by the Board; or (b) the date the Plan is approved by the shareholders of the Company. 6.3 Eligibility. The Stock Option Committee shall determine which Employees shall receive Incentive Stock Options. No member of the Stock Option Committee shall be eligible to receive Incentive Stock Options. Incentive Stock Options may not be granted to any Employee who, at the time the Incentive Stock Option is granted, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company unless: (a) such Incentive Stock Option by its terms is not exercisable after the expiration of five (5) years from the date of its grant; and (b) the Option Price of the shares covered by such Incentive Stock Option is not less than one hundred and ten percent (110%) of the fair market value of such shares on the date that such Incentive Stock Option is granted. 6.4 Special Rule Regarding Exercisability. If, for any reason, any Option granted hereunder which is intended to be an Incentive Stock Option shall exceed the limitation on exercisability contained in the Code at any time, such Options shall nevertheless be exercisable, but: (a) any exercise of such Option shall be deemed to be an exercise of an Incentive Stock Option first until the portion of such Option qualifying as an Incentive Stock Option shall have been exercised in full; and (b) the portion of such Option in excess of the foregoing limitation on exercisability shall be deemed to be a Nonstatutory Stock Option. ARTICLE VII Nonstatutory Stock Options The Stock Option Committee may grant Nonstatutory Stock Options under this Plan. Such Nonstatutory Stock Options must fulfill all of the requirements of all provisions of this Plan except for those contained in Article VI hereof. Subject to the approval and acceptance of the Stock Option Committee in its discretion, any Employee who is granted a Nonstatutory Stock Option pursuant to this Plan shall be entitled to elect to surrender all or any part of such Nonstatutory Stock Option to the Company and receive, in exchange, an Incentive Stock Option covering the same number of shares as those with respect to which the Nonstatutory Stock Option was surrendered. Any such 8 9 election shall be valid and effective only upon its approval and acceptance by the Stock Option Committee, which may impose additional terms as a condition to its approval. ARTICLE VIII Stock Certificates The Company shall not be required to issue or deliver any certificate for shares of Stock purchased upon the exercise of any Option granted hereunder or of any portion thereof, prior to fulfillment of all of the following conditions: (a) The admission of such shares to listing on all stock exchanges on which the Stock is then listed, if any; (b) The completion of any registration or other qualification of such shares under any federal or state law or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory agency, which the Company shall in its sole discretion determine to be necessary or advisable; (c) The obtaining of any approval or other clearance from any federal or state governmental agency which the Company shall in its sole discretion determine to be necessary or advisable; and (d) The lapse of such reasonable period of time following the exercise of the Option as the Company from time to time may establish for reasons of administrative convenience. ARTICLE IX Termination, Amendment, and Modification of Plan The Board may at any time terminate, and may at any time and from time to time and in any respect amend or modify, the Plan; provided, however, that no such action of the Board without approval of the shareholders of the Company may increase the total number of shares of Stock subject to the Plan except as contemplated in Section 4.3 hereof or alter the class of persons eligible to receive Options under the Plan, and provided further that no termination, amendment, or modification of the Plan shall without the written consent of the Optionee of such Option adversely affect the rights of the Optionee with respect to an outstanding Option or the unexercised portion thereof. Notwithstanding any other provision in this Plan, the Company's primary federal bank regulator shall at any time have the right to direct the Company to require Optionees to exercise their Options or forfeit their Options if the Company's capital falls below the minimum requirements, as determined by such federal bank regulator. 9 10 ARTICLE X Miscellaneous 10.1 Continued Employment Not Presumed. This Plan and any document describing this Plan and the grant of any Option hereunder shall not give any Optionee or other employee a right to continued employment by the Company or its Subsidiaries or affect the right of the Company or its Subsidiaries to terminate the employment of any such person with or without cause. 10.2 Other Compensation Plans. The adoption of the Plan shall not affect any other stock option or incentive or other compensation plans in effect for the Company or its Subsidiaries, nor shall the Plan preclude the Company or its Subsidiaries from establishing any other forms of incentive or other compensation for directors, officers, or employees of the Company or its Subsidiaries. 10.3 Plan Binding on Successors. The Plan shall be binding upon the successors and assigns of the Company. 10.4 Singular, Plural; Gender. Whenever used herein, nouns in the singular shall include the plural, and the masculine pronoun shall include the feminine gender. 10.5 Applicable Law. This Plan shall be governed by and construed in accordance with the laws of the State of Florida. 10.6 Headings, etc., No Part of Plan. Headings of Articles and Sections hereof are inserted for convenience and reference; they constitute no part of the Plan. 10.7 Severability. If any provision or provisions of this Plan shall be held to be invalid, illegal, or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. CENTERSTATE BANKS OF FLORIDA, INC. By: /s/ James H. White ---------------------------------------- James H. White, Chairman, President and Chief Executive Officer 10 EX-21 10 SUBSIDIARIES OF CENTERSTATE BANKS 1 EXHIBIT 21 Subsidiaries of Centerstate Banks of Florida None EX-23.1 11 CONSENT OF KPMG LLP 1 EXHIBIT 23.1 The Board of Directors Centerstate Banks of Florida We consent to the use of our report included herein and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG LLP Orlando, Florida January 20, 2000 EX-23.2 12 CONSENT OF ALLEN C. EWING & CO. 1 EXHIBIT 23.2 CONSENT OF ALLEN C. EWING & CO. Centerstate Banks of Florida, Inc. Winter Haven, Florida We hereby consent to the inclusion as Appendix B to this Proxy Statement/Prospectus constituting part of this Registration Statement on Form S-4 for Centerstate Banks of Florida, Inc. of our letter to the Board of Directors of First National Bank of Polk County, and to references made to such letter and to the firm in the Proxy Statement/Prospectus. ALLEN C. EWING & CO. By: /s/ Brian C. Beach ------------------------ Brian C. Beach Executive Vice President Jacksonville, Florida January 20, 2000 EX-23.4 13 CONSENT OF DWIGHT DARBY & COMPANY 1 EXHIBIT 23.4 January 20, 2000 The Board of Directors Centerstate Banks of Florida We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the prospectus. /s/ DWIGHT DARBY & COMPANY EX-23.5 14 CONSENT OF GRAHAM & COTTRILL, P.A. 1 EXHIBIT 23.5 The Board of Directors Centerstate Banks of Florida Kissimmee, Florida We consent to the use of our report included herein (or incorporated by reference) and to the reference to our firm under the heading "Experts" in the prospectus. /s/ GRAHAM & COTTRILL, P.A. Orlando, Florida January 18, 2000 EX-23.6 15 CONSENT G.T. NUNEZ & ASSOCIATES 1 EXHIBIT 23.6 The Board of Directors Centerstate Banks of Florida We consent to the use of our report included herein and to the reference to our firm under the heading "Experts" in the prospectus. /s/ G. T. NUNEZ & ASSOCIATES January 20, 2000 EX-23.7 16 CONSENT OF KPMG LLP 1 Exhibit 23.7 The Board of Directors Centerstate Banks of Florida We consent to the use of our opinion included herein regarding certain Federal tax consequences expected to result from the merger and to the reference to our firm under the heading "Federal Income Tax Consequences of the Merger." /s/ KPMG LLP Orlando, Florida January 20, 2000 EX-27.1 17 FINANCIAL DATA SCHEDULE
9 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 4,687,944 0 5,017,000 0 35,818,706 2,555,226 6,690,625 57,372,431 (781,034) 4,654,643 97,557,780 3,978,073 332,540 0 0 0 2,255,545 5,200,978 109,324,916 4,953,056 2,105,818 0 7,058,874 3,453,511 3,453,511 3,605,363 38,473 0 914,546 1,406,287 0 0 0 893,891 0 0 4.12 0 171,000 0 0 781,000 (31,000) 17,000 781,000 38,000 0 292,000
EX-27.2 18 FINANCIAL DATA SCHEDULE
9 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 4,545,343 0 2,150,000 0 25,883,187 3,537,952 3,484,850 66,611,908 (798,112) 5,548,252 95,956,421 2,790,990 192,148 0 0 0 2,555,875 5,983,096 107,478,530 4,086,715 1,494,704 0 5,581,419 2,456,597 2,456,597 3,124,822 99,000 0 2,836,088 840,206 0 0 0 532,030 0 0 4.21 0 253,000 0 0 781,000 (108,000) 26,000 798,000 99,000 0 106,000
EX-99.1 19 NOTICE OF SPECIAL MEETING OF OSCEOLA 1 EXHIBIT 99.1 FIRST NATIONAL BANK OF OSCEOLA COUNTY 920 NORTH BERMUDA AVENUE KISSIMMEE, FLORIDA 34741 (407) 843-3800 NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON _________, 2000 NOTICE IS HEREBY GIVEN that the Special Meeting of Shareholders of First National Bank of Osceola County ("Bank") will be held at __________________ on ________, ________, 2000, at _____ a.m. local time, for the following purposes: 1. Approve Agreement to Merge. To consider and vote upon a proposal to approve the Agreement to Merge ("Agreement") by and between First National Bank of Osceola County ("Bank"), Centerstate Banks of Florida, Inc. ("Centerstate") and First Interim National Bank of Osceola County ("Interim"), which provides for the reorganization of the Bank into a holding company structure, pursuant to (i) the acquisition of the Bank by Centerstate by means of a merger of the Bank with and into Interim, and (ii) the conversion of each of the issued and outstanding shares of common stock of the Bank into the right to receive 2.00 shares of common stock of Centerstate, all as more fully described in the accompanying Proxy Statement/Prospectus. 2. Other business. To transact such other business as may properly come before the Special Meeting or any adjournments or postponements thereof. Only shareholders of record at the close of business on ___________, 2000 are entitled to notice of, and to vote at, the Special Meeting. A shareholder who either (i) votes against the approval of the Agreement or (ii) gives written notice to the Bank, at or prior to the Special Meeting, that he or she dissents from the Agreement, will be entitled to payment in cash of the value of the shares held by such shareholder. However, the Board of Directors reserves the right to terminate and not consummate the Merger if the number of shares purporting to dissent from the Merger makes the Merger inadvisable. Your attention is directed to the attached Proxy Statement. THE BOARD OF DIRECTORS OF THE BANK UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR APPROVAL OF THE HOLDING COMPANY FORMATION. By Order of the Board of Directors Kissimmee, Florida James H. White _____________, 2000 Chairman of the Board WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE, AND SIGN THE ENCLOSED FORM OF PROXY AND RETURN IT IN THE ENCLOSED RETURN ENVELOPE IN ORDER TO INSURE THAT YOUR SHARES WILL BE REPRESENTED AT THE SPECIAL MEETING. THE AFFIRMATIVE VOTE OF HOLDERS OF AT LEAST TWO-THIRDS OF THE OUTSTANDING SHARES OF BANK COMMON STOCK IS REQUIRED FOR APPROVAL OF THE HOLDING COMPANY FORMATION. EX-99.2 20 PROXY CARD OF OSCEOLA 1 EXHIBIT 99.2 PROXY CARD REVOCABLE PROXY FIRST NATIONAL BANK OF OSCEOLA COUNTY PROXY SOLICITED BY AND ON BEHALF OF THE BOARD OF DIRECTORS FOR THE SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON ________, 2000. THE UNDERSIGNED HEREBY APPOINTS _____________________ AND ___________________, OR EITHER OF THEM WITH INDIVIDUAL POWER OF SUBSTITUTION, PROXIES TO VOTE ALL SHARES OF THE COMMON STOCK OF FIRST NATIONAL BANK OF OSCEOLA COUNTY (THE "BANK") WHICH THE UNDERSIGNED MAY BE ENTITLED TO VOTE AT THE SPECIAL MEETING OF SHAREHOLDERS TO BE HELD AT THE _____________________________, ___________, FLORIDA, ON _______, ________, 2000, AT _______ A.M., AND AT ANY ADJOURNMENT OR POSTPONEMENT THEREOF. SAID PROXIES WILL VOTE ON THE PROPOSALS SET FORTH IN THE NOTICE OF SPECIAL MEETING AND PROXY STATEMENT/PROSPECTUS AS SPECIFIED ON THIS CARD. IF A VOTE IS NOT SPECIFIED, SAID PROXIES WILL VOTE IN FAVOR OF AGREEMENT TO MERGE LISTED IN THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS. IF ANY OTHER MATTERS PROPERLY COME BEFORE THE SPECIAL MEETING, SAID PROXIES WILL VOTE ON SUCH MATTERS IN ACCORDANCE WITH THE RECOMMENDATIONS OF THE BOARD OF DIRECTORS. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR: 1. TO AUTHORIZE, ADOPT AND APPROVE THE AGREEMENT TO MERGE BETWEEN CENTERSTATE BANKS OF FLORIDA, INC., FIRST NATIONAL BANK OF OSCEOLA COUNTY, AND FIRST INTERIM NATIONAL BANK OF OSCEOLA COUNTY. _____ FOR _____ AGAINST _____ ABSTAIN 2 PLEASE MARK, SIGN BELOW, DATE AND RETURN THIS PROXY PROMPTLY IN THE ENVELOPE FURNISHED. PLEASE SIGN EXACTLY AS NAME APPEARS ON YOUR STOCK CERTIFICATE. WHEN SHARES ARE HELD BY JOINT TENANTS, BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF A CORPORATION, PLEASE SIGN IN FULL CORPORATE NAME BY PRESIDENT OR OTHER AUTHORIZED OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY AUTHORIZED PERSON. SHARES _______________ DATED __________, 2000 ----------------------------------- SIGNATURE ----------------------------------- SIGNATURE IF HELD JOINTLY ----------------------------------- PLEASE PRINT OR TYPE YOUR NAME [ ] PLEASE MARK HERE IF YOU INTEND TO ATTEND THE 2000 SPECIAL MEETING OF SHAREHOLDERS. ------------------------------------------------------------ PLEASE RETURN YOUR SIGNED PROXY TO: FIRST NATIONAL BANK OF OSCEOLA COUNTY 920 NORTH BERMUDA AVENUE KISSIMMEE, FLORIDA 34741 ATTN: THOMAS E. WHITE ------------------------------------------------------------ -----END PRIVACY-ENHANCED MESSAGE-----