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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
/X/ Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1999
/ / Transition Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Commission File Number 33-81890
Community Bankshares, Inc.
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(Exact name of registrant as specified in its charter)
Georgia 58-1415887
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(State or other jurisdiction of (I. R. S. Employer
Incorporation or organization) Identification No.)
448 North Main Street, Cornelia, Georgia 30531
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (706)778-2265
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all 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. Not applicable. Registrant is not required to be
registered under the Securities Exchange Act of 1934.
Aggregate market value of the voting stock held by non-affiliates
(which for purposes hereof are all holders other than executive officers and
directors) of the Registrant as of March 20, 2000: $27,762,595 (based upon
approximate market value of $40.00 /share, the latest sales price known to the
Registrant for the Common Stock, for which there is no established trading
market.
As of March 20, 2000, 2,178,830 shares of Common Stock, par value $1.00
per share, were issued and outstanding.
PART 1
ITEM 1. BUSINESS.
Community Bankshares, Inc. (the "Company") was organized under the laws
of Georgia in 1980 and commenced operations in 1981. The Company is a registered
bank holding company. All of the Company's activities are currently conducted by
or through its subsidiaries, Community Bank & Trust-Habersham
("Community-Habersham"), Community Bank & Trust-Alabama ("Community-Alabama"),
Community Bank & Trust-Jackson ("Community-Jackson") and Community Bank &
Trust-Troup ("Community-Troup") (collectively, the "Community Banking
Subsidiaries") and the non-bank subsidiaries of Community-Habersham, Financial
Supermarkets, Inc. ("Financial Supermarkets") and Financial Properties, Inc.
("Financial Properties").
All references herein to the Company include Community Bankshares,
Inc., the Community Banking Subsidiaries and Financial Supermarkets unless the
context indicates a different meaning.
Forward Looking Statements
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This Form 10-K, both in the Management's Discussion and Analysis
section and elsewhere, contains forward-looking statements under the Private
Securities Litigation Reform Act of 1995 that involve risks and uncertainties.
Although we believe the assumptions underlying the forward-looking statements
contained in the discussions are reasonable, any of the assumptions could be
inaccurate; therefore, no assurance can be made that any of the forward-looking
statements included in this discussion will be accurate. Factors that could
cause actual results to differ from results discussed in forward-looking
statements include, but are not limited to: economic conditions (both generally
and in the markets where we operate); competition from other providers of
financial services; government regulation and legislation; changes in interest
rates; material unforeseen changes in the financial stability and liquidity of
our credit customers; and other risks detailed in our filings with the
Securities and Exchange Commission, all of which are difficult to predict and
which may be beyond our control. We undertake no obligation to revise
forward-looking statements to reflect events or changes after the date of this
discussion or to reflect the occurrence of unanticipated events.
Business Description of Community Banking Subsidiaries
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GENERAL. Each of the Community Banking Subsidiaries is
community-oriented and offers such customary banking services as consumer and
commercial checking accounts, NOW accounts, savings accounts, certificates of
deposit, lines of credit and money transfers. Each Community Banking Subsidiary
finances commercial and consumer transactions, makes secured and unsecured
loans, and provides a variety of other banking services.
DEPOSITS. Each Community Banking Subsidiary offers a full range of
depository accounts and services to both consumers and businesses. At December
31, 1999, the Company's aggregate deposit base, totaling approximately $444.1
million, consisted of approximately $65.8 million in non-interest-bearing demand
deposits (14.82% of total deposits), approximately $99.2 million in
interest-bearing demand deposits (including money market accounts) (22.34% of
total deposits), approximately $20.9 million in savings deposits (4.70% of total
deposits), approximately $178.2 million in time deposits in amounts less than
$100,000 (40.13% of total deposits), and approximately $80.0 million in time
deposits of $100,000 or more (18.01% of total deposits).
LOANS. Each Community Banking Subsidiary makes both secured and
unsecured loans to individuals, firms and corporations, and both consumer and
commercial lending operations include various types of credit for customers. In
addition, the Company operates a loan production office in Gainesville, Georgia
through Community-Habersham. The Gainesville loan production office funds and
sells on the open market loans guaranteed by the Small Business Administration
(the "SBA") and services rights with respect to those loans. Each Community
Banking Subsidiary also makes direct installment loans to consumers on both a
secured and unsecured basis. At December 31, 1999, consumer, real estate
(including mortgage and construction loans) and commercial loans represented
approximately 13.56%, 31.20% and 54.60%, respectively, of the Company's total
loan portfolio. The real estate loans made by each Community Banking Subsidiary
include residential real estate construction, acquisition and development loans,
as well as some loans for other purposes which are secured by real estate.
Commercial lending is directed principally toward businesses within the
defined market area of the Community Banking Subsidiaries or which are existing
or potential deposit customers of the Community Banking Subsidiaries. The
Gainesville loan production office, however, makes a large portion of loans to
individuals and businesses that are not located in its market area. Collateral
includes marketable securities, certificates of deposit, accounts receivable,
inventory and equipment. Commercial lending decisions are based upon a
determination of the borrower's ability and willingness to repay the loan, which
in turn are impacted by such factors as the borrower's cash flow, sales trends
and inventory levels, as well as relevant economic conditions. This category
includes loans made to individuals, partnership or corporate borrowers and
obtained for a variety of purposes. Risks associated with these loans can be
significant. Risks include, but are not limited to, fraud, bankruptcy, economic
downturn, deteriorated or non-existing collateral, and changes in interest
rates.
Some loans secured by real estate which are made to businesses are
categorized as real estate loans. Often, real estate collateral is deemed to be
superior to other collateral available to small- to medium-sized businesses. The
underwriting standards of and risks to the Community Banking Subsidiaries are as
described below with respect to real estate loans.
The Community Banking Subsidiaries offer traditional first mortgage
loans to individuals for single-family structures. These loans are sold in the
secondary market. Since the Community Banking Subsidiaries are originators of
mortgages rather than investors, they sell them servicing-released. They offer
loan-to-value amounts from 70% to 95%. Various types of fixed-rate and
variable-rate products are available. Risks involved with residential mortgage
lending include, but are not limited to, title defects, fraud, general real
estate market deterioration, inaccurate appraisals, interest rate fluctuations
and financial deterioration of the borrower.
The Community Banking Subsidiaries also make residential construction
loans, generally for one-to-four unit structures. The Community Banking
Subsidiaries require a first lien position on the loans associated with
construction projects and offer these loans only to bona fide professional
building contractors. Loan disbursements require independent, on-site
inspections to assure the project is on budget and that the loan proceeds are
being used in accordance with the plans, specifications, and survey for the
construction project and not being diverted to other uses. The loan-to-value
ratio for such loans is usually 75% to 85% of the as-built appraised value.
Loans for construction can present a high degree of risk, depending on, among
other things, whether the builder can sell the home to a buyer, whether the
buyer can obtain permanent financing, whether the transaction produces income in
the interim, and the nature of changing economic conditions.
Additionally, the Community Banking Subsidiaries make acquisition and
development loans to approved developers for the purpose of developing acreage
into single-family lots on which houses will be built. The loan-to-value ratio
for such loans does not exceed 75% of the value as defined by an independent
appraisal, or 100% of the cost, whichever is less. Loans for acquisition and
development can present a high degree of risk to the Community Banking
Subsidiaries, depending upon, among other things, whether the developer can find
builders to buy the lots, whether the builders can obtain financing, whether the
transaction produces income in the interim, and the nature of changing economic
conditions.
In addition, the Community Banking Subsidiaries make consumer loans,
consisting primarily of installment loans to individuals for personal, family
and household purposes, including loans for automobiles, home improvements and
investments. Consumer lending decisions are based on a determination of the
borrower's ability and willingness to repay the loan, which in turn are impacted
by such factors as the borrower's income, job stability, previous credit history
and collateral for the loan. Risks associated with these loans include, but are
not limited to, fraud, deteriorated or non-existing collateral, a general
economic downturn, and consumer financial problems.
LENDING POLICY. The current lending strategy of each Community Banking
Subsidiary is to offer consumer, real estate and commercial credit services to
individuals and entities that meet the Company's credit standards. Each
Community Banking Subsidiary provides its lending officers with written
guidelines for lending activities. Lending authority is delegated by the Board
of Directors of the particular Community Banking Subsidiary to loan officers,
each of whom is limited in the amount of secured and unsecured loans which he or
she can make to a single borrower or related group of borrowers.
LOAN REVIEW AND NON-PERFORMING ASSETS. Each Community Banking
Subsidiary reviews its loan portfolio to determine deficiencies and corrective
action to be taken, and the Company reviews the loan portfolio of each Community
Banking Subsidiary. Senior lending officers conduct periodic reviews of
borrowers with total direct and indirect indebtedness of $75,000 or more and
ongoing reviews of all past due loans. Past due loans are reviewed at least
weekly by lending officers and a summary report is reviewed monthly by the
particular Community Banking Subsidiary's Board of Directors. Each Board of
Directors review all loans over $100,000, whether current or past due, at least
once annually. In addition, each Community Banking Subsidiary maintains internal
classifications of problem and potential problem loans.
ASSET/LIABILITY MANAGEMENT. Each Community Banking Subsidiary's Board
of Directors is charged with establishing policies to manage the assets and
liabilities of the bank. Each Board's task is to manage asset growth, net
interest margin and liquidity and capital. The Board directs the bank's overall
acquisition and allocation of funds. At monthly meetings, a committee of
executives of the Company receives a report from each bank with regard to the
monthly asset and liability funds budget and income and expense budget in
relation to the actual composition and flow of funds, the ratio of the amount of
rate-sensitive assets to the amount of rate-sensitive liabilities, the amount of
interest rate risk and equity market value exposure under varying rate
environments, the ratio of loan loss reserve to outstanding loans and other
variables, such as expected loan demand, investment opportunities, core deposit
growth within specified categories, regulatory changes, monetary policy
adjustments and the overall condition of the local and state economy.
INVESTMENT POLICY. The Company's investment portfolio policy is to
maximize income consistent with liquidity, asset quality and regulatory
constraints. The policy is reviewed from time to time by the Company's Board of
Directors. Individual transactions, portfolio composition and performance are
reviewed and approved monthly by the Board of Directors of each bank or a
committee thereof. The President of each Community Banking Subsidiary implements
the policy and reports to the bank's full Board of Directors on a monthly basis
information concerning sales, purchases, resultant gains or losses, average
maturity, federal taxable equivalent yields and appreciation or depreciation by
investment categories.
Business Description of Non-banking Subsidiaries
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FINANCIAL SUPERMARKETS. Financial Supermarkets, formed as a Georgia
corporation in 1984, is a wholly-owned subsidiary of Community-Habersham and has
three divisions. Financial Supermarkets' primary division, The Supermarket Bank,
provides various consulting and licensing services to financial institutions in
connection with the establishment of bank branches in supermarkets. These
services are marketed to international, national, regional and community
financial institutions. Financial Supermarkets enters into agreements with major
supermarket chains for the right to establish bank branches in particular sites.
Financial Supermarkets then licenses such rights, along with the right to
operate the "Supermarket Bank", to individual financial institutions, in
addition to providing consulting services to such institutions ranging from
providing alternative construction designs to coordinating employee training.
Since 1984, Financial Supermarkets has assisted clients with the
development of Supermarket Bank facilities in grocery stores throughout the
United States. Financial Supermarkets primarily competes in the in-store bank
branch consulting business with International Banking Technologies of Atlanta,
Georgia, and Memphis-based National Commerce Bank Services, Inc. a wholly owned
subsidiary of National Commerce Bancorporation.
Over its 14-year history, Financial Supermarkets has expanded the scope
of its business beyond the supermarket bank industry. In 1988, it formed a
consulting division for the financial services industry. The division is based
in Atlanta and works with financial institutions across the Southeastern United
States with regard to state and federal regulatory compliance issues and other
day-to-day operational matters.
In 1992, Financial Supermarkets formed a full-service marketing
consulting firm to consult with financial institutions primarily in the
Southeastern United States, in addition to working closely with Supermarket Bank
clients to develop related advertising and marketing programs.
In 1994, Financial Supermarkets formed a travel agency to provide
customers with a full range of travel services.
FINANCIAL PROPERTIES. Community-Habersham acquired in March 1998
Financial Properties, Inc. ("Financial Properties"). Financial Properties
engages in real estate brokerage and related activities.
Competition
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The banking business is highly competitive. Community-Habersham
competes with four other institutions in Habersham County, Georgia, three
institutions in White County, Georgia, and nine institutions in Hall County,
Georgia; Community -Jackson competes with five other depository institutions in
Jackson County, Georgia; Community-Alabama competes with one other depository
institution in Bullock County, Alabama, and eleven other depository institutions
in Montgomery, Alabama, and Community-Troup competes with eight other depository
institutions in Troup County, Georgia. Each Community Banking Subsidiary also
competes with other financial service organizations, including savings and loan
associations, finance companies, credit unions and certain governmental
agencies. To the extent that banks must maintain non-interest-earning reserves
against deposits, they may be at a competitive disadvantage when compared with
other financial service organizations that are not required to maintain reserves
against substantially equivalent sources of funds. Further, the increased
competition from investment bankers and brokers and other financial service
organizations may have a significant impact on the competitive environment in
which each Community Banking Subsidiary operates.
Employees
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At December 31, 1999, the Company had 290 full-time employees and 46
part-time employees. Neither the Company nor any of its subsidiaries is a party
to any collective bargaining agreement, and management of the Company believes
that its employee relations are good.
Supervision and Regulation
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GENERAL. The Company is a registered bank holding company subject to
regulation by the Board of Governors of the Federal Reserve (the "Federal
Reserve") under the Bank Holding Company Act of 1956, as amended (the "Bank
Holding Act"). The Company is required to file financial information with the
Federal Reserve periodically and is subject to periodic examination by the
Federal Reserve.
The Act requires every bank holding company to obtain the Federal
Reserve's prior approval before (1) it may acquire direct or indirect ownership
or control of more than 5% of the voting shares of any bank that it does not
already control; (2) it or any of its non-bank subsidiaries may acquire all or
substantially all of the assets of a bank; and (3) it may merge or consolidate
with any other bank holding company. In addition, a bank holding company is
generally prohibited from engaging in, or acquiring, direct or indirect control
of the voting shares of any company engaged in non-banking activities. This
prohibition does not apply to activities listed in the Act or found by the
Federal Reserve, by order or regulation, to be closely related to banking or
managing or controlling banks as to be a proper incident thereto. Some of the
activities that the Federal Reserve has determined by regulation or order to be
closely related to banking are:
o making or servicing loans and certain types of leases;
o performing certain data processing services;
o acting as fiduciary or investment or financial advisor;
o providing brokerage services;
o underwriting bank eligible securities;
o underwriting debt and equity securities on a limited basis
through separately capitalized subsidiaries; and o making
investments in corporations or projects designed primarily to
promote community welfare.
In addition, bank holding companies whose banking subsidiaries are all
well-capitalized and well-managed may apply to become a financial holding
company. Financial holding companies have the authority to engage in activities
that are "financial in nature" that are not permitted for other bank holding
companies. Some of the activities that the Act provides are financial in nature
are:
o lending, exchanging, transferring, investing for others or
safeguarding money or securities;
o insuring, guaranteeing, or indemnifying against loss, harm,
damage, illness, disability, or death, or providing and
issuing annuities, and acting as principal, agent, or broker
with respect thereto;
o providing financial, investment, or economic advisory
services, including advising an investment company; o issuing
or selling instruments representing interests in pools of
assets permissible for a bank to hold directly; and o
underwriting, dealing in, or making a market in securities.
Effective March 13, 2000, we were registered as a financial holding
company, but have no immediate plans to engage in new activities.
The Company must also register with the Department of Banking and
Finance of the State of Georgia (the "DBF") and file periodic information with
the DBF. As part of such registration, the DBF requires information with respect
to the financial condition, operations, management and intercompany
relationships of the Company and Community-Habersham, Community-Jackson and
Community-Troup and related matters. The DBF may also require such other
information as is necessary to keep itself informed as to whether the provisions
of Georgia law and the regulations and orders issued thereunder by the DBF have
been complied with, and the DBF may examine the Company and each of the Georgia
Community Banking Subsidiaries.
The Company is an "affiliate" of the Community Banking Subsidiaries
under the Federal Reserve Act, which imposes certain restrictions on (i ) loans
by the Community Banking Subsidiaries to the Company, (ii) investments in the
stock or securities of the Company by the Community Banking Subsidiaries, (iii)
the Community Banking Subsidiaries taking the stock or securities of an
"affiliate" as collateral for loans by the Community Banking Subsidiaries to a
borrower and (iv) the purchase of assets from the Company by the Community
Banking Subsidiaries. Further, a bank holding company and its subsidiaries are
prohibited from engaging in certain tie-in arrangements in connection with any
extension of credit, lease or sale of property or furnishing of services.
Community-Habersham, Community-Jackson and Community-Troup, as Georgia
banking associations, are subject to the supervision of, and are regularly
examined by, the Federal Deposit Insurance Corporation (the "FDIC") and the DBF.
Community-Alabama is subject to the supervision and examination of the Alabama
State Banking Department (the "ABD") in addition to the FDIC. Both the FDIC and
the DBF must grant prior approval of any merger, consolidation or other
corporate reorganization involving Community-Habersham, Community-Jackson or
Community-Troup. The ABD must grant prior approval of any merger, consolidation
or other corporate reorganization involving Community-Alabama. A bank can be
held liable for any loss incurred by, or reasonably expected to be incurred by,
the FDIC in connection with the default of a commonly-controlled institution.
PAYMENT OF DIVIDENDS. The Company is a legal entity separate and
distinct from the Community Banking Subsidiaries. Most of the revenues of the
Company result from dividends paid to it by the Community Banking Subsidiaries.
There are statutory and regulatory requirements applicable to the payment of
dividends by the Community Banking Subsidiaries, as well as by the Company to
its shareholders.
The Community Banking Subsidiaries are each state-chartered banks
regulated by the DBF or ABD, as applicable, and the FDIC. Under the regulations
of the DBF, dividends may not be declared out of the retained earnings of a
Georgia bank without first obtaining the written permission of the DBF unless
such bank meets all of the following requirements:
(a) Total classified assets as of the most recent examination of
the bank do not exceed 80% of equity capital (as defined by
regulation);
(b) The aggregate amount of dividends declared or anticipated to
be declared in the calendar year does not exceed 50% of the
net profits after taxes but before dividends for the previous
calendar year; and
(c) The ratio of equity capital to adjusted assets is not less
than 6%.
Under the regulations of the ABD, dividends may be declared by a state
bank without obtaining the prior written approval of the ABD only if (i) the
bank's surplus (as defined by regulation) is equal to at least 20% of its
capital (as defined by regulation) and (ii) the aggregate of all dividends
declared or anticipated to be declared in the calendar year does not exceed the
total of its net earnings (as defined by regulation) of that year combined with
its retained net earnings of the preceding two year, less any required transfers
to surplus. No dividends may be paid from an Alabama bank's surplus without the
prior written approval of the ABD.
The payment of dividends by the Company and the Community Banking
Subsidiaries may also be affected or limited by other factors, such as the
requirement 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 upon the financial condition of the Community
Banking Subsidiaries, could include the payment of dividends) such authority may
require, after notice and hearing, that such bank cease and desist from such
practice. The FDIC has issued a policy statement providing that insured banks
should generally only pay dividends out of current operating earnings. In
addition to the formal statutes and regulations, regulatory authorities consider
the adequacy of each of the Community Banking Subsidiary's total capital in
relation to its assets, deposits and other such items. Capital adequacy
considerations could further limit the availability of dividends to the
Community Banking Subsidiaries. At December 31, 1999, retained earnings
available from the Community Banking Subsidiaries to pay dividends totaled
approximately $4.3 million. For 1999, the Company's cash dividend payout to
shareholders was 5.36% of net income.
MONETARY POLICY. The results of operations of the Community Banking
Subsidiaries are affected by credit policies of monetary authorities,
particularly the Federal Reserve. The instruments of monetary policy employed by
the Federal Reserve include open market operations in U.S. government
securities, changes in the discount rate on bank borrowings and changes in
reserve requirements against bank deposits. In view of changing conditions in
the national economy and in the money markets, as well as the effect of actions
by monetary and fiscal authorities, including the Federal Reserve, no prediction
can be made as to possible future changes in interest rates, deposit levels,
loan demand or the business and earnings of the Community Banking Subsidiaries.
CAPITAL ADEQUACY. The Federal Reserve and the FDIC have implemented
substantially identical risk-based rules for assessing bank and bank holding
company capital adequacy. These regulations establish minimum capital standards
in relation to assets and off-balance sheet exposures as adjusted for credit
risk. Banks and bank holding companies are required to have (1) a minimum level
of total capital (as defined) to risk-weighted assets of eight percent (8%); (2)
a minimum Tier One Capital (as defined) to risk-weighted assets of four percent
(4%); and (3) a minimum stockholders' equity to risk-risk-weighted assets of our
percent (4%). In addition, the Federal Reserve and the FDIC have established a
minimum three percent (3%) leverage ratio of Tier One Capital to total assets
for the most highly-rated banks and bank holding companies. "Tier One Capital"
generally consists of common equity not including unrecognized gains and losses
on securities, minority interests in equity accounts of consolidated
subsidiaries and certain perpetual preferred stock less certain intangibles. The
Federal Reserve and the FDIC will require a bank holding company and a bank,
respectively, to maintain a leverage ratio greater than three percent (3%) if
either is experiencing or anticipating significant growth or is operating with
less than well-diversified risks in the opinion of the Federal Reserve. The
Federal Reserve and the FDIC use the leverage ratio in tandem with the
risk-based ratio to assess the capital adequacy of banks and bank holding
companies. The FDIC, the Office of the Comptroller of the Currency (the "OCC")
and the Federal Reserve amended, effective January 1, 1997, the capital adequacy
standards to provide for the consideration of interest rate risk in the overall
determination of a bank's capital ratio, requiring banks with greater interest
rate risk to maintain adequate capital for the risk.
In addition, effective December 19, 1992, a new Section 38 to the
Federal Deposit Insurance Act implemented the prompt corrective action
provisions that Congress enacted as a part of the Federal Deposit Insurance
Corporation Improvement Act of 1991 (the "1991 Act"). The "prompt corrective
action" provisions set forth five regulatory zones in which all banks are placed
largely based on their capital positions. Regulators are permitted to take
increasingly harsh action as a bank's financial condition declines. Regulators
are also empowered to place in receivership or require the sale of a bank to
another depository institution when a bank's capital leverage ratio reaches two
percent (2%). Better capitalized institutions are generally subject to less
onerous regulation and supervision than banks with lesser amounts of capital.
The FDIC has adopted regulations implementing the prompt corrective
action provisions of the 1991 Act, which place financial institutions in the
following five categories based upon capitalization ratios: (1) A "well
capitalized" institution has a total risk-based capital ratio of at least 10%, a
Tier One risk-based ratio of at least 6% and a leverage ratio of at least 5%;
(2) an "adequately capitalized" institution has a total risk-based capital ratio
of at least 8%, a Tier One risk-based ratio of at least 4% and a leverage ratio
of at least 4%; (3) an "undercapitalized" institution has a total risk-based
capital ratio of under 8%, a Tier One risk-based ratio of under 4% or a leverage
ratio of under 4%; (4) a "significantly undercapitalized" institution has a
total risk-based capital ratio of under 6%, a Tier One risk-based ratio of under
3% or a leverage ratio of under 3%; and (5) a "critically undercapitalized"
institution has a leverage ratio of 2% or less. Institutions in any of the three
undercapitalized categories would be prohibited from declaring dividends or
making capital distributions. The FDIC regulations also establish procedures for
"downgrading" an institution to a lower capital category based on supervisory
factors other than capital. Under the FDIC's regulations, all of the Community
Banking Subsidiaries were "well capitalized" institutions at December 31, 1999.
Set forth below are pertinent capital ratios for the Company and the
Community Banking Subsidiaries as of December 31, 1999.
Minimum Capital Community Community Community Community The
Requirement -Habersham -Jackson -Alabama -Troup Company
- --------------------- ----------- ---------- --------- -------- ---------
Tier One Capital 11.91% 9.33% 10.21% 11.23% 10.71%
to Risk-based
Assets: 4.00%
Total Capital to 13.17% 10.58% 11.46% 12.48% 11.97%
Risk-based
Assets 8.00%
Leverage Ratio 8.65% 6.82% 7.27% 8.23% 8.54%
(Tier One Capital
to Average Assets)
4.00%
Minimum required ratio for "well capitalized" banks is 6%
Minimumrequired ratio for "well capitalized" banks is 10%
Minimum required ratio for "well capitalized" banks is 5%
RECENT LEGISLATIVE AND REGULATORY ACTION.
On November 12, 1999, President Clinton signed the Gramm-Leach-Bliley
Act, a very significant piece of legislation intended to modernize the financial
services industry. The bill repeals the anti-affiliation provisions of the 1933
Glass-Steagall Act to allow for the merger of banking and securities
organizations and permits banking organizations to engage in insurance
activities including insurance underwriting. The bill also allows bank holding
companies to engage in financial activities that are "financial in nature or
complementary to a financial activity." The act lists the expanded areas that
are financial in nature and includes insurance and securities underwriting and
merchant banking among others. The bill also:
o prohibits non-financial entities from acquiring or
establishing a thrift while grandfathering existing thrifts
owned by non-financial entities.
o establishes state regulators as the appropriate functional
regulators for insurance activities but provides that state
regulators cannot "prevent or significantly interfere" with
affiliations between banks and insurance firms.
o contains provisions designed to protect consumer privacy. The
bill requires financial institutions to disclose their policy
for collecting and protecting confidential information and
allows consumers to "opt out" of information sharing except
with unaffiliated third parties who market the institutions'
own products and services or pursuant to joint agreements
between two or more financial institutions.
o provides for functional regulation of a bank's securities
activities by the Securities and Exchange Commission.
Various portions of the bill have different effective dates, ranging
from immediately to more than a year for implementation.
ITEM 2. PROPERTIES.
Community-Habersham's main office is located at 448 North Main Street,
Cornelia, Georgia. Community-Jackson's main office is located at 117 North Elm
Street, Commerce, Georgia. Community-Alabama's main office is located at 202 N.
Powell Street, Union Springs, Alabama. Community-Troup's main office is located
at 201 Broad Street, LaGrange, Georgia. Community-Habersham has fourteen branch
offices (four owned and ten leased, nine of which are operated in supermarkets)
located in Cornelia, Clarkesville, Clayton, Cleveland, Demorest, Gainesville,
and Toccoa, Georgia. In addition, the Bank leases the property occupied by the
Loan Production Office in Gainesville. Community-Jackson has five branch offices
(one owned and four leased, three of which are operated in supermarkets) located
in Commerce and Jefferson, Georgia. Community-Alabama has one branch (leased and
operated in a supermarket) in Montgomery, Alabama. Community - Troup has one
branch office (leased and operated in a supermarket) in LaGrange, Georgia.
Financial Supermarkets owns its main office located in Cornelia, Georgia, and
leases a division office in Atlanta, Georgia. Management of the Company believes
that all of its properties are adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to, nor is any of its property the subject
of, any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of its fiscal year.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no established public trading market for the Common Stock. As
of January 1, 2000, there were 474 holders of record of the Common Stock.
Management is aware of 32 and 30 trades of Company stock during 1999 and 1998,
respectively. During 1999, trades ranged from 25 shares to 13,849 shares at
prices ranging from $33.00 to $40.00 per share. During 1998, trades ranged from
25 shares to 9,000 shares at prices ranging from $25.00 to $33.00 per share.
In 1999, the Company paid cash dividends of $.15 per share. The Company
paid cash dividends of $.15 and $.14 in 1998 and 1997, respectively. The Company
intends to continue to pay cash dividends. However, the amount and frequency of
dividends will be determined by the Company's Board of Directors in light of the
earnings, capital requirements and the financial condition of the Company, and
no assurances can be given that dividends will be paid in the future. The
Company's ability to pay dividends will also be dependent on cash dividends paid
to it by the Community Banking Subsidiaries. The ability of the Community
Banking Subsidiaries to pay dividends to the Company is restricted by applicable
regulatory requirements. See "ITEM 1 -- BUSINESS -- Supervision and Regulation."
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31,
1999 1998 1997 1996 1995
--------------------------------------------------------------
Dollars in Thousands, Except Per Share Amounts
SELECTED INCOME STATEMENT DATA:
Total interest income $40,290 $ 34,613 $ 28,703 $ 24,465 $ 21,871
Total interest expense 17,697 15,950 13,191 11,236 9,875
Net Interest income 22,593 18,663 15,512 13,229 11,996
Provision for loan losses 1,637 1,165 936 757 849
Non bank subsidiary income 6,720 9,043 8,820 5,559 3,780
Other operating income 4,790 4,338 3,599 2,833 2,432
Other operating expenses 23,831 20,402 18,724 14,950 12,970
Net income 6,076 7,032 5,647 4,044 3,125
Diluted earnings per share 2.80 3.20 2.60 1.93 1.54
Cash dividends per share 0.15 0.15 0.14 0.14 0.13
SELECTED BALANCE SHEET DATA:
Total assets $516,150 $ 460,593 $ 377,080 $ 315,579 $ 270,007
Total deposits 444,056 405,283 335,545 278,709 242,442
Other borrowings 16,054 5,808 462 616 787
Redeemable common stock held
by ESOP 13,982 14,254 10,622 6,177 -
Shareholders' equity 30,820 26,291 23,119 21,083 22,469
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION.
The following is a discussion and analysis of the Company's financial
condition at December 31, 1999 and the results of operations for the three year
period ended December 31, 1999. The purpose of the discussion is to focus on
information about the Company's financial condition and results of operations
which are not otherwise apparent from the audited consolidated financial
statements included in this annual report. This discussion and analysis should
be read in conjunction with the consolidated financial statements and related
notes and the selected financial information and statistical data presented
elsewhere in this Annual Report.
BALANCE SHEET REVIEW. The Company experienced significant growth during
1999. For the year ended December 31, 1999, consolidated assets grew $55.6
million, or 12.06%, up from 1998 growth of $83.5 million or 22.15%. During 1999,
the Company's average assets were $494.7 million, compared with $418.6 million
during 1998. This represents an 18.19% increase in average assets during 1999
compared with a 22.35% increase during 1998.
Total earning assets, which include investment securities, loans,
Federal Funds sold, and interest-bearing deposits in banks increased $50.0
million or 12.17% during 1999. During 1998, earning assets increased $76.9
million, or 23.04%. Average earning assets for 1999 were $443.3 million , an
increase of 19.38% over average earning assets in 1998 which were $371.3 million
or an increase of 19.95% over 1997.
Total investments increased by $7.6 million or 10.41% over 1998.
Average investments were $79.5 million for 1999, a 4.52% increase over average
investments for 1998. This increase occurred mainly in the available for sale
portfolio.
Total loans grew by $62.7 million during 1999 for an increase of 19.97%
over 1998. During 1999 average loans were $350.3 million or an increase of
22.57% over 1998 compared to an increase during 1998 of 28.07% to $285.8
million. The increase in loans is primarily the result of continued loan growth
in the Company's existing markets.
Federal Funds sold decreased by $19.9 million or 87.16% from year end
1998 to 1999. Average Federal Funds for 1999 were $13.1 million or a 37.73%
increase. During 1998, average Federal Funds sold decreased by of $.2 million or
2.15% as compared to 1997.
The growth in assets for the year ended December 31, 1999 was funded
mainly by growth in deposits and advances from the Federal Home Loan Bank.
Consolidated deposits grew $38.8 million or 9.57% in 1999 as compared to $69.7
million or 20.78% in 1998. Deposit growth was concentrated in time deposits. The
Company experienced a 5.00% increase in interest bearing demand with minimal
growth in noninterest-bearing demand and savings. The Company borrowed $10
million from the Federal Home Loan Bank to add to the $5 million advanced in
1998.
As shown in Table 2 of the Selected Statistical Data, the average
yields on interest earning assets and interest bearing liabilities showed a
slight decrease from 1998 to 1999 due to a fairly stable market. The net
interest spread increased by 4 basis points from 1998 to 1999, and the net
interest margin increased by 7 basis points from 1998 to 1999.
At December 31, 1999, the Company reported net unrealized losses of
approximately $1,327,000 in the securities available for sale portfolio as
compared to net unrealized gains of approximately $227,000 at December 31, 1998.
Net unrealized gains (losses) represent the difference in the amortized cost of
those securities compared to the fair value at those dates and are included in
shareholders' equity, net of the tax effect. Management sells securities to meet
liquidity needs and may sell securities in rising interest-rate environments to
take advantage of higher returns in the long run. In 1998 the Company sold $14.2
million of securities classified as available for sale, realizing net gains of
$78,653 on a consolidated basis. The company had no sales of securities during
1999. The held to maturity securities portfolio included net unrealized losses
of approximately $590,000 at December 31, 1999 compared to net unrealized gains
of $1,259,000 in 1998. Table 4 of the Selected Statistical Data summarizes the
combined investment portfolios by types of securities. U.S. Treasury and other
U.S. Government agencies and corporations represent 37.87% of the total
portfolio, which typically provide reasonable returns with limited risk. The
remaining portfolio is comprised of municipal securities, mortgage-backed
securities, and other investments which provide, in general, higher returns on a
tax equivalent basis, with greater risk elements. Management regularly monitors
the Company's investment portfolios and utilizes forecasting models to project
the Company's net interest margin in various rising, flat, and falling
interest-rate scenarios. In a changing interest rate environment, management
would act to change the Company's asset or liability composition and interest
sensitivity in response to a definitive change in the direction of interest
rates. The Company actively manages the mix of asset and liability maturities to
control the effects of changes in the general level of interest rates on net
interest income. Except for the effect of inflation on interest rates, inflation
does not have a material impact on the Company due to variability and short-term
maturities of its earning assets repriced or matured within one year.
LIQUIDITY AND CAPITAL RESOURCES. The liquidity and capital resources of
the Company and the Community Banking Subsidiaries are monitored by management
and on a periodic basis by state and federal regulatory authorities. The
individual Community Banking Subsidiaries' liquidity ratios at December 31, 1999
were considered satisfactory under their own guidelines as well as regulatory
guidelines. At that date, the Community Banking Subsidiaries' short-term
investments were adequate to cover any reasonably anticipated immediate need for
funds.
The purpose of liquidity management is to ensure that cash flow is
sufficient to satisfy demands for credit, withdrawals, and other needs of the
Company. Traditional sources of liquidity include asset maturities and growth in
core deposits. A company may achieve its desired liquidity objectives from the
management of assets and liabilities, and through funds provided by operations.
Funds invested in short-term marketable instruments and the continuous maturing
of other earning assets are sources of liquidity from the asset perspective. The
liability base provides sources of liquidity through deposit growth and
accessibility to market sources of funds.
Scheduled loan payments are a relatively stable source of funds, but
loan payoffs and deposit flows are influenced by interest rates, general
economic conditions and competition and may fluctuate significantly. The Company
attempts to price its deposits to meet its asset/liability objectives consistent
with local market conditions.
Cash flows for the Company are of three major types. Cash flows from
operating activities consist primarily of interest and fees received on loans,
interest received on investment securities, federal funds sold, and interest
bearing deposits less cash paid for interest and operating expenses. Investing
activities use cash for the purchase of interest-bearing deposits, investment
securities, fixed assets and to fund loans. Investing activities also generate
cash from the proceeds of matured interest-bearing deposits, matured investment
securities, sales of investment securities, loan repayments and principal
prepayments of securities. Cash flows from financing activities generate cash
from a net increase in deposit accounts, the increases in other borrowed funds
and the issuance of common stock. Financing activities use cash for the payment
of cash dividends and the repayment of other borrowed funds.
For the year ended December 31, 1999, $40.3 million in cash flows from
operating activities were provided by interest and fees received from loans,
securities and federal funds. Approximately $11.5 million in cash flows were
provided by service charges, nonbank subsidiary income, sale of loans and other
income. Cash flows used in operating activities consisted of $18.4 million of
interest paid on deposits and borrowings, $12.3 million paid for salaries and
other personnel benefits and $14.0 million paid for occupancy and equipment
expenses, income taxes and other operating payments. Cash flows of $10.3 million
were provided by maturities of investment securities. Cash flows provided by
financing activities consisted primarily of $38.8 million in net increases in
deposits and an increase in other borrowings of $10 million. The increases in
deposits and other borrowings were primarily used to fund the $64.4 million in
net increase in loans. The net increase in cash and due from banks for the year
ended December 31, 1999 was $5.0 million.
For the year ended December 31, 1998, $33.4 million in cash flows from
operating activities were provided by interest and fees received from loans,
securities and federal funds. Approximately $13.4 million in cash flows were
provided by service charges, nonbank subsidiary income, sale of loans and other
income. Cash flows used in operating activities consisted of $14.8 million of
interest paid on deposits and borrowings, $10.7 million paid for salaries and
other personnel benefits and $13.2 million paid for occupancy and equipment
expenses, income taxes and other operating payments. Cash flows of $41.2 million
were provided by the proceeds of sales and maturities of investment securities.
Cash flows provided by financing activities consisted $69.7 million in net
increases in deposits and an increase in other borrowings of $5.5 million. The
increases in deposits and other borrowings were primarily used to fund the $69.7
million net increase in loans. The net increase in cash and due from banks for
the year ended December 31, 1998 was $2.8 million.
At December 31, 1999, the Company's and Community Banking Subsidiaries'
capital ratios were considered adequate based on minimum capital requirements of
the FDIC and applicable state regulatory agencies. During 1999, the Company
increased capital by retaining net earnings of $5.7 million and the issuance of
$.09 million in common stock compared to an increase in 1998 of $6.7 million in
retained net earnings. Management believes that the liquidity and capital ratios
of the Company and the Community Banking Subsidiaries are adequate based on
regulatory requirements.
The Company is capable of meeting its debt service requirements related
to existing long-term and other borrowings through dividends available from its
subsidiaries and current operations. Although the Company considers that it has
adequate capital to meet its short-term needs, the Company, at times, may seek
additional capital to support its long-term business goals, including expansion
of its fixed asset base, and for general corporate purposes.
For a tabular presentation of the Community Banking Subsidiaries'
capital ratios at December 31, 1999 see "SUPERVISION AND REGULATION".
The Company is not aware of any other trends, events or uncertainties
that will have or that are reasonably likely to have a material effect on the
Company's liquidity, capital resources or operations. The Company is not aware
of any current recommendations by the regulatory authorities which, if they were
implemented, would have such an effect.
EFFECTS OF INFLATION. Inflation impacts banks differently than
non-financial institutions. Banks, as financial intermediaries, have assets
which are primarily monetary in nature and which tend to fluctuate with
inflation. A bank can reduce the impact of inflation by managing its rate
sensitivity gap, which represents the difference between rate-sensitive assets
and rate-sensitive liabilities. The Company, through its asset-liability
committee, attempts to structure the assets and liabilities and manage the
rate-sensitivity gap, thereby seeking to minimize the potential effects of
inflation. See "Asset/liability Management".
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NET INTEREST INCOME. The Company's results of operations are influenced
by management's ability to effectively manage interest income and expense, to
minimize loan and investment losses, to generate non-interest income and to
control operating expenses. Because interest rates are determined by market
forces and economic conditions beyond the control of the Company, the Company's
ability to generate net interest income is dependent upon its ability to obtain
an adequate net interest spread between the rate paid on interest-bearing
liabilities and the rate earned on interest-earning assets. The Company's net
interest income increased by $3.9 million for the year ended December 31, 1999
as compared to an increase of $3.2 million for the same period in 1998 The
increase in net interest income is attributable to increases in earning assets,
particularly loans. The yield on interest-earning assets decreased 23 basis
points in 1999 from 1998, while the yield on interest earning liabilities
decreased by 27 basis points. The increase in average interest earning assets of
$72.0 million, net of the increase in average interest-bearing liabilities of
$55.4 million, accounts for the 21.06% increase in net interest income. Net
interest income increased for all Community Banking Subsidiaries.
The 4 basis point increase in the net interest spread in Table 2 is due
in part to the percentage on interest income earned from loans increasing
compared to 1998. In addition, the rates on deposits decreased slightly during
1999. The Company will continue to actively monitor and maintain the net
interest spread to counteract the current market trends. Net interest income for
1998 increased $3.2 million over 1997. The increase is mainly attributable to
growth in earning assets as shown in Table 1.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the year
ended December 31, 1999 increased by $472,000 from $1,165,000 at December 31,
1998. This compares to an increase of $229,000 in 1998 from the December 31,
1997 level of $936,000. The increase during both 1999 and 1998 is associated
with loan growth, as management maintains an allowance for loan losses based on
the evaluation of potential problem loans as well as minimal reserves for all
loans based on past net charge-off experience. The guaranteed portion of loans
generated by the loan production office are subsequently sold. Because most
loans generated by the loan production office are out-of market, the loans
generated by the loan production office require additional allowances due to the
greater risk of loss in the event of a default. These loans, however, are
subjected to the same underwriting standards and periodic loan review procedures
as other loans made by the Community Banking Subsidiaries.
As shown in Table 8 of the Selected Statistical Data, nonaccrual and
restructured loans, increased $789,000 from December 31, 1998 compared to a
$378,000 increase over 1997. The increase in delinquent nonaccrual loans is
attributable to an increase in delinquent SBA loans associated with interest
rate increases related to the aggressive loan growth in recent years. Although
management is aware of this increase, management has reviewed these loans and
determined that the likelihood of any loss of principal is minimal because the
loans are adequately collateralized. The ratio of the allowance for loan losses
to nonaccrual and restructured loans decreased from 271% at December 31, 1998 to
220% at December 31, 1999. However, the Company determined that no reserves were
required because of the Company's collateral positions.
The allowances for loan losses as a percentage of total loans
outstanding at December 31, 1999 and 1998 was 1.51% and 1.55%, respectively. Net
charge-offs in 1999 were $817,469, an increase of $491,529 from $325,940 in
1998, and the net charge-off ratio increased from .11 in 1998 to .23 in 1999.
Based on management's evaluation of the loan portfolio, including a review of
past loan losses, current conditions which may affect borrowers' ability to
repay and the underlying collateral value of the loans, management considers the
allowance for loan losses to be adequate.
OTHER INCOME. Other income consists of income from operations of the
Community Banking Subsidiaries and Financial Supermarkets. Traditional
non-interest income of the Community Banking Subsidiaries accounts for only
40.7%, or $4.6 million of total other income for 1999, 32.1% in 1998, and 28.5%
in 1997. The majority of the increase in other income of the Community Banking
Subsidiaries is the continued growth in deposits. Service charges on deposit
accounts increased by $ 336,802 and $510,919, respectively, for the years ended
December 31, 1999 and 1998. These increases normally have a direct relationship
with the change in demand deposit and savings accounts. Average demand deposit
and savings accounts increased 23.2% in 1999 compared to 30.9% increase in 1998
over 1997. Included in other income of the Community Banking Subsidiaries are
gains on sale of loans recognized by Community-Habersham and Jackson of $199,943
and $118,814, respectively. This represents a decrease from 1998 of $241,318.
The allocation of services as a percentage of total income for Financial
Supermarkets is shown below:
FINANCIAL SUPERMARKETS
Consulting Services provided for Supermarket
bank installation and opening 51%
Supermarket consulting and ancillary services 45
Other Miscellaneous Consulting Services 4
---
100%
The primary business of Financial Supermarkets is services offered in
connection with the establishment and operation of Supermarket Bank(R) service
centers. In 1999, Financial Supermarkets had net consulting revenue of $3.9
million compared to $6.4 million in 1998, a decrease of $2.5 million or 39%. The
decrease in net consulting revenues in 1998 over 1997 was $.2 million, or 3%.
The Company has had fewer installations of supermarket bank units
during 1999 as compared to 1998, due to the decreased branching activity
directly related to the banking industry's efforts to prepare for the Year 2000.
In addition, FSI terminated its Master Consulting Agreement with NationsBanc
Services, Inc. ("NationsBanc") in 1998 and received non-recurring compensation
as a result of this agreement. Although the consulting service provided to
NationsBanc during 1997 and 1998 enhanced FSI's income and FSI is currently
collecting consulting fees on 69 supermarket branches in operation under this
agreement, management anticipates the establishment of Supermarket Bank(R)
service centers to increase in 2000 compared to 1999, due increased branching
activity in the industry as well as FSI's agreement with the Canadian Imperial
Bank of Commerce to establish banking pavilions in Florida.
NON-INTEREST EXPENSE. Other expenses increased for the year ended
December 31, 1999 by $3.4 million compared to the $1.7 million increase in 1998.
This represented a 16.81% increase in expenses for 1999 and 8.97% increase in
1998. Salaries and benefits increased $1,668,541 or 15.63% in 1999 over 1998 due
primarily to the staffing of new branches. This compares to an increase of
$202,492 or 1.93 % in 1998 over 1997. Although salaries and benefits continue to
increase as a result of the growth in the banking subsidiaries, incentive pay in
FSI decreased in 1998 as compared to 1997 resulting in a smaller increase in the
overall salaries and benefits during that period of time. For the years ended
1999, 1998, and 1997 the Company had total employees (F.T.E.) of 313, 282, and
249, respectively. Other expenses increased by 1.0 million in 1999 and .9
million in 1998 primarily due to growth of the banking subsidiaries, increased
costs associated with day-to-day operations and increased activity of FSI.
Equipment and occupancy expenses increased by $781,112 or 24.82% in
1999 over 1998 and $583,289 or 22.76% in 1998 over 1997. The growth is due to
the increased number of facilities operated by the Community banking
subsidiaries as well as additions of computer equipment necessary to operate the
Company. The Company operated 29, 26 and 23 locations at the year end 1999,
1998, and 1997, respectively. As 1999 closed, preparations were being made to
open three additional facilities during 2000. Management expects these locations
to add to the continued growth and profitability of the Company.
Other Operating Increase/
Expenses (Decrease)
1999 1998
----------- ---------- -------------
(Dollars in Thousands)
The Company
Salaries and benefits $12,346 $ 10,677 $1,669
Equipment expenses 2,542 1,841 701
Occupancy expenses 1,386 1,306 80
Data processing expenses 886 949 (63)
Travel expenses 678 469 209
Office supply expenses 623 460 163
Other operating expenses 5,370 4,700 670
----------- ---------- -------------
$23,831 $ 20,402 $3,429
=========== ========== =============
INCOME TAXES. The Company incurred income tax expenses of $2.6 million
in 1999 which represented an effective tax rate of 30%, compared to tax expense
of $3.4 million in 1998, or an effective tax rate of 33%. Income tax expense
increased $ .8 million from 1997 to $3.4 million in 1998. The effective tax rate
at December 31, 1997 was 32%. The decrease in the effective tax rate is related
to the decreased income of Financial Supermarkets, which does not have a portion
of its income tax-free as do the Community Banking Subsidiaries.
NET INCOME. The Company's net income for 1999 was $6.1 million , as
compared to $7.0 million in 1998, a decrease of 14%. The decrease in net income
between 1999 and 1998 is primarily attributable to the decrease in income from
FSI. Net income for 1998 increased to $7.0 million or 25% over 1997's net income
of $5.6 million. Although the Company experienced a decrease in income during
1999, management does not expect this trend to continue.
ASSET/LIABILITY MANAGEMENT. The Company's objective is to manage assets
and liabilities to maintain satisfactory and consistent profitability. Officers
of each Community Banking Subsidiary are charged with monitoring policies and
procedures designed to ensure an acceptable asset/liability mix. Management's
philosophy is to support asset growth primarily through growth of core deposits
within the Community Banking Subsidiaries' market areas.
The Company's asset/liability mix is monitored regularly with a report
reflecting the interest rate sensitive assets and interest rate sensitive
liabilities is prepared and presented to the Board of Directors of each
Community Banking Subsidiary on at least a quarterly basis. Management's
objective is to monitor interest rate sensitive assets and liabilities so as to
minimize the impact on earnings of substantial fluctuations in interest rates.
An asset or liability is considered to be interest rate-sensitive if it will
reprice or mature within the time period analyzed, usually one year or less. The
interest rate-sensitivity gap is the difference between the interest-earning
assets and interest-bearing liabilities scheduled to mature or reprice within
the relevant period. A gap is considered positive when the amount of interest
rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities.
A gap is considered negative when the amount of interest rate-sensitive
liabilities exceeds the interest rate-sensitive assets. During a period of
rising interest rates, a negative gap would tend to adversely affect net
interest income, while a positive gap would tend to result in an increase in net
interest income. Conversely, during a period of falling interest rates, a
negative gap would tend to result in an increase in net interest income, while a
positive gap would tend to adversely affect net interest income. If the
Company's assets and liabilities were equally flexible and moved concurrently,
the impact of any increase or decrease in interest rates on net interest income
would be minimal.
A simple interest rate "gap" analysis by itself may not be an accurate
indicator of how net interest income will be affected by changes in interest
rates. Accordingly, the Company also evaluates how changes in interest rates
impacts the repayment of particular assets and liabilities. Income associated
with interest-earning assets and costs associated with interest-bearing
liabilities may not be affected uniformly by changes in interest rates. In
addition, the magnitude and duration of changes in interest rates may
significantly effect net interest income. For example, although certain assets
and liabilities may have similar maturities or periods of repricing, they may
react in different degrees to changes in market interest rates. Interest rates
on certain types of assets and liabilities fluctuate in advance of changes in
general market rates, while interest rates on other types may lag behind changes
in general market rates. In addition, certain assets have features (generally
referred to as "interest rate caps and floors") which limit changes in interest
rates. Also, prepayments and early withdrawal levels could deviate significantly
from those assumed in calculating the interest rate gap. Changes in interest
rates also effect the Company's liquidity position, if deposits are not priced
in response to market rates, a loss of deposits could occur which would
negatively effect the Company's liquidity position. The Company prepares a
report monthly that measures the potential impact on net interest margin by
rising or falling rates. This report is reviewed monthly by the Asset/Liability
Committee and quarterly by each Board of Directors. (See "QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK")
At December 31, 1999, the Company's cumulative one year interest rate
sensitivity gap ratio was 91%. The Company was cumulatively within its targeted
range of 80% to 120% for all time horizons.
The following table sets forth the distribution of the repricing of the
Company's earning assets and interest-bearing liabilities as of December 31,
1999, the interest rate sensitivity gap, the cumulative interest
rate-sensitivity gap, the interest rate-sensitivity gap ratio and the cumulative
interest rate-sensitivity gap ratio. The table also sets forth the time periods
in which earning assets and liabilities will mature or may reprice in accordance
with their contractual terms. However, the table does not necessarily indicate
the impact of general interest rate movements on the net interest margin since
the repricing of various categories of assets and liabilities is subject to
competitive pressures and the needs of the Company's customers. In addition,
various assets and liabilities indicated as repricing within the same period may
in fact, reprice at different times within such period and at different rates.
Community Bankshares, Inc.
Consolidated Gap Report
After After
Three One
Month Year but
Within But Within After
Three Within Five Five
Months One Year Years Years Total
------------------------------------------------- ------------
(Dollars in Thousands)
Earning assets:
Interest-bearing deposits 160 160
Federal funds sold 2,940 2,940
Investment securities 2,211 5,195 22,627 53,262 83,295
Loans 153,872 77,566 134,055 11,375 376,868
------------------------------------------------- ------------
159,183 82,761 156,682 64,637 463,263
------------------------------------------------- ------------
Interest-bearing liabilities:
Interest-bearing demand 99,185 99,185
Savings 20,863 20,863
Time deposits, $100,000
and over 19,640 49,643 10,641 - 79,924
Time deposits, less than
$100,000 39,085 37,095 102,088 178,268
Other borrowings 1,054 5,000 10,000 16,054
------------------------------------------------- ------------
179,827 86,738 117,729 10,000 394,294
------------------------------------------------- ------------
Interest rate sensitivity
Gap (20,644) (3,977) 38,953 54,637 68,969
------------------------------------------------- ------------
Cumulative interest rate
Sensitivity gap (20,644) (24,621) 14,332 68,969
-------------------------------------------------
Interest rate sensitivity
Gap 0.89 0.95 1.33 6.46
-------------------------------------------------
Cumulative interest rate
Sensitivity gap 0.89 0.91 1.04 1.17
-------------------------------------------------
YEAR 2000 COMPLIANCE
Based on a review of the Bank's and the Company's business since
January 1, 2000, the Company has not experienced any material effects of the
Year 2000 problem. Although the Company has not been informed of any material
risks associated with the Year 2000 problem from third parties, there can be no
assurance that the Company will not be impacted in the future. The Company will
continuously monitor its business applications and maintain contact with its
third party vendors and key business partners to resolve any Year 2000 problems
that may arise in the future.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed only to U.S. dollar interest rate changes and
accordingly, the Company manages exposure by considering the possible changes in
the net interest margin. The Company does not have any trading instruments nor
does it classify any portion of the investment portfolio as held for trading.
The Company does not engage in any hedging activities or enter into any
derivative instruments with a higher degree of risk than mortgage backed
securities which are commonly pass through securities. Finally, the Company has
no exposure to foreign currency exchange rate risk, commodity price risk, and
other market risks.
Interest rates play a major part in the net interest income of a
financial institution. The sensitivity to rate changes is known as "interest
rate risk." The repricing of interest earning assets and interest-bearing
liabilities can influence the changes in net interest income. As part of the
Company's asset/liability management program, the timing of repriced assets and
liabilities is referred to as Gap management. It is the policy of the Company to
maintain Gap ratio in the one-year time horizon of .80 to 1.20. See
"ASSET/LIABILITY MANAGEMENT".
GAP management alone is not enough to properly manage interest rate
sensitivity, because interest rates do not respond at the same speed or at the
same level to market rate changes. For example, savings and money market rates
are more stable than loans tied to a "Prime" rate and thus respond with less
volatility to a market rate change.
The Company uses a simulation model to monitor changes in net interest
income due to changes in market rates. The model of rising, falling and stable
interest rate scenarios allows management to monitor and adjust interest rate
sensitivity to minimize the impact of market rate swings. The analysis of impact
on net interest margins as well as market value of equity over a twelve month
period is subjected to a 200 basis point increase and decrease in rate. The
December model reflects an increase of 2% in net interest income and a 14%
decrease in market value equity for a 200 basis point increase in rates. The
same model shows a 1% decrease in net interest income and a 16% increase in
market value equity for a 200 basis point decrease in rates. The Company's
policy is to allow no more than +- 8% change in net interest income and no more
than +- 25% change in market value equity for these scenarios. Therefore, the
Company is within its policy guidelines and is protected from any significant
impact due to market rate changes.
SELECTED STATISTICAL INFORMATION
The tables and schedules on the following pages set forth certain significant
financial information and statistical data with respect to the distribution of
assets, liabilities and shareholders' equity of the Company; the interest rates
and interest differentials experienced by the Company; the investment portfolio
of the Company; the loan portfolio of the Company, including types of loans,
maturities and sensitivity to changes in interest rates and information on
nonperforming loans; summary of the loan loss experience and reserves for loan
losses of the Company; types of deposits of the Company and the return on equity
and assets for the Company.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY:
INTEREST RATES AND INTEREST DIFFERENTIALS
Table 1 Average Balances
The condensed average balance sheets for the periods indicated are presented below.
1999 1998 1997
-----------------------------------------------
ASSETS
Cash and due from banks $ 28,757 $ 25,330 $ 16,260
Interest-bearing deposits in banks 390 747 488
Taxable securities 48,378 42,262 50,957
Nontaxable securities 31,134 32,991 25,223
Unrealized gains (losses) on securities
Available for sale (645) 200 (93)
Federal Funds Sold 13,077 9,495 9,704
Loans 350,278 285,809 223,170
Allowance for loan losses (5,287) (4,382) (3,873)
Other assets 28,605 26,098 20,243
---------------------------------------------
$ 494,687 $ 418,550 $ 342,079
==============================================
Total interest-earning assets $ 443,257 $ 371,304 $ 309,542
============================================-
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 66,719 $ 52,966 $ 41,472
Interest-bearing demand 102,770 83,422 61,638
Savings 21,540 18,672 15,387
Time 242,434 217,831 185,936
---------------------------------------------
Total deposits 433,463 372,891 304,433
Other borrowings 10,271 1,699 545
Other liabilities 8,181 6,633 6,894
---------------------------------------------
Total liabilities 451,915 381,223 311,872
---------------------------------------------
Shareholders' equity 42,772 37,327 30,207
---------------------------------------------
$ 494,687 $ 418,550 $ 342,079
=============================================
Total interest-bearing liabilities $ 377,015 $ 321,624 $ 263,506
=============================================
Average balances calculated using month-end balances
Includes non-accrual loans
Loans are net of unearned fees
Unrealized gains & losses are included in equity
TABLE 2 INTEREST INCOME AND INTEREST EXPENSE
The following tables set forth the amount of the Company's interest
income and interest expense for each category of interest-earning asset and
interest-bearing liabilities and the average interest rate for total
interest-earning assets and total interest-bearing liabilities, net interest
spread and net yield on average interest-earning assets.
Year Ended December 31,
1999 1998 1997
------------------- ------------------- --------------------
Average Average Average
Interest Rate Interest Rate Interest Rate
------------------- ------------------- --------------------
INTEREST INCOME:
Interest and fees on loans 35,040 10.00% 29,767 10.41% 23,562 10.56%
Interest on taxable securities 2,378 4.92% 2,565 6.07% 3,108 6.10%
Interest on nontaxable securities 1,995 6.41% 1,710 5.18% 1,327 5.26%
Interest on Federal Funds sold 858 6.56% 535 5.63% 673 6.94%
Interest on deposits in banks 19 4.87% 36 4.82% 33 6.76%
Total interest income 40,290 9.09% 34,613 9.32% 28,703 9.27%
------ ------ ------
INTEREST EXPENSE:
Interest expense on
interest-bearing
Demand deposits 2,764 2.69% 2,511 3.01% 2,009 3.26%
Interest on savings deposits 566 2.63% 516 2.76% 436 2.83%
Interest on time deposits 13,838 5.71% 12,812 5.88% 10,704 5.76%
Interest on other borrowings 529 5.15% 111 6.53% 42 7.71%
Total interest expense 17,697 4.69% 15,950 4.96% 13,191 5.01%
------ ------ ------
NET INTEREST INCOME 22,593 18,663 15,512
------ ------ ------
Net interest spread 4.40% 4.36% 4.26%
Net yield on average
Interest-earning assets 5.10% 5.03% 5.01%
TABLE 3 RATE AND VOLUME ANALYSIS
The following table describes the extent to which changes in interest
rates and changes in volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and expense during the
year indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(1) change in volume (change in volume multiplied by old rate); (2) change in
rate (change in rate multiplied by old volume); and (3) a combination of change
in rate and change in volume. The changes in interest income and interest
expense attributable to both volume and rate have been allocated proportionately
to the change due to volume and the change due to rate.
Year Ended December 31,
1999 vs. 1998
Changes Due to:
Increase
Rate Volume (decrease)
-----------------------------------------------------
(Dollars in Thousands)
Increase (decrease) in:
Income from interest-earning assets:
Interest and fees on loans (1,216) 6,485 5,273
Interest on taxable securities (528) 340 (187)
Interest on nontaxable securities 386 (101) 285
Interest on Federal Funds sold 98 225 323
Interest on deposits in banks 0 (17) (17)
-----------------------------------------------------
Total interest income (1,260) 6,937 5,677
-----------------------------------------------------
Expense from interest-bearing liabilities:
Interest expense on interest-bearing deposits (286) 539 253
Interest on savings deposits (26) 76 50
Interest on time deposits (380) 1,406 1,026
Interest on other borrowings (29) 447 418
-----------------------------------------------------
Total interest expense (728) 2,475 1,747
-----------------------------------------------------
Net interest income (532) 4,462 3,930
-----------------------------------------------------
Year Ended December 31,
1998 vs. 1997
Changes Due to:
Increase
Rate Volume (decrease)
-----------------------------------------------------
(Dollars in Thousands)
Increase (decrease) in:
Income from interest-earning assets:
Interest and fees on loans (323) 6,528 6,205
Interest on taxable securities (15) (528) (543)
Interest on nontaxable securities (20) 403 383
Interest on Federal Funds sold (124) (14) (138)
Interest on deposits in banks (11) 14 3
-----------------------------------------------------
Total interest income (493) 6,403 5,910
-----------------------------------------------------
Expense from interest-bearing liabilities:
Interest expense on interest-bearing deposits (163) 665 502
Interest on savings deposits (11) 91 80
Interest on time deposits 237 1,871 2,108
Interest on other borrowings (7) 76 69
-----------------------------------------------------
Total interest expense 56 2,703 2,759
-----------------------------------------------------
Net interest income (549) 3,700 3,151
=====================================================
INVESTMENT PORTFOLIO
TABLE 4 TYPES OF INVESTMENTS
The carrying amounts of securities at the dates indicated are summarized as follows:
December 31,
1999 1998 1997
------------------------------------------------
(Dollars in Thousands)
U. S. Treasury and other U. S. Government
Agencies and corporations $30,708 $25,987 $29,094
Municipal securities 39,865 36,753 29,497
Mortgage-backed securities 8,785 8,979 21,962
Equity securities 1,725 1,721 1,448
------------------------------------------------
$81,083 $73,440 $82,001
------------------------------------------------
Securities include "held to maturity" securities carried at amortized
cost and "available-for-sale" securities carried at fair value in
accordance with FASB 115.
The Community Banking Subsidiaries' mortgage-backed portfolio consists
of fifty-two U.S. Government corporation collateralized mortgage obligations.
The actual maturity of these securities will differ from the contractual
maturity because borrowers on the underlying loans may have the right to prepay
obligations with or without prepayment penalties. Decreases in interest rates
will generally cause prepayments to increase while increases in the interest
rates will have the opposite effect on prepayments. Prepayments of the
underlying loans may shorten the life of the security, thereby adversely
effecting the yield to maturity. In an increasing interest rate, the Community
Banking Subsidiaries may have an obligation yielding a return less than the
current yields on securities. However, because the majority of these in
mortgage-backed securities have adjustable rates, negative effects of changes in
interest rates on earnings and carrying values of these securities are somewhat
mitigated.
The amounts of securities in each category as of December 31, 1999 are
shown in the following table according to maturity classifications of one year
or less, after one year through five years, after five years through ten years,
and after ten years.
U. S. Treasury and Other
U. S. Government agencies
and corporations Municipal Securities Other Securities
Amount Yield Amount Yield Amount Yield
------------------------------------------------------------------------------------
One year or less 3,690 5.91% 2,466 4.76% 1,725 7.00%
After one year
through five years 19,643 5.80% 4,026 4.69% - -
After five years
through ten years 12,039 6.03% 10,069 4.78% - -
After ten years 4,121 6.26% 23,304 5.06% - -
-------------- -------------- --------------
Total 39,493 5.96% 39,865 5.08% 1,725 7.00%
-------------- -------------- --------------
Yields were computed using book value, coupon interest, adding discount
accretion or subtracting premium amortization, as appropriate, on a
ratable basis over the life of each security. The weighted average
yield for each maturity range was computed using the carrying value of
each security in that range.
Yields on municipal securities have not been computed on a tax
equivalent basis.
The above schedule includes mortgage-backed securities based on their
contractual maturity date. In practice, cash flow in these securities
is significantly faster than their stated maturity schedules.
Other securities consists of equity securities and are included in the
under one year maturity range because the securities have no
contractual maturity date.
LOAN PORTFOLIO
TABLE 6 Types of Loans
The amount of loans outstanding at the indicated dates are in the
following table according to the type of loan.
December 31,
1999 1998 1997 1996 1995
-------------------------------------------------------------------------------
(Dollars in Thousands)
Commercial, financial
and agricultural 206,505 $161,572 $118,376 $102,231 $77,871
Real estate-construction 24,208 21,327 21,234 9,506 8,036
Real estate-mortgage 93,063 82,413 69,541 57,566 63,312
Consumer and other 53,093 48,825 36,070 36,483 30,072
-------------------------------------------------------------------------------
$376,869 $314,137 $245,221 $205,786 $179,291
Less allowance for loan losses (5,683) (4,863) (4,024) (3,592) (3,060)
-------------------------------------------------------------------------------
Net loans $371,186 $309,274 $241,197 $202,194 $176,231
-------------------------------------------------------------------------------
Commercial, financial and agricultural loans include loans held for
sale which are disclosed separately in the consolidated balance sheets.
Amounts are disclosed net of unearned loan income.
See "Business Description of the Community Banking- Loans" for a
description of the composition of each loan, the underwriting criteria and risks
that are unique to each.
TABLE 7 MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST
RATES
Total loans as of December 31, 1999 are shown in the following table
according to maturity classifications one year or less, after one year through
five years and after five years.
December 31, 1999
(Dollars in Thousands)
Maturity:
One year or less:
Commercial, financial and agricultural $90,635
Real estate-construction 23,140
All other loans 46,665
---------------
$160,440
---------------
After one year through five years:
Commercial, financial and agricultural 479,433
Real estate-construction 560
All other loans 90,496
---------------
$170,489
---------------
After five years:
Commercial, financial and agricultural $35,670
All other loans 9,294
---------------
$44,964
---------------
$375,893
---------------
The following table summarizes loans at December 31, 1999 with due
dates after one year which have predetermined and floating or adjustable
interest rates.
December 31, 1999
(Dollars in Thousands)
Predetermined interest rates $163,744
Floating or adjustable interest rates 51,709
-------------
$215,453
-------------
Records were not available to present the above information in each
loan category listed in the first paragraph above and could not be reconstructed
without undue burden and cost to the Company.
TABLE 8 Nonaccrual, Past Due and Restructured Loans
Information with respect to nonaccrual past due and restructured loans
at the indicated dates is as follows:
December 31,
1999 1998 1997 1996 1995
----------------------------------------------------------------------
(Dollars in Thousands)
Nonaccrual loans $1,743 $1,119 $714 $1,119 $1,456
Loans contractually past due ninety days
or more as to interest or principal
Payments and still accruing 1,572 706 533 445 345
Loans, the terms of which have been
Renegotiated to provide a reduction
or deferral of interest or principal
because of deterioration in the
financial position of the borrower 842 572 704 620 629
Loans, now current about which there are
serious doubts as to the ability of the
borrower to comply with present
loan repayment terms - - - - -
The reduction in interest income associated with nonaccrual and
renegotiated loans as of December 31, 1999 is as follows:
December 31, 1999
Interest income that would have been recorded on nonaccrual
and restructured loans under original terms
292,576
Interest income that was recorded on nonaccrual and restructured loans
105,867
The Community Banking Subsidiaries' policy is to discontinue the
accrual of interest income when, in the opinion of management, collection of
such interest becomes doubtful. This status is accorded such interest when (1)
there is a significant deterioration in the financial condition of the borrower
and full repayment of principal and interest is not expected and (2) the
principal or interest is more than ninety days past due, unless the loan is both
well-secured and in the process of collection. Accrual of interest on such loans
is resumed, in management's judgment, the collection of interest and principal
become probable. Loans classified for regulatory purposes as loss, substandard,
or special mention that have not been included in the table above do not
represent or result from trends or uncertainties which management reasonably
expects will materially effect future operating results, liquidity or capital
resources. These classified loans do not represent material credits about which
management is aware and which causes management to have serious doubts as to the
ability of such borrowers to comply with the loan repayment terms.
COMMITMENTS AND LINES OF CREDIT
The Community Banking Subsidiaries will, in the normal course of
business, commit to extend credit in the form of letters of credit or lines of
credit. The amount of outstanding loan commitments and letters of credit at
December 31, 1999 and 1998 were $30,544,552 and $28,756,057, respectively.
Commitments to extend credit 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.
SUMMARY OF LOAN LOSS EXPERIENCE
TABLE 9
The following table summarizes average loan balances for each year
determined using the daily average balances during the year; changes in the
reserve for possible loan losses arising from loans charged off and recoveries
on loans previously charged off; additions to the reserve which have been
charged to operating expense; and the ratio of net charge-offs during the year
to average loans.
December 31,
1999 1998 1997 1996 1995
----------------------------------------------------------------------
(Dollars in Thousands)
Average amount of loans outstanding $350,278 $285,809 $223,170 $191,180 $170,525
----------------------------------------------------------------------
Balance of allowance for loan losses
at beginning of year $4,863 $4,024 $3,592 $3,060 $2,686
----------------------------------------------------------------------
Loans charged off
Commercial ($423) ($97) ($136) ($118) ($221)
Real estate mortgage ($23) (7) (35) - -
Consumer ($632) (391) (424) (211) (331)
----------------------------------------------------------------------
($1,078) ($495) ($595) ($329) ($552)
----------------------------------------------------------------------
Loans recovered
Commercial $45 $20 $11 $5 $12
Real estate mortgage $4 19 28 35 12
Consumer $212 130 52 64 53
----------------------------------------------------------------------
$261 $169 $91 $104 $77
----------------------------------------------------------------------
Net charge-offs ($817) ($326) ($504) ($225) ($475)
----------------------------------------------------------------------
Additions to allowance charged
to operating expense during year $1,637 $1,165 $936 $757 $849
----------------------------------------------------------------------
Balance of allowance for loan losses
at end of year $5,683 $4,863 $4,024 $3,592 $3,060
======================================================================
Ratio of net loans charged off during
the year to average loans outstanding 0.23% 0.11% 0.23% 0.12% 0.28%
======================================================================
ALLOWANCE FOR LOAN LOSSES
The provision for possible loan losses is created by direct charges to
income. Losses on loans are charged against the allowance in the year in which
such loans, in management's opinion, become uncollectible. Recoveries during the
year are credited to this allowance. The factors that influence management's
judgment in determining the amount charged to income are past loan loss
experience, composition of the loan portfolio, evaluation of possible future
losses, current economic conditions and other relevant factors. The Company's
allowance for loan losses was approximately $5,683,000 at December 31, 1999,
representing 1.51% of total loans, compared with approximately $4,863,000 at
December 31, 1998, which represented 1.55% of total loans. The allowance for
loan losses is reviewed regularly based on management's evaluation of current
risk characteristics of the loan portfolio, as well as the impact of prevailing
and expected economic business conditions. Management considers the allowance
for loan losses adequate to cover possible loan losses at December 31, 1999.
Historically, management has not allocated the Company's allowance for
loan losses to specific categories of loans. However, based on management's best
estimate and historical experience, the allocation of the allowance for loan
losses for December 31, 1999, 1998, 1997, 1996 and 1995 is summarized below:
December 31,
1999 1998 1997 1996 1995
-------------------------------------------------------------------------------
(Dollars in Thousands)
Commercial $2,671 $2,160 $1,850 $1,830 $1,347
Real estate 568 270 230 105 467
Consumer 2,444 2,433 1,944 1,657 1,246
-------------------------------------------------------------------------------
$5,683 $4,863 $4,024 $3,592 $3,060
===============================================================================
Percent of loans in Each Category of Total Loans
December 31,
1999 1998 1997 1996 1995
-------------------------------------------------------------------------------
(Dollars in Thousands)
Commercial 55% 51% 49% 50% 43%
Real estate 31% 33% 35% 33% 40%
Consumer 14% 16% 16% 17% 17%
-------------------------------------------------------------------------------
100% 100% 100% 100% 100%
===============================================================================
DEPOSITS
TABLE 10
Average amount of deposits and average rates paid thereon, classified as to
noninterest-bearing demand deposits, interest-bearing demand and savings deposits and time deposits,
for the years indicated are presented below.
Year Ended December 31,
1999 1998 1997
-------------------- ----------------- -----------------
Average Average Average
Balance Interest Balance Interest Balance Interest
Rate Rate Rate
-------------------- ----------------- -----------------
Noninterest-bearing demand $66,719 $52,966 - $41,472 -
Interest-bearing demand deposits 102,770 2.69% 83,422 3.01% 61,638 3.26%
Savings deposits 21,540 2.63% 18,672 2.76% 15,387 2.83%
Time deposits 242,434 5.71% 217,831 5.88% 185,936 5.76%
---------- ---------- ----------
Total deposits $433,463 $372,891 $304,433
========== ========== ==========
Average balances were determined using month-end balances during the year
for each category.
The amounts of time certificates of deposit issued in amounts of
$100,000 or more as of December 31, 1999 are shown below by category, which is
based on time remaining until maturity of (1) three months or less, (2) over
three through six months, (3) over six through twelve months and (4) over twelve
months.
December 31, 1999
Dollars in Thousands)
Three months or less $18,111
Over three through six months 16,996
Over six through twelve months 34,224
Over twelve months 10,593
------------
$79,924
------------
RETURN ON ASSETS AND SHAREHOLDERS' EQUITY
TABLE 11
The following rate of return information for the years is presented
below.
Year Ended December 31,
1999 1998 1997
-----------------------------------------------
Return on assets 1.23% 1.68% 1.65%
Return on equity 14.21% 18.84% 18.69%
Dividend payout ratio 5.36% 4.69% 5.38%
Equity to assets ratio 8.65% 8.92% 8.83%
Net income divided by average total assets.
Net income divided by average equity.
Dividends declared per share divided by net income per share.
Average equity divided by average total assets.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and the report of independent accountants are
included in this Report beginning at page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
During the Company's two most recent fiscal years, the Company did not
change accountants and had no disagreement with its accountants on any matters
of accounting principles or practices or financial statement disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a brief description, as of December 31, 1999, of the
business experience of each of the directors and executive officers of the
Company who, except as otherwise indicated, has been or was engaged in his or
her present of last principal employment, in the same or a similar position, for
more than five years:
Steven C. Adams Mr. Adams has been an attorney with the firm
(51) of Adams, Ellard & Frankum, P.C. since 1973
and President of Chatham Transport Company,
a trucking company, since 1994. He has been
a director of the Company, Community -
Habersham, and Financial Supermarkets since
1990. He was named a director of Financial
Properties, Inc. in 1998.
Edwin B. Burr Mr. Burr has served as a director of the
(66) Company since April of 1995 and Financial
Supermarkets since 1992. Mr. Burr has been
President of Financial Solutions, a bank
consulting firm since 1988. He has been a
director of Community - Alabama since 1997.
Elton S. Collins Mr. Collins has been the President, Chief
(56) Executive Officer and a director of
Community - Jackson since 1982.
Annette R. Fricks Mrs. Fricks has been an Executive Vice
(55) President and Corporate Secretary of the
Company and Community - Habersham since 1992
and 1967, respectively, and has also served
as Corporate Secretary of Financial
Supermarkets since 1984. She was named the
Executive Vice President and Corporate
Secretary for Financial Properties in 1998.
Charles M. Miller Mr. Miller has served as an Executive Vice
(58) President of Company, the President and
Chief Operating Officer and director of
Community - Habersham and the Executive Vice
President and director of Financial
Supermarkets since 1990. Mr. Miller has
served as a director of Community - Troup
since November 1995. He was named a director
of Financial Properties in 1998.
Harry H. Purvis Mr. Purvis has been a director of the
(93) Company since 1981 and Community - Habersham
since 1956. Mr. Purvis has also served as a
director of Financial Supermarkets since
1984. He was named a director of Financial
Properties, Inc. in 1998.
Harry L. Stephens Mr. Stephens has been an Executive Vice
(53) President and the Chief Financial Officer of
the Company and Community - Habersham since
1992 and has served as Treasurer of
Financial Supermarkets since 1986. He has
been Executive Vice President and Chief
Financial Officer of Community - Habersham
since 1993. He was named Executive Vice
President and Treasurer of Financial
Properties, Inc. in 1998
H. Calvin Stovall, Jr. Mr. Stovall, who is retired, was the
(84) President and treasurer of Stovall Tractor
Company, a retail farm equipment dealer,
from 1948 until November 1995. He served as
the Chairman of the Company's Board of
Directors 1981-1998 and was named Chairman
Emeritus in 1998. Mr. Stovall has also
served as a director of Community -
Habersham, Community - Jackson, Financial
Supermarkets and Community - Troup since
1963, 1982, 1984 and November 1994,
respectively. He was also named a director
of Financial Properties, Inc. in 1998.
Dean C. Swanson Mr. Swanson was President of the Standard
(68) Group, a telecommunications company until
January 1999. He is a director of
Independent Telecommunications Network. Mr.
Swanson has served as a director of the
Company, Community - Habersham and Financial
Supermarkets since 1981, 1972, and 1984,
respectively. He was named a director of
Financial Properties, Inc. in 1998.
George D. Telford Mr. Telford is a retired bank executive and
(79) has served as a director of the Company and
Community - Habersham since 1981 and 1965,
respectively, as well as of Financial
Supermarkets since 1993. He was named a
director of Financial Properties, Inc. in
1998.
J. Alton Wingate Mr. Wingate has served as a director and the
(60) President and Chief Executive Officer of the
Company, Community - Habersham and Financial
Supermarkets since 1981, 1977 and 1984,
respectively. Mr. Wingate was named Chairman
of the Board in 1998. He has also been the
Chairman of the Board of Directors and a
director of Community - Jackson, Community -
Alabama, and Community - Troup since 1982,
1990, and November 1994, respectively. He
was named President and Chief Executive
Officer of Financial Properties, Inc. in
1998. Mr. Wingate has been Chairman and
Chief Executive Officer of Community -
Habersham since 1996 and has been Chairman,
President, and Chief Executive Officer of
Financial Supermarkets since 1984.
Lois M. Wood-Schroyer Ms. Wood-Schroyer is the Chairman, Chief
(61) Executive Officer, Director, and President
of Woods Furniture Co. Ms. Wood-Schroyer has
served as a Director of Community -
Habersham since 1990 and was elected to the
Company's Board of Directors in 1999.
Directors are elected at each annual meeting of shareholders and hold
office until the next annual meeting and until their successors are elected and
qualified. The executive officers are elected by the Board of Directors and
serve at the will of the Board. There are no family relationships between
executive officers and directors of the Company.
The company is not subject to Section 16(a) of the Securities Exchange
Act of 1934.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the annual and long-term compensation
paid by the Company to the Chief Executive Officer of the Company and the three
other most highly compensated officers of the Company whose salary and bonus
exceeded $100,000 during the last fiscal year (the "Named Executive Officers").
Summary Compensation Table
- ------------------------------------------------------------- ------------------------------------------------------
Annual Compensation Long-Term Compensation
- ------------------------------------------------------------- ------------------------------------------------------
Securities
Name and Principal Salary Underlying All Other
Position Year $ Bonus Options/SARS (#) Compensation
- ---------------------------- ------ ------------- ------------- ------ ------------------- ----------------- -------
J. Alton Wingate 1999 347,950 1,222,960 41,966
President and Chief 1998 245,500 1,360,258 -- 30,499
Executive Officer 1997 243,200 728,981 -- 30,687
- ---------------------------- ------ ------------- ------------- ------ ------------------- ----------------- -------
Charles M. Miller 1999 145,600 35,000 -- 27,512
Executive Vice 1998 145,600 30,000 -- 23,512
President 1997 145,600 20,000 -- 23,974
- ---------------------------- ------ ------------- ------------- ------ ------------------- ----------------- -------
Harry L. Stephens 1999 105,960 52,500 -- 22,658
Executive Vice 1998 98,000 52,500 -- 20,816
President and Chief 1997 93,000 52,500 -- 19,811
Financial Officer
- ---------------------------- ------ ------------- ------------- ------ ------------------- ----------------- -------
Annette R. Fricks 1999 99,460 62,500 21,096
Executive Vice 1998 88,000 57,500 -- 17,844
President and 1997 83,000 52,500 -- 17,088
Corporate Secretary
- ---------------------------- ------ ------------- ------------- ------ ------------------- ----------------- -------
Includes directors' fees.
Bonuses are included in this report in the year paid.
Included premiums of $4,397.03 paid for Mr. Wingate's life insurance
policies and estimated employee stock ownership plan ("ESOP")
contributions of $17,500. Final ESOP contributions have not yet been
determined for 1999.
Includes premiums of $3,171.9 paid for Mr. Miller's life insurance
policies and estimated ESOP contributions of $16,500.00. Final ESOP
contributions have not yet been determined for 1999.
Includes premiums of $912.00 paid for Mr. Stephens' life insurance
policies and estimated ESOP contributions of $16,000. ESOP
contributions have not yet been determined for 1999.
Includes premiums of $660.00 paid for Mrs. Fricks' life insurance
policies and estimated ESOP contributions of $15,500. Final ESOP
contributions have not yet been determined for 1999.
Mr. Wingate's bonus is contractually based on the performance of
Financial Supermarkets, with caps and guaranteed rates of return before
the bonus can be calculated and paid.
DIRECTOR'S COMPENSATION. The Chairman Emeritus of the Company's Board
of Directors, Calvin Stovall, currently receives a fee of $2,250 per month for
service as the Chairman of the Board and other directors of the Board of the
Company receive $2,000 a year for service on the Company's Board of Directors.
The directors of Community - Habersham, Community - Jackson, Community -
Alabama, Community - Troup and Financial Supermarkets currently receive fees of
$11,000, $6,500, $3,850, $3,600, and $6,000 per year, respectively.
AGREEMENTS WITH OFFICERS. In 1990, Community - Habersham entered into
an employment agreement with Mr. Miller pursuant to which the parties agreed
that Mr. Miller would serve as the President, Chief Operating Officer and
General Manager of Community - Habersham. The initial term of the agreement was
one year, subject to successive automatic renewals of one year each unless (i)
either party gives written notice at least 60 days prior to the annual renewal
date of the desire to terminate, or (ii) Community - Habersham terminates for
cause (as defined in the agreement).
The agreement provides for Mr. Miller to receive an annual salary of
$125,000 plus certain benefits and perquisites. The agreement also entitles Mr.
Miller to certain severance payments following a change of control (as defined
in the agreement) of Community - Habersham. Further, Mr. Miller agrees that he
will not compete with or solicit certain customers from Community - Habersham
within Habersham or Jackson County (or any contiguous county) for a period of
three years after termination of Mr. Miller's employment with Community -
Habersham.
In 1987, Community - Habersham and Mr. Wingate entered into a
change-in-control agreement for a three year term, renewable for an additional
one year period annually thereafter in the sole discretion of the compensation
committee of the Board of Directors of Community - Habersham. The agreement also
provides for the payment of certain severance benefits to Mr. Wingate if there
is a change in control (as defined in the agreement) of Community - Habersham
and Mr. Wingate's employment is involuntarily terminated other than for cause,
disability or retirement or is voluntarily terminated as a result of a material
reduction of duties, compensation or benefits or a forced relocation. Such
benefits include the continuation of salary payments to Mr. Wingate for a period
of 36 months from the date of termination, the payment of certain bonuses for
the year in which his employment is terminated and the following two calendar
years, the continuation of health and life insurance coverage and the continued
participation by Mr. Wingate in all employee retirement plans.
Aggregated Option Exercises In Last Fiscal Year And FY-End Option Values
Number of
Securities Value of
Underlying Unexercised
Unexercised In-The-Money
Options at Fiscal Options At Fiscal
Year-End Year-End ($)
Shares Acquired on (Exercisable/ (Exercisable/
Name Exercise (#) Value Realized ($) Unexercisable) Unexercisable)
---- ------------ ------------------ -------------- --------------
Charles M. Miller -3,000- $80,610 2,500/0 0/0
Harry L. Stephens -0- -0- 8,500/0 161,220/0
Annette R. Fricks -3,000- $80,610 14,500/0 322,440/0
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the percent and number of shares of the
Common Stock beneficially owned as of January 1, 2000 by (i) each of the Named
Executive Officers, (ii) each of the directors of the Company, (iii) each
shareholder who owns greater than five percent (5%) of the Company's securities
and (iv) all executive officers and directors of the Company as a group, without
naming such individuals. There were 2,178,830 shares outstanding as of that
date.
Name of Amount of Shares Percent
Beneficial Owner Beneficially Owned of Class
- ---------------- ------------------ --------
Joye H. Adams 141,720 6.50%
Steven C. Adams 495,620 22.74%
Edwin B. Burr 1,080 *
Elton S. Collins 403,540 18.52%
Community Bankshares, Inc. 380,780 17.48%
Employee Stock Ownership
Plan and Trust
Annette R. Fricks 29,986 1.23%
Emmett D. Hart 151,500 6.95%
Charles M. Miller 12,360 *
Harry H. Purvis 40,510 1.90%
Harry L. Stephens 10,248 *
H. Calvin Stovall 166,660 7.65%
Dean C. Swanson 30,000 1.38%
George D. Telford 82,617 3.79%
J. Alton Wingate 724,780 33.26%
Lois M. Wood-Schroyer 3,030 *
All executive officers and 1,145,611 52.58%
directors as a group (12 Persons)
* less than one percent
Mrs. Adams' address is 664 Chenocetah Drive, Cornelia, Georgia 30531.
Includes an aggregate of 48,000 shares held by the Taft Chatham Trusts
I and II with respect to which Messrs. Wingate and Adams are
co-trustees and share voting and investment power.
Includes 380,780 shares held by Community Bankshares, Inc. ESOP with
respect to which Messrs. Wingate, Adams and Collins are co-trustees and
share voting and investment power.
Includes 19,500 shares held by Chatham Transport company with respect
to which Messrs. Wingate and Adams share voting power.
Includes 44,340 shares held by Mr. Adams as trustee for the F. Jack
Adams Testamentary Trust, as to which Mr. Adams has voting and
investment control.
Mr. Adam's address is 148 North Main Street, Cornelia Georgia 30531.
Does not include 750 shares of Common Stock owned by Mr. Burr's wife,
as to which he disclaims beneficial ownership.
Mr. Collins' address is 1851 North Elm Street, Commerce, Georgia 30329.
The address of the ESOP is 448 North Main Street, Cornelia, Georgia
30531.
Mr. Hart's address is 1729 Davis (By-Pass) Road, LaGrange, Georgia
30241.
Includes presently-exercisable options to acquire 2,500 shares of
Common Stock.
Includes presently-exercisable options to acquire 8,500 shares of
Common Stock.
Mr. Stovall's address is 215 Grandview Circle, Cornelia, Georgia 30531.
Does not include 250 shares of Common Stock owned by Mr. Stovall's
wife, as to which he disclaims beneficial ownership.
Includes 16,500 shares held by the Estate of H. Milton Stewart, Sr., of
which Mr. Wingate is a co-trustee and has voting and investment
control.
Includes presently-exercisable options to acquire 2,500 shares of
Common Stock.
Mr. Wingate's address is 186 Hillcrest Heights, Cornelia, Georgia
30531.
Includes presently-exercisable options to acquire 28,000 shares of
Common Stock.
Includes presently-exercisable options to acquire 14,500 shares of
Common Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Each of the Community Banking Subsidiaries has had, and expects to have
in the future, banking transactions in the ordinary course of business with
directors and officers of the particular bank and the Company and their
associates, including corporations in which such officers or directors are
shareholders, directors and/or officers, on the same terms (including interest
rates and collateral) as those prevailing at the time for comparable
transactions with other persons. Such transactions have not involved more than
the normal risk of collectibility or presented other unfavorable features ITEM
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements.
The following financial statements and notes thereto of the Registrant
are included in this Report beginning at page F-1:
Independent Auditor's Report on the Financial Statement
Consolidated Balance Sheets - December 31, 1999 and 1998
Consolidated Statements of Income for the years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Comprehensive Income for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Shareholder's Equity for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
(b) Exhibits.
The following exhibits are required to be filed with this Report by Item 601 of
Regulation S-K:
3.1 Articles of Incorporation of the Registrant, as amended (included as
Exhibit 3.1 to the Registrant's Form 10-K for the year ended December
31, 1995, previously filed with the Commission and incorporated herein
by reference).
3.2 By-Laws of the Registrant (included as Exhibit 3.3 to the Registrant's
Form S-4 Registration Statement, Commission File No. 33-81890,
previously filed with the Commission and incorporated herein by
reference).
4.1 See exhibits 3.1 and 3.2 for provisions of Articles of Incorporation
and Bylaws as amended, which define the rights of the holders of Common
Stock of the Registrant (included as Exhibit 4.1 to the Registrant's
Form S-4 Registration Statement, Commission File No. 33-81890,
previously filed with the Commission and incorporated herein by
reference).
10.1 Incentive Stock Option Plan, as adopted August 17, 1987 (included as
Exhibit 10.1 to the Registrant's Form S-4 Registration Statement,
Commission File No. 33-81890, previously filed with the Commission and
incorporated herein by reference).
10.2 Employment Agreement between Charles M. Miller and Community -
Habersham, dated March 31, 1990(included as Exhibit 10.2 to the
Registrant's Form S-4 Registration Statement, Commission File No.
33-81890, previously filed with the Commission and incorporated herein
by reference).
10.3 Agreement Regarding Change in Control between J. Alton Wingate and
Community - Habersham, dated August 17, 1987 (included as Exhibit 10.3
to the Registrant's Form S-4 Registration Statement, Commission File
No. 33-81890, previously filed with the Commission and incorporated
herein by reference).
10.4 Master Consulting Agreement between Financial Supermarkets, Inc. and
NationsBanc Services, Inc.(included as Exhibit 10.1 to the Registrant's
Form 10-QSB for the period ended March 31, 1996 and incorporated herein
by reference).
10.5 Amendment to Master Consulting Agreement between Financial
Supermarkets, Inc. and NationsBanc Services, Inc. dated July 3, 1997.
10.6 Termination of Master Consulting Agreement between Financial
Supermarkets, Inc. and NationsBanc Services, Inc. (included as Exhibit
10.1 to the Registrant's Form 10-Q for the period ended September 30,
1998 and incorporated herein by reference).
10.7 Amended and Restated Revolving Credit/Term Loan Agreement between the
Registrant and SunTrust Bank dated July 31, 1999.
10.8 Community Bankshares, Inc. 1999 Stock Award Plan, as adopted December
22, 1999.
21 List of Subsidiaries of Registrant.
27 Financial Data Schedule (for SEC use only)
(c) No reports on Form 8-K were filed during the last quarter of 1999.
COMMUNITY BANKSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1999
- ---------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
INDEPENDENT AUDITOR'S REPORT...........................................F-1
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS.......................................F-2
CONSOLIDATED STATEMENTS OF INCOME.................................F-3
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME...................F-4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY...................F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS.........................F-6 AND 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.....................F-8-35
INDEPENDENT AUDITOR'S REPORT
- -----------------------------------------------------------------------------
TO THE BOARD OF DIRECTORS
COMMUNITY BANKSHARES, INC.
AND SUBSIDIARIES
CORNELIA, GEORGIA
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, comprehensive income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Community
Bankshares, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with generally accepted
accounting principles.
Atlanta, Georgia
January 14, 2000
F-1
COMMUNITY BANKSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------------------------------------------------------
ASSETS 1999 1998
------ ---------------------- ---------------------
Cash and due from banks $ 31,834,329 $ 26,796,002
Interest-bearing deposits in banks 160,751 427,870
Federal funds sold 2,940,000 22,890,000
Securities available-for-sale 49,143,458 42,525,208
Securities held-to-maturity (fair value $31,349,477 and $32,173,821) 31,939,177 30,915,014
Loans held for sale 1,274,927 699,498
Loans 375,593,370 313,437,773
Less allowance for loan losses 5,682,612 4,863,181
---------------------- ---------------------
Loans, net 369,910,758 308,574,592
Premises and equipment 13,443,644 13,463,273
Other assets 15,502,518 14,301,983
---------------------- ---------------------
TOTAL ASSETS $ 516,149,562 $ 460,593,440
====================== =====================
LIABILITIES, REDEEMABLE COMMON STOCK AND SHAREHOLDERS' EQUITY
-------------------------------------------------------------
Deposits
Noninterest-bearing demand $ 65,814,563 $ 65,266,672
Interest-bearing demand 99,185,353 94,458,133
Savings 20,863,081 19,731,233
Time, $100,000 and over 79,924,593 67,003,184
Other time 178,268,414 158,823,651
---------------------- ---------------------
TOTAL DEPOSITS 444,056,004 405,282,873
---------------------- ---------------------
Federal Home Loan Bank advances 15,000,000 5,000,000
Notes payable 1,054,100 808,200
Other liabilities 11,236,847 8,958,004
---------------------- ---------------------
TOTAL LIABILITIES 471,346,951 420,049,077
---------------------- ---------------------
Commitments and contingent liabilities
Redeemable common stock held by ESOP, 380,780 and 363,616
shares outstanding at December 31, 1999 and 1998, respectively 13,982,242 14,253,747
---------------------- ---------------------
Shareholders' equity
Common stock, par value $1; 5,000,000 shares authorized;
2,178,830 and 2,169,830 shares issued and outstanding, respectively 2,178,830 2,169,830
Capital surplus 6,115,827 6,036,220
Retained earnings 23,853,170 17,857,974
Accumulated other comprehensive income (loss) -1,327,458 226,592
---------------------- ---------------------
TOTAL SHAREHOLDERS' EQUITY 30,820,369 26,290,616
---------------------- ---------------------
TOTAL LIABILITIES, REDEEMABLE COMMON STOCK AND
SHAREHOLDERS' EQUITY $ 516,149,562 $ 460,593,440
====================== =====================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-2
COMMUNITY BANKSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- ---------------------------------------------------------------------------------------------------------------
1999 1998 1997
----------- ----------- ------------
INTEREST INCOME
Loans $35,040,618 $29,767,173 $ 23,562,784
Taxable securities 2,377,935 2,564,894 3,107,805
Nontaxable securities 1,994,814 1,710,141 1,326,884
Deposits in banks 18,653 35,973 33,523
Federal funds sold 858,093 534,903 672,915
----------- ----------- ------------
TOTAL INTEREST INCOME 40,290,113 34,613,084 28,703,911
----------- ----------- ------------
INTEREST EXPENSE
Deposits 17,167,809 15,839,093 13,149,225
Other borrowings 529,052 111,411 42,224
----------- ----------- ------------
TOTAL INTEREST EXPENSE 17,696,861 15,950,504 13,191,449
----------- ----------- ------------
NET INTEREST INCOME 22,593,252 18,662,580 15,512,462
PROVISION FOR LOAN LOSSES 1,636,900 1,164,950 936,216
----------- ----------- ------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 20,956,352 17,497,630 14,576,246
----------- ----------- ------------
OTHER INCOME
Service charges on deposits accounts 2,864,632 2,527,830 2,016,911
Other service charges, commissions and fees 649,378 523,438 431,729
Trust department fees 112,998 112,061 93,450
Nonbank subsidiary income 6,720,159 9,043,292 8,819,919
Gain on sale of loans 318,757 560,075 614,060
Net realized gains (losses) on sale of securities 0 78,653 (3,992)
Other 844,053 535,636 447,053
----------- ----------- ------------
TOTAL OTHER INCOME 11,509,977 13,380,985 12,419,130
----------- ----------- ------------
OTHER EXPENSES
Salaries and employee benefits 12,345,498 10,676,957 10,474,465
Equipment expenses 2,541,601 1,840,529 1,487,528
Occupancy expenses 1,386,038 1,305,998 1,075,710
Other operating expenses 7,558,207 6,578,930 5,686,110
----------- ----------- ------------
TOTAL OTHER EXPENSES 23,831,344 20,402,414 18,723,813
----------- ----------- ------------
INCOME BEFORE INCOME TAXES 8,634,985 10,476,201 8,271,563
INCOME TAX EXPENSE 2,558,820 3,444,497 2,624,797
----------- ----------- ------------
NET INCOME $ 6,076,165 $ 7,031,704 $ 5,646,766
=========== =========== ============
BASIC EARNINGS PER COMMON SHARE $ 2.80 $ 3.24 $ 2.73
=========== =========== ============
DILUTED EARNINGS PER COMMON SHARE $ 2.80 $ 3.20 $ 2.60
=========== =========== ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
COMMUNITY BANKSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- ----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
----------- ----------- ----------
Net income $ 6,076,165 $ 7,031,704 $5,646,766
----------- ----------- ----------
Other comprehensive income (loss):
Unrealized gains (losses) on securities available-for-sale:
Unrealized holding gains (losses) arising during period, net of taxes (benefits) of $(1,036,081),
$95,593, and $134,777,
respectively (1,554,050) 143,388 202,167
Reclassification adjustment for (gains) losses realized
in net income, net of taxes (benefits) of $0, $31,461, and
$(1,597), respectively 0 (47,192) 2,395
----------- ----------- ----------
Other comprehensive income (loss) (1,554,050) 96,196 204,562
----------- ----------- ----------
Comprehensive income $ 4,522,115 $ 7,127,900 $5,851,328
=========== =========== ==========
See Notes to Consolidated Financial Statements
F-4
COMMUNITY BANKSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------------------------------
Common Stock
------------------------- Capital Retained
Shares Par Value Surplus Earnings
---------- ----------- ---------- ------------
BALANCE, DECEMBER 31, 1996 2,004,830 $2,004,830 $5,276,520 $ 13,875,615
Net income - - - 5,646,766
Cash dividends declared, $.14 per share - - - (295,157)
Exercise of stock options 165,000 165,000 759,700 -
Adjustment for shares owned by ESOP - - - (4,444,491)
Sale of treasury stock to ESOP - - - -
Other comprehensive income - - - -
--------- ---------- ---------- ------------
BALANCE, DECEMBER 31, 1997 2,169,830 2,169,830 6,036,220 14,782,733
Net income - - - 7,031,704
Cash dividends declared, $.15 per share - - - (324,607)
Adjustment for shares owned by ESOP - - - (3,631,856)
Other comprehensive income - - - -
--------- ---------- ---------- ------------
BALANCE, DECEMBER 31, 1998 2,169,830 2,169,830 6,036,220 17,857,974
Net income - - - 6,076,165
Exercise of stock options 9,000 9,000 79,607 -
Cash dividends declared, $.15 per share - - - (352,474)
Adjustment for shares owned by ESOP - - - 271,505
Other comprehensive loss - - - -
--------- ---------- ---------- ------------
BALANCE, DECEMBER 31, 1999 2,178,830 $2,178,830 $6,115,827 $ 23,853,170
========= ========== ========== ============
Accumulated
Treasury Stock Other Total
--------------------- Comprehensive Shareholders'
Shares Amount Income (Loss) Equity
------ -------- ------------- ------------
BALANCE, DECEMBER 31, 1996 - $ - $ (74,166) $ 21,082,799
Net income - - - 5,646,766
Cash dividends declared, $.14 per share - - - (295,157)
Exercise of stock options 35,661 (782,050) - 142,650
Adjustment for shares owned by ESOP - - - (4,444,491)
Sale of treasury stock to ESOP (35,661) 782,050 - 782,050
Other comprehensive income - - 204,562 204,562
------ -------- ----------- ------------
BALANCE, DECEMBER 31, 1997 - - 130,396 23,119,179
Net income - - - 7,031,704
Cash dividends declared, $.15 per share - - - (324,607)
Adjustment for shares owned by ESOP - - - (3,631,856)
Other comprehensive income - - 96,196 96,196
------ -------- ----------- ------------
BALANCE, DECEMBER 31, 1998 - - 226,592 26,290,616
Net income - - - 6,076,165
Exercise of stock options - - - 88,607
Cash dividends declared, $.15 per share - - - (352,474)
Adjustment for shares owned by ESOP - - - 271,505
Other comprehensive loss - - (1,554,050) (1,554,050)
------ -------- ----------- ------------
BALANCE, DECEMBER 31, 1999 - $ - $(1,327,458) $ 30,820,369
====== ======== =========== ============
F-5
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
COMMUNITY BANKSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- -------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
------------ ------------ ------------
OPERATING ACTIVITIES
Net income $ 6,076,165 $ 7,031,704 $ 5,646,766
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,981,267 1,585,729 1,154,306
Amortization of intangibles 429,247 288,156 244,911
Provision for loan losses 1,636,900 1,164,950 936,216
Provision for other real estate losses 0 10,000 65,000
Deferred income tax benefits (381,217) (292,525) (195,033)
(Increase) decrease in loans held for sale (575,429) 1,861,417 (76,798)
Net (gains) losses on sale of securities available-for-sale 0 (78,653) 3,992
Loss on disposal of premises and equipment 16,460 0 0
Net losses (gains) on sale of other real estate (54,132) (3,563) 39,182
(Increase) decrease in interest receivable 266,634 (1,187,060) (690,955)
Increase (decrease) in interest payable (655,877) 1,180,385 277,325
Increase (decrease) in taxes payable 438,959 348,661 (661,580)
(Increase) decrease in accounts receivable of
nonbank subsidiary (136,686) (618,731) 1,314,629
(Increase) decrease in work in process of nonbank subsidiary 145,959 (513,252) 1,342,849
Increase (decrease) in accruals and payables of
nonbank subsidiary 2,303,101 325,031 (3,773,361)
Other operating activities (171,219) (1,145,989) 257,796
------------ ------------ ------------
Net cash provided by operating activities 11,320,132 9,956,260 5,885,245
------------ ------------ ------------
INVESTING ACTIVITIES
Purchases of securities available-for-sale (18,271,344) (29,111,438) (25,373,331)
Proceeds from sales of securities available-for-sale 0 14,296,060 10,687,389
Proceeds from maturities of securities available-for-sale 9,063,010 25,811,265 9,158,723
Purchases of securities held-to-maturity (2,268,432) (3,323,556) (11,403,699)
Proceeds from maturities of securities held-to-maturity 1,244,269 1,127,193 1,338,890
Net (increase) decrease in Federal funds sold 19,950,000 (16,930,000) 2,385,000
Net (increase) decrease in interest-bearing deposits in banks 267,119 341,044 (560,690)
Net increase in loans (63,874,282) (71,584,937) (40,109,318)
Purchase of premises and equipment (1,978,098) (2,931,496) (5,334,330)
Net cash acquired in branch acquisition 0 170,667 99,612
Proceeds from sale of other real estate 821,387 252,492 383,638
------------ ------------ ------------
Net cash used in investing activities (55,046,371) (81,882,706) (58,728,116)
------------ ------------ ------------
F-6
COMMUNITY BANKSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- ------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
--------------- --------------- ------------------
FINANCING ACTIVITIES
Net increase in deposits $ 38,773,131 $ 69,738,048 $ 56,835,456
Increase in FHLB advances 10,000,000 5,000,000 -
Increase in notes payable 400,000 500,000 -
Repayment of notes payable (154,100) (154,099) (154,100)
Proceeds from the issuance of common stock 88,607 - 924,700
Dividends paid (343,072) (318,531) (285,728)
-------------- -------------- -----------------
Net cash provided by financing activities 48,764,566 74,765,418 57,320,328
-------------- -------------- -----------------
Net increase in cash and due from banks 5,038,327 2,838,972 4,477,457
Cash and due from banks at beginning of year 26,796,002 23,957,030 19,479,573
-------------- -------------- -----------------
Cash and due from banks at end of year $ 31,834,329 $ 26,796,002 $ 23,957,030
============== ============== =================
SUPPLEMENTAL DISCLOSURES Cash paid for:
Interest $ 18,352,738 $ 14,957,440 $ 12,914,124
Income taxes $ 2,501,078 $ 3,445,529 $ 3,526,919
NONCASH TRANSACTIONS
Unrealized (gains) losses on securities available-for-sale $ 2,590,131 $ (160,328) $ 340,936
Principal balances of loans transferred to other
real estate $ 901,216 $ 481,806 $ 426,273
BRANCH ACQUISITIONS
Net cash acquired $ - $ 170,667 $ 99,612
============== ============== =================
Loans $ - $ 2,981,087 $ 4,357,901
Premises and equipment - 10,085 608,071
Other assets - 9,063 1,828
Core deposit intangible - 760,597 2,190,765
Deposits - (5,837,754) (12,387,583)
Other liabilities - (20,687) (62,790)
-------------- -------------- -----------------
Net liabilities assumed, net of cash and due from
banks of $170,667 and $99,612 $ - $ (2,097,609) $ (5,291,808)
============== ============== =================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
COMMUNITY BANKSHARES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Community Bankshares, Inc. (the "Company") is a multi-bank holding
company whose business is presently conducted by its wholly-owned
subsidiaries: Community Bank & Trust - Habersham located in
Cornelia, Georgia; Community Bank & Trust - Jackson located in
Commerce, Georgia; Community Bank & Trust - Alabama located in Union
Springs, Alabama; and Community Bank & Trust - Troup located in
LaGrange, Georgia. Financial Supermarkets, Inc. is a wholly-owned
subsidiary of Community Bank & Trust - Habersham which provides a
variety of bank related products and services to the financial
institution industry. Financial Properties, inc. is a wholly-owned
subsidiary of Community Bank & Trust-Habersham which is a real
estate sales agency which provides a variety of real estate related
services.
The banking subsidiaries are commercial banks operating
independently of one another in their respective market areas. The
banking subsidiaries in Georgia have identified their primary market
areas to be the county in which they are located and all surrounding
counties. The Georgia banking subsidiaries are all located
approximately 85 miles from the metropolitan Atlanta area. Community
Bank & Trust - Alabama is located approximately 50 miles from
Montgomery, Alabama. The Banks provide a full range of banking
services to individual and corporate customers. Financial
Supermarkets, Inc. currently provides products and services
primarily in the southeastern United States; however, their products
and services are marketed internationally. Financial Properties,
Inc. currently operates primarily in Cornelia, Habersham County,
Georgia.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Significant intercompany transactions
and accounts are eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as
of the balance sheet date 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, the valuation of
foreclosed real estate, and deferred tax assets.
CASH AND DUE FROM BANKS
Cash on hand, cash items in process of collection, and amounts due
from banks are included in cash and due from banks.
The Company maintains amounts due from banks which, at times, may
exceed Federally insured limits. The Company has not experienced any
losses in such accounts.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SECURITIES
Securities are classified based on management's intention on the
date of purchase. Securities which management has the intent and
ability to hold to maturity are classified as held-to-maturity and
recorded at amortized cost. All other securities are classified as
available-for-sale and recorded at fair value with net unrealized
gains and losses reported in other comprehensive income (loss).
Equity securities without a readily determinable fair value are
classified as securities available-for-sale and recorded at cost.
Interest and dividends on securities, including amortization of
premiums and accretion of discounts, are included in interest
income. Realized gains and losses from the sale of securities are
determined using the specific identification method.
LOANS HELD FOR SALE
Loans held for sale include mortgage and other loans originated and
intended for sale in the secondary market, and are carried at the
lower of aggregate cost or estimated fair value. Net unrealized
losses, if any, are recognized through a valuation allowance by
charges to income.
LOANS
Loans are reported at their outstanding principal balances less
unearned income and the allowance for loan losses. Interest income
is accrued based on the principal balance outstanding.
Loan origination fees and certain direct origination costs of most
loans are recognized at the time the loan is recorded. Because the
net origination loan fees and costs related to these loans are not
material, the results of operations are not materially different
than the results which would be obtained by accounting for the loan
fees and costs in accordance with generally accepted accounting
principles. Loan origination fees and costs incurred for other loans
are deferred and recognized as income over the life of the loan.
The allowance for loan losses is maintained at a level that
management believes to be adequate to absorb potential losses in the
loan portfolio. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan is confirmed.
Subsequent recoveries are credited to the allowance. Management's
determination of the adequacy of the allowance is based on an
evaluation of the portfolio, past loan loss experience, current
economic conditions, volume, growth, composition of the loan
portfolio, and other risks inherent in the portfolio. This
evaluation is inherently subjective as it requires material
estimates that are susceptible to significant change including the
amounts and timing of future cash flows expected to be received on
impaired loans. In addition, regulatory agencies, as an integral
part of their examination process, periodically review the Company's
allowance for loan losses, and may require the Company to record
additions to the allowance based on their judgment about information
available to them at the time of their examinations.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS (CONTINUED)
The accrual of interest on loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as
they become due. Interest income is subsequently recognized only to
the extent cash payments are received.
A loan is considered impaired when it is probable the Company will
be unable to collect all principal and interest payments due in
accordance with the contractual terms of the loan agreement.
Individually identified impaired loans are measured based on the
present value of expected payments using the contractual loan rate
as the discount rate, the loan's observable market price, or the
fair value of the collateral if the loan is collateral dependent. If
the recorded investment in the impaired loan exceeds the measure of
fair value, a valuation allowance is established as a component of
the allowance for loan losses. Changes to the valuation allowance
are recorded as a component of the provision for loan losses.
PREMISES AND EQUIPMENT
Land is carried at cost. Premises and equipment are carried at cost
less accumulated depreciation computed principally by the
straight-line method over the estimated useful lives of the assets.
OTHER REAL ESTATE OWNED
Other real estate owned represents properties acquired through
foreclosure. Other real estate owned is held for sale and is carried
at the lower of the recorded amount of the loan or fair value of the
properties less estimated selling costs. Any write-down to fair
value at the time of transfer to other real estate owned is charged
to the allowance for loan losses. Subsequent gains or losses on sale
and any subsequent adjustment to the value are recorded as other
expenses. The carrying amount of other real estate owned at December
31, 1999 and 1998 was $1,142,631 and $1,000,900, respectively.
INCOME TAXES
Income tax expense consists of current and deferred taxes. Current
income tax provisions approximate taxes to be paid or refunded for
the applicable year. Deferred income tax assets and liabilities are
determined using the balance sheet method. Under this method, the
net deferred tax asset or liability is determined based on the tax
effects of the differences between the book and tax bases of the
various balance sheet assets and liabilities and gives current
recognition to changes in tax rates and laws.
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES (CONTINUED)
Recognition of deferred tax balance sheet amounts is based on
management's belief that it is more likely than not that the tax
benefit associated with certain temporary differences will be
realized. A valuation allowance is recorded for those deferred tax
items for which it is more likely than not that realization will not
occur.
The Company and subsidiaries file a consolidated income tax return.
Each entity provides for income taxes based on its contribution to
income taxes of the consolidated group.
SALE OF LOANS
The Banks originate and sell participations in certain loans. Gains
are recognized at the time the sale is consummated. The amount of
gain recognized on the sale of a specific loan is equal to the
percentage resulting from determining the fair value of the portion
of the loan sold relative to the fair value of the entire loan
including servicing rights.
TRUST DEPARTMENT
Trust income is recognized on the cash basis in accordance with
established industry practices. The results of operations are not
materially different than the results which would be obtained by
accounting for such fees on the accrual basis.
NONBANK SUBSIDIARY REVENUE RECOGNITION
Financial Supermarkets, Inc., a wholly-owned subsidiary of Community
Bank & Trust - Habersham, recognizes revenue and costs on its
installation contracts on the completed-contract method of
accounting. Under this method, billings and costs are accumulated
during the period of installation, but no profits are recorded
before the completion of the work. Provisions for estimated losses
on uncompleted contracts are made at the time such losses are
identified. The results of operations are not materially different
than the results which would be obtained by accounting for these
contracts in accordance with generally accepted accounting
principles. Operating expenses, including indirect costs and
administrative expenses, are charged as incurred to periodic income
and not allocated to contract costs. Income from other consulting
services is recognized as services are provided and costs and
expenses are incurred for each individual contract.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK COMPENSATION PLAN
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 Company's
stock option plan have no intrinsic value at the grant date, and
under Opinion No. 25 no compensation cost is recognized for them.
The Company has elected to continue with the accounting methodology
in Opinion No. 25 and, as a result, has provided pro forma
disclosures of net income and earnings per share and other
disclosures, as if the fair value based method of accounting had
been applied. The pro forma disclosures include the effects of all
awards granted on or after January 1, 1995.
EARNINGS PER COMMON SHARE
Basic earnings per common share are computed by dividing net income
by the weighted-average number of shares of common stock
outstanding. Diluted earnings per common share are computed by
dividing net income by the sum of the weighted-average number of
shares of common stock outstanding and potential common shares.
Potential common shares consist of stock options.
COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income", describes
comprehensive income as the total of all components of comprehensive
income, including net income. Other comprehensive income refers to
revenues, expenses, gains and losses that under generally accepted
accounting principles are included in comprehensive income but
excluded from net income. Currently, the Company's other
comprehensive income consists of unrealized gains and losses on
available-for-sale securities.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The effective date of this statement has been deferred
by SFAS No. 137 until fiscal years beginning after June 15, 2000.
However, the statement permits early adoption as of the beginning of
any fiscal quarter after its issuance. The Company expects to adopt
this statement effective January 1, 2001. SFAS No. 133 requires the
Company to recognize all derivatives as either assets or liabilities
in the balance sheet at fair value. For derivatives that are not
designated as hedges, the gain or loss must be recognized in
earnings in the period of change. For derivatives that are
designated as hedges, changes in the fair value of the hedged
assets, liabilities, or firm commitments must be recognized in
earnings or recognized in other comprehensive income until the
hedged item is recognized in earnings, depending on the nature of
the hedge. The ineffective portion of a derivative's change in fair
value must be recognized in earnings immediately. Management has not
yet determined what effect the adoption of SFAS No. 133 will have on
the Company's earnings or financial position.
There are no other recent accounting pronouncements that have had,
or are expected to have, a material effect on the Company's
financial statements.
NOTE 2. SECURITIES
The amortized cost and fair value of securities are summarized as
follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- --------------- -------------- --------------
SECURITIES AVAILABLE-FOR-SALE
December 31, 1999:
U. S. Government and agency
securities $ 31,705,707 $ 9,688 $ (1,007,814) $ 30,707,581
State and municipal securities 8,955,524 4,205 (1,033,338) 7,926,391
Mortgage-backed securities 8,969,973 23,170 (208,388) 8,784,755
Equity securities 1,724,731 - - 1,724,731
-------------- --------------- -------------- --------------
$ 51,355,935 $ 37,063 $ (2,249,540) $ 49,143,458
============== =============== ============== ==============
December 31, 1998:
U. S. Government and agency
securities $ 25,704,416 $ 324,048 $ (41,299) $ 25,987,165
State and municipal securities 5,791,730 67,382 (21,121) 5,837,991
Mortgage-backed securities 8,930,047 85,267 (36,623) 8,978,691
Equity securities 1,721,361 - - 1,721,361
-------------- --------------- -------------- --------------
$ 42,147,554 $ 476,697 $ (99,043) $ 42,525,208
============== =============== ============== ==============
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 2. SECURITIES (CONTINUED)
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- --------------- -------------- --------------
SECURITIES HELD-TO-MATURITY
DECEMBER 31, 1999:
State and municipal securities $ 31,939,177 $ 111,195 $ (700,895) $ 31,349,477
============== =============== ============== ==============
December 31, 1998:
State and municipal securities $ 30,915,014 $ 1,300,295 $ (41,488) $ 32,173,821
============== =============== ============== ==============
Securities with a carrying value of $39,625,995 and $36,621,313 at
December 31, 1999 and 1998, respectively, were pledged to secure
public deposits and for other purposes.
Gross gains and losses on sales of securities available-for-sale
consist of the following:
DECEMBER 31,
---------------------------------------------
1999 1998 1997
------------- ------------- -------------
Gross gains $ - $ 114,546 $ 47,843
Gross losses - (35,893) (51,835)
------------- ------------- -------------
Net realized gains (losses) $ - $ 78,653 $ (3,992)
============= ============= =============
The amortized cost and fair value of debt securities as of December
31, 1999 by contractual maturity are shown below. Maturities may
differ from contractual maturities in mortgage-backed securities
because the mortgages underlying the securities may be called or
prepaid with or without penalty. Therefore, these securities are not
included in the categories in the following summary.
SECURITIES AVAILABLE-FOR-SALE SECURITIES HELD-TO-MATURITY
----------------------------------- ----------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------------- ---------------- ---------------- ----------------
Due in one year or less $ 3,846,583 $ 3,823,146 $ 2,164,129 $ 2,165,931
Due from one to five years 19,837,872 19,246,669 4,076,980 4,079,784
Due from five to ten years 9,072,671 8,635,475 9,223,869 9,099,527
Due after ten years 7,904,105 6,928,682 16,474,199 16,004,235
Mortgage-backed securities 8,969,973 8,784,755 - -
--------------- --------------- --------------- ---------------
$ 49,631,204 $ 47,418,727 $ 31,939,177 $ 31,349,477
=============== =============== =============== ===============
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of loans is summarized as follows:
DECEMBER 31,
--------------------------------
1999 1998
-------------- --------------
Commercial, financial, and agricultural $ 205,230,143 $ 160,872,954
Real estate - construction 24,208,000 21,327,303
Real estate - mortgage 93,063,000 82,413,280
Consumer 50,956,000 46,047,519
Other 2,435,876 3,042,663
------------- -------------
375,893,019 313,703,719
Unearned income (299,649) (265,946)
Allowance for loan losses (5,682,612) (4,863,181)
------------- -------------
Loans, net $ 369,910,758 $ 308,574,592
============= =============
Changes in the allowance for loan losses are as follows:
Years Ended December 31,
---------------------------------------------
1999 1998 1997
---------------------------------------------
--- ---
Balance, beginning of year $ 4,863,181 $ 4,024,171 $ 3,591,958
Provision charged to operations 1,636,900 1,164,950 936,216
Loans charged off (1,077,974) (495,008) (595,258)
Recoveries of loans previously charged off 260,505 169,068 91,255
------------- ------------- -------------
Balance, end of year $ 5,682,612 $ 4,863,181 $ 4,024,171
============= ============= =============
The following is a summary of information pertaining to impaired
loans:
DECEMBER 31,
--------------------------------
1999 1998
-------------- --------------
Impaired loans without a valuation allowance $ 2,737,255 $ 1,690,592
Impaired loans with a valuation allowance - -
-------------- --------------
Total impaired loans $ 2,737,255 $ 1,690,592
============== ==============
Valuation allowance related to impaired loans $ - $ -
============== ==============
Average investment in impaired loans $ 2,289,057 $ 1,404,191
============== ==============
Interest income recognized on impaired loans was insignificant for
the years ended December 31, 1999, 1998, and 1997.
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
The Banks have granted loans to certain related parties, including
directors, executive officers and their related entities. The
interest rates on these loans were substantially the same as rates
prevailing at the time of the transaction and repayment terms are
customary for the type of loan involved. Changes in related party
loans for the year ended December 31, 1999 are as follows:
BALANCE, BEGINNING OF YEAR $ 8,282,339
Advances, including renewals 996,968
Repayments, including renewals (902,238)
-------------
BALANCE, END OF YEAR $ 8,377,069
=============
NOTE 4. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
DECEMBER 31,
------------------------------
1999 1998
-------------- --------------
Land $ 2,413,916 $ 2,408,053
Buildings 9,809,767 9,750,436
Equipment 11,638,526 10,399,876
-------------- --------------
23,862,209 22,558,365
Accumulated depreciation (10,418,565) (9,095,092)
-------------- --------------
$ 13,443,644 $ 13,463,273
============== ==============
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 5. DEPOSITS
At December 31, 1999, the scheduled maturities of time deposits are
as follows:
2000 $ 214,604,451
2001 14,411,756
2002 6,561,585
2003 14,289,354
2004 8,297,733
Thereafter 28,128
----------------
$ 258,193,007
================
At December 31, 1999, the Company has brokered time deposits of
$792,000.
NOTE 6. OTHER BORROWINGS
Other borrowings consist of the following:
DECEMBER 31,
-----------------------------
1999 1998
------------ ------------
Note payable to bank, interest due quarterly at prime minus 1% or
7.50% at December 31, 1999, collateralized by 50,000 shares of common
stock of Community Bank & Trust-Habersham. Matures July 31, 2000 $ 1,054,100 $ 808,200
Advance from the Federal Home Loan Bank with interest due quarterly at 4.96%,
due September 15, 2003, with a six month call option 5,000,000 5,000,000
Advance from the Federal Home Loan Bank with interest due quarterly at
4.95%, due August 7, 2009, with a six month call option 10,000,000 --
----------- ----------
$16,054,100 $5,808,200
=========== ==========
Advances from the Federal Home Loan Bank are collateralized by
blanket floating liens on qualifying first mortgages. At December
31, 1999, aggregate maturities of other borrowings are as follows:
2000 $ 1,054,100
2003 5,000,000
2009 10,000,000
-----------
$16,054,100
===========
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 7. EMPLOYEE BENEFIT PLANS
INCENTIVE STOCK OPTION PLAN
The Company has an Incentive Stock Option Plan in which the Company
can grant to key personnel options for an aggregate of 225,000
shares of the Company's common stock at not less than the fair
market value of such shares on the date the option is granted. If
the optionee owns shares of the Company representing more than 10%
of the total combined voting power, then the price shall not be less
than 110% of the fair market value of such shares on the date the
option is granted. Also, the option period will not exceed ten years
from date of grant. Other pertinent information related to the
options is as follows:
------------------------ -------------------------- ---------------------------
1999 1998 1997
------------------------ -------------------------- ---------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
---------- ------------ ----------- ------------- ----------- --------------
Under option, beginning of year 39,000 $ 9.85 39,000 $ 9.85 204,000 $ 6.42
Granted 29,500 39.20 - - - -
Exercised (9,000) 9.85 - - (165,000) 5.60
---------- ----------- -----------
Under option, end of year 59,500 $ 24.40 39,000 $ 9.85 39,000 $ 9.85
========== =========== ===========
Options exercisable at year-end 30,000 $ 9.85 39,000 $ 9.85 39,000 $ 9.85
========== =========== ===========
Weighted-average fair value of
options granted during the year $ 17.77 $ - $ -
Information pertaining to options outstanding at December 31, 1999
is as follows:
-------------------------------------------- -----------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- -----------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------------------------------------ ------------- --------------- ------------- ------------- --------------
$9.85 30,000 5 years $ 9.85 30,000 $ 9.85
$39.20 29,500 10 years 39.20 - -
------------- -------------
Outstanding at end of year 59,500 7.5 years $ 24.40 30,000 $ 9.85
============= =============
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 7. EMPLOYEE BENEFIT PLANS (CONTINUED)
INCENTIVE STOCK OPTION PLAN (CONTINUED)
The Company applies APB Opinion 25 and related Interpretations in
accounting for the stock option plan. Accordingly, no compensation
cost has been recognized. Had compensation cost for the stock option
plan been determined based on the fair value at the grant dates for
awards under the plan consistent with the method prescribed by SFAS
No. 123, net income and earnings per share would have been adjusted
to the pro forma amounts indicated below.
Years Ended December 31,
--------------------------------------------
1999 1998 1997
--------------------------------------------
(In thousands, except per share data)
Net income As reported $ 6,076 $ 7,032 $ 5,647
Pro forma $ 6,076 $ 7,032 $ 5,647
Earnings per share As reported $ 2.80 $ 3.24 $ 2.73
Pro forma $ 2.80 $ 3.24 $ 2.73
Earnings per share - As reported $ 2.80 $ 3.20 $ 2.60
assuming dilution Pro forma $ 2.80 $ 3.20 $ 2.60
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions:
Year Ended December 31,
------------------------
1999
------------------------
Dividend yield .38%
Expected life 10 years
Expected volatility 6.37%
Risk-free interest 6.86%
rate
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 7. EMPLOYEE BENEFIT PLANS (CONTINUED)
401(K) PLAN
The Company has a contributory 401(K) retirement plan covering
substantially all employees. Contributions to the plan charged to
expense for the years ended December 31, 1999, 1998 and 1997
amounted to $86,478, $77,668 and $77,799, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN
The Company has an Employee Stock Ownership Plan (ESOP) for the
benefit of employees who meet certain eligibility requirements.
Contributions to the Plan are determined by the Board of Directors
of the Company taking into consideration the financial condition and
fiscal requirements of the Company and such other factors as the
Board of Directors may deem pertinent and applicable under the
circumstances. For the years ended December 31, 1999, 1998 and 1997,
the Company made cash contributions of $666,724, $820,007 and
$644,133, respectively, to the Plan.
In accordance with the Plan, the Company is expected to honor the
rights of certain participants to diversify their account balances
or to liquidate their ownership of the common stock in the event of
distribution. The purchase price of the common stock would be based
on the fair market value of the Company's common stock as of the
annual valuation date which precedes the date the put option is
exercised. No participant has exercised these rights since the
inception of the Plan, and no significant cash outlay is expected
during 2000. However, since the redemption of common stock is
outside the control of the Company, the Company's maximum cash
obligation based on the approximate market prices of common stock as
of the reporting date has been presented outside of shareholders'
equity. The amount presented as redeemable common stock held by the
ESOP in the consolidated balance sheet represents the Company's
maximum cash obligation and has been reflected as a reduction of
retained earnings.
At December 31, 1999, the ESOP held 363,469 shares and 17,311
committed-to-be-released shares. Shares held by the ESOP are
considered outstanding for purposes of calculating the Company's
earnings per share.
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 8. INCOME TAXES
Income tax expense consists of the following:
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1999 1998 1997
------------- ------------- --------------
Current $ 2,985,546 $ 3,782,531 $ 2,865,339
Deferred (381,217) (292,525) (195,033)
Current tax effect of net operating loss carryforward (45,509) (45,509) (45,509)
----------- ----------- -----------
Income tax expense $ 2,558,820 $ 3,444,497 $ 2,624,797
=========== =========== ===========
The Company's income tax expense differs from the amounts computed
by applying the Federal income tax statutory rates to income before
income taxes. A reconciliation of the differences is as follows:
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
1999 1998 1997
------------------------ ---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------------ ---------- ------------ -------- ------------ -------
Tax provision at statutory $ 2,935,895 34 % $ 3,561,908 34 % $ 2,812,331 34 %
rate
Tax-exempt interest (696,773) (8) (615,376) (6) (477,425) (6)
Disallowed interest 104,207 1 93,901 1 70,054 1
Current tax effect of net
operating loss (45,509) -- (45,509) -- (45,509) --
carryforward
Nondeductible expenses 39,395 -- 17,445 -- 38,012 --
State income taxes 224,656 3 454,555 4 264,672 3
Other items (3,051) -- (22,427) -- (37,338) --
----------- -- ----------- -- ----------- --
Income tax expense $ 2,558,820 30 % $ 3,444,497 33 % $ 2,624,797 32 %
=========== == =========== == =========== ==
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 8. INCOME TAXES (CONTINUED)
The components of deferred income taxes are as follows:
DECEMBER 31,
----------------------------
1999 1998
----------- -----------
Deferred tax assets:
Loan loss reserves $ 1,783,592 $ 1,506,432
Net operating loss carryforward 94,113 139,622
Other 9,292 --
Unrealized loss on securities available-for-sale 884,991 --
Valuation allowance (94,113) (139,622)
----------- -----------
2,677,875 1,506,432
----------- -----------
Deferred tax liabilities:
Depreciation 17,859 96,907
Accretion 156,895 141,942
Unrealized gain on securities available-for-sale -- 151,062
Other -- 30,670
----------- -----------
174,754 420,581
----------- -----------
Net deferred tax assets $ 2,503,121 $ 1,085,851
=========== ===========
At December 31, 1999, the Company has available net operating loss
carryforwards of approximately $276,000 for Federal income tax
purposes. If unused, the carryforwards will expire in 2009.
NOTE 9. EARNINGS PER COMMON SHARE
Diluted earnings per common share were computed by dividing net income
by the weighted average number of shares of common stock and common
stock equivalents outstanding. The number of common shares was
increased by the number of shares issuable upon the exercise of the
stock options described in Note 7. This theoretical increase in the
number of common shares was reduced by the number of common shares
which are assumed to have been repurchased for the treasury with the
proceeds from the exercise of the options; these purchases were assumed
to have been made at the price per share that approximates average
market price. The treasury stock method for determining the amount of
dilution of stock options is based on the concept that common shares
which could have been purchased with the proceeds of the exercise of
common stock options at market price are not actually outstanding
common shares.
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 9. EARNINGS PER COMMON SHARE (CONTINUED)
Presented below is a summary of the components used to calculate basic
and diluted earnings per share for the years ended December 31, 1999,
1998, and 1997.
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1999 1998 1997
---------------- ----------------- ----------------
Net income $ 6,076,165 $ 7,031,704 $ 5,646,766
================ ================= ================
Weighted average common shares outstanding 2,171,983 2,169,830 2,065,908
Net effect of the assumed exercise of stock
options based on the treasury stock method
using average market price for the year $ - $ 28,029 $ 107,203
---------------- ----------------- ----------------
Total weighted average common shares and
common stock equivalents outstanding 2,171,983 2,197,859 2,173,111
================ ================= ================
Diluted earnings per share $ 2.80 $ 3.20 $ 2.60
================ ================= ================
NOTE 10. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Company has entered into
off-balance-sheet financial instruments which are not reflected in the
financial statements. These financial instruments include commitments
to extend credit and standby letters of credit. Such financial
instruments are included in the financial statements when funds are
disbursed or the instruments become payable. These instruments involve,
to varying degrees, elements of credit risk in excess of the amount
recognized in the consolidated balance sheet.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual
amount of those instruments. A summary of the Company's commitments is
as follows:
DECEMBER 31,
-------------------------------
1999 1998
------------- -------------
Commitments to extend credit $ 24,265,552 $ 20,878,572
Credit card lines 4,070,000 3,144,000
Standby letters of credit 2,209,000 4,733,485
------------ ------------
$ 30,544,552 $ 28,756,057
============ ============
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Commitments to extend credit 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 credit risk involved in issuing these financial
instruments is essentially the same as that involved in extending loans
to customers. The Company evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on
management's credit evaluation of the customer. Collateral held varies
but may include real estate and improvements, marketable securities,
accounts receivable, inventory, equipment, crops, and personal
property.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private
borrowing arrangements. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan
facilities to customers. Collateral held varies as specified above and
is required in instances which the Company deems necessary.
In the normal course of business, the Company is involved in various
legal proceedings. In the opinion of management of the Company, any
liability resulting from such proceedings would not have a material
effect on the Company's financial statements.
The Company has leased various properties and equipment under
noncancelable agreements which expire at various times through January
8, 2011 and require minimum annual rentals. The leases related to
properties also require the payment of property taxes, normal
maintenance and insurance.
The total minimum rental commitment at December 31, 1999 is due as
follows:
During the year ending December 31:
2000 $ 523,305
2001 435,001
2002 280,657
2003 123,101
2004 76,086
Due thereafter 111,071
--------------
$ 1,549,221
==============
The total rental expense for the years ended December 31, 1999, 1998
and 1997 was $528,865, $467,546 and $512,293, respectively.
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 11. CONCENTRATIONS OF CREDIT
The banking subsidiaries originate primarily commercial, residential,
and consumer loans to customers in their local communities and
surrounding counties. The ability of the majority of the Banks'
customers to honor their contractual loan obligations is dependent on
their local economy as well as the economy in the metropolitan Atlanta
and Montgomery areas.
Thirty-one percent of the Company's loan portfolio is concentrated in
loans secured by real estate. A substantial portion of these loans is
in the Banks' primary market areas. In addition, a substantial portion
of the other real estate owned is located in those same markets.
Accordingly, the ultimate collectibility of the Company's loan
portfolio and the recovery of the carrying amount of other real estate
owned is susceptible to changes in market conditions in the Banks'
primary market areas.
The Company's loan portfolio also includes a concentration, 55% of the
total portfolio, of commercial, financial, and agricultural loans.
These loans represent loans made primarily to local businesses in the
Banks' market areas. A portion of these loans are small business loans
and residential loans originated by the loan production office, a
division of Community Bank & Trust - Habersham, which are outside the
Banks' primary market areas. The Company's lending policies require
loans of all types to be adequately collateralized and supported by
adequate cash flows.
Other significant concentrations of credit by type of loan are set
forth in Note 3. The Banks, as a matter of policy, do not generally
extend credit to any single borrower or group of related borrowers in
excess of 25% of each individual Bank's statutory capital, or
approximately $3,000,000, $1,075,000, $500,000, and $987,500 for
Community Bank & Trust - Habersham; Jackson; Alabama; and Troup;
respectively.
NOTE 12. REGULATORY MATTERS
The Banks are subject to certain restrictions on the amount of
dividends that may be declared without prior regulatory approval. At
December 31, 1999, approximately $4,251,000 of retained earnings were
available for dividend declaration without regulatory approval.
The Company and Banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and Banks must meet
specific capital guidelines that involve quantitative measures of the
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.
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 12. REGULATORY MATTERS (CONTINUED)
Quantitative measures established by regulation to ensure capital
adequacy require the Company and Banks to maintain minimum amounts and
ratios of Total and Tier I capital to risk-weighted assets and Tier I
capital to average assets. Management believes, as of December 31,
1999, the Banks met all capital adequacy requirements to which they are
subject.
As of December 31, 1999, the most recent notification from the Federal
Deposit Insurance Corporation 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 following table. There are no conditions or events since that
notification that management believes have changed the Banks' category.
The Company and Banks' actual capital amounts and ratios are presented
in the following tables.
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
------------------------ ---------------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------ --------- ----------- -------- ------------- --------
(DOLLARS IN THOUSANDS)
------------------------------------------------------------------------
As of December 31, 1999
Total Capital to Risk Weighted Assets:
Consolidated $ 48,685 11.97% $ 32,538 8.00% $ N/A N/A
Community Bank & Trust - Habersham $ 29,116 13.17% $ 17,693 8.00% $ 22,116 10.00%
Community Bank & Trust - Jackson $ 9,953 10.58% $ 7,524 8.00% $ 9,405 10.00%
Community Bank & Trust - Alabama $ 3,796 11.46% $ 2,650 8.00% $ 3,313 10.00%
Community Bank & Trust - Troup $ 4,934 12.48% $ 3,164 8.00% $ 3,955 10.00%
Tier I Capital to Risk Weighted Assets:
Consolidated $ 43,592 10.71% $ 10,435 4.00% $ N/A N/A
Community Bank & Trust - Habersham $ 26,346 11.91% $ 8,847 4.00% $ 13,270 6.00%
Community Bank & Trust - Jackson $ 8,775 9.33% $ 3,762 4.00% $ 5,643 6.00%
Community Bank & Trust - Alabama $ 3,381 10.21% $ 1,325 4.00% $ 1,988 6.00%
Community Bank & Trust - Troup $ 4,439 11.23% $ 1,582 4.00% $ 2,373 6.00%
Tier I Capital to Average Assets:
Consolidated $ 43,592 8.54% $ 20,418 4.00% $ N/A N/A
Community Bank & Trust - Habersham $ 26,346 8.65% $ 12,188 4.00% $ 15,235 5.00%
Community Bank & Trust - Jackson $ 8,775 6.82% $ 5,144 4.00% $ 6,430 5.00%
Community Bank & Trust - Alabama $ 3,381 7.27% $ 1,862 4.00% $ 2,327 5.00%
Community Bank & Trust - Troup $ 4,439 8.23% $ 2,157 4.00% $ 2,696 5.00%
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 12. REGULATORY MATTERS (CONTINUED)
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
------------------------ ---------------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------ --------- ----------- -------- ------------- --------
(DOLLARS IN THOUSANDS)
------------------------------------------------------------------------
As of December 31, 1998
Total Capital to Risk Weighted Assets:
Consolidated $ 41,630 12.12% $ 27,479 8.00% $ N/A N/A
Community Bank & Trust - Habersham $ 24,918 13.01% $ 15,321 8.00% $ 19,511 10.00%
Community Bank & Trust - Jackson $ 8,524 10.14% $ 6,724 8.00% $ 8,405 10.00%
Community Bank & Trust - Alabama $ 3,315 11.70% $ 2,267 8.00% $ 2,834 10.00%
Community Bank & Trust - Troup $ 4,389 14.30% $ 2,455 8.00% $ 3,069 10.00%
Tier I Capital to Risk Weighted Assets:
Consolidated $ 37,330 10.87% $ 13,737 4.00% $ N/A N/A
Community Bank & Trust - Habersham $ 22,521 11.76% $ 7,660 4.00% $ 11,491 6.00%
Community Bank & Trust - Jackson $ 7,470 8.89% $ 3,362 4.00% $ 5,043 6.00%
Community Bank & Trust - Alabama $ 2,960 10.44% $ 1,134 4.00% $ 1,700 6.00%
Community Bank & Trust - Troup $ 4,004 13.05% $ 1,228 4.00% $ 1,841 6.00%
Tier I Capital to Average Assets:
Consolidated $ 37,330 8.42% $ 17,734 4.00% $ N/A N/A
Community Bank & Trust - Habersham $ 22,521 8.58% $ 10,500 4.00% $ 13,125 5.00%
Community Bank & Trust - Jackson $ 7,470 6.71% $ 4,455 4.00% $ 5,569 5.00%
Community Bank & Trust - Alabama $ 2,960 7.19% $ 1,648 4.00% $ 2,059 5.00%
Community Bank & Trust - Troup $ 4,004 9.31% $ 1,721 4.00% $ 2,151 5.00%
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments. In
cases where quoted market prices are not available, fair values are
based on estimates using discounted cash flow models. Those models are
significantly affected by the assumptions used, including the discount
rates and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. The use of different
methodologies may have a material effect on the estimated fair value
amounts. Also, the fair value estimates presented herein are based on
pertinent information available to management as of December 31, 1999
and 1998. Such amounts have not been revalued for purposes of these
financial statements since those dates and, therefore, current
estimates of fair value may differ significantly from the amounts
presented herein.
CASH, DUE FROM BANKS, INTEREST-BEARING DEPOSITS IN BANKS, AND FEDERAL
FUNDS SOLD:
The carrying amounts of cash, due from banks, interest-bearing
deposits in banks, and Federal funds sold approximate their fair
value.
SECURITIES:
Fair values for securities are based on available quoted market
prices. The carrying values of equity securities with no readily
determinable fair value approximate fair values.
LOANS:
For loans held for sale and variable-rate loans that reprice
frequently and have no significant change in credit risk, fair
values are based on carrying values. For other loans, the fair
values are estimated using discounted cash flow models using current
market interest rates offered for loans with similar terms to
borrowers of similar credit quality. Fair values for impaired loans
are estimated using discounted cash flow models or based on the fair
value of underlying collateral.
DEPOSITS:
The carrying amounts of demand deposits, savings deposits, and
variable-rate certificates of deposit approximate their fair values.
Fair values for fixed-rate certificates of deposit are estimated
using discounted cash flow models, using current market interest
rates being offered on certificates with similar remaining
maturities.
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
OTHER BORROWINGS:
The fair values of the Company's other borrowings are estimated
using discounted cash flow models based on the Company's current
incremental borrowing rates for similar types of borrowing
arrangements.
ACCRUED INTEREST:
The carrying amounts of accrued interest approximate their fair
values.
REDEEMABLE COMMON STOCK:
The fair values of the Company's redeemable common stock
approximates the recorded amounts.
OFF-BALANCE SHEET INSTRUMENTS:
Fair values of the Company's off-balance sheet financial instruments
are based on fees charged to enter into similar agreements. However,
commitments to extend credit and standby letters of credit do not
represent a significant value to the Company until such commitments
are funded. The Company has determined that these instruments do not
have a distinguishable fair value and no fair value has been
assigned.
The estimated fair values and related carrying amounts of the
Company's financial instruments were as follows:
DECEMBER 31, 1999 December 31, 1998
------------------------------- -------------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
-------------- --------------- -------------- --------------
Financial assets:
Cash, due from banks, interest-bearing
deposits in banks, and Federal $ 31,834,329 $ 31,834,329 $ 50,113,872 $ 50,113,872
funds sold
Securities available-for-sale 49,143,458 49,143,458 42,525,208 42,525,208
Securities held-to-maturity 31,939,177 31,349,477 30,915,014 32,173,821
Loans held for sale 1,274,927 1,274,927 699,498 699,498
Loans 369,910,758 374,536,073 308,574,592 312,879,502
Accrued interest receivable 5,522,280 5,522,280 5,788,914 5,788,914
Financial liabilities:
Deposits 444,056,004 443,605,128 405,282,873 403,726,281
Other borrowings 16,054,100 16,054,000 5,808,200 5,808,200
Accrued interest payable 3,470,199 34,701,990 4,126,076 4,126,076
Redeemable common stock 13,982,242 13,982,242 14,253,747 14,253,747
F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 14. SEGMENT INFORMATION
The Company's operations have been classified into two reportable
segments, banking and bank consulting services. The banking segment
involves traditional banking services offered through its four
wholly-owned bank subsidiaries. Financial Supermarkets, Inc. provides
various consulting and licensing services to financial institutions in
connection with the establishment of bank branches in supermarkets. In
connection with the establishment of a Supermarket Bank, Financial
Supermarkets provides consulting services ranging from providing
alternative construction designs to coordinating employee training.
Financial Solutions, a division of Financial Supermarkets, Inc. was
formed to provide various consulting services to the financial
institution industry including compliance, operational, advertising,
marketing and travel related services.
The Company's reportable segments are organizations that offer
different products and services. They are managed separately because of
products and services, marketing strategies, and the regulatory
environments in which the Banks operate. In addition, the Banks
geographically are located in the Southeast and employ similar business
strategies and are evaluated using similar performance expectations.
The bank consulting segment operates throughout the United States.
Total revenue by industry segment includes revenues from unaffiliated
customers and affiliates. Revenues from affiliates are eliminated in
consolidation. Interest income, interest expenses, data processing
fees, management fees and other various revenues and expenses between
affiliates are recorded on the accrual basis of accounting consistent
with similar transactions with customers outside the consolidated
group.
Selected segment information by industry segment is as follows:
-----------------------------------------------------------------
REPORTABLE SEGMENTS
-----------------------------------------------------------------
FINANCIAL ALL
FOR THE YEAR ENDED DECEMBER 31, 1999 BANKING SUPERMARKETS OTHER TOTAL
--------------------------------------- -------------- --------------- -------------- ---------------
Interest income $ 40,931,494 $ 541,673 $ 3,956 $ 41,477,123
Interest expense 18,806,249 -- 77,622 18,883,871
Intersegment net interest income (531,089) 527,133 3,956 --
(expense)
Net interest income (loss) 22,125,245 541,673 (73,666) 22,593,252
Other revenue from external customers 4,489,623 6,720,159 300,195 11,509,977
Intersegment other revenues -- 250,493 1,575,600 1,826,093
Depreciation and amortization 1,684,949 151,485 574,080 2,410,514
Provision for loan losses 1,636,900 -- -- 1,636,900
Segment profit (loss) 5,199,897 2,082,464 (1,219,010) 6,063,351
Segment assets 519,898,791 18,187,824 2,712,601 540,799,216
Expenditures for premises and 1,191,675 261,970 647,534 2,101,179
equipment
F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 14. SEGMENT INFORMATION (CONTINUED)
-----------------------------------------------------------------
REPORTABLE SEGMENTS
-----------------------------------------------------------------
FINANCIAL ALL
FOR THE YEAR ENDED DECEMBER 31, 1999 BANKING SUPERMARKETS OTHER TOTAL
--------------------------------------- -------------- --------------- -------------- ---------------
Interest income $ 34,903,053 $ 434,067 $ 7,636 $ 35,344,756
Interest expense 16,651,395 -- 30,781 16,682,176
Intersegment net interest income (403,187) 395,551 7,636 --
(expense)
Net interest income (loss) 18,251,658 434,067 (23,145) 18,662,580
Other revenue from external customers 4,185,170 9,043,292 152,523 13,380,985
Intersegment other revenues -- 126,195 1,451,520 1,577,715
Depreciation and amortization 1,476,554 132,464 264,867 1,873,885
Provision for loan losses 1,164,950 -- -- 1,164,950
Segment profit (loss) 4,505,680 3,485,106 (971,896) 7,018,890
Segment assets 470,906,187 13,756,048 2,195,710 486,857,945
Expenditures for premises and equipment 2,620,509 260,104 50,883 2,931,496
------------- ----------- ----------- ------------
FOR THE YEAR ENDED DECEMBER 31, 1997
---------------------------------------- ------------- ----------- ----------- ------------
Interest income $ 28,484,716 $ 360,350 $ 7,515 $ 28,852,581
Interest expense 13,298,033 -- 42,086 13,340,119
Intersegment net interest income (334,340) 326,825 7,515 --
(expense)
Net interest income (loss) 15,186,683 360,350 (34,571) 15,512,462
Other revenue from external customers 3,517,131 8,819,917 82,082 12,419,130
Intersegment other revenues -- 117,221 1,365,200 1,482,421
Depreciation and amortization 1,203,921 129,460 65,836 1,399,217
Provision for loan losses 936,216 -- -- 936,216
Segment profit (loss) 3,480,412 2,548,043 (394,503) 5,633,952
Segment assets 380,142,578 9,933,018 2,055,595 392,131,191
Expenditures for premises and equipment 4,074,703 163,420 1,096,207 5,334,330
F-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 14. SEGMENT INFORMATION (CONTINUED)
------------- ------------- -------------
1999 1998 1997
------------- ------------- -------------
NET INTEREST INCOME
Total net interest income for reportable segments $ 22,666,918 $ 18,685,725 $ 15,547,033
Non-reportable segment net interest income (73,666) (23,145) (34,571)
------------- ------------- -------------
Total consolidated net interest income $ 22,593,252 $ 18,662,580 $ 15,512,462
============= ============= =============
OTHER INCOME
Total other income for reportable segments $ 11,460,275 $ 13,354,657 $ 12,454,269
Non-reportable segment other income 1,875,795 1,604,043 1,447,282
Elimination of intersegment other income (1,826,093) (1,577,715) (1,482,421)
------------- ------------- -------------
Total consolidated other income $ 11,509,977 $ 13,380,985 $ 12,419,130
============= ============= =============
NET INCOME
Total profit for reportable segments $ 7,282,361 $ 7,990,786 $ 6,028,455
Non-reportable segment loss (1,219,010) (971,896) (394,503)
Elimination of intersegment (gains) losses 12,814 12,814 12,814
------------- ------------- -------------
Total consolidated other income $ 6,076,165 $ 7,031,704 $ 5,646,766
============= ============= =============
TOTAL ASSETS
Total assets for reportable segments $ 538,086,615 $ 484,662,235 $ 390,075,596
Non-reportable segment assets 2,712,601 2,195,710 2,055,595
Elimination of intersegment assets (24,649,654) (26,264,505) (15,051,675)
------------- ------------- -------------
Total consolidated assets $ 516,149,562 $ 460,593,440 $ 377,079,516
============= ============= =============
EXPENDITURES FOR PREMISES AND EQUIPMENT
Total expenditures for reportable segments $ 1,453,645 $ 2,880,613 $ 4,238,123
Non-reportable segment assets 647,534 50,883 1,096,207
Elimination of intersegment gains (123,081) -- --
------------- ------------- -------------
Total consolidated expenditures for
premises and equipment $ 1,978,098 $ 2,931,496 $ 5,334,330
============= ============= =============
F-32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 15. SUPPLEMENTAL FINANCIAL DATA
Components of other operating expenses in excess of 1% of total revenue
are as follows:
DECEMBER 31,
------------------------------------------------
1999 1998 1997
--------------- ------------- -------------
Data processing $ 885,699 $ 948,644 $ 385,795
Travel expenses 677,840 469,126 583,208
Office supply expenses 623,213 460,341 437,375
NOTE 16. PARENT COMPANY ONLY FINANCIAL INFORMATION
The following information presents the condensed balance sheets as of
December 31, 1999 and 1998 and the statements of income and cash flows
as of and for the years ended December 31, 1999, 1998 and 1997:
CONDENSED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
1999 1998
--------------- --------------
Assets
Cash $ 964,915 $ 547,686
Investment in subsidiaries 43,950,731 39,703,016
Equipment 1,011,134 923,645
Other assets 634,960 593,572
----------- -----------
Total assets $46,561,740 $41,767,919
=========== ===========
Liabilities
Other borrowings $ 1,054,100 $ 808,200
Other liabilities 678,419 385,082
----------- -----------
Total liabilities 1,732,519 1,193,282
----------- -----------
Redeemable common stock 13,982,242 14,253,747
----------- -----------
Shareholders' equity 30,846,979 26,320,890
----------- -----------
Total liabilities, redeemable common stock,
and shareholders' equity $46,561,740 $41,767,919
=========== ===========
F-33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 16. PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
----------- ----------- -----------
Income
Dividends from subsidiaries $ 1,400,000 $ 1,250,000 $ 1,120,000
Interest 3,955 7,636 7,515
Other income 1,724,166 1,506,545 1,447,282
----------- ----------- -----------
3,128,121 2,764,181 2,574,797
----------- ----------- -----------
Expense
Interest 77,557 30,781 42,086
Salaries and employee benefits 1,565,019 1,335,771 1,174,798
Equipment expense 701,315 349,484 306,851
Other expense 1,145,766 1,027,698 425,565
----------- ----------- -----------
3,489,657 2,743,734 1,949,300
----------- ----------- -----------
Income (loss) before income tax benefits and
equity in undistributed earnings of subsidiaries (361,536) 20,447 625,497
Income tax benefits (631,941) (280,000) (100,000)
----------- ----------- -----------
Income before equity in undistributed income
of subsidiaries 270,405 300,447 725,497
Equity in undistributed income of subsidiaries 5,801,765 6,727,261 4,917,273
----------- ----------- -----------
Net income $ 6,072,170 $ 7,027,708 $ 5,642,770
=========== =========== ===========
F-34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 16. PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
----------- ----------- -----------
OPERATING ACTIVITIES
Net income $ 6,072,170 $ 7,027,708 $ 5,642,770
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 560,046 270,799 65,836
Undistributed earnings of subsidiaries (5,801,765) (6,727,261) (4,917,273)
Other operating activities 251,949 367,725 (518,268)
----------- ----------- -----------
Net cash provided by operating activities 1,082,400 938,971 273,065
----------- ----------- -----------
INVESTING ACTIVITIES
Purchases of premises and equipment (1,053,841) (22,856) (1,115,771)
Investment in subsidiary -- (500,000) --
Disposal of premises and equipment 406,306 -- 19,564
----------- ----------- -----------
Net cash used in investing activities (647,535) (522,856) (1,096,207)
----------- ----------- -----------
FINANCING ACTIVITIES
Increase in other borrowings 400,000 500,000 --
Repayment of other borrowings (154,100) (154,099) (154,100)
Exercise of stock options 88,607 -- --
Proceeds from the issuance of common stock -- -- 924,700
Dividends paid (352,143) (318,531) (285,728)
----------- ----------- -----------
Net cash provided by (used in) financing (17,636) 27,370 484,872
activities
----------- ----------- -----------
Net increase (decrease) in cash 417,229 443,485 (338,270)
Cash at beginning of year 547,686 104,201 442,471
----------- ----------- -----------
Cash at end of year $ 964,915 $ 547,686 $ 104,201
=========== =========== ===========
F-35
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 on Form 10-K to
be signed on its behalf by the, thereunto duly authorized, in the City of
Cornelia, State of Georgia, on the 25th of March, 2000.
COMMUNITY BANKSHARES, INC.
By: /s/ J. Alton Wingate
J. Alton Wingate
President and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints J. Alton Wingate or Harry L. Stephens and either
of them (with full power in each to act alone), as true and lawful
attorneys-in-fact, with full power of substitution, for him and in his name,
place and stead, in any and all capacities, to sign any amendments to this
Report on Form 10-K and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that said attorney-in-fact, or their
substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Act of, this
Registration Statement has been signed by the following persons in the
capacities indicated on the 25th day of March, 2000.
Signature Title
/s/ J. Alton Wingate President and Chief Executive
J. Alton Wingate Officer (Principal Executive
Officer) and Director
/s/ Steven C. Adams Director
Steven C. Adams
/s/ Edwin B. Burr Director
Edwin B. Burr
/s/ Harry H. Purvis Director
Harry H. Purvis
/s/ H. Calvin Stovall, Jr. Director
H. Calvin Stovall, Jr.
/s/ Dean C. Swanson Director
Dean C. Swanson
/s/ George D. Telford Director
George D. Telford
/s/ Lois M. Wood-Schroyer Director
Lois M. Wood-Schroyer
/s/ Harry L. Stephens Executive Vice President and
Harry L. Stephens Chief Financial Officer
(Principal Financial and
Accounting Officer)
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
The Registrant has furnished annual reports and proxy material to
security holders, and copies of such documents have been furnished to the
Commission for its information.
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.7 Amended and Restated Revolving Credit/Term Loan Agreement between the
Registrant and SunTrust Bank dated July 31, 1999.
10.8 Community Bankshares, Inc. 1999 Stock Award Plan, as adopted December
22, 1999.
21 Subsidiaries of Community Bankshares, Inc.
24.0 A Power of Attorney is set forth on the signature pages to this Form
10-K.
27 Financial Data Schedule