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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999 File Number 000-22054
COMMUNITY BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
South Carolina 57-0966962
(State or Other Jurisdiction of (IRS Employer Identification
Incorporation or Organization) Number)
791 Broughton St., Orangeburg, South Carolina 29115
(Address of Principal Executive Office, Zip Code)
Registrant's Telephone Number, Including Area Code: (803) 535-1060
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, No Par Value - American Stock Exchange
(Title of Class) - (Name of each exchange on which registered)
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all the
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting and non-voting common equity held
by non-affiliates on February 23, 2000, was approximately $29,064,000. As of
February 23, 2000, there were 3,191,462 shares of the Registrant's Common Stock,
no par value, outstanding. For purposes of the foregoing calculation only, all
directors and executive officers of the Registrant have been deemed affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Proxy Statement for the 2000 Annual Meeting of
Shareholders - Part III
10-K TABLE OF CONTENTS
Page
Part I Page
Item 1 Description of Business 1
Item 2 Description of Property 9
Item 3 Legal Proceedings 9
Item 4 Submission of Matters to a Vote of Security Holders 9
Part II
Item 5 Market for Common Equity and Related Stockholder Matters 9
Item 6 Selected Financial Data 10
Item 7 Management's Discussion and Analysis of Financial Position and Operations 11
Item 7A Quantitative and Qualitative Disclosures about Market Risk 27
Item 8 Financial Statements and Supplementary Data 29
Independent Auditor's Report 31
Consolidated Balance Sheets, December 31, 1999 and 1998 32
Consolidated Statements of Income, Years Ended December 31, 1999, 1998 and 1997 33
Consolidated Statements of Changes in Shareholders' Equity, Years Ended December 35
31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows, Years Ended December 31, 1999, 1998 and 36
1997
Notes to Consolidated Financial Statements 37
Quarterly Data for 1999 and 1998 61
Item 9 Changes In and Disagreements with Accountants on Accounting and Financial 62
Disclosure
Part III
Item 10 Directors and Executive Officers *
Item 11 Executive Compensation *
Item 12 Security Ownership of Certain Beneficial Owners and Management *
Item 13 Certain Relationships and Related Transactions *
Part IV
Item 14 Exhibits and Reports on Form 8-K 63
* Incorporated by reference to Registrant's Proxy Statement for
2000 Annual Meeting of Shareholders
PART I
Item 1. Description of Business
Form of organization
Community Bankshares, Inc. (CBI) is a South Carolina corporation and a
bank holding company. CBI commenced operations on July 1, 1993, upon
effectiveness of the acquisition of the Orangeburg National Bank as a
wholly-owned subsidiary. In June 1996 CBI acquired all the stock of Sumter
National Bank, which is also a wholly-owned subsidiary. In July 1998 CBI
acquired all the stock of Florence National Bank, which is also a wholly-owned
subsidiary.
Orangeburg National Bank (the Orangeburg bank) is a national bank,
chartered in 1987, operating from two offices located in Orangeburg, South
Carolina.
Sumter National Bank (the Sumter bank) is a national bank, chartered in
1996, operating from one office located in Sumter, South Carolina.
Florence National Bank (the Florence bank) is a national bank,
chartered in 1998, operating from one office located in Florence, South
Carolina.
Business of banking
The Orangeburg, Sumter and Florence banks (hereafter referred to as the
Banks) offer a full array of commercial bank services. Deposit services include
business and personal checking accounts, NOW accounts, savings accounts, money
market accounts, various term certificates of deposit, IRA accounts, and other
deposit services. The Federal Deposit Insurance Corporation insures deposits up
to applicable limits. Most of the Banks' deposits are attracted from individuals
and small businesses.
The Banks offer secured and unsecured, short-to-intermediate term
loans, with floating and fixed interest rates for commercial and consumer
purposes. Consumer loans include: car loans, home equity improvement loans
secured by first and second mortgages, personal expenditure loans, education
loans, and the like. Commercial loans include short-term unsecured loans, short
and intermediate term real estate mortgage loans, loans secured by listed
stocks, loans secured by equipment, inventory, accounts receivable, and the
like. The Banks do not and will not discriminate against any applicant for
credit on the basis of race, color, creed, sex, age, marital status, familial
status, handicap, or derivation of income from public assistance programs.
Other services offered by the Banks include safe deposit boxes, night
depository service, VISA and Master Card charge cards (through a correspondent),
tax deposits, sale of U.S. Treasury bonds, notes and bills and other U. S.
government securities (through a correspondent), and twenty-four hour automated
teller service. Each of the Banks has ATMs and they are all part of the Honor
and Cirrus networks.
Competition
The market for financial institutions in Orangeburg, Sumter, and
Florence is highly competitive. Banks generally compete with other financial
institutions through the banking services and products offered, the pricing of
services, the level of service provided, the convenience and availability of
services, and the degree of expertise and personal concern with which services
are offered. The Banks encounter strong competition from most of the financial
institutions in their market areas.
The market area for the Orangeburg bank generally encompasses an area
extending nine miles around the city of Orangeburg. The market area for the
Sumter bank generally encompasses the county of Sumter. The market area for the
Florence bank generally encompasses the city of Florence. In the conduct of
certain banking business, the Banks also compete with credit unions, consumer
finance companies, insurance companies, money market mutual funds, and other
financial institutions, some of which are not subject to the same degree of
regulation and restrictions imposed upon the Banks. Many of these competitors
have substantially greater resources and lending limits than the Banks and offer
certain services, such as international banking and trust services, that the
Banks do not provide. The Banks believe, however, that their relatively small
size permits them to offer more personalized services than many of their
competitors. The Banks attempt to compensate for their lower lending limits by
participating larger loans with other institutions, often with each other.
Most of the other financial institutions in the Orangeburg, Sumter, and
Florence areas are branch offices of large, regional banks. The financial
institution with the largest deposit base in Orangeburg County is First National
Bank with deposits of $160 million. The following chart illustrates the relative
position of the Banks and other financial institutions in the marketplace in
terms of their deposits as of June 30, 1999, 1998 and 1997.
Orangeburg, S. C. Comparative Bank Deposits
June 1999 June 1998 June 1997
Bank Deposit $ % market Deposit $ % market Deposit $ % market
--------- -------- --------- -------- --------- --------
(Dollar amounts in millions)
First National Bank $160 31.4% $154 30.8% $148 30.1%
First Union National Bank 48 9.4% 61 12.2% 63 12.8%
NationsBank 97 19.1% 97 19.4% 100 20.3%
BB&T 88 17.4% 90 18.0% 90 18.3%
Credit unions 8 1.6% 6 1.2% 5 1.0%
Orangeburg National 108 21.1% 92 18.4% 86 17.5%
---- ------ ---- ------ ---- ------
Total deposits $509 100.0% $500 100.0% $492 100.0%
==== ====== ==== ====== ==== ======
Source: FDIC and NCUA websites
The financial institution with the largest deposit base in Sumter
County is SAFE (Shaw Air Force Employees) Federal Credit Union with deposits of
$236 million. It should be noted, however, the SAFE does not provide deposit
information by branches and the total represented herein includes deposits in
adjacent counties. The following chart illustrates the relative position of the
Banks and other financial institutions in the marketplace in terms of their
deposits as of June 30, 1999, 1998 and 1997.
Sumter, S. C. Comparative Bank Deposits
June 1999 June 1998 June 1997
Bank Deposit $ % market Deposit $ % market Deposit $ % market
--------- -------- --------- -------- --------- --------
(Dollar amounts in millions)
BB&T $103 11.9% $97 12.6% $96 13.2%
National Bk of SC 221 25.6% 176 22.8% 171 23.4%
NationsBank 73 8.4% 78 10.1% 73 10.0%
Sumter National Bank 51 6.0% 38 4.9% 22 3.0%
First Citizens Bank 18 2.1% 16 2.1% 17 2.4%
Wachovia Bank NA 150 17.4% 151 19.6% 147 20.1%
Citizens Bank 6 0.7% - -
Centura Bank 3 0.3% - -
SAFE FCU * 236 27.4% 215 27.6% 202 27.6%
Sumter City CU 1 0.1% 2 0.3% 2 0.3%
---- ------ ---- ------ ---- ------
Total deposits $862 100.0% $773 100.0% $730 100.0%
==== ====== ==== ====== ==== ======
Source: FDIC and NCUA websites
* includes deposits outside of Sumter County
2
The financial institution with the largest deposit base in Florence
County is Wachovia Bank, NA with deposits of $216 million. The following chart
illustrates the relative position of the Banks and other financial institutions
in the marketplace in terms of their deposits as of June 30, 1999, 1998 and
1997.
Florence, S. C. Comparative Bank Deposits
June 1999 June 1998 June 1997
BANK Deposit $ % market Deposit $ % market Deposit $ % market
--------- -------- --------- -------- --------- --------
(Dollar amounts in millions)
Wachovia Bank, NA $216 18.2% $213 17.3% $240 20.1%
Branch Banking & Trust 211 17.8% 209 16.9% 164 13.8%
Company of SC
Peoples FS&LA of SC 184 15.5% 187 15.2% 127 10.7%
First Union National Bank 99 8.4% 106 8.6% 119 9.9%
NationsBank NA 79 6.6% 109 8.9% 92 7.7%
Centura (formerly Pee Dee 75 6.3% 91 7.4% 84 7.0%
State Bank)
National Bank of SC 74 6.2% 76 6.2% 74 6.2%
Citizens Bank 65 5.5% 65 5.3% 58 4.9%
Florence National Bank* 15 1.3% - -
Florence County National Bank 23 2.0% - -
Others (8 institutions) 145 12.2% 176 14.3% 236 19.7%
------ ------ ------ ------ ------ ------
Total $1,185 100.0% $1,230 100.0% $1,194 100.0%
====== ====== ====== ====== ====== ======
Source: FDIC and NCUA websites
* opened July 6, 1998
Dependence on Major Customers
The Banks do not consider themselves dependent on any single customer
or small group of customers, either in the deposit or lending areas.
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under
federal and state law. To the extent that the following information describes
statutory and regulatory provisions, it is qualified in its entirety by
reference to such statutes and regulations. Any change in applicable law or
regulation may have a material effect on the business of CBI and the Banks.
As discussed below under the caption "Recent Legislation", Congress has
recently adopted extensive changes in the laws governing the financial services
industry. Among the changes adopted are creation of the financial holding
company, a new type of bank holding company with powers that greatly exceed
those of standard holding companies, and creation of the financial subsidiary, a
subsidiary that can be used by national banks to engage in many, though not all,
of the same activities in which a financial holding company may engage. The
legislation also establishes the concept of functional regulation whereby the
various financial activities in which financial institutions engage are overseen
by the regulator with the relevant regulatory experience. Neither CBI nor the
Banks has yet made a decision as to how to adapt the new legislation to its use.
Accordingly, the following discussion relates to the supervisory and regulatory
provisions that apply to CBI and the Banks as they currently operate.
Regulation of Bank Holding Companies
General
As a bank holding company registered under the Bank Holding Company Act
("BHCA"), CBI is subject to the regulations of the Federal Reserve. Under the
BHCA, CBI's activities and those of its subsidiaries are limited to banking,
managing or controlling banks, furnishing services to or performing services for
3
its subsidiaries or engaging in any other activity which the Federal Reserve
determines to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. The BHCA prohibits CBI from acquiring direct
or indirect control of more than 5% of the outstanding voting stock or
substantially all of the assets of any bank or from merging or consolidating
with another bank holding company without prior approval of the Federal Reserve.
The BHCA also prohibits CBI from acquiring control of any bank operating outside
the State of South Carolina unless such action is specifically authorized by the
statutes of the state where the Bank to be acquired is located.
Additionally, the BHCA prohibits CBI from engaging in or from acquiring
ownership or control of more than 5% of the outstanding voting stock of any
company engaged in a non-banking business unless such business is determined by
the Federal Reserve to be so closely related to banking as to be properly
incident thereto. The BHCA generally does not place territorial restrictions on
the activities of such non-banking related activities.
As discussed below under "Recent Legislation", a bank holding company
that meets certain requirements may now qualify as a financial holding company
and thereby significantly increase the variety of services it may provide and
the investments it may make.
CBI is also subject to limited regulation and supervision by the South
Carolina State Board of Financial Institutions. A South Carolina bank holding
company may be required to provide the State Board with information with respect
to the financial condition, operations, management and inter-company
relationships of the holding company and its subsidiaries. The State Board also
may require such other information as is necessary to keep itself informed about
whether the provisions of South Carolina law and the regulations and orders
issued thereunder by the State Board have been complied with, and the State
Board may examine any bank holding company and its subsidiaries. Furthermore,
pursuant to applicable law and regulations, the Company must receive approval
of, or give notice to (as applicable) the State Board prior to engaging in the
acquisition of banking or non-banking institutions or assets.
Obligations of Holding Company to its Subsidiary Banks
A number of obligations and restrictions are imposed on bank holding
companies and their depository institution subsidiaries by Federal law and
regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance funds in
the event the depository institution is in danger of becoming insolvent or is
insolvent. For example, under the policy of the Federal Reserve, a bank holding
company is required to serve as a source of financial strength to its subsidiary
depository institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. In addition, the
"cross-guarantee" provisions of the Federal Deposit Insurance Act, as amended
("FDIA"), require insured depository institutions under common control to
reimburse the FDIC for any loss suffered or reasonably anticipated by either the
Savings Association Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF")
of the FDIC as a result of the default of a commonly controlled insured
depository institution or for any assistance provided by the FDIC to a commonly
controlled insured depository institution in danger of default. The FDIC may
decline to enforce the cross-guarantee provisions if it determines that a waiver
is in the best interest of the SAIF or the BIF or both. The FDIC's claim for
damages is superior to claims of stockholders of the insured depository
institution or its holding company but is subordinate to claims of depositors,
secured creditors and holders of subordinated debt (other than affiliates) of
the commonly controlled insured depository institutions.
The FDIA also provides that amounts received from the liquidation or
other resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or stockholder. This
provision would give depositors a preference over general and subordinated
creditors and stockholders in the event a receiver is appointed to distribute
the assets of the Bank.
Any capital loans by a bank holding company to any of its subsidiary
banks are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
4
Under the National Bank Act, if the capital stock of a national bank is
impaired by losses or otherwise, the OCC is authorized to require payment of the
deficiency by assessment upon the Bank's shareholders', pro rata, and to the
extent necessary, if any such assessment is not paid by any shareholder after
three months notice, to sell the stock of such shareholder to make good the
deficiency.
Capital Adequacy Guidelines for Bank Holding Companies and National Banks
The Federal Reserve has adopted risk-based and leverage capital
adequacy guidelines for holding companies and banks that are members of the
Federal Reserve System subject to its regulation. The capital guidelines and
CBI's capital position are summarized in Note 20 to the Financial Statements,
contained elsewhere in this report. All three of the Banks are considered well
capitalized.
Failure to meet capital guidelines could subject the Banks to a variety
of enforcement remedies, including the termination of deposit insurance by the
FDIC and a prohibition on the taking of brokered deposits.
The risk-based capital standards of both the Federal Reserve Board and
the FDIC explicitly identify concentrations of credit risk and the risk arising
from non-traditional activities, as well as an institution's ability to manage
these risks, as important factors to be taken into account by the agencies in
assessing an institution's overall capital adequacy. The capital guidelines also
provide that an institution's exposure to a decline in the economic value of its
capital due to changes in interest rates be considered by the agencies as a
factor in evaluating a bank's capital adequacy. The Federal Reserve Board also
has recently issued additional capital guidelines for bank holding companies
that engage in certain trading activities.
Payment of Dividends
CBI is a legal entity separate and distinct from the Banks. Most of the
revenues of CBI result from dividends paid to CBI by the Banks. There are
statutory and regulatory requirements applicable to the payment of dividends by
subsidiary banks as well as by CBI to its shareholders.
Each national banking association is required by federal law to obtain
the prior approval of the OCC for the payment of dividends if the total of all
dividends declared by the board of directors of such bank in any year will
exceed the total of (i) such bank's net profits (as defined and interpreted by
regulation) for that year plus (ii) the retained net profits (as defined and
interpreted by regulation) for the preceding two years, less any required
transfers to surplus. In addition, national banks can only pay dividends to the
extent that retained net profits (including the portion transferred to surplus)
exceed bad debts (as defined by regulation).
The payment of dividends by CBI and the Banks may also be affected or
limited by other factors, such as the requirements to maintain adequate capital
above regulatory guidelines. In addition, if, in the opinion of the applicable
regulatory authority, a bank under its jurisdiction is engaged in or is about to
engage in an unsafe or unsound practice (which, depending on the financial
condition of the Banks, could include the payment of dividends), such authority
may require, after notice and hearing, that such bank cease and desist from such
practice. The OCC has indicated that paying dividends that deplete a national
bank's capital base to an inadequate level would be an unsafe and unsound
banking practice. The Federal Reserve, the OCC and the FDIC have issued policy
statements which provide that bank holding companies and insured banks should
generally only pay dividends out of current operating earnings.
Certain Transactions by CBI with its Affiliates
Federal law regulates transactions among CBI and its affiliates,
including the amount of the Banks' loans to or investments in nonbank affiliates
and the amount of advances to third parties collateralized by securities of an
affiliate. Further, a bank holding company and its affiliates 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.
5
FDIC Insurance Assessments
Because Orangeburg National Bank's, Sumter National Bank's, and
Florence National Bank's deposits are insured by the BIF, the Banks are subject
to semiannual insurance assessments imposed by the FDIC. Since January 1, 1997,
the assessments imposed on all FDIC deposits for deposit insurance have an
effective rate ranging from 0 to 27 basis points per $100 of insured deposits,
depending on the institution's capital position and other supervisory factors.
However, because legislation enacted in 1996 requires that both SAIF-insured and
BIF-insured deposits pay a pro rata portion of the interest due on the
obligations issued by the Financing Corporation ("FICO"), the FDIC is currently
assessing BIF-insured deposits an additional 1.26 basis points per $100 of
deposits, and SAIF-insured deposits an additional 6.30 basis points per $100 of
deposits, to cover those obligations. The FICO assessment will continue to be
adjusted quarterly to reflect changes in the assessment bases of the respective
funds based on quarterly Call Report and Thrift Financial Report submissions.
Regulation of the Banks
Orangeburg National Bank, Sumter National Bank, and Florence National
Bank are also subject to examination by the OCC bank examiners. In addition, the
Banks are subject to various other state and federal laws and regulations,
including state usury laws, laws relating to fiduciaries, consumer credit and
laws relating to branch banking. The Banks' loan operations are subject to
certain federal consumer credit laws and regulations promulgated thereunder,
including, but not limited to: the federal Truth-In-Lending Act, governing
disclosures of credit terms to consumer borrowers; the Home Mortgage Disclosure
Act, requiring financial institutions to provide certain information concerning
their mortgage lending; the Equal Credit Opportunity Act and the Fair Housing
Act, prohibiting discrimination on the basis of certain prohibited factors in
extending credit; the Fair Credit Reporting Act, governing the use and provision
of information to credit reporting agencies; the Bank Secrecy Act, dealing with,
among other things, the reporting of certain currency transactions; and the Fair
Debt Collection Act, governing the manner in which consumer debts may be
collected by collection agencies. The deposit operations of the Banks are
subject to the Truth in Savings Act, requiring certain disclosures about rates
paid on savings accounts; the Expedited Funds Availability Act, which deals with
disclosure of the availability of funds deposited in accounts and the collection
and return of checks by banks; the Right to Financial Privacy Act, which imposes
a duty to maintain certain confidentiality of consumer financial records and the
Electronic Funds Transfer Act and regulations promulgated thereunder, which
govern automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
The Banks are subject to the requirements of the Community Reinvestment
Act (the "CRA"). The CRA imposes on financial institutions an affirmative and
ongoing obligation to meet the credit needs of their local communities,
including low- and moderate-income neighborhoods, consistent with the safe and
sound operation of those institutions. Each financial institution's actual
performance in meeting community credit needs are evaluated as part of the
examination process, and also are considered in evaluating mergers, acquisitions
and applications to open a branch or facility.
Other Safety and Soundness Regulations
Prompt Corrective Action. The federal banking agencies have broad
powers under current federal law to take prompt corrective action to resolve
problems of insured depository institutions. The extent of these powers depends
upon whether the institutions in question are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized."
A bank that is "undercapitalized" becomes subject to provisions of the
FDIA restricting payment of capital distributions and management fees; requiring
OCC to monitor the condition of the bank; requiring submission by the bank of a
capital restoration plan; restricting the growth of the bank's assets and
requiring prior approval of certain expansion proposals. A bank that is
"significantly undercapitalized" is also subject to restrictions on compensation
paid to senior management of the bank, and a bank that is "critically
undercapitalized" is further subject to restrictions on the activities of the
bank and restrictions on payments of subordinated debt of the bank. The purpose
of these provisions is to require banks with less than adequate capital to act
quickly to restore their capital and to have the OCC move promptly to take over
banks that are unwilling or unable to take such steps.
6
Brokered Deposits. Under current FDIC regulations, "well capitalized"
banks may accept brokered deposits without restriction, "adequately capitalized"
banks may accept brokered deposits with a waiver from the FDIC (subject to
certain restrictions on payments of rates), while "undercapitalized" banks may
not accept brokered deposits. The regulations provide that the definitions of
"well capitalized", "adequately capitalized" and "undercapitalized" are the same
as the definitions adopted by the agencies to implement the prompt corrective
action provisions described in the previous paragraph.
Interstate Banking
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 ("Riegel-Neal"), CBI and any other adequately capitalized bank holding
company located in South Carolina can acquire a bank located in any other state,
and a bank holding company located outside South Carolina can acquire any South
Carolina-based bank, in either case subject to certain deposit percentage and
other restrictions. Rieglel-Neal also provides that, in any state that has not
previously elected to prohibit out-of-state banks from operating interstate
branches within its territory, adequately capitalized and managed bank holding
companies can consolidate their multistate bank operations into a single bank
subsidiary and branch interstate through acquisitions. De novo branching by an
out-of-state bank is permitted only if it is expressly permitted by the laws of
the host state. The authority of a bank to establish and operate branches within
a state will continue to be subject to applicable state branching laws. South
Carolina law was amended, effective July 1, 1996, to permit such interstate
branching but not de novo branching by an out-of-state bank.
The Riegel-Neal Act, together with legislation adopted in South
Carolina, resulted in a number of South Carolina banks being acquired by large
out-of-state bank holding companies. Size gives the larger banks certain
advantages in competing for business from larger customers. These advantages
include higher lending limits and the ability to offer services in other areas
of South Carolina and the region. As a result, the Banks do not generally
attempt to compete for the banking relationships of large corporations, but
concentrates its efforts on small to medium-sized businesses and on individuals.
CBI believes its' Banks have competed effectively in this market segment by
offering quality, personal service.
Legislative Proposals
Other proposed legislation which could significantly affect the
business of banking has been introduced or may be introduced in Congress from
time to time. CBI cannot predict the future course of such legislative proposals
or their impact on CBI should they be adopted.
Recent Legislation
On November 12, 1999, the President signed the Gramm-Leach-Bliley Act,
which makes it easier for affiliations between banks, securities firms and
insurance companies to take place. The Act removes Depression-era barriers that
had separated banks and securities firms, and seeks to protect the privacy of
consumers' financial information. Most of the provisions of the Act require the
applicable regulators to adopt regulations in order to implement these
provisions.
Under provisions of the new legislation, which are effective March 11,
2000, banks, securities firms and insurance companies are able to structure new
affiliations through a holding company structure or through a financial
subsidiary. The legislation creates a new type of bank holding company called a
"financial holding company" which has powers much more extensive than those of
standard holding companies. These expanded powers include authority to engage in
"financial activities," which are activities that are (1) financial in nature;
(2) identical to activities that are financial in nature; or (3) complimentary
to a financial activity and that do not impose a safety and soundness risk.
Significantly, the permitted financial activities for financial holding
companies include authority to engage in merchant banking and insurance
activities, including insurance portfolio investing. A bank holding company can
qualify as a financial holding company and expand the services it offers only if
all of its subsidiary depository institutions are well-managed, well-capitalized
and have received a rating of "satisfactory" on their last Community
Reinvestment Act examination.
7
The legislation also creates another new type of entity called a
"financial subsidiary." A financial subsidiary may be used by a national bank or
a group of national banks to engage in many of the same activities permitted for
a financial holding company, though several of these activities, including real
estate development or investment, insurance or annuity underwriting, insurance
portfolio investing and merchant banking, are reserved for financial holding
companies. A bank's investment in a financial subsidiary affects the way in
which the bank calculates its regulatory capital, and the assets and liabilities
of financial subsidiaries may not be consolidated with those of the bank. The
bank must also be certain that its risk management procedures are adequate to
protect it from financial and operational risks created both by itself and by
any financial subsidiary. Further, the bank must establish policies to maintain
the separate corporate identities of the bank and its financial subsidiary and
to prevent each from becoming liable for the obligations of the other.
The Act also establishes the concept of "functional supervision,"
meaning that similar activities should be regulated by the same regulator.
Accordingly, the Act spells out the regulatory authority of the bank regulatory
agencies, the Securities and Exchange Commission and state insurance regulators
so that each type of activity is supervised by a regulator with corresponding
expertise. The Federal Reserve Board is intended to be an umbrella supervisor
with the authority to require a bank holding company or financial holding
company or any subsidiary of either to file reports as to its financial
condition, risk management systems, transactions with depository institution
subsidiaries and affiliates, and compliance with any federal law that it has
authority to enforce.
Although the Act reaffirms that states are the regulators for insurance
activities of all persons, including federally-chartered banks, the Act
prohibits states from preventing depository institutions and their affiliates
from conducting insurance activities.
The Act also establishes a minimum federal standard of privacy to
protect the confidentiality of a consumer's personal financial information and
gives the consumer the power to choose how personal financial information may be
used by financial institutions. The privacy provisions of the Act will not go
into effect until after adoption of implementing regulations by various federal
agencies.
CBI anticipates that the Act and the regulations which are to be
adopted pursuant to the Act will be likely to create new opportunities for it to
offer expanded services to customers in the future, though CBI has not yet
determined what the nature of the expanded services might be or when CBI might
find it feasible to offer them. CBI further expects that the Act will increase
competition from larger financial institutions that are currently more capable
than CBI of taking advantage of the opportunity to provide a broader range of
services. However, CBI continues to believe that its commitment to providing
high quality, personalized service to customers will permit it to remain
competitive in its market area.
Fiscal and Monetary Policy
Banking is a business which depends to a large extent on interest rate
differentials. In general, the difference between the interest paid by a bank on
its deposits and its other borrowings, and the interest received by a bank on
its loans and securities holdings, constitutes the major portion of a bank's
earnings. Thus, the earnings and growth of CBI are subject to the influence of
economic conditions generally, both domestic and foreign, and also to the
monetary and fiscal policies of the United States and its agencies, particularly
the Federal Reserve. The Federal Reserve regulates the supply of money through
various means, including open-market dealings in United States government
securities, the discount rate at which banks may borrow from the Federal
Reserve, and the reserve requirements on deposits. The nature and timing of any
changes in such policies and their impact on CBI cannot be predicted.
Employees
At December 31, 1999 the Corporation employed 85 full time equivalent
employees Of these, 35 were employed by the Orangeburg bank, 20 were employed by
the Sumter bank, 12 were employed by the Florence bank and 18 were employed by
the holding company. Management believes that its employee relations are
excellent.
8
Item 2. Description of Property
The Corporation's Orangeburg bank owns land located at 1820 Columbia
Road NE, in Orangeburg, South Carolina. The Orangeburg bank maintains its main
office at this address. The total investment in this real estate was $245,000.
The Bank operates from a one-story building of approximately 7,000 square feet.
The Bank's investment in the building is $536,000.
The Orangeburg bank also owns a building, which was previously a branch
of the bank, at the corner of Broughton and Glover Streets in Orangeburg. The
Bank's investment in the land is $120,000. The Bank's investment in the building
plus its improvements and renovations is $225,546. The Orangeburg bank currently
rents this facility to the Corporation for office space. In June 1999 the Bank
moved into a new branch facility located adjacent to the old building. This new
branch office is approximately 6,500 square feet and the total investment in it
was approximately $648,146, with an additional investment of $78,789 in land
improvements.
The foregoing properties are owned in fee simple by the Orangeburg
bank. Management believes that insurance coverage on the foregoing properties is
adequate.
The Corporation's Sumter bank owns land located at 683 Bultman Drive,
in Sumter, South Carolina. The Sumter bank maintains its main office at this
address. The total investment in this real estate was $317,000. The Bank
operates from a one-story building of approximately 6,500 square feet. The
Bank's investment in the building is $606,000.
The foregoing property is owned in fee simple by the Sumter bank.
Management believes that insurance coverage on the foregoing properties is
adequate.
The Florence bank is leasing approximately 1.7 acres of land located at
2009 Hoffmeyer Road in Florence, South Carolina. This land is the site of the
main office for Florence National Bank. The details of the lease are discussed
in Note 6 to the financial statements contained elsewhere in this report. The
Corporation has constructed a one-story building for the Florence bank of
approximately 7,500 square feet on the leased site. The building cost
approximately $724,000.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted for a vote of the security holders during the
fourth quarter of 1999.
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
The Corporation's shares of Common Stock are traded on the American
Stock Exchange (the AMEX) under the ticker symbol SCB.
The following table summarizes the range of high and low prices for the
Corporation's Common Stock of which management has knowledge for each quarterly
period over the last two years. The prices in the table have been adjusted to
reflect the 5% stock dividend paid on January 31, 2000.
Sales price of the Corporation's Common Stock
Quarter ended High Low
Mar. 31, 1998 $16.57 $13.30
June 30, 1998 $16.15 $13.30
Sept. 30, 1998 $16.04 $12.35
Dec. 31, 1998 $14.07 $12.35
Mar. 31, 1999 $13.78 $12.29
June 30, 1999 $13.48 $11.51
Sept. 30, 1999 $14.01 $11.29
Dec. 31, 1999 $13.78 $11.16
9
During 1999 the Corporation had a stock sales volume of 262,900 shares on the
American Stock Exchange, compared to 159,000 shares in 1998.
There were 1,419 holders of record of the Corporation's Common Stock
(no par value) as of December 31, 1999, compared to 1,457 the prior year.
During 1999 the Corporation authorized and paid two cash dividends
totaling 19 cents per share. The total cost of these payments was approximately
$608,000 or 28% of after tax profits. During 1998 the Corporation authorized and
paid two cash dividends totaling 15 cents per share. The total cost of these
payments was approximately $453,000 or 29% of after tax profits. The dividend
policy of the Corporation is subject to the discretion of the Board of Directors
and depends upon a number of factors, including earnings, financial condition,
cash needs and general business conditions, as well as applicable regulatory
considerations. Subject to ongoing review of these circumstances, the Board
expects to maintain a reasonable, safe, and sound dividend payment policy.
The current source of dividends to be paid by the Corporation is
dividends of its banking subsidiaries. Accordingly, the payment of dividends by
the Corporation is indirectly subject to the same laws and regulations that
govern the payment of dividends by national banking associations. National banks
may pay dividends only out of present and past earnings with numerous
limitations designed to ensure that the Banks have adequate capital to operate
safely and soundly (See Item 1. Description of Business - Supervision and
Regulation - Payment of Dividends.). At December 31, 1999 the Banks could pay up
to $3,749,000 in dividends without special approval of the Comptroller of the
Currency.
Item 6. Selected Financial Data
The following is a summary of the consolidated financial position and
results of operations of the Corporation for the years ended December 31, 1995
through December 31, 1999.
For the years ended December 31, 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Financial Condition (All amounts in thousands of dollars, except per share data.)
Investment securities .................... $ 43,936 $ 34,148 $ 32,452 $ 25,787 $ 24,669
Net loans receivable .................... 155,152 116,336 90,811 67,953 51,617
Total assets ............................. 228,030 182,281 134,574 105,461 83,897
Total deposits ........................... 184,364 147,630 117,167 89,851 72,550
Long-term obligations .................... 19,420 9,490 1,060 1,130 700
Stockholders' equity ..................... $ 20,245 $ 19,659 $ 13,037 $ 12,104 $ 7,346
Earnings Summary
Interest income .......................... $ 15,550 $ 12,320 $ 9,820 $ 7,261 $ 6,327
Interest expense ......................... (6,958) (5,554) (4,374) (3,279) (2,965)
--------- --------- --------- --------- ---------
Net interest income ................. 8,592 6,766 5,446 3,982 3,362
Provision for loan losses ................ (612) (484) (358) (227) (160)
Other operating income ................... 1,317 1,055 768 503 431
Other operating expenses ................. (6,066) (5,107) (4,004) (3,097) (2,179)
--------- --------- --------- --------- ---------
Net income before taxes ............. 3,231 2,230 1,852 1,161 1,454
Income taxes ............................. (1,049) (663) (636) (411) (517)
--------- --------- --------- --------- ---------
Net income after tax ................ $ 2,182 $ 1,567 $ 1,216 $ 750 $ 937
========= ========= ========= ========= =========
Per share data
Basic earnings .......................... $ 0.68 $ 0.52 $ 0.44 $ 0.29 $ 0.51
Diluted earnings ........................ $ 0.68 $ 0.51 $ 0.43 $ 0.29 $ 0.51
Dividends ............................... $ 0.19 $ 0.15 $ 0.14 $ 0.14 $ 0.13
Per share information is adjusted for a 5% stock dividend paid on Jan. 31, 2000
10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
INTRODUCTION
The discussion and data presented below analyze major factors and
trends regarding the financial position and results of operations of Community
Bankshares Inc. and its subsidiaries (herein after referred to as the
Corporation or CBI) for the three year period ended December 31, 1999.
Forward Looking Statements
Statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations that are not historical in nature
are intended to be, and are hereby identified as "forward looking statements"
for purposes of the safe harbor provided by Section 21E of the Securities
Exchange Act of 1934, as amended. The Corporation cautions readers that forward
looking statements, including without limitation, those relating to the
Corporation's future business prospects, revenues, working capital, liquidity,
capital needs, interest costs, and income, are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
indicated in the forward looking statements, due to several important factors
herein identified, among others, and other risks and factors identified from
time to time in the Corporation's reports filed with the Securities and Exchange
Commission.
Business of the Corporation and the Banks
Community Bankshares Inc. is a bank holding company. It was
incorporated on November 30, 1992, and commenced operations July 1, 1993, by
acquiring Orangeburg National Bank. CBI now owns three banking subsidiaries:
Orangeburg National Bank, Sumter National Bank, and Florence National Bank
(herein after referred to collectively as the Banks). CBI provides item and data
processing and other technical services for its banking subsidiaries. The
consolidated financial report for 1999 represents the operations of the holding
company and its three banks. (Parent-only financial statements are presented in
the footnotes to the consolidated financial statements.)
Orangeburg National Bank is a national banking association and
commenced operations in November 1987. It operates two offices in Orangeburg,
South Carolina. Sumter National Bank is a national banking association and
commenced operations in June 1996. It operates one office in Sumter, South
Carolina. Florence National Bank is a national banking association and commenced
operations in July 1998. It operates one office in Florence, South Carolina. The
Banks provide commercial banking services in their respective communities. Their
primary customer markets are consumers and small businesses.
Year 2000
Community Bankshares Inc. did not suffer any unusual circumstances
associated with the century date rollover beyond a minimal reduction in earnings
as the result of the Banks' increasing their vault cash at year-end to
accommodate any increase in customer needs for cash. All mission critical
systems functioned normally after the rollover. The Corporation considers its
Year 2000 efforts successful. The Banks' cash holdings have returned to normal
levels.
Stock Split and Stock Dividend
On July 21, 1997, the Corporation effected a two-for-one split of its
common shares outstanding. On January 31, 2000 the Corporation effected a five-
percent stock dividend. All references to per share information contained in
this discussion have been adjusted accordingly.
DISTRIBUTION OF ASSETS AND LIABILITIES
The following table presents the average balance sheets, the average
yield and the interest earned on earning assets, and the average rate and the
interest paid on interest bearing liabilities for the years ended December 31,
1999, 1998 and 1997.
11
Years ended December 31, 1999 1998 1997
Interest Interest Interest
Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/
Assets Balance Expense(1) Rates(1) Balance Expense(1) Rates(1) Balance Expense(1) Rates(1)
------ ------- ---------- -------- ------- ---------- -------- ------- ---------- --------
(Dollar amounts in thousands
Interest bearing deposits ........... $ 1,937 $ 101 5.21% $ 2,385 $ 126 5.28% $ 1,283 $ 73 5.69%
Investment securities taxable ....... 39,856 2,458 6.17% 30,096 1,915 6.36% 28,727 1,797 6.26%
Investment securities--tax exempt ... 783 30 5.81% 341 14 6.22% 410 17 6.28%
Federal funds sold .................. 10,967 555 5.06% 10,626 568 5.35% 4,363 241 5.52%
Loans receivable (2) ................ 139,215 12,406 8.91% 103,500 9,697 9.37% 81,167 7,692 9.48%
-------- ------- ----- -------- ------- ----- -------- ------ -----
Total interest earning assets ....... 192,758 15,550 8.07% 146,948 12,320 8.38% 115,950 9,820 8.47%
Cash and due from banks ............. 8,896 6,499 4,990
Allowance for loan losses ........... (1,692) (1,281) (1,011)
Premises and equipment .............. 4,549 3,622 2,817
Other assets ........................ 2,251 1,718 1,640
-------- -------- --------
Total assets ........................ $206,762 $157,506 $124,386
======== ======== ========
Liabilities and
Shareholders' Equity
Interest bearing deposits
Savings ............................. $ 28,321 $ 943 3.33% $ 22,235 $ 774 3.48% $ 19,576 $ 681 3.48%
Interest bearing
transaction accounts .............. 17,417 269 1.54% 14,028 253 1.80% 11,974 217 1.81%
Time deposits ....................... 96,761 4,901 5.07% 73,045 4,018 5.50% 59,522 3,250 5.46%
-------- ------- ----- -------- ------- ----- -------- ------ -----
Total interest bearing deposits ..... 142,499 6,113 4.29% 109,308 5,045 4.62% 91,072 4,148 4.55%
Short term borrowing ................ 5,210 170 3.26% 3,225 119 3.69% 3,846 153 3.98%
FHLB advances ....................... 12,335 675 5.47% 6,905 390 5.65% 1,101 73 6.63%
-------- ------- ----- -------- ------- ----- -------- ------ -----
Total interest bearing liabilities .. 160,044 6,958 4.35% 119,438 5,554 4.65% 96,019 4,374 4.56%
Noninterest bearing demand deposits . 26,124 19,536 15,098
Other liabilities ................... 978 942 864
Shareholders' equity ................ 19,616 17,590 12,405
-------- -------- --------
Total liabilities and
shareholders' equity .............. $206,762 $157,506 $124,386
======== ======== ========
Interest rate spread (3) 3.72% 3.73% 3.91%
Net interest income and net yield
on earning assets (4) ............. $ 8,592 4.46% $ 6,766 4.60% $5,446 4.70%
1. Computed on a fully taxable equivalent basis using a federal tax rate of
34%.
2. Nonaccruing loans are included in the average loan balances and income from
such loans are recognized on a cash basis.
3. Total interest earning assets yield less total interest bearing liabilities
rate.
4. Net yield equals net interest income divided by total interest earning
assets.
Earnings Performance, 1999 compared to 1998
The Corporation's net income was $2,182,000, or $.68 per share, in
1999. This compares to $1,567,000, or $.52 per share, in 1998, an increase of
$615,000, or 39%.
Management views this increase in earnings as primarily the result of a
substantial increase in earning assets resulting from growth in its three
markets, but particularly Sumter and Florence. The earnings at the Sumter bank
increased to $559,000 in 1999 from $179,000 in 1998, a 212% increase. The
earnings at the Orangeburg bank increased to $2,054,000 in 1999 from $1,737,000
in 1998, an 18% increase. The Florence bank showed a net loss of $314,000 for
the twelve-month period in 1999 compared to a net loss of $331,000 for six
months of operation in 1998.
12
Interest Income and Interest Expense, 1999 compared to 1998
The Corporation's interest income increased substantially in 1999 from
1998. In 1999 the Corporation earned $15,550,000 in total interest income, up
from the prior year's $12,320,000. This represented a $3,230,000 or a 26.2%
increase. This growth was mostly the result of increased volume in the loan and
investment portfolios at each of the three banks.
Interest bearing deposits in other banks contributed $101,000 to
interest income in 1999, down from $126,000 the prior year, a decrease of
$25,000 or 19.8%. In 1999 the Corporation had an average of $1,937,000 in
interest bearing deposits, down from the prior year's $2,385,000, a decrease of
$448,000 or 18.8%. The average yield on these deposits during 1999 was 5.21%,
down from the prior year's 5.28%.
Investments contributed $2,458,000 to interest income in 1999, up from
$1,915,000 the prior year, an increase of $543,000 or 28.4%. The investment
portfolio averaged $39,856,000 in 1999, up from the prior year's $30,096,000, an
increase of $9,760,000 or 32.4%. The Corporation's investment portfolio consists
primarily of short-term U. S. government and agency debt issues. The average
yield on investments during 1999 was 6.17%, down from 6.36% in 1998.
The Corporation's tax-exempt securities portfolio earned $30,000 during
1999, up from $14,000 the prior year. The portfolio averaged $783,000 in 1999,
up from $341,000 in 1998, an increase of $442,000 or 130%. The average yield was
5.81%, compared to 6.22% the prior year, on a fully taxable equivalent basis.
Federal funds sold represent temporary surplus funds that one bank
lends to another. These funds are a source of day to day operating liquidity.
Federal funds sold contributed $555,000 to interest income in 1999, down from
$568,000 in the prior year, a decrease of $13,000 or 2.3%. The Corporation had
an average of $10,967,000 in federal funds during 1999, up from the prior year's
$10,626,000, an increase of $341,000 or 3.2%. The average yield on federal funds
during 1999 was 5.06%, down from 5.35% in 1998.
The Corporation's major source of interest income is the loan
portfolio, which contributed $12,406,000 to interest income in 1999, up from
$9,697,000 in the prior year, an increase of $2,709,000 or 28%. The average loan
portfolio for 1999 was $139,215,000, compared to the prior year's $103,500,000,
an increase of $35,715,000 or 34.5%. The average yield on loans during 1999 was
8.91%, down from 9.37% in 1998.
The Corporation had average earning assets in 1999 of $192,758,000,
which earned a yield of 8.07%. The Corporation had average earning assets in
1998 of $146,948,000, which earned a yield of 8.38%. Average earning assets
increased $45,810,000 or 31.2%.
The Corporation's savings deposits consist of savings and money market
accounts. Total savings accounts averaged $28,321,000 in 1999, up from
$22,235,000 in the prior year, an increase of $6,086,000 or 27.4%. The cost of
these funds decreased to 3.33% in 1999 from 3.48% in the prior year.
Interest bearing transaction accounts are the primary checking accounts
that the Banks offer customers. This overall category was $17,417,000 in 1999,
up from $14,028,000 in 1998, an increase of $3,389,000 or 24.2%. The average
cost of these funds was 1.54% in 1999, compared to 1.80% in the prior year.
Time deposits are the largest category of deposits, totaling
$96,761,000 in 1999, up from $73,045,000 in the prior year, an increase of
$23,716,000 or 32.5%. The cost of time deposits decreased to 5.07% from 5.50%.
Short-term borrowing includes federal funds purchased and securities
sold under agreements to repurchase. The repurchase agreements are consummated
with several commercial customers of the Orangeburg bank. These accounts are not
deposits; they are considered other obligations of the Banks. Balances in these
accounts are subject to wide fluctuation, but they constitute a relatively small
portion of the balance sheet. The average balance for 1999 was $5,210,000, up
from $3,225,000 in the prior year, an increase of $1,985,000 or 61.5%. The cost
of these funds decreased to 3.26% from 3.69%.
The Orangeburg, Sumter and Florence banks are members of and have the
ability to borrow from the Federal Home Loan Bank (FHLB). The banks had an
average $12,335,000 outstanding borrowing balance during 1999 at an average cost
of 5.47%. The banks had an average $6,905,000 outstanding during 1998 at an
13
average cost of 5.65%. These borrowings are a result of the Banks' on-going
asset/liability management strategy. These loans are secured by a blanket lien
on the bank's one-to-four family residential mortgage loan portfolio and the
bank's stock in the FHLB. The Florence bank did not have any borrowing activity
with the FHLB during 1999 and 1998.
The Corporation had total interest bearing liabilities in 1999 of
$160,044,000 costing an average of 4.35%, compared with interest bearing
liabilities in 1998 of $119,438,000 that cost an average of 4.65%. Average
interest bearing liabilities increased $40,606,000 or 34%.
Earnings Performance, 1998 compared to 1997
The Corporation's net income was $1,567,000, or $.52 per share, in
1998. This compares to $1,216,000, or $.44 per share, in 1997, an increase of
$351,000, or 29%.
Management views this increase in earnings as primarily the result of a
substantial increase in earning assets resulting from growth in its three
markets. Earnings at the Orangeburg bank increased to $1,737,000 in 1998 from
$1,401,000 in 1997, a 24% increase. Earnings at the Sumter bank increased to
$179,000 in 1998 from a net loss of $163,000 in 1997. The Florence bank showed a
net loss at year-end 1998 of $331,000 for six months of operation.
Interest Income and Interest Expense, 1998 compared to 1997
The Corporation's interest income increased in 1998 from 1997. In 1998
the Corporation earned $12,320,000 in total interest income, up from the prior
year's $9,820,000. This represented a $2,500,000 or a 25.4% increase. This
growth was mostly the result of increased volume in the loan and investment
portfolios at each of the three banks.
Interest bearing deposits in other banks contributed $126,000 to
interest income in 1998, up from $73,000 the prior year, an increase of $53,000
or 72.6%. In 1998 the Corporation had an average of $2,385,000 invested in
interest bearing deposits, up from the prior year's $1,283,000, an increase of
$1,102,000 or 85.9%. The average yield on these deposits during 1998 was 5.28%,
down .41% from the prior year's yield of 5.69%.
Investments contributed $1,915,000 to interest income in 1998, up from
$1,797,000 the prior year, an increase of $118,000 or 6.6%. The investment
portfolio averaged $30,096,000 in 1998, up from the prior year's $28,727,000, an
increase of $1,369,000 or 4.7%. The average yield on investments during 1998 was
6.36%, up from 6.26% in 1997.
The Corporation's tax-exempt securities portfolio earned $14,000 during
1998, down from $17,000 the prior year. The portfolio averaged $341,000 in 1998,
down from $410,000 in 1997, a decrease of $69,000 or 16.8%. The average yield
was 6.22%, compared to 6.28% the prior year, on a fully taxable equivalent
basis.
Federal funds sold contributed $568,000 to interest income in 1998, up
from $241,000 in the prior year, an increase of $327,000 or 136%. The
Corporation had an average of $10,626,000 in federal funds during 1998, up from
the prior year's $4,363,000, an increase of $6,263,000 or 144%. The average
yield on federal funds during 1998 was 5.35%, down from 5.52% in 1997. The
primary reason for the substantial increase in federal funds was that the new
bank in Florence maintained a highly liquid position in its first months of
operation.
The loan portfolio contributed $9,697,000 to interest income in 1998,
up from $7,692,000 in the prior year, an increase of $2,005,000 or 26%. The
average loan portfolio for 1998 was $103,500,000, compared to the prior year's
$81,167,000, an increase of $22,333,000 or 27.5%. The average yield on loans
during 1998 was 9.37%, down from 9.48% in 1997.
The Corporation had average earning assets in 1998 of $146,948,000
which earned a yield of 8.38%. In 1997 the Corporation had average earning
assets of $115,950,000 which earned a yield of 8.47%. Average earning assets
increased $30,998,000 or 26.7%.
14
Total savings accounts averaged $22,235,000 in 1998, up from
$19,576,000 in the prior year, an increase of $2,659,000 or 13.6%. The cost of
these funds increased to 3.48% in 1998 from 3.47% in the prior year.
Interest bearing transaction accounts were $14,028,000 in 1998, up from
$11,974,000 in 1997, an increase of $2,054,000 or 17.2%. The average cost of
these funds was 1.80% in 1998, compared to 1.81% in the prior year.
Time deposits totaled $73,045,000 in 1998, up from $59,522,000 in the
prior year, an increase of $13,523,000 or 22.7%. The cost of time deposits
increased to 5.50% from 5.46%.
The Orangeburg bank has several commercial customers for whom it offers
daily repurchase agreements. The average balance of short-term borrowings for
1998 was $3,225,000, down from $3,846,000 in the prior year, a decrease of
$621,000 or 16.1%. The cost of these funds decreased to 3.69% from 3.98%.
The Orangeburg bank had an average $6,905,000 outstanding borrowing
balance with the FHLB during 1998 at an average cost of 5.65%. The bank had an
average $1,101,000 outstanding during 1997 with the FHLB at an average cost of
6.63%. The Sumter and Florence banks did not have any borrowing activity with
the FHLB during 1998 and 1997.
The Corporation had total interest bearing liabilities in 1998 of
$119,438,000 costing an average of 4.65%, compared with interest bearing
liabilities in 1997 of $96,019,000 that cost an average of 4.55%. Average
interest bearing liabilities increased $23,419,000 or 24.4%.
Volume and Rate Variance Analysis
The table "Volume and Rate Variance Analysis" provides a summary of
changes in net interest income resulting from changes in volume and changes in
rate (The changes in volume are the difference between the current and prior
year's balances times the prior year's rate. The changes in rate are the
difference between the current and prior year's rate times the prior year's
balance.)
As reflected in the table, the increase in 1999 net interest income of
$1,826,000 is due to changes in volume. All of the $3,230,000 increase in
interest income was from volume growth in earning assets, especially the loan
portfolio. Likewise, the $1,404,000 increase in interest expense was due to
volume increases for time deposits. During 1998 there was a similar pattern,
with most of the increase in net interest income coming from changes in volume.
The prime interest rate has changed over the last several years in both
directions. The prime rate went to 8.50% in March 1997 and stayed there until
late 1998, when it was reduced in three installments to 7.75%. It stayed stable
through the first half of 1999, then gradually increased to 8.50% by year-end
1999. Management expects that interest rates may increase another 50 basis
points during the first half of 2000, as the Federal Reserve maintains its
anti-inflation bias. Management expects inflation to remain very low. The
Corporation is not aware of any other immediately identifiable factors that
would cause short-term interest rates to increase beyond these expectations in
the near term. Therefore, as in 1999, any improvements in net interest income
during 2000 are more likely to be the result of changes in volume and the mix of
earning assets and interest bearing liabilities than changes in rates.
15
Volume and Rate Variance Analysis
1999 compared to 1998 1998 compared to 1997
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
Interest earning assets (Dollar amounts in thousands)
- -----------------------
Interest bearing deposits ......................... $ (24) $ (1) $ (25) $ 58 $ (5) $ 53
Investment securities taxable ..................... 602 (59) 543 87 31 118
Investment securities--tax exempt ................. 17 (1) 16 (5) - (5)
Federal funds sold ................................ 18 (31) (13) 334 (7) 327
Loans receivable .................................. 3,203 (494) 2,709 2,095 (88) 2,007
------- ------- ------- ------- ------- -------
Total interest income ............................. 3,816 (586) 3,230 2,569 (69) 2,500
------- ------- ------- ------- ------- -------
Interest bearing liabilities
Savings ........................................... 204 (35) 169 93 1 94
Interest bearing transaction accounts ............. 55 (39) 16 37 (1) 36
Time deposits ..................................... 1,221 (338) 883 743 24 767
------- ------- ------- ------- ------- -------
Total interest bearing deposits ................... 1,480 (412) 1,068 873 24 897
Short term borrowing .............................. 66 (15) 51 (24) (10) (34)
FHLB advances ..................................... 297 (12) 285 328 (11) 317
------- ------- ------- ------- ------- -------
Total interest expense ............................ 1,843 (439) 1,404 1,177 3 1,180
------- ------- ------- ------- ------- -------
Net interest income .................................. $ 1,973 $ (147) $ 1,826 $ 1,392 $ (72) $ 1,320
======= ======= ======= ======= ======= =======
(1) The rate / volume variance for each category has been allocated on a
consistent basis between rate and volume variances based on the percentage
of rate or volume variance to the sum of the two absolute variances, except
in categories having balances in only one period. In such cases, the entire
variance is attributed to volume differences.
(2) Computed on a fully taxable equivalent basis using a federal income tax
rate of 34%.
PREMISES AND EQUIPMENT
Premises and equipment were $4,619,000 at December 31, 1999, compared
to $3,892,000 the prior year, an increase of $727,000 or 18.6%. Most of this
increase was associated with the new branch bank in Orangeburg. Premises and
equipment are discussed further in Note 6 to the consolidated financial
statements.
INVESTMENT PORTFOLIO
The Corporation's investment portfolio consists primarily of short-term
U. S. government and agency debt issues. Investment securities averaged $39.8
million in 1999, $30.1 million in 1998 and $28.7 million in 1997. Note 4 to the
consolidated financial statements provides further information on the investment
portfolio.
The table below gives the amortized cost and fair value of the
Corporation's investment portfolio for the past three years.
16
1999 1998 1997
---- ---- ----
Amortized Fair Amortized Fair Amortized Fair
cost value cost value cost value
---- ----- ---- ----- ---- -----
(Dollar amounts in thousands)
Securities held to maturity
U.S. government and agencies ............. $13,369 $12,919 $15,035 $15,076 $16,906 $16,923
State and local government ............... - - 251 253 405 408
------- ------- ------- ------- ------- -------
Total held to maturity .............. $13,369 $12,919 $15,286 $15,329 $17,311 $17,331
======= ======= ======= ======= ======= =======
Securities available for sale
U.S. government and agencies ............. $28,931 $28,151 $16,921 $16,975 $14,413 $14,444
State and local government ............... 825 814 225 227 327 327
Other securities ......................... 1,601 1,601 1,660 1,660 370 370
------- ------- ------- ------- ------- -------
Total available for sale ............ $31,357 $30,566 $18,806 $18,862 $15,110 $15,141
======= ======= ======= ======= ======= =======
Information on the maturity distribution of the investment portfolio is
presented in Note 4 to the financial statements, page 42.
At December 31, 1999 the Corporation's available for sale portfolio
showed a net of tax other comprehensive loss in the equity section of the
balance sheet of $511,000 compared to a net of tax other comprehensive income
item of $36,000 the prior year. The change in the valuation of the investment
portfolio was directly related to changes in market interest rates during the
year. Management considers it unlikely that these investments will be sold prior
to maturity and does not regard the valuation as anything other than a temporary
fluctuation in market values.
LOAN PORTFOLIO
The average size of the loan portfolio in 1999 was $139.2 million, in
1998 it was $103.5 million, and in 1997 it was $81.1 million.
At December 31, 1999, the loan portfolio was $157.1 million, compared
to $117.8 million the prior year, an increase of $39.3 million, or 33%.
Management believes the loan portfolio is adequately diversified. There
are no foreign loans and few agricultural loans.
The table, "Loan Portfolio Composition," on the following page,
indicates the amounts of loans outstanding according to the type of loan at the
dates indicated.
Loan Portfolio Composition
The following table shows the composition of the loan portfolio for the
years ended December 31, 1995 through 1999.
Loan category 1999 1998 1997 1996 1995
- ------------- ---- ---- ---- ---- ----
(Dollar amounts in thousands)
Commercial, financial and agricultural ............. $ 39,752 $ 29,403 $ 21,690 $ 16,520 $ 12,408
Real estate - construction ......................... 9,156 5,738 6,563 5,611 3,449
Real estate - mortgage ............................. 84,680 62,789 46,734 35,553 28,029
Installment loans to individuals ................... 23,033 19,325 16,348 11,021 8,361
Obligations of political subdivisions .............. 468 540 616 124 77
-------- -------- -------- -------- --------
Total loans - gross ........................... $157,089 $117,795 $ 91,951 $ 68,829 $ 52,324
======== ======== ======== ======== ========
17
Commercial, financial, and agricultural loans, primarily representing
loans made to small businesses, increased by $10.3 million or 35% during 1999.
These loans may be made on either a secured or an unsecured basis. When taken,
security consists of liens on inventories, receivables, equipment, and furniture
and fixtures. Unsecured business loans are generally short-term with emphasis on
repayment strengths and low debt to worth ratios.
Real estate loans consist of construction loans and loans
collateralized by mortgages. Construction loans are also generally
collateralized with mortgages. Because the Corporation's subsidiaries are
community banks, real estate loans comprise the bulk of the loan portfolio.
Construction loans increased $3.4 million or 60% in 1999. Mortgage loans
increased $21.9 million or 35% in 1999.
The Corporation generally does not compete with 15 and 30 year fixed
secondary market mortgage interest rates, so it has elected to pursue the
origination of mortgage loans that could be easily sold into the secondary
mortgage market. These loans are generally pre-qualified with the underwriters
to avoid problems in the sale of the loans. In 1999, 1998 and 1997 the
Corporation sold $9.9 million, $12.1 million and $4.8 million, respectively, in
such loans. These loans are sold at par so no gain or loss is recognized at the
time of sale. However, the origination and sale of these loans generates fee
income. The Corporation also makes mortgage loans for its own account. Such
loans are usually for a shorter term than loans made to sell and usually have a
variable rather than a fixed interest rate.
Installment loans to individuals increased $3.7 million or 19% in 1999.
Interest income from the loan portfolio was $12.4 million in 1999,
compared to $9.7 million in 1998, an increase of $2.7 million or 28%. The
average yield on the portfolio was 8.91% in 1999, compared to 9.37% in 1998.
Maturity Distribution of Loans
The following table sets forth the maturity distribution of the
Corporation's loans, by type, as of December 31, 1999, as well as the type of
interest on loans due after one year.
Within one After one After five Total
year year but years but
within five within ten
years years
------- -------- --------- --------
(Dollar amounts in thousands)
Commercial .......... $18,574 $17,209 $ 4,874 $ 40,657
Real Estate ......... 22,850 44,410 25,852 93,112
Installment ......... 6,643 15,910 1,036 23,589
------- ------- ------- --------
Total .......... $48,067 $77,529 $31,762 $157,358
======= ======= ======= ========
Sensitivity of loans to changes in interest rates-- Loans due after one year
Predetermined interest rate $ 89,471
Floating interest rate 19,820
--------
Total $109,291
========
Note - total of $157,356,000 includes $269,000 in loans held for resale.
18
Lending Risks
Because extending credit involves a certain degree of risk, management
has established loan and credit policies designed to control both the types and
amounts of risks assumed and to minimize losses. Such policies include
limitations on loan-to-collateral values for various types of collateral,
requirements for appraisals of real estate collateral, problem loan management
practices and collection procedures, and nonaccrual and charge-off guidelines.
The Corporation also conducts internal loan reviews to monitor on an ongoing
basis the quality of its portfolio.
The Corporation has a geographic concentration of loans within its home
communities of Orangeburg, Sumter, and Florence, South Carolina, because its
primary business is community banking.
Concentrations of credit also occur where a number of customers are
engaged in similar business activities. The banks regularly review their
business lending in an effort to detect, monitor and control such loan
concentrations. At December 31, 1999 the Corporation had a concentration in the
following areas: medical and dental offices - $7,428,000; dwelling operators -
$2,620,000; and real estate developers - $2,993,000.
Nonaccrual and Past Due Loans
The nonaccrual, past due, and impaired loans and other real estate
owned are summarized in Note 5 to the consolidated financial statements. The
Corporation had no restructured loans in 1999 or 1998.
Years ended December 31, 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollar amounts in thousands)
Nonaccrual loans ............................................. $ 90 $ 31 $ 81 $ 431 $348
Accruing loans 90 days or more past due ...................... 6 187 - 93 76
---- ---- ---- ------ ----
Total ................................................... $ 96 $218 $ 81 $ 524 $424
==== ==== ==== ====== ====
Total as a % of outstanding loans ....................... 0.06% 0.19% 0.13% 0.76% 0.81%
==== ==== ==== ====== ====
Other Real Estate Owned ...................................... $ - $266 $132 $ - $ -
==== ==== ==== ====== ====
Impaired Loans (included in nonaccrual) ...................... $ 90 $ 31 $ 81 $ 120 $108
==== ==== ==== ====== ====
Gross income that would have been recorded for the year ended December 31, 1999
and 1998, if nonaccrual loans had been performing in accordance with their
original terms was approximately $2,100 each year. No interest income was
recognized in the current period for the non-accrual loans.
The Corporation's nonaccrual loan policy is discussed in Note 2 to the
consolidated financial statements in the section labeled Loans Receivable. The
Corporation's policy on impaired loans is discussed in Note 2 to the
consolidated financial statements in the section labeled Allowance for Loan
Losses.
Nonaccrual loans and impaired loans were not material in relation to
the portfolio as a whole in 1999. Management is aware of no trends, events or
uncertainties that would cause nonaccrual loans to change materially in 2000.
Potential Problem Loans
At December 31, 1999, the Corporation's internal loan review program
had identified $1,774,000 (1.1% of the portfolio) in various loans where
information about credit problems of borrowers had caused management to have
concerns about the ability of the borrowers to comply with original repayment
terms.
19
The amounts reflected above do not represent management's estimate of
the potential losses since a large proportion of these loans are collateralized
by real estate and other marketable collateral.
Secured versus Unsecured Loans
The Corporation does not aggressively seek to make unsecured loans,
since these loans may be somewhat more risky than collateralized loans. There
are, however, occasions when it is in the business interests of the Corporation
to provide short-term, unsecured loans to selected customers. In 1999 the
Corporation had $9.6 million in unsecured loans or 6.1% of its loan portfolio.
In 1998 the Corporation had $7.3 million in unsecured loans or 6.2% of its loan
portfolio.
Loan Participations
Periodically, the Corporation's banking subsidiaries enter into sales
or purchases of loan participations with one another and other financial
institutions. The banks generally only sell participations in loans that would
cause the bank to exceed its lending limitation to a single customer. As the
Banks' lending limits increase they may buy back such loan participations. Such
loans are usually commercial in nature, subject to the Banks' standard
underwriting requirements, and all risks associated with the portion of the loan
sold flow to the purchaser.
At the end of 1999 the three banks had $7,292,000 in loan
participations purchased. Of these loans, all but $564,000 were among the three
banks.
At the end of 1999 the three banks had $6,701,000 in loan
participations sold. Of these loans, all were sold among the three banks.
At the end of 1998 the three banks had a total of $3,595,000 in loan
participations purchased. Of these loans, all but $219,000 were among the three
banks.
At the end of 1998 the three banks had $3,333,000 in loan
participations sold. Of these loans, all were sold among the three banks.
Other Real Estate
Other real estate, consisting of foreclosed properties, was $0 in 1999
and $266,000 in 1998 and $132,000 in 1997. Other real estate is initially
recorded at the lower of net loan balance or its estimated fair value, net of
estimated disposal costs. The estimate of fair value for foreclosed properties
is determined by appraisal at the time of acquisition.
SUMMARY OF LOAN LOSS EXPERIENCE
Allowance for Loan Losses
The allowance for loan losses is increased by the provision for loan
losses, which is a direct charge to expense. Losses on loans are charged against
the allowance in the period in which management determines that such loans
become uncollectable. Recoveries of previously charged-off loans are credited to
the allowance. At December 31, 1999 and 1998, the allowance for loan losses was
1.23% and 1.24%, respectively, of total loans. The following table provides
details on the changes in the allowance for loan losses during the past five
years.
20
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollar amounts in thousands)
Average amount of loans outstanding ................ $139,215 $103,349 $ 81,167 $ 57,806 $ 50,724
======== ======== ======== ======== ========
Allowance at beginning of year ..................... $ 1,459 $ 1,140 $ 876 $ 707 $ 616
-------- -------- -------- -------- --------
Loan charge-offs:
Real estate ........................................ 0 7 0 0 15
Installment ........................................ 95 111 121 70 58
Credit cards and related plans ..................... 5 6 9 5 2
Commercial and other ............................... 80 56 2 11 9
-------- -------- -------- -------- --------
Total charge-offs ............................. 180 180 132 86 84
-------- -------- -------- -------- --------
Recoveries:
Real Estate ........................................ 0 0 0 4 0
Installment ........................................ 17 12 34 23 13
Credit cards and related plans ..................... 3 3 4 1 2
Commercial and other ............................... 25 0 0 0 0
-------- -------- -------- -------- --------
Total recoveries .............................. 45 15 38 28 15
-------- -------- -------- -------- --------
Net charge-offs .................................... 135 165 94 58 69
Provision for loan losses .......................... 612 484 358 227 160
-------- -------- -------- -------- --------
Allowance for loan losses at end of year .......... $ 1,936 $ 1,459 $ 1,140 $ 876 $ 707
======== ======== ======== ======== ========
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Ratios
Net charge-offs to average loans outstanding ................. 0.10% 0.16% 0.12% 0.10% 0.14%
Net charge-offs to loans outstanding at end of ............... 0.09% 0.14% 0.10% 0.08% 0.13%
year
Allowance for loan losses to average loans ................... 1.39% 1.41% 1.40% 1.52% 1.39%
Allowance for loan losses to total loans at end .............. 1.23% 1.24% 1.24% 1.27% 1.35%
of year
Net charge-offs to allowance for losses ...................... 6.97% 11.31% 8.33% 6.62% 9.76%
Net charge-offs to provision for loans losses ................ 22.06% 34.09% 26.46% 25.55% 43.13%
Management reviews its allowance for loan losses in three broad
categories: commercial, real estate and installment loans. The combination of a
relatively short operating history and relatively high asset quality precludes
management from establishing a specific loan loss percentage for the computation
of the allowance for each category. Instead management assigns an estimated
percentage factor to each in the computation of the overall allowance. In
general terms, the real estate portfolio is least risky, followed by the
commercial loan portfolio, followed by the installment loan portfolio. The
Banks' internal and external loan review programs will from time to time
identify loans that are subject to specific weaknesses and such loans will be
reviewed for a specific loan loss allowance.
21
The Corporation operates three independent community banks in central
South Carolina. Under the provisions of the National Bank Act each board of
directors is responsible for determining the adequacy of their loan loss
allowance. In addition, each bank is supervised and regularly examined by the
Office of the Comptroller of the Currency of the U. S. Treasury Department. As a
normal part of a safety and soundness examination, the OCC examiners will assess
and comment on the adequacy of a national bank's allowance for loan losses. The
allowance presented in this discussion is on an aggregated basis and as such
will generally show a substantial unallocated reserve that might not be present
if the Corporation was comprised of one operating bank subsidiary.
The nature of community banking is such that the loan portfolios will
be predominantly comprised of small and medium size business and consumer loans.
As community banks there is by definition a geographic concentration of loans
within the Banks' respective city or county. Management at each bank monitors
the loan concentrations and loan portfolio quality on an ongoing basis
including, but not limited to: quarterly analysis of loan concentrations,
monthly reporting of past dues, non-accruals, and watch loans, and quarterly
reporting of loan charge-offs and recoveries. These efforts focus on historical
experience and are bolstered by quarterly analysis of local and state economic
conditions, which is part of the Banks' assessment of the adequacy of their
allowances for loan losses.
Based on the current levels of non-performing and other problem loans,
management believes that loan charge-offs in 2000 will at least approximate the
1999 levels as such loans progress through the collection, foreclosure, and
repossession process. Management believes that the allowance for loan losses, as
of December 31, 1999, is sufficient to absorb the expected charge-offs and
provide adequately for the inherent losses that remain in the loan portfolio.
Management will continue to closely monitor the levels of non-performing and
potential problem loans and address the weaknesses in these credits to enhance
the amount of ultimate collection or recovery of these assets. Should increases
in the overall level of non-performing and potential problem loans accelerate
from the current trend, management will adjust the methodology for determining
the allowance for loan losses to increase the provision and allowance for loan
losses. This would decrease net income.
The following table presents the allocation of the allowance for loan
losses, as of December 31, 1995 through 1999, compared with the percent of loans
in the applicable categories to total loans.
1999 % of 1998 % of 1997 % of 1996 % of 1995 % of
loans in loans in loans in loans in loans in
each each each each each
category category category category category
---- -------- ---- -------- ---- -------- ---- -------- ---- --------
(Dollar amounts in thousands)
Commercial ................ $ 660 28% $ 364 25% $ 336 24% $ 314 24% $ 253 24%
Real estate ............... 565 57% 385 59% 301 58% 313 60% 171 60%
Installment ............... 360 15% 388 16% 288 18% 188 16% 208 16%
Unallocated ............... 351 0% 322 0% 215 0% 61 0% 75 0%
------ --- ------ --- ------ --- ------ --- ------ ---
Total ................ $1,936 100% $1,459 100% $1,140 100% $ 876 100% $ 707 100%
====== === ====== === ====== === ====== === ====== ===
This allocation is an estimate only and is not intended to restrict the
Corporation's ability to respond to losses. The Corporation charges losses from
any segment of the portfolio to the allowance, regardless of the allocation. The
allowance for each subsidiary bank is available to absorb losses on that bank's
loan portfolio only.
22
Provision for Loan Losses
The provision for loan losses is charged to earnings based on
management's continuing review and evaluation of the loan portfolio and general
economic conditions. In reviewing the adequacy of the provision for loan losses
during each period, the Corporation considers historical loan loss experience,
current economic conditions, loans outstanding, trends in non-performing and
delinquent loans, the quality of collateral securing problem loans, and the
results of its ongoing internal loan review process. Provisions for loan losses
totaled $612,000 and $484,000 in 1999 and 1998, respectively. Based on the
available information, the Corporation considers its 1999 provision for loan
losses adequate.
Net charge-offs in 1999 were $135,000 or 22% of the provision for loan
losses compared to $165,000 or 34% of the provision for loan losses in the prior
year. See "Allowance for Loan Losses" for a discussion of the factors management
considers in its review of the adequacy of the allowance and provision for loan
losses.
AVERAGE DEPOSITS
The Corporation's average deposits in 1999 were $168.6 million,
compared to $128.8 million in 1998, an increase of $39.8 million or 30.9%.
The total average deposits for the Corporation for the years ended
December 31, 1999, 1998 and 1997, are summarized below:
1999 1998 1997
---- ---- ----
Average Average Average Average Average Average
balance cost balance cost balance cost
------- ---- ------- ---- ------- ----
(Dollar amounts in thousands)
Noninterest bearing demand ........................ $ 26,124 $ 19,536 $ 15,098
Interest bearing transaction accounts ............. 17,417 1.54% 14,028 1.80% 11,974 1.87%
Savings-regular ................................... 8,595 2.08% 10,774 2.38% 8,892 2.46%
Savings- money market ............................. 19,726 3.97% 11,461 4.96% 10,684 4.32%
Time deposits less than $100,000 .................. 39,406 5.09% 52,314 5.39% 43,240 5.40%
Time deposits greater than $100,000 ............... 57,355 5.14% 20,731 5.92% 16,282 5.63%
-------- -------- --------
Total average deposits ....................... $168,623 $128,844 $106,170
======== ======== ========
At December 31, 1999, the Corporation had $36,163,000 in certificates
of deposit of $100,000 or more. The maturities of these certificates are
disclosed in Note 7 to the consolidated financial statements.
RETURN ON EQUITY AND ASSETS
The following table shows the return on assets (net income divided by
average total assets), return on equity (net income divided by average equity),
dividend payout ratio (dividends declared per share divided by net income per
share), and equity to assets ratio (average equity divided by average total
assets) for the years ended December 31, 1999, 1998 and 1997.
1999 1998 1997
---- ---- ----
Return on assets (ROA) .................. 1.06% 0.99% 0.98%
Return on equity (ROE) .................. 11.12% 8.91% 9.80%
Dividend payout ratio
(dividends/net income) ................ 27.82% 28.91% 32.40%
Equity as a percent of assets ........... 9.49% 11.17% 9.97%
23
SHORT-TERM BORROWINGS
The Corporation's short-term borrowings consist of federal funds
purchased and securities sold under agreements to repurchase, which generally
mature each business day. There was $2,782,000, $4,464,000 and $2,551,000
outstanding at year-end 1999, 1998 and 1997, respectively. Further information
is provided in Note 8 to the consolidated financial statements.
FEDERAL HOME LOAN BANK ADVANCES
CBI's banking subsidiaries are members of the Federal Home Loan Bank of
Atlanta. As such they have access to long-term borrowing from the FHLB. There
were $19,420,000 and $9,490,000 outstanding in such advances at year-end 1999
and 1998, respectively. Further information on these borrowings from the FHLB is
provided in Note 9 to the consolidated financial statements.
CAPITAL
Dividends
During 1999 CBI paid cash dividends to shareholders of 19 cents per
share, which totaled $608,000. This represented a dividend payout ratio
(dividends divided by net income) of 28%. The dividend payout ratio in 1998 was
29%.
Common Stock
Common stock at December 31, 1999, totaled $14,207,000, compared to
$14,648,000 the prior year. The changes in this account included a decrease of
$630,000 as a result of stock redemption and an increase of $189,000 resulting
from the exercise of stock options.
Capital Adequacy
The Federal Reserve and federal bank regulatory agencies have adopted a
risk-based capital standard for assessing the capital adequacy of a bank holding
company or financial institution. The minimum required ratio is 8%. Orangeburg
National Bank, Sumter National Bank, and Florence National Bank are each
considered `well capitalized' for regulatory purposes. This category requires a
minimum risk based capital ratio of 10%. During 1998 and 1999 CBI transferred
$1,000,000 to Sumter National Bank in the form of additional capital in order to
maintain the well-capitalized standing. This additional capital was necessary to
accommodate growth in the bank's balance sheet during the period. Detailed
information on the Corporation's capital position, as well as that of its
subsidiary banks, is provided in Note 20 to the consolidated financial
statements. The Corporation considers its current and projected capital position
to be adequate.
NONINTEREST INCOME AND NONINTERST EXPENSE
Noninterest income, 1999 compared to 1998
Noninterest income increased to $1,317,000 in 1999 from $1,055,000 in
1998, a $262,000 or 24.8% increase. The major component of this change was in
service charge income, which in 1999 was $1,031,000 compared to $798,000 in the
prior year, a $235,000 or 29.2% increase.
Noninterest expense, 1999 compared to 1998
Overall, non-interest expenses increased to $6,066,000 in 1999 from
$5,074,000 in 1998, an increase of $992,000 or 19.6%. The first full year of
operation of the new bank in Florence accounted for much of this increase.
Accordingly, many of the dollar and percentage changes discussed herein will be
larger than normal.
24
Personnel costs in 1999 were $3,493,000 compared to $2,911,000 the
prior year, an increase of $582,000 or 20%.
Premises and equipment expenses in 1999 were $886,000 compared to
$701,000 the prior year, a $185,000 or 26.4% increase.
Supplies expense was $155,000 in 1999, compared to $174,000 in the
prior year, a decrease of $19,000 or 10.9%.
Director fees were $121,000 in 1999, compared to $125,000 in the prior
year, a decrease of $4,000 or 3%. Orangeburg National Bank pays its outside
directors $600 per month. Sumter National Bank pays its directors $300 per
month. CBI pays its outside directors $200 per month. Florence National Bank
does not currently pay director fees.
FDIC insurance costs were $23,000 in 1999, compared to $16,000 in the
prior year, an increase of $7,000 or 44%.
All other expenses were $1,388,000 in 1999, compared to $1,147,000 in
the prior year, an increase of $241,000 or 21%.
Income Taxes, 1999 compared to 1998
The Corporation pays U. S. corporate income taxes and South Carolina
bank income taxes. The 1999 provision for income taxes was $1,049,000, compared
to $663,000 the prior year, an increase of $386,000 or 58.2%. The Corporation's
effective average tax rate is 32.4%. CBI was the beneficiary of the exercise of
non-qualified stock options on 27,500 shares during 1999. The tax benefit to the
Corporation approximated $89,000 and accounts for the reduction in the effective
tax rate.
Noninterest income, 1998 compared to 1997
Noninterest income increased to $1,055,000 in 1998 from $768,000 in
1997, a $287,000 or 37.4% increase. The major component of this change was in
service charge income, which in 1998 was $798,000 compared to $561,000 in the
prior year, a $237,000 or 42.2% increase.
Noninterest expense, 1998 compared to 1997
Overall, non-interest expenses increased to $5,074,000 in 1998 from
$4,004,000 in 1997, an increase of $1,070,000 or 26.7%. The first six months of
operation of the new bank in Florence accounted for $516,000 of this increase.
Pre-opening expenses associated with the new bank accounted for $75,000 of this
increase. The remaining increase was related to growth in the Sumter and
Orangeburg banks and increased volumes of their business. Accordingly, many of
the dollar and percentage changes discussed herein will be larger than normal.
Personnel costs in 1998 were $2,911,000 compared to $2,332,000 the
prior year, an increase of $579,000 or 24.8%.
Premises and equipment expenses in 1998 were $701,000 compared to
$527,000 the prior year, a $174,000 or 33% increase.
Supplies expense was $174,000 in 1998, compared to $121,000 in the
prior year, an increase of $53,000 or 43.8%.
Director fees were $125,000 in 1998, compared to $72,000 in the prior
year, an increase of $53,000 or 73.6%. Orangeburg National Bank pays its outside
directors $600 per month. Sumter National Bank pays its directors $300 per
month. CBI pays its outside directors $200 per month. Florence National Bank
does not pay director fees.
FDIC insurance costs were $16,000 in 1998, compared to $15,000 in 1997,
an increase of $1,000 or 6.7%.
All other expenses were $1,147,000 in 1998, compared to $937,000 in the
prior year, an increase of $210,000 or 22.4%.
25
Income Taxes, 1998 compared to 1997
The Corporation pays U. S. corporate income taxes and South Carolina
bank income taxes. The 1998 provision for income taxes was $663,000, compared to
$636,000 the prior year, an increase of $27,000 or 4.2%. The Corporation's
effective average tax rate is 29.3% in 1998. CBI was the beneficiary of the
exercise of non-qualified stock options on 58,000 shares during 1998. The tax
benefit to the corporation approximated $174,000 and accounts for the reduction
in the effective tax rate.
INFLATION
The assets and liabilities of the Corporation are mostly monetary in
nature. Accordingly, the financial results and operations of the Corporation are
much more affected by changes in interest rates than changes in inflation. There
is, however, a strong correlation between increasing inflation and increasing
interest rates. The impact of inflation has been very moderate, less than 3%,
during 1999. Prospects appear good for continued low inflation. Although
inflation does not normally affect a financial institution as dramatically as it
affects businesses with large investments in plants and inventories, it does
have an effect. During periods of high inflation there are usually corresponding
increases in the money supply, and banks experience above average growth in
assets, loans, and deposits. General increases in the prices of goods and
services also result in increased operating expenses.
In November and December 1999 the Federal Reserve increased the
discount rate by a total of 50 basis points. The current bias of the Federal
Reserve Board indicates that further interest rate hikes are likely. However, as
of late first quarter 2000 the interest rate increases have not slowed new loan
demand in the Banks' markets. Competition for new loan business and demand for
new loans appear to have mitigated the effect of increased interest rates. Of
course, if rates continue to increase it is possible that demand will slow. In
any case, it is likely that the Banks will continue to face increased pressure
on their net interest margins during 2000.
LIQUIDITY
Liquidity is the ability to meet current and future obligations through
liquidation or maturity of existing assets or the acquisition of additional
liabilities, most often deposits. Adequate liquidity is necessary to meet the
requirements of customers for loans and deposit withdrawals in a timely and
economical manner. The most manageable sources of liquidity are composed of
liabilities, with the primary focus of liquidity management being the ability to
attract deposits within the Orangeburg National Bank, Sumter National Bank, and
Florence National Bank service areas. Core deposits (total deposits less
certificates of deposit of $100,000 or more) provide a relatively stable funding
base. Certificates of deposit of $100,000 or more are generally more sensitive
to changes in rates, so they must be monitored carefully. Asset liquidity is
provided by several sources, including amounts due from banks, federal funds
sold, and investments available for sale.
The Corporation maintains an available for sale investment portfolio.
While investment securities purchased for this portfolio are generally purchased
with the intent to be held to maturity, such securities are marketable and
occasional sales may occur prior to maturity as part of the process of
asset/liability and liquidity management. The Corporation also maintains a
held-to-maturity investment portfolio. Securities in this portfolio are
generally not considered a primary source of liquidity. Management deliberately
maintains a short-term maturity schedule for its investments so that there is a
continuing stream of maturing investments. The Corporation intends to maintain a
short-term investment portfolio in order to continue to be able to supply
liquidity to its loan portfolio and for customer withdrawals.
The Corporation has substantially more liabilities that mature in the
next 12 months than it has assets maturing in the same period. However, based on
its historical experience, and that of similar financial institutions, the
Corporation believes that it is unlikely that so many deposits would be
withdrawn, without being replaced by other deposits, that the Corporation would
be unable to meet its liquidity needs with the proceeds of maturing assets.
26
The Corporation also maintains various federal funds lines of credit
with correspondent banks and is able to borrow from the Federal Home Loan Bank
and the Federal Reserve's discount window.
The Corporation has a demonstrated ability to attract deposits from its
market area. Deposits have grown from $72 million in 1995 to over $184 million
in 1999. This stable growing base of deposits is the major source of operating
liquidity.
The Corporation's long-term liquidity needs are expected to be
primarily affected by the maturing of long-term certificates of deposit. At
December 31, 1999, the Corporation had approximately $13.4 million in
certificates of deposit and other obligations maturing in one to five years. The
Corporation had $17.7 million in obligations maturing after five years. The
Corporation's assets maturing in the same periods were $87 million and $45
million, respectively. With a substantially larger dollar amount of assets
maturing in both periods than liabilities, the Corporation believes that it will
not have any significant long-term liquidity problems.
In the opinion of management, the current and projected liquidity
position is adequate.
NEW ACCOUNTING STANDARDS
The effect of new accounting standards on the Corporation is discussed
in Footnote 2 to the consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from adverse changes in market prices
and rates. The Corporation's market risk arises principally from interest rate
risk inherent in its lending, deposit and borrowing activities. Management
actively monitors and manages its interest rate risk exposure. Although the
Corporation manages other risks, such as credit quality and liquidity risk in
the normal course of business, management considers interest rate risk to be its
most significant market risk and this risk could potentially have the largest
material effect on the Corporation's financial condition and results of
operations. Other types of market risks such as foreign currency exchange risk
and commodity price risk do not arise in the normal course of community banking
activities.
Achieving consistent growth in net interest income is the primary goal
of the Corporation's asset/liability function. The Corporation attempts to
control the mix and maturities of assets and liabilities to achieve consistent
growth in net interest income despite changes in market interest rates. The
Corporation seeks to accomplish this goal while maintaining adequate liquidity
and capital. The Corporation's asset/liability mix is sufficiently balanced so
that the effect of interest rates moving in either direction is not expected to
be significant over time.
The Corporation's Asset/Liability Committee uses a simulation model to
assist in achieving consistent growth in net interest income while managing
interest rate risk. The model takes into account interest rate changes as well
as changes in the mix and volume of assets and liabilities. The model simulates
the Corporation's balance sheet and income statement under several different
rate scenarios. The model's inputs (such as interest rates and levels of loans
and deposits) are updated on a quarterly basis in order to obtain the most
accurate projection possible. The projection presents information over a
twelve-month period. It reports a base case in which interest rates remain flat
and reports variations that occur when rates increase and decrease 100 and 200
basis points. According to the model as of December 31, 1999, the Corporation is
positioned so that net interest income will increase $264,000 and net income
will increase $163,000 in the next twelve months if interest rates rise 200
basis points. Conversely, net interest income will decline $175,000 and net
income will decline $108,000 in the next twelve months if interest rates decline
200 basis points. Computation of prospective effects of hypothetical interest
rate changes are based on numerous assumptions, including relative levels of
market interest rates and loan prepayment, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions the Corporation could undertake in response to changes in interest
rates.
27
The Market Risk Maturity table, which follows this discussion, shows
the Corporation's financial instruments that are sensitive to changes in
interest rates. The Corporation uses certain assumptions to estimate fair values
and expected maturities. For assets, expected maturities are based upon
contractual maturity, projected repayments, prepayment of principal and
potential calls. For core deposits without contractual maturity (i.e., interest
checking, savings and money market accounts), the table presents principal cash
flows based on management's judgment concerning their most likely runoff. The
actual maturities and runoff could vary substantially if future prepayments,
runoff and calls differ from the Corporation's historical experience.
Average Market Risk Maturity
rate 2000 2001 2002 2003 2004 After 2005 Total Fair value
------- ---- ---- ---- ---- ---- ---------- ----- ----------
(Dollar amounts in thousands)
Earning Assets
Interest bearing deposits .......... 5.21% $ 788 $ - $ - $ - $ - $ - $ 788 $ 788
Investment securities .............. 6.17% 2,292 2,424 4,926 6,514 7,565 20,214 43,935 43,485
Federal funds sold ................. 5.06% 8,040 - - - - - 8,040 8,040
Loans .............................. 5.06% 36,033 14,091 18,329 21,304 31,519 36,082 157,358 155,422
Interest bearing
liabilities
Savings ............................ 3.33% 1,525 1,449 1,377 1,308 1,242 23,605 30,506 30,506
Interest bearing ................... 1.54% 937 890 845 803 763 14,494 18,732 18,732
transaction accounts
Time deposits < $100,000 ........... 5.09% 62,150 8,917 591 487 121 179 72,445 72,377
Time deposits > $100,000 ........... 5.14% 31,983 4,075 - - - 105 36,163 36,095
Short term borrowing ............... 3.26% 2,782 - - - - - 2,782 2,782
FHLB advances ...................... 5.47% $ 2,000 $ - $ - $ - $ - $17,420 $ 19,420 $ 19,420
The Corporation also reviews its interest rate risk by periodically
evaluating its interest rate sensitivity gap (the ratio of assets and
liabilities repricing within specific maturity ranges). At December 31, 1999 on
a cumulative basis through twelve months, rate sensitive liabilities exceeded
rate sensitive assets, by $71.8 million. The liability sensitive position is
largely due to the assumption that the Banks' $48.8 million in interest bearing
transaction accounts, savings accounts and money market accounts will reprice
within a year. This assumption may or may not be valid, since these accounts
vary greatly in their sensitivity to interest rate changes in the market.
The following table summarizes the Corporation's interest sensitivity
position as of December 31, 1999.
28
Interest Sensitivity Analysis
Within 3 4-12 months 1-5 years Over 5 Total
months years
-------- ----------- --------- ------ -----
(Dollar amounts in thousands)
Interest earning assets
Interest bearing deposits ...................... $ 788 $ - $ - $ - $ 788
Investment securities .......................... 500 1,700 20,952 20,783 43,935
Federal funds sold ............................. 8,040 - - - 8,040
Loans, net of unearned income .................. 54,863 10,852 66,703 24,940 157,358
-------- -------- -------- -------- --------
Total interest earning assets .................. 64,191 12,552 87,655 45,723 210,121
-------- -------- -------- -------- --------
Interest bearing liabilities
Savings ........................................ 30,506 - - - 30,506
Interest bearing transaction accounts .......... 18,372 - - - 18,372
Time deposits .................................. 24,432 70,599 13,369 208 108,608
Short term borrowings .......................... 2,782 - - - 2,782
FHLB advances .................................. 1,910 - - 17,510 19,420
-------- -------- -------- -------- --------
Total interest bearing liabilities ............. $ 78,002 $ 70,599 $ 13,369 $ 17,718 $179,688
-------- -------- -------- -------- --------
Interest sensitivity gap ....................... $(13,811) $(58,047) $ 74,286 $ 28,005 $ 30,433
Cumulative gap ................................. (13,811) (71,858) 2,428 30,433
RSA/RSL ........................................ 82% 18%
Cumulative RSA/RSL ............................. 82% 52%
RSA- rate sensitive assets; RSL- rate sensitive
liabilities
The above table reflects the balances of interest earning assets and
interest bearing liabilities at the earlier of their repricing or maturity
dates. Amortizing fixed rate loans are reflected at the scheduled maturity date.
Variable rate amortizing loans are reflected at the earliest date at which they
may be repriced contractually. Deposits in other banks and debt securities are
reflected at each instrument's ultimate maturity date. Overnight federal funds
sold are reflected as instantly repriceable. Interest bearing liabilities with
no contractual maturity, such as savings deposits and interest bearing
transaction accounts, are reflected in the earliest repricing period possible.
Fixed rate time deposits are reflected at the earlier of their next repricing or
maturity dates.
Item 8. Financial Statements and Supplementary Data
Please see the attached consolidated audited financial statements for
the years ended December 31, 1999, 1998 and 1997.
29
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report ................................................................ 31
Consolidated Balance Sheets, December 31, 1999 and 1998 ..................................... 32
Consolidated Statements of Income, Years Ended December 31,
1999, 1998 and 1997 ...................................................................... 33-34
Consolidated Statements of Changes in Shareholders' Equity, Years Ended
December 31, 1999, 1998 and 1997 ......................................................... 35
Consolidated Statements of Cash Flows, Years Ended December 31,
1999, 1998 and 1997 ...................................................................... 36
Notes to Consolidated Financial Statements .................................................. 37
30
INDEPENDENT AUDITORS' REPORT
To the Shareholders and
Board of Directors of
Community Bankshares, Inc.
We have audited the accompanying consolidated balance sheets of Community
Bankshares, Inc., and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1999. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Community
Bankshares, Inc., and subsidiaries at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
J. W. HUNT AND COMPANY, LLP
Columbia, South Carolina
January 31, 2000
31
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 1999 AND 1998
ASSETS
($ in thousands) 1999 1998
---- ----
Cash and due from banks ............................................................... $ 12,275 $ 7,746
Federal funds sold .................................................................... 8,040 15,550
--------- ---------
Total cash and cash equivalents ...................................... 20,315 23,296
Interest-bearing deposits with banks .................................................. 788 1,577
Securities held to maturity (fair value approximates
$12,919 and $15,329 as of December 31, 1999 and
1998, respectively) ................................................................. 13,369 15,286
Securities available for sale, at fair value .......................................... 30,566 18,862
Loans held for sale ................................................................... 269 722
Loans receivable, net of allowance for loan
losses of $1,936 in 1999 and $1,459 in 1998 ........................................ 155,153 116,336
Accrued interest receivable ........................................................... 1,700 1,242
Premises and equipment - net .......................................................... 4,619 3,892
Net deferred tax asset ................................................................ 858 453
Other assets .......................................................................... 393 615
--------- ---------
Total assets ........................................................ 228,030 182,281
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand, non interest bearing .................................................... $ 26,878 $ 23,883
Interest-bearing transaction accounts ........................................... 18,372 16,220
Savings ......................................................................... 30,506 25,602
Certificates of deposit of $100 and over ........................................ 36,163 24,504
Other time deposits ............................................................. 72,445 57,421
--------- ---------
Total deposits ...................................................... 184,364 147,630
Federal funds purchased and securities sold under
agreements to repurchase ..................................................... 2,782 4,464
Federal Home Loan Bank advances ................................................. 19,420 9,490
Accrued interest payable ........................................................ 770 603
Accrued expenses and other liabilities .......................................... 449 435
--------- ---------
Total liabilities ................................................... 207,785 162,622
--------- ---------
Shareholders' equity:
Common stock - no par value, authorized shares
- 12,000,000; issued and outstanding - 3,191,462 shares
in 1999 and 3,200,070 shares in 1998 ............................................. 14,207 14,648
Retained earnings .................................................................. 6,549 4,975
Accumulated other comprehensive income (loss) ...................................... (511) 36
--------- ---------
Total shareholders' equity .......................................... 20,245 19,659
--------- ---------
Total liabilities and shareholders' equity .......................... 228,030 182,281
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS
32
CONSOLIDATED STATEMENTS OF INCOME, YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
($ in thousands, except per share data) 1999 1998 1997
---- ---- ----
Interest and dividend income:
Loans, including fees .................................................. $12,406 $ 9,697 $ 7,692
Deposits with other financial institutions ............................. 101 126 73
------- ------- -------
Total ................................................... 12,507 9,823 7,765
------- ------- -------
Investment securities interest and dividends:
Interest - U. S. Treasury and
U.S. Government Agencies ......................................... 2,352 1,831 1,754
Interest - tax exempt securities .................................... 30 14 17
Dividends ........................................................... 106 84 43
------- ------- -------
Total investment securities interest
and dividends ........................................ 2,488 1,929 1,814
------- ------- -------
Federal funds sold and securities
purchased under agreements to resell ............................. 555 568 241
------- ------- -------
Total interest and dividend income ...................... 15,550 12,320 9,820
------- ------- -------
Interest expense:
Deposits:
Interest-bearing transaction accounts ............................... 269 253 217
Savings ............................................................. 942 774 681
Certificates of deposit of $100 and over ............................ 1,523 1,174 897
Certificates of deposit of less than $100 ........................... 3,379 2,844 2,353
------- ------- -------
Total interest on deposits .............................. 6,113 5,045 4,148
Federal funds purchased and securities sold
under agreements to repurchase ...................................... 170 119 153
Federal Home Loan Bank advances ........................................ 675 390 73
------- ------- -------
Total interest expense .................................. 6,958 5,554 4,374
------- ------- -------
Net interest income ....................................................... 8,592 6,766 5,446
Provision for loan losses ................................................. 612 484 358
------- ------- -------
Net interest income after provision
for loan losses ...................................... 7,980 6,282 5,088
------- ------- -------
Noninterest income:
Service charges on deposit accounts .................................... 1,031 798 561
Deposit box rent ....................................................... 24 19 16
Bank card fees ......................................................... 14 12 9
Credit life insurance commissions ...................................... 48 74 52
Other .................................................................. 200 152 130
------- ------- -------
Total noninterest income ................................ 1,317 1,055 768
------- ------- -------
Noninterest expenses:
Salaries and employee benefits ......................................... 3,493 2,911 2,332
Premises and equipment ................................................. 886 701 527
Marketing .............................................................. 180 166 173
Regulatory fees ........................................................ 155 92 75
Supplies ............................................................... 155 174 121
Director fees .......................................................... 121 125 72
FDIC insurance ......................................................... 23 16 15
Other .................................................................. 1,053 889 689
------- ------- -------
Total noninterest expenses .............................. 6,066 5,074 4,004
------- ------- -------
(Continued)-1
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS
33
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME, YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- -------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
Income before provision for income taxes and
cumulative effect of a change in accounting principle .................... $ 3,231 $ 2,263 $ 1,852
Provision for income taxes .................................................. 1,049 663 636
------- ------- -------
Income before cumulative effect of a change in
accounting principle ..................................................... 2,182 1,600 1,216
Cumulative effect of a change in accounting principle,
net of tax ............................................................... - 33 -
------- ------- -------
Net income ...................................................... 2,182 1,567 1,216
======= ======= =======
Average number of common shares outstanding ................................. 3,189 3,041 2,766
======= ======= =======
Average number of common shares outstanding,
assuming dilution ........................................................ 3,215 3,097 2,816
======= ======= =======
Basic earnings per common share:
Income before cumulative effect of a change in
accounting principle .................................................. $ 0.68 $ 0.53 $ 0.44
Cumulative effect of a change in accounting principle,
net of tax ............................................................ - (0.01) -
------- ------- -------
Net income ............................................................... 0.68 0.52 0.44
======= ======= =======
Diluted earnings per common share:
Income before cumulative effect of a change in
accounting principle .................................................. $ 0.68 $ 0.52 $ 0.43
Cumulative effect of a change in accounting principle,
net of tax ............................................................ - (0.01) -
------- ------- -------
Net income ............................................................... 0.68 0.51 0.43
======= ======= =======
(Concluded)-2
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS
34
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY,
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
($ in thousands, except per share data)
ACCUMULATED
OTHER
COMMON STOCK RETAINED COMPREHENSIVE
SHARES AMOUNT EARNINGS INCOME (LOSS) TOTAL
------ ------ -------- ------------- -----
Balance,
January 1, 1997 .............................. 2,757,800 $ 9,065 $ 3,039 $ - $ 12,831
Sale of common stock ......................... 8,610 100 - - 100
Stock issuance cost .......................... - (9) - - (9)
---------
Comprehensive Income:
Net income ................................. - - 1,216 - 1,216
Change in unrealized gains
(losses), net of applicable
deferred income taxes
on securities
available for sale ...................... - - - 20 20
---------
Total comprehensive income 1,236
---------
Dividends paid at $.14
per share ................................. - - (394) - (394)
--------- --------- --------- --------- ---------
Balance,
December 31, 1997 ............................ 2,766,410 9,156 3,861 20 13,037
Sale of common stock ......................... 378,010 5,372 - - 5,372
Stock issuance cost .......................... - (87) - - (87)
Exercise of stock options .................... 55,650 207 - - 207
---------
Comprehensive income:
Net income ................................. - - 1,567 - 1,567
Change in unrealized gains
(losses), net of applicable
deferred income taxes
on securities
available for sale ...................... - - - 16 16
---------
Total comprehensive income .......... - - - - 1,583
---------
Dividends paid at $.15
per share ................................. - - (453) - (453)
--------- --------- --------- --------- ---------
Balance,
December 31, 1998 ............................ 3,200,070 $ 14,648 $ 4,975 $ 36 $ 19,659
Repurchase of stock .......................... (49,455)
(630) - - (630)
Stock options exercised ...................... 40,847 189 - - 189
----------
Comprehensive income:
Net income ................................. - - 2,182 - 2,182
Change in unrealized gains
(losses), net of applicable
deferred income taxes
on securities
available for sale ...................... - - - (547) (547)
----------
Total comprehensive income
1,635
Dividends paid at $.19 ----------
per share ................................. - - (608) - (608)
---------- ---------- ---------- ---------- ----------
Balance,
December 31, 1999 ............................ 3,191,462 14,207 6,549 (511) 20,245
========== ========== ========== ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS
35
CONSOLIDATED STATEMENTS OF CASH FLOWS,
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
($ in thousands)
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net income ................................................................ $ 2,182 $ 1,567 $ 1,216
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .......................................... 462 437 295
Accretion of discounts and amortization of premiums -
securities - net .................................................... (14) (8) (103)
Provision for loan losses .............................................. 612 484 358
Deferred income taxes .................................................. (405) (102) (68)
Proceeds from sales of real estate loans held for sale ................. 9,963 12,089 4,768
Originations of real estate loans held for sale ........................ (9,963) (12,089) (4,768)
Decrease in real estate loans held for sale ............................ (453) (363) (63)
Net changes in operating assets and liabilities:
Accrued interest receivable ......................................... (458) (75) (313)
Other assets ........................................................ 289 (339) 29
Accrued interest payable ............................................ 167 93 160
Other liabilities ................................................... 14 187 (33)
-------- -------- --------
Net cash provided by operating activities .................. 2,396 1,881 1,478
-------- -------- --------
Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits
with banks ............................................................. 789 (339) (806)
Purchases of securities held to maturity .................................. (2,424) (19,253) (10,156)
Purchases of securities available for sale ................................ (23,050) (23,181) (11,918)
Proceeds from maturities of securities
held to maturity ....................................................... 4,340 21,284 8,999
Proceeds from maturities of securities
available for sale ..................................................... 10,485 19,479 7,614
Loan originations and principal collections, net .......................... (38,261) (26,012) (24,296)
Purchases of premises and equipment ...................................... (1,189) (1,530) (190)
-------- -------- --------
Net cash used by investing activities ...................... (49,310) (29,552) (30,753)
-------- -------- --------
Cash flows from financing activities:
Net increase in demand, transaction
and savings deposit accounts ............................................ $ 10,048 $ 16,544 9,354
Net increase in time deposits ............................................. 26,686 13,919 17,961
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase ...................... (1,682) 1,913 807
Federal Home Loan Bank advances ........................................... 9,930 8,430 (70)
Repurchase of stock ....................................................... (630) - -
Proceeds from issuance of common stock .................................... - 5,372 100
Stock issuance cost ....................................................... - (87) (9)
Proceeds from exercise of stock options ................................... 189 207 -
Dividends paid ............................................................ (608) (453) (394)
-------- -------- --------
Net cash provided by financing activities .................. 43,933 45,845 27,749
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ......................... (2,981) 18,174 (1,526)
Cash and cash equivalents at beginning of year ............................... 23,296 5,122 6,648
-------- -------- --------
Cash and cash equivalents at end of year ..................................... 20,315 23,296 5,122
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash payments of interest .............................................. $ 6,751 $ 5,461 $ 4,222
======== ======== ========
Cash payments for income taxes ......................................... $ 1,287 $ 718 $ 758
======== ======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING ACTIVITIES:
Transfers of loans receivable to other
real estate owned ................................................... $ 99 $ - $ 132
======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS
36
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 - ORGANIZATION:
Community Bankshares, Inc. (the "Corporation"), was organized under the laws of
the State of South Carolina and was chartered as a business corporation on
November 30, 1992. Pursuant to the provisions of the Federal Bank Holding
Company Act, an application was filed with and approved by the Board of
Governors of the Federal Reserve System for the Corporation to become a bank
holding company by the acquisition of Orangeburg National Bank (ONB).
In June 1996, Sumter National Bank (SNB) and in July 1998, Florence National
Bank (FNB) commenced operations in Sumter and Florence, South Carolina,
respectively, following approval by the Comptroller of the Currency and other
regulators. Upon completion of their organization, the common stock of SNB and
FNB was acquired by the Corporation.
The Banks operate as wholly-owned subsidiaries of the Corporation with separate
Boards of Directors and operating policies and provide a variety of financial
services to individuals and small businesses through their offices in South
Carolina. The primary deposit products are checking, savings and term
certificate accounts and the primary lending products are consumer, commercial
and mortgage loans.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Corporation
(the Parent Holding Company) and its subsidiaries, the Banks. All significant
intercompany balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES:
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the balance sheet and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses and
the valuation of deferred taxes assets.
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK:
Most of the Corporation's activities are with customers located within South
Carolina. Note 4 discusses the types of securities the Corporation purchases.
Note 5 discusses the types of lending that the Corporation engages in. The Banks
grant agribusiness, commercial, consumer and residential loans to customers
throughout the State of South Carolina. Although the Banks have diversified loan
portfolios, a substantial portion of their debtors' ability to honor their
contracts is dependent upon the economies of Florence, Orangeburg and Sumter
Counties, South Carolina and the surrounding areas.
37
ORGANIZATION, STOCK OFFERING AND PREOPENING COSTS:
Preopening costs associated with the organization of the Banks were expensed as
incurred while stock issuance costs were charged to common stock as incurred.
Organization costs were, until 1998, deferred and amortized over five years
using the straight-line method. In 1998, the Corporation adopted Statement of
Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities". This SOP
requires costs of start-up activities and organization costs to be expensed as
incurred. The initial application of this SOP is reported as the cumulative
effect of a change in accounting principle.
The effect of adopting this SOP in 1998 was to decrease income before provision
for income taxes and net income by approximately $46,000 and $33,000,
respectively, and basic earnings per share and diluted earnings per share by
$0.01 and $0.01, respectively.
CASH AND CASH EQUIVALENTS:
For purposes of the consolidated statements of cash flows, the Corporation has
defined cash and cash equivalents as those amounts included in the balance
sheets under the caption, "Cash and due from banks" and "Federal funds sold",
all of which mature within ninety days.
INTEREST-BEARING DEPOSITS WITH BANKS:
Interest-bearing deposits with banks mature within one year and are carried at
cost.
SECURITIES:
Securities that management has both the ability and positive intent to hold to
maturity are classified as held to maturity and carried at cost, adjusted for
amortization of premium and accretion of discounts using methods approximating
the interest method. Securities that may be sold prior to maturity for
asset/liability management purposes, or that may be sold in response to changes
in interest rates, changes in prepayment risk, increase in regulatory capital,
or other similar factors, are classified as available for sale and are carried
at fair value. Unrealized gains and losses on securities available for sale are
excluded from earnings and reported in other comprehensive income. Gains and
losses on the sale of securities available for sale are recorded on the trade
date and are determined using the specific identification method. Declines in
the fair value of held to maturity and available for sale securities below their
cost that are deemed to be other than temporary are reflected in earnings as
realized losses.
Interest and dividends on securities, including the amortization of premiums and
the accretion of discounts, are reported in interest and dividends on
securities.
No securities are being held for short-term resale; therefore, the Corporation
does not currently use a trading account classification.
LOAN SALES:
The Corporation originates loans for sale generally without recourse to other
financial institutions under commitments or other arrangements in place prior to
loan origination. Sales are completed at or near the loan origination date.
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value in the aggregate. Gains and
losses, if any, on the sale of such loans are determined using the specific
identification method. All fees and other income from these activities are
recognized in income when loan sales are completed.
38
LOANS RECEIVABLE:
The Corporation grants mortgage, commercial and consumer loans to customers. The
ability of the Corporation's debtors to honor their contracts is dependent upon
the real estate and general economic conditions in its service areas. Loans
receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off generally are reported at their
outstanding unpaid principal balance adjusted for charge-offs, the allowance for
loan losses, and any deferred fees or costs on originated loans, or unamortized
premiums or discounts on purchased loans. Interest income is accrued on the
unpaid principal balance.
The accrual of interest on mortgage and commercial loans is discontinued at the
time the loan is 90 days delinquent unless the credit is well collateralized and
in process of collection. Residential real estate loans are typically placed on
nonaccrual at the time the loan is 120 days delinquent. Credit card loans, other
unsecured personal credit lines and certain consumer finance loans are typically
charged off no later than the time the loan is 180 days delinquent.
Other consumer loans are charged off at the time the loan is 120 days
delinquent. In all cases, loans are placed on nonaccrual or charged off at an
earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual
or charged off is reversed against interest income. The interest on these loans
is accounted for on the cash basis or cost recovery method, until qualifying for
return to accrual. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments
are reasonably assured.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is established through a provision for loan losses
charged against earnings as losses are estimated to have occurred. Loan losses
are charged against the allowance when management believes the uncollectibility
of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral, and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
Management of each Bank reviews its allowance for loan losses in three broad
categories: commercial, real estate, and installment loans, and assigns an
estimated percentage factor to each in the determination of the estimate of the
allowance for loan losses. The Banks' internal and external loan review programs
identify loans that are subject to specific weaknesses, and such loans will be
reviewed for a specific loan loss allowance.
39
A loan is considered impaired when, based on current information and events, it
is probable that the Corporation will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement. Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified
as impaired. Management determines the significance of payment delays and
payment shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for commercial and construction
loans by either the present value of expected future cash flows discounted at
the loan's effective interest rate, the loan's obtainable market price, or the
fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Corporation does not separately identify individual
consumer and residential loans for impairment disclosures.
STOCK-BASED COMPENSATION:
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation", encourages all entities to adopt a fair value based
method of accounting for employee stock compensation plans, whereby compensation
cost is measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No 25, "Accounting for Stock Issued to
Employees", whereby compensation cost is the excess, if any, of the quoted
market price of the stock at the grant date (or other measurement date) over the
amount an employee must pay to acquire the stock. Stock options issued under the
Corporation's stock option plans have no intrinsic value at the grant date, and
under Opinion No. 25 no compensation cost is recognized for them. The
Corporation has elected to continue with the accounting methodology in Opinion
No. 25 and, as a result, has provided pro forma disclosures of net income and
earnings per share and other disclosures, as if the fair value based method of
accounting had been applied.
OTHER REAL ESTATE OWNED:
Foreclosed assets, which are recorded in other assets, include properties
acquired through foreclosure or in full or partial satisfaction of the related
loan and are held for sale.
Foreclosed assets are initially recorded at fair value at the date of
foreclosure, establishing a new cost basis. Subsequent to foreclosure,
valuations are periodically performed by management and the assets are carried
at the lower of carrying amount or fair value, less costs to sell. Revenue and
expenses from operations and changes in the valuation allowance are included in
other expenses.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost, less accumulated depreciation
computed principally on the straight-line method over the estimated useful lives
of the assets. Useful lives generally used in providing for depreciation are as
follows:
Building 40 years
Building components 5-30 years
Vault doors, safe deposit boxes, night depository, etc. 40 years
Furniture, fixtures and equipment 5-25 years
40
INCOME TAXES
Deferred income tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes. The provision (benefit) for income taxes of each
subsidiary is recorded as if each subsidiary filed a separate return.
FINANCIAL INSTRUMENTS:
In the ordinary course of business the Banks enter into commitments to extend
credit and grant standby letters of credit. Such off-balance-sheet financial
instruments are recorded in the consolidated financial statements when they are
funded.
SEGMENTS:
Community Bankshares, Inc. through its banking subsidiaries, ONB, SNB, and FNB,
provides a broad range of financial services to individuals and companies in
central South Carolina. These services include demand, time, and savings
deposits; lending services; ATM processing; and similar financial services.
While the Corporation's decision makers monitor the revenue streams of the
various financial products and services, operations are managed and financial
performance is evaluated on a corporate-wide basis. Accordingly, the banking
operations are not considered by management to comprise more than one reportable
operating segment.
COMPREHENSIVE INCOME:
The Corporation adopted SFAS No. 130, "Reporting Comprehensive Income", as of
January 1, 1998. Accounting principles generally require that recognized
revenue, expenses, gains and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses on
securities available for sale, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income. The adoption of SFAS No. 130 had no effect
on the Corporation's net income or shareholders' equity. Currently, the
Corporation's only component of Comprehensive Income (Loss) is its unrealized
gains (losses) on securities available for sale.
ACCOUNTING PRONOUNCEMENTS:
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
will be effective for the Corporation beginning January 2000. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure them at fair
value. The adoption of this Statement in 2000 is not expected to have a material
effect on the Corporation's consolidated financial statements.
OTHER:
Certain amounts in the statements have been restated to conform to the current
year's presentation and disclosure requirements.
NOTE 3 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS:
The Banks are required to maintain average reserve balances with the Federal
Reserve, or in available cash. The average daily reserve balance requirements
for December 31, 1999 and 1998, were met by cash held in the three banks.
At December 31, 1999, the Corporation had cash balances with correspondent banks
totaling approximately $283,000, all fully insured by the FDIC.
41
NOTE 4 - SECURITIES:
Securities held to maturity consist of the following (in thousands of dollars):
DECEMBER 31, 1999
-----------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
U.S. Government and
federal agencies ....... $13,369 $ 2 $ (452) $12,919
======= ======= ======= =======
DECEMBER 31, 1998
-----------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
U.S. Government and
federal agencies ....... $15,035 $ 61 $ (20) $15,076
State and local
governments ............ 251 2 - 253
------- ------- ------- -------
Total ......... 15,286 63 (20) 15,329
======= ======= ======= =======
Securities available for sale consist of the following (in thousands of
dollars):
DECEMBER 31, 1999
-----------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
U.S. Government and
federal agencies ....... $28,931 $ 2 $ (782) $28,151
State and local
governments ............ 825 1 (12) 814
Federal Home Loan
Bank stock ............. 1,016 - - 1,016
Federal Reserve
Bank stock ............. 408 - - 408
Equity securities ......... 177 - - 177
------- ------- ------- -------
Total ......... 31,357 3 (794) 30,566
======= ======= ======= =======
42
DECEMBER 31, 1998
-----------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
U.S. Government and
federal agencies ....... $16,921 $ 74 $ (20) $16,975
State and local
governments ............ 225 2 - 227
Federal Home Loan
Bank stock ............. 1,189 - - 1,189
Federal Reserve
Bank stock ............. 385 - - 385
Equity securities ......... 86 - - 86
------ -- --- ------
Total ......... 18,806 76 (20) 18,862
====== == === ======
The following is a summary of maturities and yields of securities held to
maturity and securities available for sale as of December 31, 1999 (in thousands
of dollars):
After five years
After one year but but within ten
Within one year within five years years Over ten years Total
--------------- ----------------- ----- -------------- -----
Securities held to maturity:
Federal agency obligations ............... $ 999 6.60% $ 4,999 6.13% $ 7,371 6.28% $ - 0.00% $13,369 6.25%
----- ---- ------ ---- ------ ---- ----- ---- ------ ----
Total held to maturity ......... 999 6.60% 4,999 6.13% 7,371 6.28% - 0.00% 13,369 6.25%
----- ---- ------ ---- ------ ---- ----- ---- ------ ----
Securities available for sale:
Federal agency obligations ............... 1,199 6.36% 15,751 5.94% 11,201 6.19% - 0.00% 28,151 6.06%
State and local governments .............. - 0.00% 814 5.38% - 0.00% - 0.00% 814 5.38%
Equities ................................. - 0.00% - 0.00% - 0.00% 1,601 6.63% 1,601 6.63%
----- ---- ------ ---- ------ ---- ----- ---- ------ ----
Total available for sale ........ 1,199 6.36% 16,565 5.92% 11,201 6.19% 1,601 6.63% 30,566 6.07%
----- ---- ------ ---- ------ ---- ----- ---- ------ ----
Total for portfolio ...................... 2,198 6.46% 21,564 5.97% 18,572 6.22% 1,601 6.63% 43,935 6.12%
===== ==== ====== ==== ====== ==== ===== ==== ====== ====
Yields on tax exempt obligations have been computed on a tax equivalent basis
using the maximum federal tax rate of 34%.
The Banks, as members of the Federal Home Loan Bank ("FHLB") of Atlanta, are
required to own capital stock in the FHLB of Atlanta based generally upon their
balances of residential mortgage loans and FHLB advances. FHLB capital stock
owned by ONB and SNB is pledged as collateral on FHLB advances. No ready market
exists for this stock, and it has no quoted market value. However, redemption of
this stock has historically been at par value.
43
All equity securities including investments in the FHLB stock and Federal
Reserve Bank stock (as required of the respective banks) have no contractual
maturity and are classified in the maturity category of over ten years.
Securities with a carrying amount of approximately $18,289,000 and $15,719,000
at December 31, 1999 and 1998, respectively, were pledged as collateral on
securities sold under agreements to repurchase. Of these respective amounts,
approximately $5,216,000 and $7,590,000 was pledged to secure public deposits in
excess of FDIC limits.
NOTE 5 - LOANS RECEIVABLE:
The following is a summary of loans by category at December 31, 1999 and 1998
(in thousands of dollars):
1999 1998
---- ----
Commercial, financial and agricultural ................. $ 39,752 $ 29,403
Real estate - construction ............................. 9,156 5,738
Real estate - mortgage ................................. 84,680 62,789
Installment loans to individuals ....................... 23,033 19,325
Obligations of states and political subdivisions ....... 468 540
-------- --------
Total loans - gross $157,089 $117,795
======== ========
The loan portfolio included fixed rate and adjustable rate loans totaling
$104,546,000 and $52,543,000, respectively, at December 31, 1999.
Overdrawn demand deposits totaling $492,000 and $142,000 have been reclassified
as loan balances at December 31, 1999.
Gross proceeds on mortgage loans originated for resale were approximately
$9,900,000, $12,100,000, and $4,800,000 for the years ended December 31, 1999,
1998 and 1997, respectively. The Bank sold all of these loans at par; therefore,
no gain or loss was recognized on the sales.
Loans outstanding to directors, executive officers, principal holders of equity
securities, or to any of their associates totaled $7,581,000 at December 31,
1999, and $6,595,000 at December 31, 1998. A total of $8,906,000 in loans were
made or added, while a total of $7,920,000 were repaid or deducted during 1999.
Related party loans are made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than normal risk of
collectibility. Changes in the composition of the board of directors or the
group comprising executive officers result in additions to or deductions from
loans outstanding to directors, executive officers or principal holders of
equity securities.
44
Changes in the allowance for loan losses and related ratios for the years ended
December 31, 1999, 1998 and 1997, were as follows (in thousands of dollars):
1999 1998 1997
---- ---- ----
Average amount of loans outstanding .............................. $139,215 $103,349 $ 81,167
======== ======== ========
Allowance for loan losses at beginning
of year ....................................................... $ 1,459 $ 1,140 $ 876
-------- -------- --------
Loan charge-offs:
Real estate ................................................... - 7 -
Installment ................................................... 95 111 121
Credit cards and related plans ................................ 5 6 9
Commercial and other .......................................... 80 56 2
-------- -------- --------
Total charge-offs ....................................... 180 180 132
-------- -------- --------
Recoveries:
Installment ................................................... 17 12 34
Credit cards and related plans ................................ 3 3 4
Commercial and other .......................................... 25 - -
-------- -------- --------
Total recoveries ........................................ 45 15 38
-------- -------- --------
Net charge-offs .................................................. 135 165 94
-------- -------- --------
Provision for loan losses ........................................ 612 484 358
-------- -------- --------
Allowance for loan losses at end of year ......................... 1,936 1,459 1,140
======== ======== ========
Ratios
Net charge-offs to average loans
outstanding ................................................... 0.10% 0.16% 0.12%
Net charge-offs to loans outstanding
at end of year ................................................ 0.09% 0.14% 0.10%
Allowance for loan losses to average
loans ......................................................... 1.39% 1.41% 1.40%
Allowance for loan losses to total loans
at end of year ................................................ 1.23% 1.24% 1.24%
Net charge-offs to allowance for loan losses ................... 6.97% 11.31% 8.33%
Net charge-offs to provision for
loan losses ................................................... 22.06% 34.09% 26.46%
The following is a summary of information pertaining to impaired loans:
Year Ended December 31,
1999 1998
---- ----
(In thousands)
Impaired loans without a valuation allowance ........ $ - $ -
Impaired loans with a valuation allowance ........... 90 31
--- ---
Total impaired loans ................................ 90 31
=== ===
Valuation allowance related to impaired loans ....... $14 $ 6
=== ===
45
Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
(In thousands)
Average investment in impaired loans ...................................... $ 53 $ 74 $ 98
====== ====== =====
Interest income recognized on impaired loans .............................. $ - $ - $ -
====== ====== =====
Interest income recognized on a cash basis on
impaired loans ............................................................ $ - $ - $ -
====== ====== =====
No additional funds are committed to be advanced in connection with impaired
loans.
Nonaccrual, past due loans, and other real estate owned at December 31, 1999 and
1998, were as follows (in thousands of dollars):
1999 1998
---- ----
Nonaccrual loans .......................................................... $ 90 $ 31
Accruing loans 90 days or more past due ................................... 6 187
---- ----
Total ........................................................... 96 218
==== ====
Total as a percentage of outstanding loans ...................... 0.06% 0.19%
==== ====
Other real estate owned ................................................... $ - $266
==== ====
Gross interest income that would have been recorded for the years ended December
31, 1999, 1998 and 1997, if nonaccrual loans had been performing in accordance
with their original terms was approximately $2,100, $2,100 and $7,700,
respectively.
NOTE 6 - PREMISES AND EQUIPMENT:
Premises and equipment at December 31, 1999 and 1998, consist of the following
(in thousands of dollars):
1999 1998
---- ----
Land ............................................... $ 761 $ 684
Building and components ............................ 2,749 2,101
Furniture, fixtures and equipment .................. 2,921 2,440
------ ------
Total .................................... 6,431 5,225
Less, accumulated depreciation ..................... 1,812 1,408
------ ------
4,619 3,817
Construction in progress ........................... - 75
------ ------
Premises and equipment - net ............. 4,619 3,892
====== ======
46
Depreciation expense was approximately $462,000, $371,000, and $294,000, for the
years ended December 31, 1999, 1998 and 1997, respectively.
The FNB office building was constructed on leased land. The land is being leased
under a noncancellable operating lease for an initial term of ten years. The
lease terms provide for two ten year renewal options and a third renewal of two
years. FNB is responsible for property taxes and improvements. The annual basic
rent in lease years one through five is $48,000 and in years six through ten
$53,000.
Rent expense totaled approximately $49,500 and $25,000 in 1999 and 1998,
respectively.
NOTE 7 - DEPOSITS:
At December 31, 1999, the scheduled maturities of time deposits greater than
$100,000 are as follows (in thousands of dollars):
Maturity
--------
Less than 3 months $ 9,694
Over 3 through 6 months 6,974
Over 6 through 12 months 15,204
One to five years 4,291
-------
Total $36,163
=======
Deposits of directors and officers totaled approximately $4,484,000 and
$5,662,000 at December 31, 1999 and 1998, respectively.
NOTE 8 - OTHER BORROWED FUNDS:
Federal funds purchased and securities sold under agreements with customers to
repurchase generally mature within one to four days from the transaction date.
Securities sold under agreements to repurchase are reflected at the amount of
cash received in connection with the transaction. The Corporation monitors the
fair value of the underlying securities on a daily basis.
Information concerning securities sold under agreements to repurchase is
summarized as follows (in thousands of dollars):
1999 1998
---- ----
Outstanding at year-end ................................ $2,782 $4,464
====== ======
Interest rate at year-end .............................. 3.50% 3.00%
====== ======
Maximum month-end balance during the year .............. $6,473 $7,315
====== ======
Average amount outstanding during the year ............. $4,846 $3,220
====== ======
Weighted average interest rate during the year ......... 3.26% 3.69%
====== ======
47
NOTE 9 - FEDERAL HOME LOAN BANK ADVANCES:
The Banks are members of the Federal Home Loan Bank of Atlanta and as such, have
access to long-term borrowing. The collateral for any such borrowings are
blanket liens on ONB's and SNB's one-to-four family residential loans and the
stock in the Federal Home Loan Bank. Borrowings during 1999 and 1998 are
summarized as follows (in thousands of dollars):
1999 1998
---- ----
Outstanding at year-end ............................... $19,420 $9,490
======= ======
Interest rate at year-end ............................. 5.55% 5.41%
======= ======
Maximum amount outstanding at any month-end ........... $19,420 $9,560
======= ======
Average amount outstanding during the year ............ $12,290 $6,905
======= ======
Weighted average interest rate during the year ........ 5.47% 5.65%
======= ======
Required principal reductions are as follows (in thousands of dollars):
YEAR ENDED:
2000 $70
2001 70
2002 70
2003 70
2004 70
Thereafter 19,070
------
Total 19,420
======
NOTE 10 - COMMON STOCK:
The Company declared a five percent stock dividend in January 2000. The average
number of common shares outstanding and all earnings per common share amounts
included in the accompanying consolidated financial statements and notes are
based on the increased number of shares giving retroactive effect for the stock
dividend.
The Corporation repurchased 49,455 shares of its common stock from the
Corporation's former chief executive officer in January 1999. The repurchase
price per share was at the then market price of $12.74 and totaled approximately
$630,000.
Under the Corporation's Dividend Reinvestment Plan, shareholders may reinvest
all or part of their cash dividends in shares of common stock and also purchase
additional shares of common stock.
NOTE 11 - STOCK OPTIONS AND DIVIDEND REINVESTMENT SHARES:
The information in this Note has been adjusted for the five percent stock
dividend.
At December 31, 1999, 272,000 common shares were reserved for issuance for
employee stock option plans and 630,000 common shares were reserved for issuance
pursuant to the dividend reinvestment and additional stock purchase plan.
During 1999, the Corporation amended its 1997 Stock Option Plan. Under the
amended Plan, up to 272,000 shares of common stock were authorized to be granted
to selected officers and other employees of the Corporation and its subsidiaries
pursuant to exercise of incentive and nonqualified stock options. Of such
shares, 181,000 were reserved for issuance pursuant to exercise of incentive
stock options and 91,000 were reserved for issuance pursuant to exercise of
nonqualified stock options. Stock options granted in 1999 under this Plan are
not exercisable until February 2000.
48
Under the 1994 Stock Option Plan, the Corporation reserved 88,200 shares of
common stock for issuance upon exercise of options granted to key employees as
nonqualified stock options. All options under the 1994 Plan had been exercised
or forfeited as of December 31, 1999.
The exercise price of any option granted is equal to the fair value of the
common stock on the date the option is granted.
The Corporation applies APB Opinion 25 and related Interpretations in accounting
for the stock-based option plans. Accordingly, no compensation cost has been
recognized for the stock-based option plans. Had compensation cost for the
stock-based option plans been recognized based on the fair value at the grant
dates for the stock options consistent with the method prescribed by SFAS No.
123, the Corporation's net income and earnings per share would have been
adjusted to the pro forma amounts indicated below:
Year Ended December 31,
-----------------------
(In thousands, except per share data)
1999 1997
---- ----
Net income As reported $2,182 $1,216
Pro Forma 1,678 1,094
Basic earnings per share As reported $0.68 $0.44
Pro Forma 0.53 0.40
Diluted earnings per share As reported $0.68 $0.43
Pro Forma 0.52 0.39
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
Year Ended December 31,
-----------------------
1999 1997
---- ----
Dividend yield 1.54% 1.88%
Expected life 7.9 years 4.7 years
Expected volatility 27.5% 33.9%
Risk-free interest rate 5.30% 5.28%
Pro forma net income reflects only options granted since 1995, therefore, the
full impact of calculating the compensation expense for stock options under SFAS
No. 123 is not reflected in the pro forma net income amount presented above
since options granted prior to January 1, 1995, are not considered. The fair
value of each option granted in 1999 was estimated using the Black-Scholes
option-pricing model to be less than the exercise price.
49
A summary of the status of the Corporation's 1994 stock option plan is presented
below:
1999 1998 1997
---- ---- ----
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Fixed options:
Outstanding at beginning
of year .............................. 28,875 $ 3.71 84,525 $ 3.71 88,200 $ 3.71
Granted ................................... - - - - - -
Exercised ................................. (28,875) 3.71 (55,650) 3.71 - -
Forfeited ................................. - - - - (3,675) 3.71
------- ------- ------
Outstanding at end of
year ................................ - - 28,875 3.71 84,525 3.71
======= ======= ======
Options exercisable at
year-end ................................. - - 28,875 3.71 84,525 3.71
Weighted average fair value
of options granted
during the year .......................... - - - - - -
A summary of the status of the Corporation's 1997 pre-amended stock option plan
is presented below:
1999 1998 1997
---- ---- ----
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Fixed options:
Outstanding at beginning
of year .......................... 75,390 $ 7.60 79,590 $ 7.60 - $ -
Granted ............................... - - - - 79,590 7.60
Exercised ............................. (10,710) 7.60 (2,310) 7.60 - -
Forfeited ............................. (840) 7.60 (1,890) 7.60 - -
------- ------ -------
Outstanding at end of
year ............................ 63,840 - 75,390 - 79,590 -
======= ====== =======
Options exercisable at
year-end ............................. 63,840 7.60 75,390 7.60 - -
Weighted average fair
value of options .................... - - - - - 8.28
granted during the year.
50
A summary of the status of the Corporation's 1999 stock option activity is
presented below:
1999
----
Exercise
Shares Price
------ -----
Fixed options:
Outstanding at beginning of year .................. - $ -
Granted ........................................ 161,700 12.83
Exercised ...................................... - -
Forfeited ...................................... - -
------- -----
Outstanding at end of year ........................ 161,700 12.83
======= =====
Options exercisable at year end ................... - $ -
Weighted average fair value of options
granted during the year ....................... - 4.62
Information pertaining to options (in thousands) outstanding at December 31,
1999 is as follows:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
$12.83 161,700 8.4 years $12.83 - $ -
7.60 63,840 7.3 years 7.60 63,840 7.60
------- ------
Outstanding at
End of year 225,540 11.35 63,840 7.60
======= ======
NOTE 12 - INCOME TAXES:
The Corporation files consolidated federal income tax returns on a calendar-year
basis.
The 1999, 1998 and 1997 provision for income taxes consists of the following (in
thousands of dollars):
1999 1998 1997
---- ---- ----
Current tax provision:
Federal .............................. $ 1,065 $ 710 $ 636
South Carolina ....................... 85 80 77
Deferred tax benefit .................... (101) (127) (77)
------- ------- -------
Total ......................... 1,049 663 636
======= ======= =======
51
The provision for federal income taxes differs from that computed by applying
federal statutory rates to income before federal income tax expense as indicated
in the following summary (in thousands of dollars):
1999 1998 1997
---- ---- ----
Income tax at statutory rate on income
before income taxes ........................ $ 1,099 $ 769 $ 630
Increase (decrease) resulting from:
Exercise of certain stock options .......... (89) (165) -
South Carolina bank tax, net of federal
tax benefit ............................. 96 67 55
Tax exempt interest ........................ (19) (14) (14)
Other ...................................... (38) 6 (35)
------- ------- -------
Provision for income taxes .......... 1,049 663 636
======= ======= =======
Temporary differences, which give rise to deferred tax assets and liabilities at
December 31, 1999 and 1998, are as follows (in thousands of dollars):
1999 1998
---- ----
Deferred tax assets:
Allowance for loan losses .......................... $ 614 $ 443
Net unrealized losses on securities
available for sale .............................. 280 -
Preopening costs ................................... 67 78
State tax net operating loss carry forward ......... 65 48
Other .............................................. 1 16
------ ------
Total deferred tax assets .................. 1,027 585
------ ------
1999 1998
---- ----
Deferred tax liabilities:
Depreciation ........................................... $ 145 $ 87
Accretion .............................................. 6 8
Net unrealized gain on securities available for
sale ................................................ - 24
----- -----
Total deferred tax liabilities ................. 151 119
----- -----
Net deferred tax asset before valuation
allowance ................................. 876 466
Less, valuation allowance ...................... (18) (13)
----- -----
Net deferred tax asset ......................... 858 453
===== =====
At December 31, 1999, the Corporation had net operating loss (NOL) carryforwards
for state income tax purposes of approximately $1,412,000 available to offset
future state taxable income. The NOL carryforwards expire primarily in the years
2011 through 2019. The Corporation and the Banks each file separate state income
tax returns. The valuation allowance represents management's estimate of the
state NOL carryforwards that will not be realized in the foreseeable future.
52
NOTE 13 - EMPLOYEE BENEFIT PLANS:
The Corporation provides a defined contribution plan with an Internal Revenue
Code Section 401(K) provision. All employees who have completed 500 hours of
service during a six-month period and have attained age 18 may participate in
the plan.
A participant may elect to make tax deferred contributions up to a maximum of
12% of eligible compensation. The Corporation will make matching contributions
on behalf of each participant in the amount of 100% of the elective deferral,
not exceeding 3% of the participant's compensation. The Corporation may also
make nonelective contributions determined at the discretion of the Board of
Directors.
The Corporation's contributions for the years ended December 31, 1999, 1998, and
1997 totaled approximately $149,000, $140,000, and $122,000, respectively.
NOTE 14 - OFF-BALANCE-SHEET ACTIVITIES:
The Banks are parties to credit related financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of their customers. These financial instruments include commitments to
extend credit and standby letters of credit. Such commitments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets.
The Banks' exposure to credit loss is represented by the contractual amount of
these commitments. The Banks use the same credit policies in making commitments
as they do for on-balance-sheet instruments.
At December 31, 1999 and 1998, the following financial instruments were
outstanding whose contract amounts represent credit risk:
Contract Amount
---------------
1999 1998
---- ----
(In thousands)
Commitments to grant loans ....................... $11,231 $10,159
Unfunded commitments under lines of
credit ....................................... 11,269 8,405
Standby letters of credit ........................ 3,427 929
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The amount of collateral obtained, if deemed
necessary by the Banks upon extension of credit, is based on management's credit
evaluation of the counter-party. Collateral held varies but may include personal
residences, accounts receivable, inventory, property, plant, and equipment, and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Banks to
guarantee the performance of a customer to a third party. Those letters of
credit are primarily issued to support private borrowing arrangements. All
letters of credit are short-term guarantees. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Banks generally hold collateral supporting those
commitments if deemed necessary.
To reduce credit risk related to the use of both derivatives and credit-related
financial instruments, the Bank might deem it necessary to obtain collateral.
The amount and nature of the collateral obtained is based on the Banks' credit
evaluation of the customer. Collateral held varies but may include cash,
securities, accounts receivable, inventory, property, plant and equipment and
real estate.
53
NOTE 15 - EARNINGS PER COMMON SHARE:
Basic earnings per common share represents income available to common
stockholders divided by the weighted-average number of common shares outstanding
during the year. Diluted earnings per common share reflects additional common
shares that would have been outstanding if dilutive potential common shares had
been issued. Potential common shares that may be issued by the Corporation
relate solely to outstanding stock options, and are determined using the
treasury stock method.
Earnings per common share have been computed based on the following:
Years Ended December 31,
1999 1998 1997
---- ---- ----
(In thousands)
Net income ............................................................. $ 2,182 $ 1,567 $ 1,216
========== ========== ==========
Average number of common shares outstanding ............................ 3,189,235 3,040,512 2,766,410
Effect of dilutive options ............................................. 25,888 56,550 49,545
---------- ---------- ----------
Average number of common shares outstanding used to
calculate diluted earnings per common share
3,215,123 3,097,062 2,815,955
========== ========== ==========
NOTE 16 - OTHER COMPREHENSIVE INCOME (LOSS):
The components of other comprehensive income (loss) and related tax effects are
as follows:
Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
(In thousands)
Unrealized holding gains (losses) on available for
sale securities ............................................................. $(791) $ 56 $ 31
Less: Reclassification adjustment for gains
(losses) realized in income .............................................. - - -
----- ----- -----
Net unrealized gains (losses) ............................................... (791) 56 31
Tax effect .................................................................. 280 20 11
----- ----- -----
Net-of-tax amount ........................................................... (511) 36 20
===== ===== =====
Unrealized holding losses on available for sale securities increased
approximately $328,000 in January 2000.
NOTE 17 - CREDIT RISK CONCENTRATIONS
Concentrations of credit risk arise when a number of customers are engaged in
similar business activities, or activities in the same geographic region, or
have similar economic features that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic
conditions.
The Banks regularly monitor various segments of their credit risk portfolio to
assess potential concentration risks and to obtain collateral when considered
necessary.
54
The Banks' exposure within these major segments are diversified and these
diversification factors reduce concentration risk.
Major industry exposures at December 31, 1999, representing on a consolidated
basis loans receivable balances by loan type in excess of ten percent of total
shareholders' equity (in thousands of dollars), are as follows:
Medical and dental offices $7,428
Rental housing 2,620
Real estate developers 2,993
NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair value of a financial instrument is the current amount that would be
exchanged between willing parties, other than in a forced liquidation. Fair
value is best determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for the Corporation's various
financial instruments. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. These techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. Accordingly, the
fair value estimates may not be realized in an immediate settlement of the
instrument. SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments", excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented may not necessarily represent the underlying fair value
of the Corporation.
The following methods and assumptions were used by the Corporation in estimating
fair values of financial instruments as disclosed herein:
Cash and cash equivalents. The carrying amounts of cash and cash
equivalents approximate fair values.
Interest-bearing deposits with banks. The carrying amounts of
interest-bearing deposits with banks approximate their fair values.
Securities available for sale and held to maturity. Fair values for
securities, excluding Federal Home Loan Bank and Federal Reserve Bank
stock, are based on quoted market prices. The carrying value of Federal
Home Loan Bank and Federal Reserve Bank stock approximates fair value based
on the redemption provisions of the Federal Home Loan Bank and Federal
Reserve Bank. The market values of state and local government securities
are established with the assistance of an independent pricing service. The
values are based on data which often reflect transactions of relatively
small size and are not necessarily indicative of the value of the
securities when traded in large volumes.
Loans held for sale. The carrying amounts approximate their fair values.
Loans receivable. For variable-rate loans that reprice frequently and with
no significant change in credit risk, fair values are based on carrying
values. Fair values for certain mortgage loans (for example, one-to-four
family residential) and other consumer loans are based on quoted market
prices of similar loans sold, adjusted for differences in loan
characteristics. Fair values for commercial real estate and commercial
loans are estimated using discounted cash flow analyses, using interest
rates currently being offered for loans with similar terms to borrowers of
similar credit quality. Fair values for non-performing loans are estimated
using discounted cash flow analyses or underlying collateral values, where
applicable.
Deposit liabilities. The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date
(that is, their carrying amounts). The carrying amounts of variable-rate,
fixed-term money-market accounts and certificates of deposit (CDs)
approximate their fair values 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.
55
Short-term borrowings. The carrying amounts of federal funds purchased and
borrowings under repurchase agreements, approximate their fair values.
Federal Home Loan Bank advances. The fair values of the Federal Home Loan
Bank advances are estimated using discounted cash flow analyses based on
the Corporation's current incremental borrowing rates for similar types of
borrowing arrangements.
Accrued interest. The carrying amounts of accrued interest approximate fair
value.
Off-balance-sheet instruments. Fair values for off-balance-sheet
credit-related financial instruments are based on fees currently charged to
enter into similar agreements, taking into account the remaining terms of
the agreements and the counterparties' credit standings.
The estimated fair values and related carrying or notional amounts of the
Corporation's financial instruments at December 31, 1999 and 1998, are as
follows (in thousands of dollars):
1999 1998
---- ----
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
Financial assets:
Cash and cash equivalents ........................................... $ 20,315 $ 20,315 $ 23,296 $ 23,296
Interest-bearing deposits with banks ................................ 788 788 1,577 1,577
Investment securities ............................................... 43,935 43,485 34,148 34,190
Loans held for sale ................................................. 269 269 722 722
Loans receivable .................................................... 155,153 152,327 116,336 116,537
Accrued interest receivable ......................................... 1,700 1,700 1,242 1,242
Financial liabilities:
Deposits ............................................................ $184,364 $184,228 $147,630 $148,005
Federal funds purchased and
securities sold under agreements
to repurchase .................................................... 2,782 2,782 4,464 4,464
Federal Home Loan Bank advances ..................................... 19,420 19,324 9,490 9,563
Accrued interest payable ............................................ 770 770 603 603
Off-balance-sheet credit related financial instruments:
Commitments to extend credit ..................................... $ 11,231 $ 11,231 $ 10,159 $ 10,159
Unfunded commitments under
lines of credit ............................................... 11,269 11,269 8,405 8,405
Standby letters of credit ........................................ 3,427 3,427 929 929
NOTE 19 - CONTINGENCIES:
CLAIMS AND LAWSUITS:
The Corporation is subject at times to claims and lawsuits arising out of the
normal course of business which, in the opinion of management, will have no
material effect on the Corporation's consolidated financial statements.
NOTE 20 - REGULATORY MATTERS:
The Banks, as national banks, are subject to the dividend restrictions set forth
by the Comptroller of the Currency. Under such restrictions, the Banks may not,
without the prior approval of the Comptroller of the Currency, declare dividends
in excess of the sum of the current year's earnings (as defined) plus the
retained earnings (as defined) from the prior two years. The dividends, at
December 31, 1999, that the Banks could declare, without the approval of the
56
Comptroller of the Currency, amounted to approximately $2,974,000. In addition,
dividends paid by the Banks to the Corporation would be prohibited if the effect
thereof would cause the Banks' capital to be reduced below applicable minimum
capital requirements.
Under Federal Reserve regulation, the Banks also are limited as to the amount
they may loan to the Corporation unless such loans are collateralized by
specified obligations. The maximum amount available for transfer from the Banks
to the Corporation in the form of loans or advances totaled approximately
$3,749,000 at December 31, 1999.
The Corporation (on a consolidated basis) and the Banks are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material adverse effect on the Corporation's and the Banks'
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Corporation and the Banks must meet
specific capital guidelines that involve quantitative measures of their assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors. Prompt corrective action provisions are not applicable to bank
holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Banks to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital to
average assets (as defined). Management believes, as of December 31, 1999, and
1998, that the Corporation and the Banks met all capital adequacy requirements
to which they are subject.
As of June 30, 1998, for ONB and SNB and September 30, 1999, for FNB, the most
recent notifications from the Office of the Comptroller of the Currency
categorized the Banks as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Banks must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. There are no conditions or events since the
notifications that management believes have changed the Banks' categories.
The Corporation's and the Banks' actual capital amounts and ratios are also
presented in the table (in thousands of dollars).
57
MINIMUM REQUIRED MINIMUM REQUIRED
FOR CAPITAL TO BE WELL CAPITALIZED
ACTUAL ADEQUACY PURPOSES UNDER PROMPT
------ ----------------- CORRECTIVE
ACTION PROVISIONS
-----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
At December 31, 1999:
Tier I Capital (to
Average Assets):
Consolidated $ 20,757 9.4% $ 8,861 4.0% $ 11,077 5.0%
ONB 10,667 7.8% 5,485 4.0% 6,857 5.0%
SNB 4,735 7.8% 2,443 4.0% 3,054 5.0%
FNB 3,855 16.5% 933 4.0% 1,166 5.0%
Tier I Capital (to
Risk Weighted
Assets):
Consolidated 20,757 13.0% 6,377 4.0% 9,566 6.0%
ONB 10,667 11.7% 3,647 4.0% 5,470 6.0%
SNB 4,735 9.3% 2,027 4.0% 2,841 6.0%
FNB 3,855 23.2% 665 4.0% 998 6.0%
Total Capital (to
Risk Weighted
Assets):
Consolidated 22,694 14.2% 12,754 8.0% 15,944 10.0%
ONB 11,808 13.0% 2,293 8.0% 9,117 10.0%
SNB 5,266 10.4% 4,054 8.0% 5,067 10.0%
FNB 4,028 24.2% 1,331 8.0% 1,664 10.0%
At December 31, 1998:
Tier I Capital (to
Average Assets):
Consolidated $ 19,620 10.9% $ 7,190 4.0% $ 8,987 5.0%
ONB 9,481 8.1% 4,693 4.0% 5,867 5.0%
SNB 3,672 7.9% 1,872 4.0% 2,340 5.0%
FNB 4,169 30.1% 542 4.0% 677 5.0%
Tier I Capital (to
Risk Weighted
Assets):
Consolidated 19,620 15.9% 4,925 4.0% 7,387 6.0%
ONB 9,481 9.1% 3,004 4.0% 4,506 6.0%
SNB 3,672 9.7% 1,508 4.0% 2,262 6.0%
FNB 4,169 52.7% 316 4.0% 474 6.0%
Total Capital (to
Risk Weighted
Assets):
Consolidated 20,979 17.0% 9,850 8.0% 12,312 10.0%
ONB 10,421 13.9% 6,008 8.0% 7,510 10.0%
SNB 4,039 10.7% 3,017 8.0% 3,771 10.0%
FNB 4,221 53.4% 632 8.0% 791 10.0%
58
NOTE 21 - CONDENSED FINANCIAL STATEMENTS:
Presented below are the condensed financial statements for Community Bankshares,
Inc. (Parent Company only) (in thousands of dollars):
COMMUNITY BANKSHARES, INC. (PARENT COMPANY ONLY)
DECEMBER 31,
------------
1999 1998
---- ----
Balance Sheets:
Assets:
Cash ............................................................................... $ 1,041 $ 1,930
Investment in banking subsidiaries ................................................. 18,746 17,361
Securities available for sale, at fair value ....................................... 50 50
Premises and equipment (net of accumulated depreciation
of $411 in 1999 and $313 in 1998) ............................................... 292 329
Other assets ....................................................................... 166 128
------- -------
Total assets ........................................................... 20,295 19,798
======= =======
Liabilities and shareholders' equity:
Other liabilities ..................................................................... $ 50 $ 140
Shareholders' equity .................................................................. 20,245 19,658
------- -------
Total liabilities and shareholders' equity ............................. 20,295 19,798
======= =======
59
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
Statements of Income:
Income:
Management fees assessed banking subsidiaries ....................... $ 1,176 $ 1,141 $ 948
Dividends ........................................................... 872 700 580
Interest ............................................................ 61 138 50
------- ------- -------
Total ................................................... 2,109 1,979 1,578
------- ------- -------
Expenses:
Salaries and employee benefits ...................................... 796 648 558
Premises and equipment .............................................. 260 230 184
Supplies ............................................................ 59 70 35
Director fees ....................................................... 22 24 22
Preopening - FNB .................................................... - 75 -
Other general expenses .............................................. 281 258 228
------- ------- -------
Total ................................................... 1,418 1,305 1,027
------- ------- -------
Income before income tax benefit and equity in
undistributed earnings of banking subsidiaries ......................... 691 674 551
Applicable income tax benefit ............................................. 60 8 7
Equity in undistributed earnings of banking subsidiaries .................. 1,431 885 658
------- ------- -------
Net income ................................................................ 2,182 1,567 1,216
======= ======= =======
Statements of Cash Flows:
Cash flows from operating activities:
Net income .......................................................... $ 2,182 $ 1,567 $ 1,216
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ................................. 107 106 91
Accretion of discounts - securities ........................... - - (23)
Decrease in due from banking
Subsidiaries ............................................... - - (3)
Decrease (increase) in other assets ........................... (38) 46 (68)
Increase (decrease) in other liabilities ...................... (90) 85 6
Equity in undistributed earnings of banking subsidiaries ...... (1,431) (885) (658)
------- ------- -------
Net cash provided by operating activities ............... 730 919 561
------- ------- -------
Cash flows from investing activities:
Investment in SNB ...................................................... (500) (500) -
Investment in FNB ...................................................... - (4,500) -
Purchase of premises and equipment ..................................... (70) (169) (60)
Purchases of securities held to maturity ............................... - - (636)
Purchases of securities available for sale ............................. - - (50)
Proceeds from maturities of securities held to maturity ................ - 647 900
------- ------- -------
Net cash provided (used) by investing activities ........ (570) (4,522) 154
------- ------- -------
Cash flows from financing activities:
Repurchase of stock .................................................... (630) - -
Common stock issued .................................................... 189 5,579 100
Stock issuance cost .................................................... - (87) (9)
Cash dividends paid .................................................... (608) (453) (394)
------- ------- -------
Net cash used (provided) by financing activities ........ (1,049) 5,039 (303)
------- ------- -------
Net increase (decrease) in cash ........................................... (889) 1,436 412
Cash at beginning of year ................................................. 1,930 494 82
------- ------- -------
Cash at end of year ....................................................... 1,041 1,930 494
======= ======= =======
Supplemental disclosures of cash flow information:
Cash payments for income taxes ......................................... $ 1,214 $ 656 $ 640
======= ======= =======
60
NOTE 22 - QUARTERLY DATA (UNAUDITED):
YEARS ENDED DECEMBER 31,
------------------------
1999 1998
---- ----
Fourth Third Second First Fourth Third Second First
quarter quarter quarter quarter quarter quarter quarter quarter
------- ------- ------- ------- ------- ------- ------- -------
(In thousands, except per share data)
Interest and dividend income ............... $ 4,313 $ 4,092 $ 3,730 $ 3,415 $ 3,411 $ 3,201 $ 2,944 $ 2,764
Interest expense ........................... (1,942) (1,827) (1,670) (1,519) (1,540) (1,466) (1,295) (1,253)
------- ------- ------- ------- ------- ------- ------- -------
Net interest income ........................ 2,371 2,265 2,060 1,896 1,871 1,735 1,649 1,511
Provision for loan losses .................. (173) (166) (139) (134) (160) (136) (97) (91)
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses ............... 2,198 2,099 1,921 1,762 1,711 1,599 1,552 1,420
Noninterest income ......................... 323 344 345 305 270 294 261 230
Noninterest expenses ....................... (1,639) (1,530) (1,460) (1,437) (1,534) (1,371) (1,143) (1,059)
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes ................. 882 913 806 630 447 522 670 591
Provision for income taxes ................. (286) (299) (263) (201) (62) (187) (222) (192)
------- ------- ------- ------- ------- ------- ------- -------
Net income ................................. 596 614 543 429 385 335 448 399
======= ======= ======= ======= ======= ======= ======= =======
Earnings per share
Basic ................................... $ 0.19 $ 0.19 $ 0.17 $ 0.13 $ 0.13 $ 0.11 $ 0.15 $ 0.13
======= ======= ======= ======= ======= ======= ======= =======
Diluted ................................. $ 0.19 $ 0.19 $ 0.17 $ 0.13 $ 0.12 $ 0.11 $ 0.14 $ 0.13
======= ======= ======= ======= ======= ======= ======= =======
Florence National Bank began operations in July 1998. The operating losses of
Florence National Bank are reflected in consolidated net income beginning in the
third quarter of 1998.
THESE NOTES ARE AN INTEGRAL PART OF THE ACCOMPANYING FINANCIAL STATEMENTS
61
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information set forth under the caption "Directors and Executive
Officers" and under "Section 16(a) Beneficial Ownership Reporting Compliance" in
the Proxy Statement to be used in conjunction with the 2000 Annual Meeting of
Shareholders (the "Proxy Statement"), which will be filed within 120 days of the
Corporation's fiscal year end, is incorporated herein by reference.
Item 11. Executive Compensation
The information set forth under the caption "Executive Compensation" in
the Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions
The information set forth under the caption "Certain Relationships and
Related Transactions" in the Proxy Statement is incorporated herein by
reference.
62
Item 14. Exhibits and Reports on Form 8-K
(a) (1) All financial statements:
Consolidated Balance Sheets, December 31, 1999 and 1998
Consolidated Statements of Income, Years Ended December 31, 1999, 1998 and
1997
Consolidated Statements of Changes in Shareholders' Equity, Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows, Years Ended December 31, 1999, 1998
and 1997
Notes to Consolidated Financial Statements
(2) Financial statement schedules:
Quarterly Data for 1999 and 1998
(3)
Exhibit No. Description
(from item 601 of
S-K)
3.1 Articles of Incorporation, as amended (incorporated by
reference to exhibits filed in the Registrant's Form
10-QSB filed September 30, 1997).
3.2 Bylaws, as amended (incorporated by reference to exhibits
filed in the Registrant's Form S-4, Commission File No.
33-55314).
4 Stock certificate (incorporated by reference to exhibits
filed in the Registrant's Registration Statement on
Form S-2, filed September 11, 1995, Commission File No.
33-96746).
10.1 1997 Stock Option Plan (incorporated by reference to
Registrant's Form S-8, filed May 20, 1999, Commission
File No. 333-78867).
10.2 Lease for site of Florence National Bank
10.3 Change of Control Agreements between the Registrant and each
of E. J. Ayers, Jr., William W. Traynham, Michael A.
Wolfe, William H. Nock and Jesse A. Nance (incorporated
by reference to exhibits to Registrant's Form 10-QSB
for the quarter ended June 30, 1999).
21 Subsidiaries of the registrant (incorporated by reference to
exhibits filed in the Registrant's Registration
Statement on Form S-2, Commission File No. 333-46111).
23 Consent of J. W. Hunt and Company, LLP
27 Financial data schedule
(b) Reports on Form 8-K. None.
63
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COMMUNITY BANKSHARES, INC. DATED: March 22, 2000
By: s/E. J. Ayers, Jr.
-------------------
Chief Executive Officer
By s/William W. Traynham, Jr.
--------------------------
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
s/ Alvis J. Bynum
- ---------------------------------
Alvis J. Bynum, Director
s/ Martha Rose C. Carson
- ---------------------------------
Martha Rose C. Carson, Director
s/ Anna O. Dantzler
- ---------------------------------
Anna O. Dantzler, Director
s/J. M. Guthrie
- ---------------------------------
J. M. Guthrie, Director
s/Richard L. Havekost
- ---------------------------------
Richard L. Havekost, Director
s/ Phil P. Leventis
- ---------------------------------
Phil P. Leventis, Director
s/Jess A. Nance
- ---------------------------------
Jess A. Nance, Director
s/William H. Nock
- ---------------------------------
William H. Nock, Director
s/ Samuel F. Reid, Jr.
- ---------------------------------
Samuel F. Reid, Jr., Director
s/ J. Otto Warren, Jr.
- ---------------------------------
J. Otto Warren, Jr., Director
s/ Wm. Reynolds Williams
- ---------------------------------
Wm. Reynolds Williams, Director
s/ Michael A. Wolfe, II
- ---------------------------------
Michael A. Wolfe, II, Director
64
EXHIBIT INDEX
Exhibit No. Description
(from item 601 of
S-K)
3.1 Articles of Incorporation, as amended (incorporated by
reference to exhibits filed in the Registrant's Form
10-QSB filed September 30, 1997).
3.2 Bylaws, as amended (incorporated by reference to exhibits
filed in the Registrant's Form S-4, Commission File No.
33-55314).
4 Stock certificate (incorporated by reference to exhibits
filed in the Registrant's Registration Statement on
Form S-2, filed September 11, 1995, Commission File No.
33-96746).
10.1 1997 Stock Option Plan (incorporated by reference to
Registrant's Form S-8, filed May 20, 1999, Commission
File No. 333-78867).
10.2 Lease for site of Florence National Bank
10.3 Change of Control Agreements between the Registrant and each
of E. J. Ayers, Jr., William W. Traynham, Michael A.
Wolfe, William H. Nock and Jesse A. Nance (incorporated
by reference to exhibits to Registrant's Form 10-QSB
for the quarter ended June 30, 1999).
21 Subsidiaries of the registrant (incorporated by reference to
exhibits filed in the Registrant's Registration
Statement on Form S-2, Commission File No. 333-46111).
23 Consent of J. W. Hunt and Company, LLP
27 Financial data schedule
65