EXHIBIT 99.1
NBOG BANCORPORATION, INC.
AN UPDATE
TO OUR SHAREHOLDERS
CONTENTS
Summary Consolidated Financial Statements as of September 30, 2006...........1
Summary Management's Discussion and Analysis.................................3
Information Regarding the Previous Merger with El Banco Financial............8
Information Regarding the Issuance of Preferred Stock.......................11
CONSOLIDATED BALANCE SHEET
ASSETS
SEPTEMBER 30, December 31,
2006 2005
(UNAUDITED)
------------ ------------
CASH AND CASH EQUIVALENTS
Cash and Due from Banks $ 892,953 $ 680,381
Federal Funds Sold 1,374,000 95,000
------------ ------------
2,266,953 775,381
------------ ------------
INVESTMENT SECURITIES AVAILABLE FOR SALE, AT FAIR VALUE 8,944,300 8,424,986
------------ ------------
OTHER INVESTMENTS 329,820 270,120
------------ ------------
LOANS 21,142,419 25,515,185
Allowance for Loan Losses (707,408) (785,326)
------------ ------------
20,435,011 24,729,859
------------ ------------
PREMISES AND EQUIPMENT 2,238,547 2,315,875
------------ ------------
OTHER REAL ESTATE -- 839,000
------------ ------------
OTHER ASSETS 286,000 526,077
------------ ------------
TOTAL ASSETS $ 34,500,631 $ 37,881,298
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS
Noninterest-Bearing $ 1,840,949 $ 2,514,693
Interest-Bearing 27,249,100 31,427,489
------------ ------------
29,090,049 33,942,182
------------ ------------
OTHER BORROWINGS 2,000,000 --
------------ ------------
OTHER LIABILITIES 412,792 165,233
------------ ------------
STOCKHOLDERS' EQUITY
Preferred Stock, No Par Value; 10,000,000 Shares
Authorized; 21,000 and -0- Shares Issued
and Outstanding in 2006 and 2005, Respectively 210,000 --
Common Stock, No Par Value; 50,000,000 Shares
Authorized; 993,560 and 991,560 Shares Issued
and Outstanding in 2006 and 2005, Respectively 8,611,888 8,603,888
Accumulated Deficit (5,689,591) (4,656,733)
Accumulated Other Comprehensive Loss (134,507) (173,272)
------------ ------------
2,997,790 3,773,883
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 34,500,631 $ 37,881,298
============ ============
1
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, 2006
--------------------------------------------------------------
2006 2005 2006 2005
--------------------------------------------------------------
INTEREST INCOME
Loans, Including Fees $ 488,379 $ 578,091 $ 1,600,631 $ 1,810,831
Investments 87,222 64,494 266,685 179,474
Federal Funds Sold 20,629 22,675 36,594 59,605
--------------------------------------------------------------
596,230 665,260 1,903,910 2,049,910
--------------------------------------------------------------
INTEREST EXPENSE
Deposits 332,142 283,249 951,238 750,988
Fed Funds Purchased 566 68 919 68
Other Borrowings 27,830 -- 48,332 --
--------------------------------------------------------------
360,538 283,317 1,000,489 751,056
--------------------------------------------------------------
NET INTEREST INCOME 235,692 381,943 903,421 1,298,854
Provision for Loan Losses -- -- -- 225,000
--------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 235,692 381,943 903,421 1,073,854
--------------------------------------------------------------
NON-INTEREST INCOME
Service Charges and Fees on Deposits 18,822 16,586 48,167 43,012
Mortgage Origination and Processing Fees -- 3,025 10,125 3,694
Other 4,175 3,129 13,637 13,413
--------------------------------------------------------------
22,997 22,740 71,929 60,119
--------------------------------------------------------------
NON-INTEREST EXPENSES
Salaries and Employee Benefits 217,975 277,074 682,425 869,021
Occupancy and Equipment 85,774 89,554 256,683 277,906
Professional Fees 144,236 66,872 287,728 173,949
Other 116,656 183,099 611,642 683,456
--------------------------------------------------------------
564,641 616,599 1,838,478 2,004,332
--------------------------------------------------------------
LOSS BEFORE INCOME TAXES (305,952) (211,916) (863,128) (870,359)
Provision for Income Taxes -- -- -- --
--------------------------------------------------------------
NET LOSS $ (305,952) $ (211,916) $ (863,128) $ (870,359)
==============================================================
BASIC LOSS PER COMMON SHARE $ (.31) $ (.23) $ (.87) $ (1.00)
==============================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 993,560 930,272 993,377 870,825
==============================================================
2
SUMMARY MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 2006
In the third quarter of 2006, The National Bank of Gainesville's (the
"Bank's") asset quality continued to improve, as the Bank was able to sell off
all Other Real Estate Owned and non-performing assets as a percentage of gross
loans fell to 2.42% at September 30, 2006 from 5.07% at June 30, 2006 and 6.65%
at December 31, 2005. However, the Company suffered its eleventh consecutive
quarter of net losses. Unless and until the Bank is able to increase its capital
and increase the size of its loan portfolio, the Company will continue to
experience net losses. With the termination of the proposed merger with El Banco
Financial Corporation on October 25, 2006, the Company is seeking a strategic
partner to acquire or recapitalize the Bank.
FORMAL AGREEMENT
On August 18, 2004, the Bank entered a formal written agreement with
the Office of the Comptroller of the Currency (the "OCC"), which set forth a
series of actions necessary to correct identified weaknesses. THE TABLE BELOW
DESCRIBES EACH REQUIREMENT OF THE FORMAL AGREEMENT WITH THE OCC AND THE BANK'S
CORRECTIVE ACTION OR THE CURRENT STATUS AND EFFORTS TO CORRECT THE ISSUES
IDENTIFIED IN THE FORMAL AGREEMENT.
REQUIREMENT CORRECTIVE ACTION/STATUS
- ----------- ------------------------
Appoint a compliance committee to monitor the Bank's IN COMPLIANCE. In light of the decision to identify a
compliance with the Formal Agreement. strategic partner to acquire or recapitalize the Bank,
the Bank's entire Board of Directors is responsible for
monitoring the Bank's compliance with the Formal
Agreement.
Obtain a permanent President and Senior Lender. IN COMPLIANCE. On October 25, 2006, R. Allen Smith
agreed to serve as the Company's and the Bank's
permanent President and CEO until a merger or
recapitalization can be consummated. Lance G. Jones
was named the Bank's new permanent Senior Lender on
October 19, 2006.
Obtain a permanent President and Senior Lender. IN COMPLIANCE. On October 25, 2006, R. Allen Smith
agreed to serve as the Company's and the Bank's
permanent President and CEO until a merger or
recapitalization can be consummated. Lance G. Jones
was named the Bank's new permanent Senior Lender on
October 19, 2006.
By September 30, 2004, achieve and maintain the following IN COMPLIANCE. At the end of January 2005, the Bank
capital ratios: achieved and has since maintained Total Capital at
o Total Capital at least equal to 12% of least equal to 12% of risk-weighted assets and Tier 1
risk-weighted assets; and Capital at least equal to 8% of adjusted total
o Tier 1 Capital at least equal to 8% of adjusted assets.
total assets.
By March 31, 2005, achieve and maintain the following IN COMPLIANCE. At September 30, 2006, with the
capital ratios: additional capital raised from the issuance of the
o Total Capital at least equal to 14% of Preferred Stock to our directors, Total Capital
risk-weighted assets; and represented 14.88% of risk weighted assets and Tier 1
o Tier 1 Capital at least equal to 9% of adjusted Capital represented 9.18% of adjusted total assets.
total assets.
Develop, implement and thereafter ensure Bank adherence IN COMPLIANCE. An updated three-year capital plan has
to a three-year capital program. been completed and was forwarded to the OCC for its
review on October 25, 2006.
3
REQUIREMENT CORRECTIVE ACTION/STATUS
- ----------- ------------------------
Revise the Bank's written loan policy. IN COMPLIANCE. The Board of Directors has reviewed
and revised the Bank's written loan policy. This
policy has been adopted and implemented by the Board
and will be monitored for Bank adherence. A copy of
the policy was forwarded to the OCC.
Employ a qualified consultant to perform an ongoing asset IN COMPLIANCE. The Bank has entered into a two-year
quality review of the Bank until such time as an ongoing service agreement with Professional Bank Services
internal asset quality review system is developed by the (PBS) of Louisville, Kentucky to perform periodic
Board, implemented and demonstrated to be effective. credit review examinations.
Obtain current and satisfactory credit information on all IN COMPLIANCE. Current and satisfactory credit
loans over $25,000 lacking such information and obtain information has been obtained on all loans over
proper collateral documentation on all loans. $25,000. Proper collateral documentation has also
been obtained on all loans identified with collateral
deficiencies. Any loans for which the Bank was unable to
obtain satisfactory credit or collateral documentation
have been classified by the Bank.
Adopt, implement and thereafter take all available IN COMPLIANCE. The Bank has adopted and implemented
measures to ensure the Bank's adherence to a written the appropriate measures to ensure the Bank's
program designed to eliminate the basis of criticism of adherence to the written program designed to eliminate
assets criticized in the Report of Examination, in any the basis of criticism of assets criticized in the
subsequent Report of Examination or by any internal or Report of Examination, in any subsequent Report of
external loan review, or in any list provided to Examination or by any internal or external loan
management by the National Bank of Examiners. The Board review, or in any list provided to management by the
or a designated committee, shall conduct a review of this National Bank of Examiners. The Compliance Committee
process on a quarterly basis to determine the status of reviews a list of all criticized assets each month to
each criticized asset or criticized portion thereof that ensure Bank adherence and forwards a copy of this list
equals or exceeds $50,000, management's adherence to the to the OCC.
program adopted pursuant to this requirement, the status
and effectiveness of the written program, and the need to
revise the program or take alternative action.
Review on a quarterly basis the Bank's Allowance for Loan IN COMPLIANCE. The Board has established a
Losses and establish a program for maintenance of an methodology to analyze and review the adequacy of the
adequate allowance. Any deficiency in the allowance Bank's Allowance for Loan Losses, which is reviewed on
shall be remedied in the quarter it is discovered by a monthly basis to ensure adequate reserves are
additional provisions from earnings. Written maintained at the end of the fiscal quarter. Any
documentation shall also be maintained indicating the deficiency in the amount of reserves maintained in the
required factors considered and conclusions reached by loan loss allowance will be remedied by the end of the
the Board in determining the adequacy of the allowance. quarter as required by the Formal Agreement. Written
documentation is also maintained in the file
indicating the factors considered and conclusions
reached by the Board in determining the adequacy of
the Allowance for Loan and Lease Losses.
Adopt, implement and thereafter ensure Bank adherence to IN COMPLIANCE. A three-year plan has been completed
a written strategic plan for the Bank covering at least a and was submitted to the OCC during 2005. Management
three-year period. continues to monitor and re-visit the plan accordingly.
4
Pursuant to the terms of the formal agreement indicated above, the
Company had committed to undertake certain actions, including the maintenance of
specified capital levels, retention of senior management and the formulation of
strategic and capital plans. Following discussions with the OCC, on January 26,
2006, the Board passed a resolution to identify, and enter into an agreement
with, a strategic partner who would either purchase the entire institution or a
significant interest in the institution, and the OCC agreed to a ninety day
waiver of certain commitments contained in the formal agreement, namely the
appointment of a President and Senior Lender, the development of a three-year
capital plan, and the development of a strategic plan. As previously discussed,
the Company previously entered into a merger agreement with EBFC on May 5, 2006.
In light of this merger agreement, the waiver was further extended to September
30, 2006. The Company is committed to complying with all of the provisions of
the Formal Agreement
RESULTS OF OPERATIONS
A net loss of $863,128 was incurred for the first nine months of 2006
as compared to a net loss of $870,359 for the same period in 2005. The net loss
of $305,952 for the three months ended September 30, 2006 was up $94,036 or 44%
from the $211,916 net loss incurred during the third quarter of 2005 due mainly
to $82,430 in legal fees accrued for expenses related to the Company's merger
with El Banco Financial Corporation. In addition the net loss for the nine
months ended September 30, 2006 includes a $208,995 provision (write-down)
recorded at the end of June for an anticipated loss on the sale of foreclosed
property held in Other Real Estate. In an effort to help liquidate this asset,
the Bank accepted a contract with a sales amount of approximately $208,995 below
the property's recorded net book value. Without this write-down and the legal
fees related to the merger, the Bank's net loss for the nine months ended
September 30, 2006 would have only been $571,703 resulting in a $298,656 or 34%
reduction from the net loss incurred for the nine months ended September 30,
2005.
Our operational results depend to a large degree on three factors: our
net interest income, our provision for loan losses, and our non-interest
expenses. Net interest income is the difference between the interest income
received on investments (such as loans, investment securities, and federal funds
sold) and the interest expense on deposit liabilities and borrowings. Net
interest income declined to $235,692 or 38% for the quarter ended September 30,
2006 compared to $381,943 for the quarter ended September 30, 2005 and declined
to $903,421 or 30% for the first nine months of 2006 compared to the $1,298,854
that was earned for the first nine months of 2005. This decrease was due to a
lower volume of loan demand during the last twelve months along with pay-out of
participation loans originated outside of our lending area. Additionally, this
decrease is part of an ongoing effort by management to seek and reduce
classified and criticized loans by payoff or by their exit from the Bank. This
decrease was also due to interest foregone on classified loans being placed in a
non-earning status.
No provision for loan losses was recorded in the third quarter or for
the first nine months of 2006 as management considers the current allowance for
loan losses to be adequate to sustain any estimated or potential losses based on
the Bank's internal analysis and on external credit review examinations
conducted by regulatory authorities and by third-party review services. As
indicated above, there was no provision for loan losses recorded for the nine
months ended September 30, 2006 versus the $225,000 that was expensed for the
same period a year ago. This difference continues to demonstrate the improvement
in the credit quality of the Bank's loan portfolio and of management's efforts
to identify and reduce criticized and classified loans. The allowance for loan
loss was $707,408 (3.35% of total gross loans) at September 30, 2006 compared to
$1,036,147 (3.66% of total gross loans) at September 30, 2005 and $785,326
(3.08% of total gross loans) at December 31, 2005.
There are risks inherent in making all loans, including risks with
respect to the period of time over which loans may be repaid, risks resulting
from changes in economic and industry conditions, risks inherent in dealing with
individual borrowers, and, in the case of a collateralized loan, risks resulting
from uncertainties about the future value of the collateral. We anticipate
maintaining an allowance for loan loss based on, among other things, historical
experience, an evaluation of economic conditions, and regular reviews of
delinquencies and loan portfolio quality. Our judgment about the adequacy of the
allowance is based upon a number of assumptions about future events, which we
believe to be reasonable, but which may not prove to be accurate. Thus, there is
a risk that charge-offs in future periods could exceed the allowance for loan
losses or that substantial additional increases in the allowance for loan losses
could be required. Our loan loss reserve methodology incorporates any
anticipated write-downs and charge-offs in all problem loans identified by
management, credit review services and regulatory authorities. The current
allowance for loan losses at September 30, 2006 reflects management's estimate
of probable
5
losses inherent and remaining in the loan portfolio. We believe our estimates
are sufficient to absorb any such losses.
Total non-interest income for the quarter ended September 30, 2006 was
$22,997 compared to $22,740 for the quarter ended September 30, 2005 and was
$71,929 for the nine months ended September 30, 2006 compared to $60,119 for the
nine months ended September 30, 2005, an increase of $11,810 or 20%.
Non-interest income includes service charges on deposit accounts, customer
service fees, and mortgage origination fee income. The increase in non-interest
income for the first nine months of 2006 compared to the first nine months of
2005 was mostly due to larger fees earned on mortgage origination and higher
fees assessed for NSF charges and for check cashing services.
Total non-interest expense for the third quarter of 2006 was $564,641
as compared to $616,599 for the same period in 2005 resulting in a decrease of
$51,958 or 8%. Non-interest expense for the nine months ended September 30, 2006
was $1,838,478 compared to $2,004,332 for the nine months ended September 30,
2005, a decrease as well of $165,854 or 8%. Without the $208,995 provision for
loss on Other Real Estate and the $82,430 in legal fees accrued for expenses
related to the Company's merger with El Banco Financial Corporation, the Bank's
non-interest expense for the first nine months of this year would have only been
$1,547,053 resulting in a $457,279 or 23% decrease from the first nine months of
2005. Salaries and benefits, the largest component of non-interest expense, was
$217,975 for the quarter ended September 30, 2006, compared to $277,074 for the
same period a year ago and was $682,425 for the first nine months of 2006
compared to $869,021 for the first nine months of 2005, a decrease of 21% from
both the quarter ended and the nine months ended September 30, 2005,
respectively. Total salary and benefits expense has decreased due to the
downsizing of five staff positions in early 2006. Additionally, this decrease is
a result of the resignation of three officers in the third quarter of 2005, two
of which were members of senior management. Salary and benefits expense
continues to decrease on a quarter-to-quarter basis with total expense down in
each quarter since third quarter 2004.
Occupancy and equipment expense totaled $85,774 for the quarter ended
September 30, 2006, compared to $89,554 for the same period a year ago and
totaled $256,683 for the first nine months of 2006 compared to $277,906 for the
first nine months of 2005. Total occupancy expense for the third quarter of 2006
was lower than the quarter ended September 30, 2005 due to less depreciation
expense incurred on furniture, fixtures, and equipment as the estimated useful
life on certain assets has expired over the last year along with lower ad
valorem taxes related to these and other remaining furniture, fixtures and
equipment items. Professional fees totaled $144,236 for the quarter ended
September 30, 2006, compared to $66,872 for the quarter ended September 30, 2005
and totaled $287,728 for the first nine months of 2006 compared to $173,949 for
the first nine months of 2005, an increase of $77,364 and $113,779 for the third
quarter and for the first nine months of 2006, respectively. As indicated
earlier, the increase in professional fees for third quarter 2006 was due to
$82,430 in legal fees accrued for expenses related to the Company's merger with
El Banco Financial Corporation. The year-to-date increase was primarily due to
$183,303 in legal fees associated with the search for a strategic partner and/or
potential investors for the Company as well as expenses related to the Company's
planned merger with El Banco Financial Corporation.
Other non-interest expense for the third quarter of 2006 was $116,656
versus $183,099 for the third quarter of 2005, a decrease of $66,443 or 36%, and
was $611,642 for the nine months ended September 30, 2006 versus $683,456 for
the nine months ended September 30, 2005, a decrease of 71,814 or 11%. Once
again, without the $208,995 write-down to Other Real Estate, the Bank's total
other non-interest expense for the nine months ended September 30, 2006 was only
$402,647 resulting in a $280,809 or 41% decrease from the total expense incurred
during the first nine months of 2005. In addition, the reduction in expenses for
the third quarter of 2006 and for the first nine months of 2006 when compared to
the same periods in 2005 also indicates continued improvement in cost control
and the Bank's overall management of other non-interest expense.
FINANCIAL CONDITION
Total assets decreased $3,380,667 or 9% from December 31, 2005 to
September 30, 2006. The major source of this reduction was in net loans, which
decreased by $4,294,847 or 17% over the last nine months of 2006. Fed Funds
Sold, however, increased $1,279,000 from $95,000 at December 31, 2005 to
$1,374,000 at September 30, 2006. Investment securities available-for-sale also
increased $519,315 or 6% from $8,424,986 at December 31, 2005 to 8,944,300 at
September 30, 2006. Total deposits declined by $4,852,133 or 14% since December
31, 2005,
6
with $4,178,389 or 13% of the decline in interest bearing accounts (primarily
Certificates of Deposits). The reduction in total net loans, (in particular the
pay-off of certain large participation loans) created excess funds providing
management the flexibility to replace loan run-off by investing in new loans
and/or investment securities. Additionally, with total net loans declining,
management has not been as aggressive in retaining or obtaining deposits in an
attempt to match funding levels with loan balances and upcoming maturities.
Total shareholders' equity decreased from $3,773,883 at December 31, 2005 to
$2,997,790 at September 30, 2006. This decrease of $776,093 or 21% was
attributable to the recognition of $193,399 in deferred offering costs related
to the Company's stock rights offering and the $863,128 net loss for the nine
months ended September 30, 2006. Capital contributions, however, in the amount
of $210,000 received during September 2006 from the directors of the Company for
the purchase of a Series "A" preferred stock helped offset the net losses
incurred for 2006.
Activity in the allowance for loan losses for the nine months ended
September 30, 2006 and the twelve months ended December 31, 2005 is summarized
as follows:
2006 2005
--------- ---------
Beginning Balance $ 785,326 $ 989,852
Provision Charged to Operations -- 225,000
Loan Charge-Offs (103,514) (777,586)
Loan Recoveries 25,596 348,060
--------- ---------
Ending Balance $ 707,408 $ 785,326
========= =========
The following is a summary of risk elements in the loan portfolio at
September 30, 2006 and at December 31, 2005:
2006 2005
---------- ----------
Loans on Nonaccrual $ 511,849 $ 778,216
Loans Past Due 90 Days and Still Accruing -- 80,309
Other Real Estate Owned and Repossessions -- 839,000
---------- ----------
Total Nonperforming Assets $ 511,849 $1,697,525
========== ==========
Total Nonperforming Assets as a Percentage of Gross Loans 2.42% 6.65%
========== ==========
As a result of management's ongoing review of the loan portfolio,
loans are classified as non-accrual when management believes, after considering
economic and business conditions and collection efforts, the borrower's
financial condition is such that collection of interest is doubtful. Generally,
loans are placed on non-accrual status when principal or interest payments are
past due for more than 90 days. Exceptions are allowed for loans past due
greater than 90 days when such loans are well secured and in process of
collection. Interest income that would have been reported on the non-accrual
loans totaled $31,657 for the nine months ended September 30, 2006 and totaled
$46,533 for the twelve months ended December 31, 2005.
7
INFORMATION REGARDING THE PREVIOUS MERGER
WITH EL BANCO FINANCIAL
GENERAL
On May 5, 2006, NBOG and El Banco Financial Corporation ("EBFC")
entered into an Agreement and Plan of Merger, which provided that subject to
approval by the shareholders of NBOG, receipt of necessary regulatory approvals,
receipt of financing by EBFC and satisfaction of certain other conditions, NBOG
would merge with and into EBFC. Upon completion of the Merger, the corporate
existence of NBOG would cease, The National Bank of Gainesville would become a
wholly owned subsidiary of EBFC, and EBFC would succeed to the business formerly
conducted by NBOG as the surviving corporation. However, on October 25, 2006,
NBOG and EBFC mutually agreed to terminate the merger agreement after concluding
that regulatory approval would not be received in a timely manner.
BACKGROUND
The decision to undertake the transaction with EBFC was made only after
NBOG pursued numerous efforts to remain an independent financial institution.
The Bank suffered from significant credit quality issues and incurred loan
losses dating from its first years of operation. As a result, on August 18, 2004
the Board of Directors entered into a formal agreement with the Office of the
Comptroller of the Currency to correct identified weaknesses. The formal
agreement required, among other things, that the Bank obtain and maintain
elevated capital levels.
In the fall of 2004, the Board of Directors considered a variety of
alternatives for raising the capital levels of the Bank, including the
possibility of selling the holding company and its assets. In part because of
the uncertainties that remained in the Bank's loan portfolio, the Board found
that it would be difficult to attract acceptable offers and determined that it
was in the best interest of NBOG to continue to remain an independent
institution. The Board determined that the fairest means of raising additional
capital while protecting the shareholders' investment in NBOG was to offer to
all of its shareholders the opportunity to purchase additional shares at $6 a
share.
In December of 2004, after consultation with counsel and investment
bankers, the Board approved a $6.0 million capital offering at $6 a share to all
of its shareholders. Because NBOG needed additional capital before a public
offering to shareholders could be completed, the directors and management agreed
to purchase 75,066 shares at $6 a share in advance of the offering, with the
understanding that such purchases would reduce their pro-rata shares in the
subsequent offering.
In March of 2005, while the SEC was reviewing the offering materials to
be provided to the shareholders, an investment group approached the Board
expressing interest in purchasing shares in NBOG. The investment group's
interest was conditioned on Board members exercising one-third of their
out-of-the-money warrants and lowering the price in the offering to $4 a share.
Given continuing delays in the offering and the Bank's urgent need for
additional capital, the Board agreed to exercise options to purchase 49,675
shares at $10 a share for a total of $490,675. The Board also lowered the
offering price to all shareholders to $4 a share. The Board also decided not to
adjust the purchase price of the shares they purchased in December of 2004. As a
result, directors paid from $2 to $6 per share in excess of the price offered to
other shareholders.
In June of 2005, after the offering materials for the $4 per share
offering were provided to our shareholders, the investment group informed the
Board that it was no longer planning to purchase any shares. As a result, the
Board retained the services of an investment banker to assist in the marketing
and sale of the shares. This relationship was terminated by mutual agreement
after the investment banker was unable to bring any new investors to NBOG. The
rights offering portion of the public offering was closed on July 31, 2005, with
40,344 shares sold at $4 per share, for total gross proceeds of $161,376. After
subtracting the rights offering purchases, NBOG offered a total of 1,452,957
shares of common stock to its existing shareholders and new investors. Through
November of 2005, NBOG had sold an additional 39,805 shares at $4 per share, for
total gross proceeds of $159,220.
8
In the fall of 2005, the Board began serious discussions with an
investor interested in purchasing all of the remaining shares from the $4 per
share offering and obtaining a management role with the Bank. This arrangement
would have permitted the Bank's existing shareholders to potentially recover
some of the losses that they had incurred in their stock. Ultimately, after
months of negotiation, the investor decided not to make an investment due to tax
regulations that would have limited his ability to use NBOG's net operating loss
carry-forward for tax gains. Facing additional regulatory scrutiny if additional
capital were not raised, in December the Board and management agreed to purchase
38,000 shares at $4 per share for a total of $152,000 to meet capital ratios at
December 31, 2005.
In January of 2006, the directors reviewed their strategic
alternatives, and authorized management to retain an investment banker to assist
in either marketing NBOG's stock or to find an acquirer for NBOG. Having made
this decision, the directors also placed a moratorium on any purchases of stock
by insiders. After hearing presentations from four investment bankers and
consulting with the Office of the Comptroller of the Currency and counsel, on
January 26, 2006, the Board passed a formal resolution to identify and enter
into an agreement with a strategic partner who would purchase either the entire
institution, or a significant interest in the institution, and retained Stevens
& Company to conduct a public auction to identify the strongest strategic
partner or acquisition. The $4 per share public offering price was suspended
pending disclosure of the search for a strategic partner. The offering
terminated in accordance with its terms on March 31, 2006, without any
additional shares being sold. The $4 per share offering resulted in total net
proceeds of $293,917 after deducting offering expenses of $193,399.
In February of 2006, NBOG's financial advisor conducted a structured
bid process consisting of more than ten potential candidates. The financial
advisor provided a confidential information package regarding the Bank and
sought letters of intent no later than March 1, 2006.
On March 1, 2006, NBOG received a letter of intent from EBFC, in which
EBFC offered to pay 1.62 times the book value of the Bank at the closing of the
merger. On March 2, 2006, the NBOG Board of Directors met with their financial
advisor and counsel to review the terms of the EBFC letter of intent as well as
those received from other parties. After reviewing the terms of all offers
received, the Board authorized its financial advisor to follow-up with the three
highest bidders, including EBFC, to offer them the opportunity to complete their
due diligence review of NBOG.
In early March, EBFC and another of the original three highest bidders
conducted due diligence of the Bank (the third bidder elected to combine its bid
with another bidder in an effort to maximize their offering price). On March 14,
2006, NBOG received an unsolicited third party offer that was fully contingent
on completing due diligence during April. On March 16, 2006, NBOG received a
revised letter of intent from EBFC offering to pay 1.75 times the book value of
the Bank at the closing of the merger. On March 16, 2006, the Board voted
unanimously to move forward with a transaction with EBFC and authorized
management to sign the letter of intent with EBFC.
On April 17, 2006, NBOG received an unsolicited offer from one of the
original bidders to purchase NBOG for a fixed price of approximately $6.2
million. On April 18, 2006, EBFC provided a draft definitive agreement fixing
the merger consideration at $6.5 million, less specified expenses. On April 20,
2006, the NBOG Board of Directors met to discuss the unsolicited offer,
including the termination fee under the existing letter of intent with EBFC,
which would total $50,000 plus EBFC's expenses. After discussions with its
financial advisor, the Board unanimously approved moving forward with EBFC.
On May 2, 2006, the NBOG Board of Directors met with counsel and its
financial advisor to consider and discuss the terms of the definitive merger
agreement with EBFC. NBOG's financial advisor delivered its oral opinion that,
based on the information then available, the transaction was fair from a
financial point of view to NBOG. On May 4, 2006, the NBOG Board of Directors
again met with counsel and its financial advisor. Following a discussion of the
terms of the merger agreement, the fairness of the exchange ratio to NBOG
shareholders and the other factors listed under "Reasons for the Merger" below,
the NBOG board concluded unanimously that the merger was fair to, and in the
best interests of, the NBOG shareholders and approved the merger agreement and
the transactions contemplated by the merger agreement.
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On May 5, 2006, NBOG and EBFC entered into the merger agreement. The
parties issued a joint press release announcing the execution of the merger
agreement on May 9, 2006.
Throughout the summer of 2006, NBOG and EBFC prepared and filed the
regulatory applications necessary to consummate the merger agreement. However,
on October 25, 2006, NBOG and EBFC mutually agreed to terminate the merger
agreement after concluding that regulatory approval would not be received in a
timely manner.
REASONS FOR THE MERGER
In reaching its decision to approve the Merger Agreement, the Board of
Directors of NBOG considered a number of factors, including the following:
o the overall terms of the proposed transaction;
o the financial condition, results of operations, and future prospects
of NBOG and The National Bank of Gainesville;
o the value of the consideration to be received by you relative to the
book value, earnings and dividends per share of NBOG's common stock;
o the competitive and regulatory environment for community banks
generally;
o the fact that the Merger will enable shareholders to exchange their
shares of NBOG common stock (for which there is no active public
trading market) for cash (a fully liquid form of compensation);
o the likelihood that NBOG and EBFC would receive the requisite
regulatory approvals to perform the Merger;
o the likelihood of EBFC's ability to satisfy the financing
contingency; and
o the ability of EBFC to continue to offer a broad range of quality
services to the customers of the Bank.
In its deliberations, the Board of Directors of NBOG did not assign any
relative or specific weight to any of the factors that are discussed above, and
individual members of the Board of Directors of NBOG may have given different
weights to different factors as they were discussed. In addition, the discussion
of the information above and factors considered is not intended to be exhaustive
of the factors considered.
In hindsight, NBOG and EBFC concluded that they would not receive the
requisite regulatory approvals in a timely fashion. Having made this
determination, NBOG and EBFC agreed to terminate the agreement. The Board of
Directors intends to consider these same factors as it seeks a new strategic
partner.
ENGAGEMENT OF STEVENS & COMPANY
In January of this year, the Board of Directors of NBOG interviewed a
number of financial advisors to assist in determining the best strategic
alternatives for the bank. Stevens & Company ("Stevens"), a LaGrange, Georgia
based firm was selected in part due to its prior experience in 54 bank sales.
The Board also considered the fact that Stevens had recently participated in a
bank sale that involved regulatory and capital issues very similar to those
faced by NBOG.
As part of the engagement, Stevens conducted a structured bid process
affording a large number of financial institutions, including both in state and
out of state, the opportunity to make proposals for NBOG. More than 10
candidates became a part of the bid process, including two out of state banks
that would need a Georgia charter to expand their franchise.
After terminating the agreement with EBFC, the Board of Directors has
instructed Stevens to reopen the bid process in order to identify a strategic
partner to acquire or recapitalize the bank.
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INFORMATION REGARDING ISSUANCE OF PREFERRED STOCK
NEED FOR ADDITIONAL CAPITAL
Under the terms of the Formal Agreement with the OCC, the Bank is
required to maintain elevated capital ratios. While the OCC had previously
waived the capital ratios in light of the merger agreement with EBFC, in
September the OCC informed the Board of Directors that it would not extend the
waiver, and would require compliance with the elevated capital ratios at
September 30, 2006. The merger agreement with EBFC also required that NBOG
maintain the capital ratios required in the Formal Agreement, unless formally
waived by the OCC. Based on NBOG's financial position, management informed the
Board of Directors that NBOG needed to raise $210,000 to comply with the capital
ratios.
After lengthy discussions with EBFC, EBFC agreed to permit the Board of
Directors to contribute the capital in exchange for the Series A Preferred
Stock, but only agreed to absorb half the cost of the redemption of the Series A
Preferred Stock in the merger consideration. As a result, the merger
consideration that would have been paid to common shareholders was reduced by
approximately 9 cents per share. The Board of Directors unanimously determined
that it was in the best interest of NBOG common shareholders to comply with the
capital requirements of the Formal Agreement and the terms of the merger
agreement with EBFC, and therefore authorized the issuance of the Series A
Preferred Stock.
TERMS OF THE SERIES A PREFERRED STOCK
The Board of Directors authorized the issuance of up to 50,000 shares
of Series A Preferred Stock, no par value. The Series A Preferred Stock is
non-cumulative perpetual preferred stock and will be treated as Tier 1 Capital
under existing Federal Reserve regulations. The Series A Preferred Stock is
generally non-voting and cannot be converted into common stock of NBOG. NBOG has
the right, subject to Federal Reserve approval, to redeem the shares for their
purchase price plus accrued dividends, if any. It is not anticipated, however,
that any dividends will be paid to the holders of either the NBOG common stock
or the Series A Preferred Stock.
The directors who purchased the Series A Preferred Stock will not
receive any financial gain as a result of their purchase. While they may be
reimbursed for their purchase of the Series A Preferred Stock at a future date,
they are also significant common stock shareholders and will therefore suffer a
loss to the extent the value of common stock declines. Despite this risk of
personal loss without any potential of gain in value on the preferred shares,
the Board of Directors unanimously believed it was in the best interest of all
shareholders for the directors to invest the additional $210,000 while the
merger with EBFC was pending to ensure compliance with both the Formal Agreement
and the terms of the merger agreement with EBFC. Timing and cost considerations
did not permit the Board of Directors to allow any other shareholders to
purchase the shares of the Series A Preferred Stock, and the Board did not
believe other shareholders would wish to invest under these circumstances.
11