SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999 Commission File Number 24749
CLOVER COMMUNITY BANKSHARES, INC.
(Name of Small Business Issuer in its Charter)
South Carolina 58-2381062
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
124 North Main Street, Clover, South Carolina 29710
(Address of Principal Executive Office, Zip Code)
Issuer's Telephone Number, Including Area Code: (803) 222-7660
Securities Registered Under Section 12(b) of the Act:
None
(Title of Class)
Securities Registered Under Section 12(g) of the Act:
Common Stock ($.01 par value)
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
[_]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for the most recent fiscal year. $4,701,710
The aggregate market value of the voting and non-voting common equity
held by non-affiliates on March 1, 2000, was approximately $25,557,129. As of
March 1, 2000, there were 1,014,096 shares of the Registrant's Common Stock, no
par value, outstanding. For purposes of the foregoing calculation only, all
directors and executive officers of the Registrant have been deemed affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Annual Report to the Shareholders for the year ended
December 31, 1999 - Parts I and II
(2) Portions of the Registrant's Proxy Statement for the 2000 Annual
Meeting of Shareholders - Part III
Transitional Small Business Disclosure Format.
Yes __ No X
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10-KSB CROSS REFERENCE INDEX
Part I Page
Item 1 Description of Business ........................................ 1
Item 2 Description of Property ........................................ 9
Item 3 Legal Proceedings .............................................. 9
Item 4 Submission of Matters to a Vote of Security Holders ............ 9
Part II
Item 5 Market for Common Equity and Related Stockholder Matters ....... 9
Item 6 Management's Discussion and Analysis or Plan of Operation ...... 9
Item 7 Financial Statements ........................................... 9
Item 8 Changes In and Disagreements with Accountants ..................
on Accounting and Financial Disclosure ....................... 9
Part III
Item 9 Directors and Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of the Exchange Act ..... *
Item 10 Executive Compensation ......................................... *
Item 11 Security Ownership of Certain Beneficial Owners and Management . *
Item 12 Certain Relationships and Related Transactions ................. *
Part IV
Item 13 Exhibits and Reports on Form 8-K
* Incorporated by reference to the Registrant's Proxy Statement for the
2000 Annual Meeting of Shareholders
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PART I
This Annual Report on Form 10-KSB contains forward-looking statements
as defined by the Private Securities Litigation Reform Act of 1995.
Forward-looking statements should be read with the cautionary statements and
important factors included in this Form 10-KSB. (See Item 6. - Management's
Discussion and Analysis of Financial Condition and Results of Operations,
Forward-Looking Statements.) Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events or performance
and underlying assumptions and other statements which are other than statements
of historical facts. Such forward- looking statements may be identified, without
limitation, by the use of the words "anticipates," "estimates," "expects,"
"intends," "plans," "predicts," "projects," and similar expressions. The
Company's expectations, beliefs and projections are expressed in good faith and
are believed by the Company to have a reasonable basis, including without
limitation, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's expectations, beliefs or
projections will result or be achieved or accomplished.
Item 1. Description of Business
FORM OF ORGANIZATION
Clover Community Bankshares, Inc. (the "Company") is a South Carolina
corporation and a bank holding company incorporated March 4, 1998. The Company
commenced operations on June 5, 1998, upon effectiveness of the acquisition of
Clover Community Bank (the "Bank") as a wholly owned subsidiary. The principal
business of the Company is ownership and operation of the Bank.
BUSINESS OF BANKING
General
The Bank was incorporated under the laws of the State of South Carolina
as a state chartered bank on August 18, 1987 and commenced operations on October
1, 1987. The Bank operates under the jurisdiction of the South Carolina State
Board of Financial Institutions (the "State Board"), and its deposits are
insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank is not a
member of the Federal Reserve System. The Bank engages in a general commercial
banking business, emphasizing the banking needs of individuals and small to
medium-sized business and professional concerns in its primary service area, and
offers a full range of deposit services and short to medium term commercial and
other loans, as well as various other services from a single office in Clover,
South Carolina. The Bank does not exercise trust powers or other fiduciary
services at this time.
The Bank offers the full range of deposit services that are typically
available in most banks and savings and loan associations, including checking
accounts, NOW accounts, savings accounts, and other time deposits of various
types ranging from daily money market accounts to longer-term certificates of
deposit. The transaction accounts and time certificates are tailored to the
Bank's principal market area at rates competitive to those offered in the area.
All deposit accounts are insured by the FDIC up to the maximum amount ($100,000
per depositor, subject to aggregation rules). The Bank solicits these accounts
from individuals, businesses, associations and organizations, and governmental
authorities.
The Bank offers a full range of short to medium-term commercial,
personal, and mortgage loans. Commercial loans include both secured and
unsecured loans for working capital (including inventory and receivables),
business expansion (including acquisition of real estate and improvements), and
purchase of equipment and machinery. Personal (or consumer) loans include
secured and unsecured loans for financing automobiles, home improvements,
education, and personal investments. The Bank also offers mortgage loans secured
by personal residences.
The Bank offers travelers checks, safe deposit boxes, MasterCard and
Visa accounts, ATM cards, and overdraft lines of credit to its customers. The
Bank does not offer trust services. The Bank is a member of regional and
national networks of automated teller machines that may be used by Bank
customers in major cities throughout South Carolina and the United States, as
well as in various cities worldwide.
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Employees
At December 31, 1999, the Company employed 23 people.
Market Area
The Bank's primary service area includes the Clover community in York
County, South Carolina. York County is located in the north central portion of
South Carolina about 75 miles north of Columbia, South Carolina and just
southwest of Charlotte, North Carolina. The county is bounded by North Carolina
to the north, by Lancaster County to the east, by Cherokee County to the west,
and by Chester County to the south. Clover is near the North Carolina line in
the northwest corner of the county.
Competition
The Bank generally competes with other financial institutions through
the selection of banking products and services offered, the pricing of services,
the level of service provided, the convenience and availability of services, and
the degree of expertise and the personal manner in which services are offered.
South Carolina law permits statewide branching by banks and savings
institutions, and many financial institutions in the state have branch networks.
Consequently, commercial banking in South Carolina is highly competitive.
Furthermore, as a consequence of legislation recently enacted by the United
States Congress, out-of-state banks not previously allowed to operate in South
Carolina may commence operations and compete in the Bank's primary service
areas. Many large banking organizations currently operate in the respective
market areas of the Bank, several of which are controlled by out-of-state
ownership.
The Bank faces competition from both federally chartered and
state-chartered banks and thrift institutions, as well as credit unions,
consumer finance companies, insurance companies, and other institutions in the
Bank's market area. Some of these competitors are not subject to the same degree
of regulation and restriction imposed upon the Bank. Many of these competitors
also have broader geographic markets and substantially greater resources and
lending limits than the Bank and offer certain services such as trust banking
that the Bank does not currently provide. In addition, many of these competitors
have numerous branch offices located throughout the extended market area of the
Bank which may provide these competitors with an advantage in geographic
convenience that the Bank does not have at present. Such competitors may also be
in a position to make more effective use of media advertising, support services,
and electronic technology than can the Bank.
Currently there are two other commercial banks operating in the
community of Clover, which is the Bank's existing primary service area. There
are eight other commercial banks, five credit unions, and one savings
institution operating in York County.
EFFECT OF GOVERNMENT REGULATION
Bank holding companies and banks are extensively regulated under
federal and state law. To the extent that the following information describes
statutory and regulatory provisions, it is qualified in its entirety by
reference to such statutes and regulations. Any change in applicable law or
regulation may have a material effect on the business of the Holding Company and
the Bank.
General
As a bank holding company registered under the Bank Holding Company Act
("BHCA"), the Company is subject to supervision, and to regular inspection by
the Federal Reserve. The Company is also subject to regulation by the State
Board. The Bank is a state bank subject to regulation by the State Board and the
FDIC. The following discussion summarizes certain aspects of those laws and
regulations that affect the Company and the Bank. Proposals to change the laws
and regulations governing the banking industry are frequently raised in
Congress, the state legislature and before the various bank regulatory agencies.
The likelihood and timing of any changes and the impact such changes might have
on the Company and the Bank are difficult to determine.
As discussed below under the caption "Recent Legislation", Congress has
recently adopted extensive changes in the laws governing the financial services
industry. Among the changes adopted are creation of the financial holding
company, a new type of bank holding company with powers that greatly exceed
those of standard holding companies, and creation of the financial subsidiary, a
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subsidiary that can be used by national banks to engage in many, though not all,
of the same activities in which a financial holding company may engage. The
legislation also establishes the concept of functional regulation whereby the
various financial activities in which financial institutions engage are overseen
by the regulator with the relevant regulatory experience. Neither the Company
nor the Bank has yet made a decision as to how to adapt the new legislation to
its use. Accordingly, the following discussion relates to the supervisory and
regulatory provisions that apply to the Company and the Bank as they currently
operate.
Under the BHCA, the Company's activities and those of its subsidiaries
are limited to banking, managing or controlling banks, furnishing services to or
performing services for its subsidiaries or engaging in any other activity which
the Federal Reserve determines to be so closely related to banking or managing
or controlling banks as to be a proper incident thereto. The BHCA prohibits the
Company from acquiring direct or indirect control of more than 5% of the
outstanding voting stock or substantially all of the assets of any bank or from
merging or consolidating with another bank holding company without prior
approval of the Federal Reserve. In making such determinations, the Federal
Reserve is required to consider whether the performance of such activities by a
bank holding company or its subsidiaries can reasonably be expected to produce
benefits to the public such as greater convenience, increased competition or
gains in efficiency that outweigh possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest or unsound banking practices.
Additionally, the BHCA prohibits the Company from engaging in, or from
acquiring ownership or control of more than 5% of the outstanding voting stock
of any company engaged in, a non-banking business unless such business is
determined by the Federal Reserve to be so closely related to banking as to be
properly incident thereto.
As discussed below under "Recent Legislation", a bank holding company
that meets certain requirements may now qualify as a financial holding company
and thereby significantly increase the variety of services it may provide and
the investments it may make.
In addition to regulation by the Federal Reserve under the BHCA, the
Company is also subject to supervision and regulation by the State Board. The
Company must provide the State Board with information with respect to its
financial condition, operations, management, and inter-company relationships of
the Company and its subsidiaries. The State Board may also require such other
information as is necessary to keep itself informed about whether the provisions
of South Carolina law and the regulations and orders issued thereunder by the
State Board have been complied with, and the State Board may make examinations
of the Company and its subsidiaries.
Obligations of the Company to its Subsidiary Bank
A number of obligations and restrictions are imposed on bank holding
companies and their depository institution subsidiaries by Federal law and
regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance funds in
the event the depository institution is in danger of becoming insolvent or is
insolvent. For example, under the policy of the Federal Reserve with respect to
bank holding company operations, a bank holding company is required to serve as
a source of financial strength to its subsidiary depository institutions and to
commit resources to support such institutions in circumstances where it might
not do so absent such policy. In addition, the "cross-guarantee" provisions of
the Federal Deposit Insurance Act, as amended ("FDIA"), require insured
depository institutions under common control to reimburse the FDIC for any loss
suffered or reasonably anticipated by either the Savings Association Insurance
Fund ("SAIF") or the Bank Insurance Fund ("BIF") of the FDIC as a result of the
default of a commonly controlled insured depository institution or for any
assistance provided by the FDIC to a commonly controlled insured depository
institution in danger of default. The FDIC may decline to enforce the
cross-guarantee provisions if it determines that a waiver is in the best
interest of the SAIF or the BIF or both. The FDIC's claim for damages is
superior to claims of stockholders of the insured depository institution or its
holding company but is subordinate to claims of depositors, secured creditors
and holders of subordinated debt (other than affiliates) of the commonly
controlled insured depository institutions.
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The FDIA also provides that amounts received from the liquidation or
other resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or stockholder. This
provision would give depositors a preference over general and subordinated
creditors and stockholders in the event a receiver is appointed to distribute
the assets of the Bank.
Any capital loans by a bank holding company to any of its subsidiary
banks are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
Capital Adequacy Guidelines for Bank Holding Companies and State Banks
The various federal bank regulators, including the Federal Reserve and
the FDIC, have adopted risk-based capital requirements for assessing bank
holding company and bank capital adequacy. These standards define what qualifies
as capital and establish minimum capital standards in relation to assets and
off-balance sheet exposures, as adjusted for credit risks.
The Company's and the Bank's December 31, 1999 ratios are set forth in
the Annual Report to Shareholders for the year ended December 31, 1999 under the
caption "Management's Discussion and Analysis -- Capital Resources."
Failure to meet capital guidelines could subject the Bank to a variety
of enforcement remedies, including termination of deposit insurance by the FDIC.
The risk-based capital standards of both the Federal Reserve Board and
the FDIC explicitly identify concentrations of credit risk and the risk arising
from non-traditional activities, as well as an institution's ability to manage
these risks, as important factors to be taken into account by the agency in
assessing an institution's overall capital adequacy. The capital guidelines also
provide that an institution's exposure to a decline in the economic value of its
capital due to changes in interest rates be considered by the agency as a factor
in evaluating a bank's capital adequacy. The Federal Reserve Board also has
recently issued additional capital guidelines for bank holding companies that
engage in certain trading activities.
Payment of Dividends
The Company is a legal entity separate and distinct from its bank
subsidiary. Most of the revenues of the Company are expected to result from
dividends paid to the Company by the Bank. There are statutory and regulatory
requirements applicable to the payment of dividends by subsidiary banks as well
as by the Company to its stockholders.
Certain Transactions by the Company with its Affiliates
Federal law regulates transactions between the Company and its
affiliates, including the amount of the Bank's loans to or investments in
nonbank affiliates and the amount of advances to third parties collateralized by
securities of an affiliate. Further, a bank holding company and its 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.
FDIC Insurance Assessments
Because the Bank's deposits are insured by the BIF, the Bank is subject
to insurance assessments imposed by the FDIC. Since January 1, 1997, the
assessments imposed on all FDIC deposits for deposit insurance have an effective
rate ranging from 0 to 27 basis points per $100 of insured deposits, depending
on the institution's capital position and other supervisory factors. However,
because legislation enacted in 1996 requires that both SAIF-insured and
BIF-insured deposits pay a pro rata portion of the interest due on the
obligations issued by the Financing Corporation ("FICO"), the FDIC is currently
assessing BIF-insured deposits an additional 1.26 basis points per $100 of
deposits, and SAIF-insured deposits an additional 6.30 basis points per $100 of
deposits, to cover those obligations. The FICO assessment is based on deposit
balances and will be adjusted quarterly to reflect changes in the assessment
bases of the respective funds based on quarterly Call Report and Thrift
Financial Report submissions.
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Regulation of the Bank
The Bank is also subject to examination by the South Carolina State
Board. In addition, the Bank is subject to various other state and federal laws
and regulations, including state usury laws, laws relating to fiduciaries,
consumer credit and laws relating to branch banking. The Bank's loan operations
are also subject to certain federal consumer credit laws and regulations
promulgated thereunder, including, but not limited to: the federal
Truth-In-Lending Act, governing disclosures of credit terms to consumer
borrowers; the Home Mortgage Disclosure Act, requiring financial institutions to
provide certain information concerning their mortgage lending; the Equal Credit
Opportunity Act and the Fair Housing Act, prohibiting discrimination on the
basis of certain prohibited factors in extending credit; the Fair Credit
Reporting Act, governing the use and provision of information to credit
reporting agencies; the Bank Secrecy Act, dealing with, among other things, the
reporting of certain currency transactions; and the Fair Debt Collection Act,
governing the manner in which consumer debts may be collected by collection
agencies. The deposit operations of the Bank are also subject to the Truth in
Savings Act, requiring certain disclosures about rates paid on savings accounts;
the Expedited Funds Availability Act, which deals with disclosure of the
availability of funds deposited in accounts and the collection and return of
checks by banks; the Right to Financial Privacy Act, which imposes a duty to
maintain certain confidentiality of consumer financial records and the
Electronic Funds Transfer Act and regulations promulgated thereunder, which
govern automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
The Bank is also subject to the requirements of the Community
Reinvestment Act (the "CRA"). The CRA imposes on financial institutions an
affirmative and ongoing obligation to meet the credit needs of their local
communities, including low- and moderate-income neighborhoods, consistent with
the safe and sound operation of those institutions. Each financial institution's
actual performance in meeting community credit needs is evaluated as part of the
examination process, and also is considered in evaluating mergers, acquisitions
and applications to open a branch or facility.
Other Safety and Soundness Regulations
Prompt Corrective Action. The federal banking agencies have broad
powers under current federal law to take prompt corrective action to resolve
problems of insured depository institutions. The extent of these powers depends
upon whether the institutions in question are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized" (as defined in the regulations).
A bank that is "undercapitalized" becomes subject to provisions of the
FDIA restricting payment of capital distributions and management fees; requiring
FDIC to monitor the condition of the bank; requiring submission by the bank of a
capital restoration plan; restricting the growth of the bank's assets and
requiring prior approval of certain expansion proposals. A bank that is
"significantly undercapitalized" is also subject to restrictions on compensation
paid to senior management of the bank, and a bank that is "critically
undercapitalized" is further subject to restrictions on the activities of the
bank and restrictions on payments of subordinated debt of the bank. The purpose
of these provisions is to require banks with less than adequate capital to act
quickly to restore their capital and to have the FDIC move promptly to take over
banks that are unwilling or unable to take such steps.
Brokered Deposits. Under current FDIC regulations, "well capitalized"
banks may accept brokered deposits without restriction, "adequately capitalized"
banks may accept brokered deposits with a waiver from the FDIC (subject to
certain restrictions on payment of rates), while "undercapitalized" banks may
not accept brokered deposits. The regulations provide that the definitions of
"well capitalized", "adequately capitalized" and "undercapitalized" are the same
as the definitions adopted by the agencies to implement the prompt corrective
action (described in the previous paragraph).
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Interstate Banking
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 the Company and any other adequately capitalized bank holding company
located in South Carolina can acquire a bank located in any other state, and a
bank holding company located outside South Carolina can acquire any South
Carolina-based bank, in either case subject to certain deposit percentage and
other restrictions. The legislation also provides that, in any state that has
not previously elected to prohibit out-of-state banks from operating interstate
branches within its territory, adequately capitalized and managed bank holding
companies can consolidate their multistate bank operations into a single bank
subsidiary and branch interstate through acquisitions. De novo branching by an
out-of-state bank is permitted only if it is expressly permitted by the laws of
the host state. The authority of a bank to establish and operate branches within
a state will continue to be subject to applicable state branching laws. South
Carolina law was amended, effective July 1, 1996, to permit such interstate
branching but not de novo branching by an out-of-state bank.
The Riegel-Neal Act, together with legislation adopted in South
Carolina, resulted in a number of South Carolina banks being acquired by large
out-of-state bank holding companies. Size gives the larger banks certain
advantages in competing for business from larger corporations. These advantages
include higher lending limits and the ability to offer services in other areas
of South Carolina and the region. As a result, the Company does not generally
attempt to compete for the banking relationships of large corporations, but
concentrates its efforts on small to medium-sized businesses and on individuals.
The Company believes it has competed effectively in this market segment by
offering quality, personal service.
Recent Legislation
On November 12, 1999, the President signed the Gramm-Leach-Bliley Act,
which makes it easier for affiliations between banks, securities firms and
insurance companies to take place. The Act removes Depression-era barriers that
had separated banks and securities firms, and seeks to protect the privacy of
consumers' financial information. Most of the provisions of the Act require the
applicable regulators to adopt regulations in order to implement these
provisions.
Under provisions of the new legislation, which are effective March 11,
2000, banks, securities firms and insurance companies are able to structure new
affiliations through a holding company structure or through a financial
subsidiary. The legislation creates a new type of bank holding company called a
"financial holding company" which has powers much more extensive than those of
standard holding companies. These expanded powers include authority to engage in
"financial activities," which are activities that are (1) financial in nature;
(2) identical to activities that are financial in nature; or (3) complimentary
to a financial activity and that do not impose a safety and soundness risk.
Significantly, the permitted financial activities for financial holding
companies include authority to engage in merchant banking and insurance
activities, including insurance portfolio investing. A bank holding company can
qualify as a financial holding company and expand the services it offers only if
all of its subsidiary depository institutions are well-managed, well-capitalized
and have received a rating of "satisfactory" on their last Community
Reinvestment Act examination.
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The legislation also creates another new type of entity called a
"financial subsidiary." A financial subsidiary may be used by a national bank or
a group of national banks to engage in many of the same activities permitted for
a financial holding company, though several of these activities, including real
estate development or investment, insurance or annuity underwriting, insurance
portfolio investing and merchant banking, are reserved for financial holding
companies. A bank's investment in a financial subsidiary affects the way in
which the bank calculates its regulatory capital, and the assets and liabilities
of financial subsidiaries may not be consolidated with those of the bank. The
bank must also be certain that its risk management procedures are adequate to
protect it from financial and operational risks created both by itself and by
any financial subsidiary. Further, the bank must establish policies to maintain
the separate corporate identities of the bank and its financial subsidiary and
to prevent each from becoming liable for the obligations of the other.
The Act also establishes the concept of "functional supervision,"
meaning that similar activities should be regulated by the same regulator.
Accordingly, the Act spells out the regulatory authority of the bank regulatory
agencies, the Securities and Exchange Commission and state insurance regulators
so that each type of activity is supervised by a regulator with corresponding
expertise. The Federal Reserve Board is intended to be an umbrella supervisor
with the authority to require a bank holding company or financial holding
company or any subsidiary of either to file reports as to its financial
condition, risk management systems, transactions with depository institution
subsidiaries and affiliates, and compliance with any federal law that it has
authority to enforce.
Although the Act reaffirms that states are the regulators for insurance
activities of all persons, including federally-chartered banks, the Act
prohibits states from preventing depository institutions and their affiliates
from conducting insurance activities.
The Act also establishes a minimum federal standard of privacy to
protect the confidentiality of a consumer's personal financial information and
gives the consumer the power to choose how personal financial information may be
used by financial institutions. The privacy provisions of the Act will not go
into effect until after adoption of implementing regulations by various federal
agencies.
The Company anticipates that the Act and the regulations which are to
be adopted pursuant to the Act will be likely to create new opportunities for it
to offer expanded services to customers in the future, though the Company has
not yet determined what the nature of the expanded services might be or when the
Company might find it feasible to offer them. The Company further expects that
the Act will increase competition from larger financial institutions that are
currently more capable than the Company of taking advantage of the opportunity
to provide a broader range of services. However, the Company continues to
believe that its commitment to providing high quality, personalized service to
customers will permit it to remain competitive in its market area.
Legislative Proposals
Other proposed legislation which could significantly affect the
business of banking has been introduced or may be introduced in Congress from
time to time. Management of the Bank cannot predict the future course of such
legislative proposals or their impact on the Company and the Bank should they be
adopted.
Fiscal and Monetary Policy
Banking is a business which depends to a large extent on interest rate
differentials. In general, the difference between the interest paid by a bank on
its deposits and its other borrowings, and the interest received by a bank on
its loans and securities holdings, constitutes the major portion of a bank's
earnings. Thus, the earnings and growth of the Company and the Bank are subject
to the influence of economic conditions generally, both domestic and foreign,
and also to the monetary and fiscal policies of the United States and its
agencies, particularly the Federal Reserve. The Federal Reserve regulates the
supply of money through various means, including open-market dealings in United
States government securities, the discount rate at which banks may borrow from
the Federal Reserve, and the reserve requirements on deposits. The nature and
timing of any changes in such policies and their impact on the Company and the
Bank cannot be predicted.
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Item 2. Description of Property
The Bank owns in fee simple with no major encumbrances, real property
at the corner of North Main and Marion Street (124 North Main Street) in Clover,
South Carolina, where its offices are located. The building located on the
property contains approximately 7,000 square feet. The Bank also owns property
adjacent to the Bank building which it plans to use for additional parking.
Management of the Company believes the Bank's facilities are suitable and
adequate for the Company's needs.
Item 3. Legal Proceedings
The Bank is from time to time a party to various legal proceedings
arising in the ordinary course of business, but management of the Bank is not
aware of any pending or threatened litigation or unasserted claims or
assessments that are expected to result in losses, if any, that would be
material to the Bank's business and operations.
Neither the Company nor the Bank were involved as defendants in any
litigation at December 31, 1999, and Management is not aware of any pending or
threatened litigation, or unasserted claims or assessments that are expected to
result in losses, if any, that would be material to the consolidated financial
statements.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted for a vote of the security holders during
the fourth quarter of 1999.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The information set forth under the caption "Market for Common Stock
and Dividends" and in Note J to the Company's Consolidated Financial Statements
under the caption "Restrictions on Subsidiary Dividends, Loans or Advances" in
the Annual Report to Shareholders for the year ended December 31, 1999 (the
"1999 Annual Report") is incorporated herein by reference. The information set
forth in Part I, Item 1 of this Form 10-KSB under the caption "Effect of
Government Regulation -- Payment of Dividends" is also incorporated herein by
reference.
In connection with its acquisition of all of the Common Stock of the
Bank, in 1998, the Company exchanged shares of its Common Stock for all of the
outstanding stock of the Bank. Issuance of the Company's securities in this
transaction was registered under the Securities Act of 1933 in a Registration
Statement on Form S-4 (No. 333-47597).
Item 6. Management's Discussion and Analysis or Plan of Operation
The information set forth under the caption "Management's Discussion and
Analysis" in the 1999 Annual Report is incorporated herein by reference.
Item 7. Financial Statements
The Consolidated Financial Statements, including Notes thereto, set
forth in the 1999 Annual Report are incorporated herein by reference.
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no disagreements with or changes in accountants.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
(a)(1) Directors of the Company
The information set forth under the captions "ELECTION OF DIRECTORS"
and "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" in the Proxy
Statement to be used in conjunction with the 2000 Annual Meeting of Shareholders
(the "Proxy Statement"), which will be filed within 120 days of the
Corporation's fiscal year end, is incorporated herein by reference.
9
<PAGE>
(2) Executive Officers of the Company
Name (and Officer Since) Age Position
James C. Harris, Jr. 49 President and Chief
(1987) Executive Officer
Gwen M. Thompson 45 Senior Vice President,
(1987) Cashier, and Secretary
Frank M. Gadsden 40 Vice President
(1989)
Earnest A. Robertson 55 Vice President
(1992)
Mr. Harris is the nephew by marriage of two directors of the Bank, Ruby M.
Bennett and H. Marvin McCarter.
Item 10. Executive Compensation
The information set forth under the caption "MANAGEMENT COMPENSATION"
in the Proxy Statement is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in the Proxy Statement is incorporated
herein by reference.
Item 12. Certain Relationships and Related Transactions
The information set forth under the caption "EXTENSIONS OF CREDIT AND
OTHER TRANSACTIONS" in the Proxy Statement is incorporated herein by reference.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibit No.(from Description
Item 601 of
Regulation S-B)
3.1 Articles of Incorporation (Incorporated by
reference to Exhibits to Registrant's
Registration Statement on Form S-4
(Registration No. 333-47597) (the "Form S-4"))
3.2 By-laws (Incorporated by reference Exhibits to
to the Form S-4)
4 Specimen Stock certificate (Incorporated by
reference to Exhibits to the Form S-4)
10.1 Clover Community Bankshares Dividend
Reinvestment Plan (Incorporated by Reference
to Registration Statement on Form S-3
(Registration No. 333-71777))
13 Portions of the Annual Report to Shareholders
for the Year Ended December 31, 1999
21 Subsidiaries of the registrant
23 Consent of Donald G. Jones and Company, P.A.
27 Financial data schedule
(b) No reports on Form 8-K were filed during the year ended December 31, 1999.
10
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CLOVER COMMUNITY BANKSHARES, INC.
s/James C. Harris, Jr.
Date: March 13, 2000 By:-------------------------------------------
James C. Harris, Jr.
Its President
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
<S> <C> <C>
s/Ruby M. Bennett Director March 13, 2000
- -----------------------------
(Ruby M. Bennett)
s/Charles R. Burrell Director March 13, 2000
- -----------------------------
(Charles R. Burrell)
s/James C. Harris, Jr. President, Chief Executive Officer. March 13, 2000
- ----------------------------- and Director
(James C. Harris, Jr.)
s/Herbert Kirsh Chairman and Director March 13, 2000
- -----------------------------
(Herbert Kirsh)
s/H. Marvin McCarter Director March 13, 2000
- -----------------------------
(H. Marvin McCarter)
s/James H. Owen, Jr. Director March 13, 2000
- -----------------------------
(James H. Owen, Jr.)
s/Gwen M. Thompson Senior Vice President, Chief Financial and March 13, 2000
- ----------------------------- Accounting Officer, Cashier, Secretary
(Gwen M. Thompson) and Director
Director March __, 2000
- -----------------------------
(William C. Turner)
</TABLE>
11
<PAGE>
EXHIBIT INDEX
3.1 Articles of Incorporation (Incorporated by
reference to Exhibits to Registrant's
Registration Statement on Form S-4
(Registration No. 333-47597) (the "Form S-4"))
3.2 By-laws (Incorporated by reference Exhibits to
to the Form S-4)
4 Specimen Stock certificate (Incorporated by
reference to Exhibits to the Form S-4)
10.1 Clover Community Bankshares Dividend
Reinvestment Plan (Incorporated by Reference
to Registration Statement on Form S-3
(Registration No. 333-71777))
13 Portions of the Annual Report to Shareholders
for the Year Ended December 31, 1999
21 Subsidiaries of the registrant
23 Consent of Donald G. Jones and Company, P.A.
27 Financial data schedule
12
PORTIONS OF THE ANNUAL REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED DECEMBER 31, 1999
Financial Summary*
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
Financial Condition
<S> <C> <C> <C> <C> <C>
Securities ......................................... $17,554 $16,300 $16,136 $16,016 $17,009
Allowance for loan losses .......................... 259 265 272 270 245
Net loans .......................................... 29,260 28,850 31,614 31,282 27,975
Premises and equipment - net ....................... 874 716 760 842 924
Total assets ....................................... 52,340 56,921 52,909 52,611 49,611
Noninterest bearing deposits ....................... 3,084 3,962 3,890 3,341 3,494
Interest bearing deposits .......................... 37,774 41,645 38,078 38,879 35,846
Total deposits ..................................... 40,858 45,607 41,968 42,220 39,340
Long-term debt ..................................... 4,000 4,000 4,000 4,000 4,000
Total liabilities .................................. 45,178 49,999 46,368 46,574 44,117
Total shareholders' equity ......................... 7,162 6,922 6,541 6,037 5,494
Results of Operations
Interest income .................................... $ 4,226 $ 4,302 $ 4,222 $ 3,986 $ 3,891
Interest expense ................................... 1,619 1,815 1,847 1,822 1,807
------- ------- ------- ------- -------
Net interest income ................................ 2,607 2,487 2,375 2,164 2,084
Provision for loan losses .......................... - - 5 32 45
------- ------- ------- ------- -------
Net interest income after provision ................ 2,607 2,487 2,370 2,132 2,039
Other income ....................................... 476 411 341 297 267
Other expenses ..................................... 1,571 1,508 1,375 1,250 1,231
------- ------- ------- ------- -------
Income before income taxes ......................... 1,512 1,390 1,336 1,179 1,075
Income tax expense ................................. 493 459 433 375 357
------- ------- ------- ------- -------
Net income ......................................... $ 1,019 $ 931 $ 903 $ 804 $ 718
======= ======= ======= ======= =======
Per Share Data
Net income ......................................... $ 1.00 $ 0.92 $ 0.89 $ 0.80 $ 0.71
Cash dividends declared ............................ 0.60 0.50 0.50 0.20 0.15
Period end book value .............................. 7.06 6.85 6.47 5.97 5.43
</TABLE>
* Clover Community Bankshares, Inc. became the bank holding company of Clover
Community Bank effective June 5, 1998 as part of a corporate reorganization
which was accounted for as if it were a pooling-of-interests. The consolidated
financial statements and related information for the year ended December 31,
1998 are presented as if the reorganization had occurred on January 1, 1998. The
financial statements and related information for the years ended December 31,
1995 through 1997 are the same as the amounts reported previously by Clover
Community Bank.
13
<PAGE>
Market for Common Stock and Dividends
Although a limited number of shares of common stock of Clover Community
Bankshares, Inc. (the "Company") are traded from time to time on an individual
basis, no established trading market has developed and none is expected to
develop in the near future. The common stock is not traded on the NASDAQ
National Market System, nor are there any market makers known to management.
During 1999, management was aware of a few transactions in which the Company's
common stock traded in a price range from $25.00 to $38.00 per share. However,
management has not ascertained that these transactions are the result of arm's
length negotiations between the parties, and because of the limited number of
shares involved, these prices may not be indicative of the market value of the
common stock. For the first time, shareholders had the opportunity to purchase
additional common shares in the Company by reinvesting their cash dividends
under the new dividend reinvestment plan that was placed in operation in 1999.
Under the plan, 4,778 newly issued shares were purchased by shareholders in 1999
at a price of $27.56 per share in accordance with the plan's pricing formula. In
1999, 1,702 shares of the Company's common stock were repurchased from
eleemosynary organizations at an average price of $30.25 and retired. The
repurchases were effected at prices set at the discretion of the Company's Board
of Directors. Prices established for the issuance for shares under the dividend
reinvestment plan and for such repurchases may not be indicative of the market
value of the common stock.
As of February 29, 2000, there were approximately 714 holders of record
of the Company's common stock, excluding individual participants in security
position listings.
The Company has paid an annual cash dividend since 1991. In 1999 and
1998, the Bank declared and paid cash dividends to shareholders of $.60 and $.50
per share, respectively.
The Board of Directors considers such factors as adequacy of capital to
support future growth, regulatory capital requirements, maximum legal lending
limits based on capital levels and profitability in making its decisions
regarding cash dividends. The Company's ability to declare and pay cash
dividends is largely dependent upon the successful operation of the subsidiary
Bank and its ability to pay cash dividends to the Company. South Carolina
banking regulations restrict the amount of cash dividends that can be paid by
the Bank to the Company. Any of the Bank's cash dividends to the Company in
excess of the current year's earnings are subject to the prior approval of the
South Carolina Commissioner of Banking.
Management's Discussion and Analysis
This discussion is intended to assist in understanding the consolidated
financial condition and results of operations of Clover Community Bankshares,
Inc. and its wholly-owned subsidiary, Clover Community Bank (the "Bank"), which
are collectively referred to as the "Company". This information should be
reviewed in conjunction with the consolidated financial statements and related
notes contained elsewhere in this report.
Forward Looking Statements
Statements included in Management's Discussion and Analysis which are
not historical in nature are intended to be, and are hereby identified as
"forward looking statements" for purposes of the safe harbor provided by Section
21E of the Securities Exchange Act of 1934, as amended. The Company cautions
readers that forward looking statements, including without limitation, those
relating to future business prospects, revenues, working capital, liquidity,
capital needs, interest costs, and income, are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
indicated in the forward looking statements, due to several important factors
herein identified, among others, and other risks and factors identified from
time to time in the Company's reports filed with the Securities and Exchange
Commission.
14
<PAGE>
Earnings Performance
1999 Compared with 1998
The Company recorded net income of $1,019,000 for the year ended
December 31, 1999, an increase of $88,000, or 9.5%, over net income of $931,000
for 1998. Net income per share for 1999 was $1.00, compared with $.92 for 1998.
Return on average assets and return on average shareholders' equity were 1.80%
and 14.73%, respectively, for 1999, and 1.70% and 14.12%, respectively, for
1998.
The primary factor causing the increase in 1999 earnings was an
increase of $120,000 in net interest income, resulting principally from lower
interest expenses. Interest expenses decreased primarily because of lower rates
paid for interest bearing deposits and other funding sources. Noninterest income
increased by $65,000 in 1999 over the 1998 amount. Costs directly associated
with the Company's Year 2000 Preparedness Program were insignificant in 1999,
and there have been no significant problems within the Company, nor among its
suppliers or customers, caused by the date change to the year 2000. No provision
for loan losses was necessary in 1999 because of the continued excellent
performance of the loan portfolio.
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," as of January 1, 1998.
Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Certain changes in assets and liabilities,
such as unrealized holding gains and losses on available-for-sale securities,
are reported as a separate component of the shareholders' equity section of the
consolidated balance sheet. Such items, along with net income, are components of
comprehensive income. Comprehensive income for 1999, 1998 and 1997 was $780,000,
$887,000 and $1,009,000, respectively. Comprehensive income for 1999 and 1998
was impacted negatively by the effects of increasing market rates of interest on
the market values of the Company's available-for-sale securities. The magnitude
of this effect on comprehensive income for 1999 was a decrease of $239,000, net
of tax effects, compared with a decrease of $44,000, net of tax effects, for
1998. This increased negative effect was caused by a relatively larger increase
in market rates of interest throughout 1999. However, the adoption of SFAS No.
130 had no effect on the Company's net income or total shareholders' equity.
1998 Compared with 1997
For the year ended December 31, 1998, the Company recorded net income
of $931,000, an increase of $28,000, or 3.1%, over net income of $903,000 for
1997. Net income per share for 1998 was $.92 compared with $.89 for 1997. Return
on average assets for 1998 was 1.70% compared with 1.72% for 1997. Return on
average shareholders' equity was 14.12% for 1998 compared with 14.84% for 1997.
Net income increased, primarily as a result of the $112,000 increase in
net interest income combined with a $70,000 increase in noninterest service
charges on deposit accounts and other income. Net interest income increased due
to higher levels of interest earning assets and lower overall rates paid on
interest bearing liabilities. Because of the excellent performance of the loan
portfolio, no provision for loan losses was deemed necessary in 1998. A $5,000
provision was charged to expense in 1997. These factors which increased net
income, were partially offset, however, by nonrecurring expenses of $34,000
associated with effecting the reorganization into the bank holding company
structure. Incremental costs relating to the Company's Y2K Preparedness Program
were negligible as the result of implementing the program using existing
personnel. Additionally, the Company acquired new computer equipment and
software in 1996 which was mostly Year 2000 compliant when installed.
Net Interest Income
Net interest income is the amount of interest earned on interest
earning assets (loans, securities, interest bearing deposits in other banks and
federal funds sold), less the interest expense incurred on interest bearing
liabilities (primarily interest bearing deposits and long-term debt), and is the
principal source of the Company's earnings. Net interest income is affected by
the level of interest rates, the volume and mix of interest earning assets and
interest bearing liabilities, and the relative funding of the assets.
15
<PAGE>
For analysis purposes, interest income from tax-exempt investments is
adjusted to an amount which would have to be earned on taxable investments to
produce the same after-tax yields. This adjusted amount is referred to as fully
taxable equivalent ("FTE") interest income.
FTE net interest income was $2,699,000, $2,585,000 and $2,467,000 for
1999, 1998 and 1997, respectively. The $114,000 growth in FTE net interest
income for 1999 was attributable primarily to lower rates paid on interest
bearing liabilities. The average rate paid for such funding sources in 1999 was
3.60%, a decrease of 56 basis points from the 1998 average rate of 4.16%. The
average amount of such liabilities increased by $1,266,000 or 2.9% during 1999.
The combination of these two factors resulted in a $196,000 reduction in
interest expense.
FTE interest income decreased in 1999, also, but by only $82,000 from
the 1998 amount. The average rate earned on average interest earning assets
decreased to 8.08% in 1999 from 8.49% in 1998. The average volume of such assets
increased by $1,634,000, or 3.2%, in 1999. However, the average amount of loans,
the Company's highest yielding asset, decreased by $1,340,000, or 4.4%, in 1999
from the 1998 amount.
The $118,000 growth in FTE net interest income for 1998 was
attributable primarily to larger volumes of interest earning assets and lower
rates paid on interest bearing liabilities. The yield earned on average interest
earning assets decreased by 19 basis points in 1998 compared with 1997. However,
volumes of interest earning assets increased by $2,104,000, or 4.2%. This volume
increase was more than sufficient to offset the reduction in yield and resulted
in an increase of $86,000 in FTE interest income.
The rate paid on average interest bearing liabilities decreased by 17
basis points in 1998, resulting in a $32,000 reduction of interest expense, net
of the offsetting effect of interest paid on the increased volume of average
interest bearing liabilities. While average interest bearing liabilities
increased in 1998 by $1,054,000 or 2.5%, interest-free funds supporting interest
earning assets increased by $1,050,000 or 14.8%. This increased level of
interest-free funds caused the net yield on earning assets to increase by 3
basis points.
16
<PAGE>
The table, "Average Balances, Yields and Rates", provides a detailed
analysis of the effective yields and rates on the categories of average interest
earning assets and interest bearing liabilities for the years ended December 31,
1999, 1998 and 1997.
Average Balances, Yields and Rates
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1999 1998 1997
---- ---- ----
FTE Interest FTE Interest FTE Interest
Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/
Balances (1) Expense Rates Balances(1) Expense Rates Balances(1) Expense Rates
-------------------- ----- ----------- ------- ----- ----------- ------- -----
(Dollars in thousands)
Assets
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits in other banks $ 268 $ 20 7.46% $ 351 $ 20 5.70% $ 481 $ 29 6.03%
Securities
Taxable ................................ 12,537 796 6.35% 11,447 756 6.60% 11,793 766 6.50%
Tax-exempt(2) .......................... 3,884 270 6.95% 4,188 289 6.90% 4,040 272 6.73%
------- ------- -------- ------- -------- ------
Total securities ............... 16,421 1,066 6.49% 15,635 1,045 6.68% 15,833 1,038 6.56%
Other investments ...................... 295 26 8.81% 377 27 7.16% 377 26 6.90%
Federal funds sold ..................... 7,323 356 4.86% 4,970 259 5.21% 2,004 109 5.44%
Loans(3) ............................... 29,159 2,850 9.77% 30,499 3,049 10.00% 31,033 3,112 10.03%
------- ------- -------- ------- -------- ------
Total interest earning assets .. 53,466 4,318 8.08% 51,832 4,400 8.49% 49,728 4,314 8.68%
Cash and due from banks ................ 1,967 1,760 1,555
Allowance for loan losses .............. (263) (269) (270)
Premises and equipment ................. 687 750 800
Other assets ........................... 613 756 673
-------- -------- --------
Total assets ................... $ 56,470 $ 54,829 $ 52,486
======== ======== ========
Liabilities and shareholders' equity
Interest bearing deposits
Interest bearing transaction
accounts ........................ $ 14,658 $ 232 1.58% $ 13,043 $ 279 2.14% $11,824 $ 261 2.21%
Savings ........................... 2,682 46 1.72% 2,640 58 2.20% 2,624 65 2.48%
Time deposits $100M and over ...... 4,389 201 4.58% 4,453 208 4.67% 4,352 207 4.76%
Other time deposits ............... 19,213 926 4.82% 19,508 1,039 5.33% 19,784 1,080 5.46%
-------- ------- -------- ------- -------- ------
Total interest bearing
deposits ..................... 40,942 1,405 3.43% 39,644 1,584 4.00% 38,584 1,613 4.18%
Federal funds purchased ................ 3 - 0.00% 35 3 8.57% 41 2 4.88%
Long-term debt ......................... 4,000 214 5.35% 4,000 228 5.70% 4,000 232 5.80%
-------- ------- -------- ------- -------- ------
Total interest bearing
liabilities .................. 44,945 1,619 3.60% 43,679 1,815 4.16% 42,625 1,847 4.33%
Noninterest bearing demand deposits .... 4,209 4,104 3,362
Other liabilities ...................... 398 453 416
Shareholders' equity ................... 6,918 6,593 6,083
-------- -------- --------
Total liabilities and
shareholders' equity .......... $ 56,470 $ 54,829 $ 52,486
======== ========= ========
Interest rate spread(4) ................ 4.48% 4.33% 4.35%
Net interest income and net yield
on earning assets(5) .............. $ 2,699 5.05% $ 2,585 4.99% $2,467 4.96%
Interest free funds supporting
earning assets(6) ................. $ 8,521 $ 8,153 $ 7,103
</TABLE>
- -----------------------------
(1) Average balances are computed on a daily basis.
(2) Computed on a fully taxable equivalent basis using a federal income tax
rate of 34%.
(3) Nonaccruing loans are included in the average loan balances and income on
such loans is recognized on a cash basis.
(4) Total interest earning assets yield less the total interest bearing
liabilities rate.
(5) Net interest income divided by total interest earning assets.
(6) Total interest earning assets less total interest bearing liabilities.
17
<PAGE>
The table, "Volume and Rate Variance Analysis", provides a summary of changes in
net interest income resulting from changes in volumes of interest earning assets
and interest bearing liabilities, and the rates earned and paid on such assets
and liabilities.
Volume and Rate Variance Analysis
<TABLE>
<CAPTION>
1999 Compared with 1998 1998 Compared with 1997
----------------------- -----------------------
Volume(1) Rate(1) Total Volume(1) Rate(1) Total
--------- ------- ----- --------- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits in other banks ............. $ (5) $ 5 $ - $ (7) $ (2) $ (9)
Taxable securities ................................... 70 (30) 40 (23) 13 (10)
Tax-exempt securities (2) ............................ (21) 2 (19) 10 7 17
Other investments .................................... (7) 6 (1) - 1 1
Federal funds sold ................................... 115 (18) 97 155 (5) 150
Loans ................................................ (132) (67) (199) (53) (10) (63)
----- ----- ----- ----- ----- -----
Total interest income .................... 20 (102) (82) 82 4 86
----- ----- ----- ----- ----- -----
Interest bearing deposits
Interest bearing transaction accounts ........... 32 (79) (47) 26 (8) 18
Savings ......................................... 1 (13) (12) - (7) (7)
Time deposits $100M and over .................... (3) (4) (7) 5 (4) 1
Other time deposits ............................. (16) (97) (113) (15) (26) (41)
Federal funds purchased .............................. (1) (2) (3) - 1 1
Long-term debt ....................................... - (14) (14) - (4) (4)
----- ----- ----- ----- ----- -----
Total interest expense ................... 13 (209) (196) 16 (48) (32)
----- ----- ----- ----- ----- -----
Net interest income ...................... $ 7 $ 107 $ 114 $ 66 $ 52 $ 118
===== ===== ===== ===== ===== =====
</TABLE>
- --------------------------------
(1) The rate/volume variance for each category has been allocated on a
consistent basis between rate and volume variance based on the percentage
of rate or volume variance to the sum of the two absolute variances, except
in categories having balances in only one period. In such cases, the entire
variance is attributed to volume differences.
(2) Computed on a fully taxable equivalent basis using a federal income tax
rate of 34%.
During 2000, management expects that interest rates will move within a
narrow range, and management has not identified any factors that would cause
interest rates to increase or decrease sharply in a short period of time. Any
improvements in net interest income for 2000 are expected, therefore, to be
largely the result of increases in the volume of interest earning assets and
liabilities. Management expects to continue to use aggressive marketing
strategies to increase the Company's market share for both deposits and quality
loans within its service area. These strategies involve offering attractive
interest rates and continuing the Company's commitment to providing outstanding
customer service.
Interest Rate Sensitivity
Interest rate sensitivity measures the timing and magnitude of the
repricing of assets compared with the repricing of liabilities and is an
important part of asset/liability management. The objective of interest rate
sensitivity management is to generate stable growth in net interest income, and
to control the risks associated with interest rate movements. Management
constantly monitors interest rate risk exposures and the expected interest rate
environment so that adjustments in interest rate sensitivity can be timely made.
The table, "Interest Sensitivity Analysis", indicates that, on a
cumulative basis through twelve months, rate sensitive liabilities exceeded rate
sensitive assets, resulting in a liability sensitive position at the end of 1999
18
<PAGE>
of $20,625,000, and a cumulative gap ratio of .48. When interest sensitive
assets exceed interest sensitive liabilities for a specific repricing "horizon",
a positive interest sensitivity gap results. The gap is negative when interest
sensitive liabilities exceed interest sensitive assets, as was the case at the
end of 1999 with respect to the one-year time horizon. For a bank with a
negative gap, falling interest rates would be expected to have a positive effect
on net interest income and rising rates would be expected to have the opposite
effect.
The table reflects the balances of interest earning assets and interest
bearing liabilities at the earlier of their repricing or maturity dates. Amounts
of fixed rate loans are reflected at the loans' final maturity dates. Variable
rate loans are reflected at the earlier of their contractual maturity date or
the date at which the loans may be repriced contractually. Interest bearing
deposits in other banks and debt securities are reflected at the earlier of each
instrument's ultimate maturity or contractual repricing date. Overnight federal
funds sold are reflected in the earliest contractual repricing interval due to
the immediately available nature of these funds. Interest bearing liabilities
with no contractual maturity, such as interest bearing transaction accounts and
savings deposits are reflected in the earliest repricing interval due to
contractual arrangements which give management the opportunity to vary the rates
paid on these deposits within a thirty-day or shorter period. However, the
Company is under no obligation to vary the rates paid on those deposits within
any given period. Fixed rate time deposits, principally certificates of deposit
are reflected at their contractual maturity dates. Variable rate time deposits,
principally individual retirement accounts, are reflected at the earlier of
their next repricing or maturity dates.
Interest Sensitivity Analysis
<TABLE>
<CAPTION>
December 31, 1999
-----------------
Within 4-12 Over 1-5 Over 5
3 Months Months Years Years Total
-------- ------ ----- ----- -----
(Dollars in thousands)
Interest earning assets
<S> <C> <C> <C> <C> <C>
Interest-bearing deposits in other banks .............. $ 35 $ - $ - $ - $ 35
Securities available-for-sale ......................... 861 717 3,343 12,633 17,554
Other investments ..................................... 250 - - - 250
Federal funds sold .................................... 2,440 - - - 2,440
Loans (1) ............................................. 13,512 1,081 13,201 1,725 29,519
-------- -------- -------- -------- --------
Total interest earning assets .................. 17,098 1,798 $ 16,544 $ 14,358 $ 49,798
-------- -------- ======== ======== ========
Interest bearing liabilities
Interest bearing deposits
Interest bearing transaction accounts .............. $ 12,889 $ - $ - $ - $ 12,889
Savings ............................................ 2,360 - - - 2,360
Time deposits $100M and over ....................... 837 2,641 617 - 4,095
Other time deposits ................................ 7,271 9,523 1,636 - 18,430
Long-term debt ........................................ 4,000 - - - 4,000
-------- -------- -------- -------- --------
Total interest bearing liabilities ............. 27,357 12,164 $ 2,253 $ - $ 41,774
-------- -------- ======== ======== ========
Interest sensitivity gap ................................... $(10,259) $(10,366)
Cumulative interest sensitivity gap ........................ $(10,259) $(20,625)
Gap ratio .................................................. 0.62 0.15
Cumulative gap ratio ....................................... 0.62 0.48
</TABLE>
(1) Loans are net of net deferred loan fees of $15,000.
During 2000, management plans to monitor the Company's liability
sensitive position and take appropriate actions to promote a stable net interest
spread and soften the negative effects of any increase in interest rates that
might occur.
19
<PAGE>
Provision for Loan Losses
The provision for loan losses is charged to earnings based on
management's continuing review and evaluation of the loan portfolio and general
economic conditions. There were no provisions for loan losses in 1999 and 1998,
compared with a provision of $5,000 for the year ended December 31, 1997. The
lack of provisions in 1999 and 1998 is due mainly to reduced loan volumes, as
compared with prior years, and low net loan charge-offs. Furthermore, the level
of impaired or nonperforming loans decreased, and identified potential problem
loans were immaterial. The allowance for loan losses as a percentage of total
loans at year-end was .88% for 1999 compared with .91% at the end of 1998. Net
loan charge-offs were $6,000 in 1999 compared with $7,000 and $3,000 for 1998
and 1997, respectively. See "Impaired Loans" and "Allowance for Loan Losses" for
a discussion of the factors management considers in its review of the adequacy
of the allowance and provision for loan losses.
Other Income
Noninterest income for 1999 increased $65,000 or 15.8% compared with an
increase of $70,000 or 20.5% for 1998. Service charges on deposit accounts
increased $51,000 in 1999 and $55,000 in 1998. These increases were primarily
due to increased chargeable account activity. Credit life insurance commission
income increased $8,000 in 1999 because of increased marketing efforts and
higher consumer loan demand, after decreasing $16,000 in 1998. There were no
realized securities gains or losses in 1999, 1998 or 1997. Other noninterest
income increased $6,000 in 1999 compared with the previous year. In 1998, other
noninterest income included an increase of $25,000 in credit card merchant
services income, a $5,000 increase in safe deposit box rental fees, and an
$11,000 gain from the sale of a Company vehicle.
Other Expenses
Noninterest expenses for 1999 increased $63,000 or 4.2%, compared with
an increase of $133,000 or 9.7% for 1998. Salaries and employee benefits
increased $67,000 or 8.5% in 1999, and $34,000 or 4.5% in 1998, primarily as the
result of salary increases. Net occupancy and furniture and equipment expenses
increased $10,000 or 3.7%, after a $23,000 or 9.2% increase for 1998. The 1999
increase was caused by a $24,000 increase in the amount of software amortization
expense, which was offset partially by a $12,000 reduction in the amount of
equipment service contracts. The increase in 1998 was caused primarily by higher
amortization and maintenance expenses for the Company's computer equipment and
related software. Other expenses decreased by $15,000 in 1999, primarily as a
result of a $23,000 decline in the amount of professional services expenses in
1999. Other expenses increased a total of $77,000 or 20.8% in 1998 compared with
1997. Included in this net increase in expenses were a $12,000 increase for
stationery, printing and postage, and nonrecurring professional services
expenses in connection with the reorganization of Clover Community Bank into the
present bank holding company structure totaling approximately $34,000.
Noninterest overhead expenses for 2000 are expected to increase as
compared with 1999, due in part to continued growth, investment in technology,
operation of the bank holding company, as well as some general inflationary
increases. Management believes that continued investment in technology is
essential to allow for the expansion of products and services necessary to keep
the Company competitive in its market. The Company's FDIC insurance rates are
assessed based on the lowest rate available under regulations and are expected
to continue at relatively low levels for the near future. Increases in
noninterest expenses are closely monitored and cost control will continue to be
emphasized by management where possible in order to achieve profitability
objectives and attain the goals of growth and outstanding customer service in
the Clover market area.
Income Taxes
For 1999, federal and state income tax expenses increased to $493,000
from $459,000 in 1998 and $433,000 in 1997. The increases in income tax expense
are due to higher earnings and taxable income. The effective income tax rate
(income tax expense divided by income before income taxes) was 32.6% for 1999,
compared with 33.0% and 32.4% for 1998 and 1997, respectively. The somewhat
higher effective rate for 1998 was attributable to the nondeductibility of
certain expenses incurred to form the bank holding company.
20
<PAGE>
Securities
The following table summarizes the carrying value amounts of securities
held by the Company at each of the dates indicated.
<TABLE>
<CAPTION>
December 31,
------------
1999 1998 1997
---- ---- ----
Available- Available- Available-
for-Sale for-Sale for-Sale
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
U. S. Treasury ................................................ $ - $ 1,002 $ 998
U. S. Government agencies ..................................... 6,803 2,980 2,978
State, county and municipal ................................... 4,327 5,198 4,188
Mortgage-backed securities .................................... 6,424 7,120 7,972
------- ------- -------
Total .................................................... $17,554 $16,300 $16,136
======= ======= =======
</TABLE>
On an ongoing basis, management assigns securities upon purchase into
one of the categories designated by Statement of Financial Accounting Standards
("SFAS") No. 115 (trading, available-for-sale or held-to-maturity) based on
intent, taking into consideration other factors including expectations for
changes in market rates of interest, liquidity needs, asset/liability management
strategies, and capital requirements. The Company has never held securities for
trading purposes. During 1999, 1998, and 1997, there have been no transfers of
available-for-sale or held-to-maturity securities to other categories.
At December 31, 1999, the Company had concentrated an amortized cost of
$885,000 into Town of Clover, South Carolina general obligation bonds (not
rated) which were carried in the consolidated balance sheet at an estimated fair
value of $885,000. Management is not aware of any special risks involving these
investments.
The following table presents maturities and weighted average yields of
securities at December 31, 1999.
Securities Portfolio Maturities and Yields
<TABLE>
<CAPTION>
December 31, 1999
-----------------
After After
One Year Five Years
Within Through Through After
One Year Five Years Ten Years Ten Years Total
-------- ---------- --------- --------- -----
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Available-for-sale
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Government agencies ........ $ - 0.00% $ 1,914 5.54% $ 4,157 6.49% $ 732 6.07% $ 6,803 6.18%
State, county and municipal(1) ... 656 6.61% 1,429 6.75% 1,968 6.70% 274 7.20% 4,327 6.73%
Mortgage-backed securities(2) .... - 0.00% - 0.00% 1,071 6.68% 5,353 6.57% 6,424 6.59%
------- ------- ------- ------- -------
Total .................... $ 656 6.61% $ 3,343 6.06% $ 7,196 6.58% $ 6,359 6.54% $17,554 6.47%
======= ======= ======= ======= =======
</TABLE>
- ------------------------
(1) Computed on a fully taxable equivalent basis using a federal income tax
rate of 34%.
(2) Maturity categories based upon final stated maturity dates. Average
maturity is substantially shorter because of the monthly return of
principal on certain securities.
21
<PAGE>
Loan Portfolio
Management believes the loan portfolio is adequately diversified. There
are no significant concentrations of loans in any particular individuals or
industry or group of related individuals or industries, and there are no foreign
loans.
The amounts of loans outstanding at December 31, 1999, 1998 and 1997
are shown in the following table according to type of loan, and the percentage
of each category to total loans:
Loan Portfolio Composition
<TABLE>
<CAPTION>
December 31,
------------
1999 1998 1997
---- ---- ----
Amount % Amount % Amount %
------ - ------ - ------ -
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial and industrial ................... $ 5,822 19.7% $ 4,540 15.6% $ 5,611 17.6%
Real estate - construction .................. 4,993 16.9% 4,966 17.0% 6,447 20.2%
Real estate - mortgage
Farmland ............................... 105 .4% 187 .6% 244 .7%
1-4 family residential ................. 10,558 35.7% 11,079 38.0% 11,359 35.6%
Nonfarm, nonresidential ................ 4,101 13.9% 5,243 18.0% 5,092 16.0%
Consumer installment ........................ 3,954 13.4% 3,128 10.8% 3,163 9.9%
------- ----- ------- ----- ------- -----
Total loans ............ $29,533 100.0% $29,143 100.0% $31,916 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
A certain degree of risk taking is inherent in the extension of credit.
Management has established loan and credit policies designed to control both the
types and amounts of risks assumed and to ultimately minimize losses. Such
policies include limitations on loan-to-collateral values for various types of
collateral, requirements for appraisals of real estate collateral, problem loan
management practices and collection procedures, and nonaccrual and charge-off
guidelines.
Commercial and industrial loans primarily represent loans made to
businesses, and may be made on either a secured or an unsecured basis. When
taken, collateral consists of liens on receivables, equipment, inventories,
furniture and fixtures. Unsecured business loans are generally short-term with
emphasis on repayment strengths and low debt-to-worth ratios. During 1999,
commercial and industrial loans increased $1,282,000 or 28.2%. This category
accounted for a significant portion of the increase in total loans in 1999 as
the Company responded to greater demand in the local market. Loans mainly for
business and investment purposes that are secured by real estate (nonfarm,
nonresidential) decreased by $1,142,000 or 21.8% during 1999, due to lower
demand. Commercial lending involves significant risk because repayment usually
depends on the cash flows generated by a borrower's business, and the debt
service capacity of a business can deteriorate because of downturns in national
and local economic conditions. To control risk, more in-depth initial and
continuing financial analysis of a commercial borrower's cash flows and other
financial information is generally required.
Real estate construction loans generally consist of financing the
construction of 1-4 family dwellings and some nonfarm, nonresidential real
estate. Usually, loan-to-cost ratios are limited to 75% and permanent financing
commitments are usually required prior to the advancement of loan proceeds. In
1999, this category of loans increased $27,000 or .5%. The volume of real estate
construction loans can vary significantly in any given period depending on
building activity in the local market.
22
<PAGE>
Loans secured by real estate mortgages comprised approximately 50%, 57%
and 52% of the Company's loan portfolio at the end of 1999, 1998 and 1997,
respectively. Real estate mortgage loans of all types decreased by $1,745,000
during 1999 after declining by $186,000 and $490,000 in 1998 and 1997,
respectively. These reductions are attributable primarily to the "buyer's
market" in mortgage lending rates which existed throughout most of the past
three years. The Company purposely has not originated fixed-rate long-term
mortgage loans at the low rates then prevailing, opting instead to lend for
these purposes using instruments with fixed-rate terms not exceeding five years.
Recent events, however, have caused significant increases in market rates
charged for long-term mortgage loans, and the Company will continually
reevaluate its strategies with regard to mortgage-lending activities.
Residential real estate loans consist mainly of first and second mortgages on
single family homes. Loan-to-value ratios for these instruments are generally
limited to 80%. Nonfarm, nonresidential loans are secured by business and
commercial properties with loan-to-value ratios generally limited to 75%. The
repayment of both residential and business real estate loans is dependent
primarily on the income and cash flows of the borrowers, with the real estate
serving as a secondary or liquidation source of repayment.
Maturity Distribution of Loans
The following table sets forth the maturity distribution of the
Company's loans, by type, as of December 31, 1999, as well as the type of
interest requirement on such loans.
<TABLE>
<CAPTION>
December 31, 1999
-----------------
One Year One to Five Years
or Less Five Years or More Total
----------- ------------- --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial and industrial .......................................... $ 2,319 $ 2,474 $ 1,029 $ 5,822
Real estate - construction ......................................... 2,517 2,374 102 4,993
Real estate - mortgage ............................................. 1,170 8,221 5,373 14,764
Consumer installment ............................................... 1,434 2,309 211 3,954
------- ------- ------- -------
Total loans .......................................... $ 7,440 $15,378 $ 6,715 $29,533
======= ======= ======= =======
Predetermined rate, maturity greater than one year ................. $11,829 $ 3,099 $14,928
======= ======= =======
Variable rate or maturity within one year .......................... $ 7,440 $ 3,549 $ 3,616 $14,605
======= ======= ======= =======
</TABLE>
Impaired Loans
Impaired loans are those loans on which, based on current information
and events, it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the loan agreement. Loans
which management has identified as impaired generally are nonperforming loans.
Nonperforming loans include nonaccrual loans or loans which are 90 days or more
delinquent as to principal or interest payments. Following is a summary of the
Company's impaired loans:
23
<PAGE>
Nonaccrual and Past Due Loans
<TABLE>
<CAPTION>
December 31,
------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Nonaccrual loans ....................................................... $ 8 $ - $70
Accruing loans 90 days or more past due ................................ 2 1 7
--- --- ---
Total .................................................... $10 $ 1 $77
=== === ===
Percent of total loans ................................................. 0.0% 0.0% 0.2%
</TABLE>
When an impaired loan is 90 days or more past due as to interest or
principal or there is serious doubt as to ultimate collectibility, the accrual
of interest income is generally discontinued. Previously accrued interest on
loans placed in a nonaccrual status is reversed against current income, and
subsequent interest income is recognized on a cash basis when received. When the
collectibility of a significant amount of principal is in serious doubt,
collections are credited first to the remaining principal balance on a cost
recovery basis. An impaired nonaccrual loan is not returned to accrual status
unless principal and interest are current and the borrower has demonstrated the
ability to continue making payments as agreed. The effects of interest income
accrued and collected on impaired loans were immaterial to the consolidated
financial statements for 1999, 1998 and 1997.
As of December 31, 1999, there were no commitments to lend additional
funds to debtors owing amounts on impaired loans.
Potential Problem Loans
Management has identified and maintains a list of potential problem
loans. These are loans that are not included in impaired loans (nonaccrual or
past due 90 days or more and still accruing). A loan is added to the potential
problem list when management becomes aware of information about possible credit
problems of borrowers that causes doubts as to the ability of such borrowers to
comply with the current loan repayment terms. The total amount of loans
outstanding at December 31, 1999 determined by management to be potential
problem loans was $44,000. This amount does not represent management's estimate
of potential losses since a portion of such loans is secured by various types of
collateral.
Allowance for Loan Losses
The allowance for loan losses is increased by direct charges to
operating expense. Losses on loans are charged against the allowance in the
period in which management has determined it is more likely than not that such
loans have become uncollectible. Recoveries of previously charged off loans are
credited to the allowance. The table, "Summary of Loan Loss Experience",
summarizes loan balances at the end of each period indicated, averages for each
period, changes in the allowance arising from charge-offs and recoveries by loan
category, and additions to the allowance which have been charged to expense.
In reviewing the adequacy of the allowance for loan losses at each year
end, management took into consideration the historical loan losses experienced
by the Company, current economic conditions affecting the borrowers' ability to
repay, the volume of loans, the trends in delinquent, nonaccruing, and potential
problem loans, and the quality of collateral securing nonperforming and problem
loans. After charging off all known losses, management considers the allowance
for loan losses adequate to cover its estimate of possible future loan losses
inherent in the loan portfolio as of December 31, 1999.
In calculating the amount required in the allowance for loan losses,
management applies a consistent methodology that is updated quarterly. The
methodology utilizes a loan risk grading system and detailed loan reviews to
assess credit risks and the overall quality of the loan portfolio, as well as
other off-balance-sheet credit risks such as loan commitments and standby
letters of credit. Also, the calculation provides for management's assessment of
trends in national and local economic conditions that might affect the general
quality of the loan portfolio.
24
<PAGE>
Summary of Loan Loss Experience
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding at end of period ..................... $29,519 $29,115 $31,886 $31,552 $28,220
Average amount of loans outstanding .......................... 29,159 30,499 31,033 29,206 27,307
Balance of allowance for loan losses - beginning ............. $ 265 $ 272 $ 270 $ 245 $ 248
------- ------- ------- ------- -------
Loans charged off
Commercial and industrial ............................... - - 4 - 40
Consumer installment .................................... 9 9 6 10 10
------- ------- ------- ------- -------
Total charge-offs ................................. 9 9 10 10 50
------- ------- ------- ------- -------
Recoveries of loans previously charged off
Commercial and industrial ............................... - - 4 - -
Consumer installment .................................... 3 2 3 3 2
------- ------- ------- ------- -------
Total recoveries .................................. 3 2 7 3 2
------- ------- ------- ------- -------
Net charge-offs .............................................. 6 7 3 7 48
------- ------- ------- ------- -------
Additions to allowance charged to expense .................... - - 5 32 45
------- ------- ------- ------- -------
Balance of allowance for loan losses - ending ................ $ 259 $ 265 $ 272 $ 270 $ 245
======= ======= ======= ======= =======
Ratios
Net charge-offs to average loans ........................ 0.02% 0.02% 0.01% 0.02% 0.18%
Net charge-offs to loans at end of period ............... 0.02% 0.02% 0.01% 0.02% 0.17%
Allowance for loan losses to average loans .............. 0.89% 0.87% 0.88% 0.92% 0.90%
Allowance for loan losses to loans at end of period ..... 0.88% 0.91% 0.85% 0.86% 0.87%
Net charge-offs to allowance for loan losses ............ 2.32% 2.64% 1.10% 2.59% 19.59%
Net charge-offs to provision for loan losses ............ NA NA 60.00% 21.88% 106.67%
</TABLE>
The following table presents the allocation of the allowance for loan
losses at the end of each of the last three years, compared with the percent of
loans in the applicable categories to total loans.
Allocation of Allowance for Loan Losses
<TABLE>
<CAPTION>
December 31,
------------
1999 1998 1997
---- ---- ----
% of % of % of
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial and industrial ...................... $ 58 19.7% $ 48 15.6% $ 57 17.6%
Real estate- construction ...................... 37 16.9% 37 17.0% 48 20.2%
Real estate - mortgage ......................... 111 50.0% 122 56.6% 125 52.3%
Consumer installment ........................... 47 13.4% 38 10.8% 42 9.9%
Unallocated .................................... 6 0.0% 21 0.0% - 0.0%
---- ----- ---- ----- ---- -----
Total ................................ $259 100.0% $265 100.0% $272 100.0%
==== ===== ==== ===== ==== =====
</TABLE>
25
<PAGE>
Deposits
The average amounts and percentage composition of deposits held by the
Company for each of the past three years are summarized below:
Average Deposits
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
Amount % Amount % Amount %
------ - ------ - ------ -
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand ........................ $ 4,209 9.3% $ 4,104 9.4% $ 3,362 8.0%
Interest bearing transaction accounts ............. 14,658 32.5% 13,043 29.8% 11,824 28.2%
Savings ........................................... 2,682 5.9% 2,640 6.0% 2,624 6.3%
Time deposits $100M and over ...................... 4,389 9.7% 4,453 10.2% 4,352 10.4%
Other time ........................................ 19,213 42.6% 19,508 44.6% 19,784 47.1%
------- ----- ------- ----- ------- -----
Total deposits ....................... $45,151 100.0% $43,748 100.0% $41,946 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
As of December 31, 1999, there were $4,095,000 in time deposits of
$100,000 or more with approximately $736,000 maturing within three months,
$1,173,000 maturing over three through six months, $1,569,000 maturing over six
through twelve months and $617,000 maturing after one year. Average time
deposits $100,000 and over comprised approximately 10% of total average deposits
during 1999, 1998 and 1997. The vast majority of time deposits $100,000 and over
are acquired from customers within the Company's local market area. Such
deposits generally are acquired in the normal course of business. The Company
does not purchase brokered deposits. While most of the large time deposits are
acquired from customers with standing banking relationships, it is a common
industry practice not to consider these types of deposits as core deposits
because their retention can be expected to be heavily influenced by rates
offered, and therefore such deposits have the characteristics of shorter-term
purchased funds. Certificates of deposit $100,000 and over involve the
maintenance of an appropriate matching of maturity distribution and a
diversification of sources to achieve an appropriate level of liquidity.
Total deposits as of December 31, 1999 were $4,749,000, or 10.4%, less
than the level reported as of December 31, 1998. This decrease resulted
primarily from the activities of two large customers. These customers had large
construction projects underway as of the end of 1998. However, these projects
had been completed by the end of 1999. Consequently, the majority of the funds
for these projects were on hand as of the end of 1998, but had been expended
prior to the end of 1999. Management was aware that the deposits would be
short-term in nature and, accordingly, invested the majority of these in federal
funds sold during 1999.
Return on Equity and Assets
The following table shows the return on assets (net income divided by
average total assets), return on equity (net income divided by average equity),
dividend payout ratio (dividends declared per share divided by net income per
share), and equity to assets ratio (average equity divided by average total
assets) for each period indicated.
Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
Return on assets ................. 1.80% 1.70% 1.72%
Return on equity ................. 14.73% 14.12% 14.84%
Dividend payout ratio ............ 60.00% 54.35% 56.18%
Equity to assets ratio ........... 12.25% 12.02% 11.59%
Liquidity
Liquidity is the ability to meet current and future obligations through
liquidation or maturity of existing assets or the acquisition of additional
26
<PAGE>
liabilities. Adequate liquidity is necessary to meet the requirements of
customers for loans and deposit withdrawals in the most timely and economical
manner. Some liquidity is ensured by maintaining assets which may be immediately
converted into cash at minimal cost (amounts due from banks and federal funds
sold). However, the most manageable sources of liquidity are composed of
liabilities, with the primary focus of liquidity management being on the ability
to obtain deposits within the Company's market area. Core deposits (total
deposits, less time deposits of $100,000 and over) provide a relatively stable
funding base, and the average of these deposits represented 72.2% of average
total assets during 1999 compared with 71.7% during 1998, and 71.6% during 1997.
The banking subsidiary has available at the end of 1999 unused
short-term lines of credit to purchase up to $2,750,000 of federal funds from
unrelated correspondent institutions. In addition, the Bank has outstanding
long-term debt of $4,000,000 from the Federal Home Loan Bank of Atlanta (the
"FHLB") used to fund earning assets with longer maturities. In connection with
this long-term debt, the Bank has a further undrawn long-term debt availability
from the FHLB of approximately $2,054,000.
Asset liquidity is provided from several sources, including amounts
due from banks and federal funds sold. Available-for-sale securities,
particularly those maturing within one year, provide a secondary source of
liquidity. In addition, funds from maturing loans are a source of liquidity.
Asset liquidity provided by federal funds sold decreased by $5,630,000 in 1999,
primarily to provide funds for the reduction of deposit liabilities. Management
influences the acquisition of deposits by varying the rates paid for such
liabilities, and by its practices with regard to service charges and other
associated fees.
Clover Community Bankshares, Inc.'s ability to meet its cash
obligations or to pay any possible future cash dividends to shareholders is
dependent primarily on the successful operation of the subsidiary bank and its
ability to pay cash dividends to the parent company. Any of the banking
subsidiary's cash dividends in an amount exceeding current year-to-date earnings
are subject to the prior approval of the South Carolina Commissioner of Banking
and are generally payable only from its undivided profits. At December 31, 1999,
the banking subsidiary's available undivided profits totaled $3,423,000. Under
Federal Reserve Board regulations, the amounts of loans or advances from the
banking subsidiary to the parent company are also restricted. During 1998, the
parent company received a $500,000 cash dividend from its banking subsidiary.
Management believes that the overall liquidity sources of both the
Company and its banking subsidiary are adequate to meet their operating needs.
Capital Resources
Shareholders' equity increased by $240,000 and $381,000 during 1999 and
1998, respectively. During 1999, net income increased shareholders' equity by
$1,019,000, cash dividends and unrealized losses on available-for-sale
securities decreased stockholders equity by $607,000 and $239,000, respectively,
and net sales and repurchases of stock increased stockholders' equity by
$67,000. The Company in 1999 established a dividend reinvestment program to
provide shareholders with the opportunity to reinvest automatically all or a
portion of their cash dividends into additional shares of the Company's common
stock. Reinvestment of dividends in 1999, net of plan expenses, resulted in an
increase of $118,000 in stockholders' equity. Also during 1999, the Company
initiated a limited program to redeem shares of its stock held by charitable
organizations which resulted in the repurchase and retirement of 1,702 shares of
stock and a reduction of $51,000 in shareholders' equity.
During 1998, net income increased shareholders' equity $931,000, while
cash dividends of $506,000 and the change in unrealized holding gains and losses
on available-for-sale securities of $44,000, charged to accumulated other
comprehensive income, decreased shareholders' equity.
27
<PAGE>
The Company and its banking subsidiary are each subject to regulatory
risk-based capital adequacy standards. Under these standards, bank holding
companies and banks are required to maintain certain minimum ratios of capital
to risk-weighted assets and average total assets. Under the provisions of the
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), federal
bank regulatory authorities are required to implement prescribed "prompt
corrective actions" upon the deterioration of the capital position of a bank or
bank holding company. If the capital position of an affected institution were to
fall below certain levels, increasingly stringent regulatory corrective actions
are mandated. Unrealized holding gains and losses on available-for-sale
securities are generally excluded for purposes of calculating regulatory capital
ratios. However, the extent of any unrealized appreciation or depreciation on
securities will continue to be a factor that regulatory examiners consider in
their overall assessment of capital adequacy.
Quantitative measures established by regulation to ensure capital
adequacy require both the Company and Clover Community Bank to maintain minimum
amounts and ratios set forth in the table below of Total and Tier 1 Capital, as
defined in the regulation, to risk weighted assets, as defined, and of Tier 1
Capital, as defined, to average assets, as defined. Management believes, as of
December 31, 1999 and 1998, that the Company and Clover Community Bank exceeded
all capital adequacy minimum requirements to which they were subject.
To be categorized as well capitalized, the Company and Clover Community
Bank must maintain minimum Total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios as set forth in the table below. The federal regulators may also
categorize the Company or Clover Community Bank as less than well capitalized
based on subjective criteria. Management knows of no conditions or events that
would cause the Company or Clover Community Bank to be categorized as less than
well capitalized.
<TABLE>
<CAPTION>
Minimum for Minimum to be
Actual Capital Adequacy Well Capitalized
------ ---------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 1999 (Dollars in thousands)
The Company
<S> <C> <C> <C> <C> <C> <C>
Total Capital to risk weighted assets ............ $7,421 22.6% $2,627 8.0% $3,284 10.0%
Tier 1 Capital to risk weighted assets ........... $7,162 21.8% $1,314 4.0% $1,970 6.0%
Tier 1 Capital to average assets (leverage)....... $7,162 13.1% $1,643 3.0% $2,738 5.0%
Clover Community Bank
Total Capital to risk weighted assets ............ $6,900 21.2% $2,610 8.0% $3,262 10.0%
Tier 1 Capital to risk weighted assets ........... $6,641 20.4% $1,305 4.0% $1,957 6.0%
Tier 1 Capital to average assets (leverage)....... $6,641 12.1% $1,641 3.0% $2,734 5.0%
December 31, 1998
The Company
Total Capital to risk weighted assets ............ $7,063 21.3% $2,657 8.0% $3,321 10.0%
Tier 1 Capital to risk weighted assets ........... $6,798 20.5% $1,328 4.0% $1,992 6.0%
Tier 1 Capital to average assets (leverage)....... $6,798 11.9% $1,717 3.0% $2,862 5.0%
Clover Community Bank
Total Capital to risk weighted assets ............ $6,603 19.9% $2,657 8.0% $3,321 10.0%
Tier 1 Capital to risk weighted assets ........... $6,338 19.1% $1,328 4.0% $1,992 6.0%
Tier 1 Capital to average assets (leverage)....... $6,338 11.1% $1,717 3.0% $2,862 5.0%
</TABLE>
Inflation
Since the assets and liabilities of a bank are primarily monetary in
nature (payable in fixed, determinable amounts), the performance of a bank is
affected more by changes in interest rates than by inflation. Interest rates
generally increase as the rate of inflation increases, but the magnitude of the
change in rates may not be the same.
While the effect of inflation on banks is normally not as significant
as is its influence on those businesses which have large investments in plant
and inventories, it does have an effect. During periods of high inflation, there
are normally corresponding increases in the money supply, and banks will
normally experience above-average growth in assets, loans and deposits. Also,
general increases in the prices of goods and services will result in increased
operating expenses.
28
<PAGE>
Independent Auditors' Report
The Shareholders and Board of Directors
of Clover Community Bankshares, Inc.
We have audited the accompanying consolidated balance sheet of Clover
Community Bankshares, Inc. and subsidiary as of December 31, 1999 and 1998, and
the related consolidated statements of income, changes in shareholders' equity,
and cash flows for each of the 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 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Clover
Community Bankshares, Inc. and subsidiary as of December 31, 1999 and 1998, and
the consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles.
s/Donald G. Jones and Company, P.A.
Donald G. Jones and Company, P.A.
Certified Public Accountants
Columbia, South Carolina
January 14, 2000
29
<PAGE>
Consolidated Balance Sheet
Clover Community Bankshares, Inc.
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
---- ----
Assets
<S> <C> <C>
Cash and due from banks (Note C) ........................................... $ 1,197,482 $ 1,727,391
Interest-bearing deposits in other banks ................................... 34,998 320,267
Federal funds sold ......................................................... 2,440,000 8,070,000
Securities available-for-sale (Note D) ..................................... 17,554,460 16,299,880
Other investments (Note E) ................................................. 250,000 377,400
Loans-net (Note F) ......................................................... 29,259,606 28,849,664
Premises and equipment - net (Note G) ...................................... 874,379 715,632
Accrued interest receivable ................................................ 361,463 316,239
Other assets ............................................................... 367,597 244,804
------------ ------------
Total assets ........................................................ $ 52,339,985 $ 56,921,277
============ ============
Liabilities
Deposits (Note H)
Noninterest bearing .................................................... $ 3,083,477 $ 3,962,262
Interest bearing ....................................................... 37,774,047 41,644,373
------------ ------------
Total deposits ...................................................... 40,857,524 45,606,635
Long-term debt (Note I) .................................................... 4,000,000 4,000,000
Accrued interest payable ................................................... 319,449 392,644
Other liabilities .......................................................... 768 -
------------ ------------
Total liabilities ................................................... 45,177,741 49,999,279
------------ ------------
Commitments and contingent liabilities (Note N)
Shareholders' equity (Notes B and J)
Common stock - par value $.01, 10,000,000 shares
authorized; issued and outstanding - 1,014,096
shares for 1999 and 1,011,020 shares for 1998 .......................... 10,141 10,110
Capital surplus ............................................................ 3,390,436 3,323,861
Retained earnings .......................................................... 3,877,203 3,464,499
Accumulated other comprehensive income (loss) .............................. (115,536) 123,528
------------ ------------
Total shareholders' equity .......................................... 7,162,244 6,921,998
------------ ------------
Total liabilities and shareholders' equity .......................... $ 52,339,985 $ 56,921,277
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
Consolidated Statement of Income
Clover Community Bankshares, Inc.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
Interest Income
<S> <C> <C> <C>
Loans, including fees ....................................... $2,849,542 $3,048,653 $3,112,053
Interest-bearing deposits in other banks .................... 19,523 20,575 28,955
Securities
Taxable ................................................. 796,151 756,518 765,822
Tax-exempt .............................................. 178,334 190,766 179,662
Federal funds sold .......................................... 356,433 258,544 109,441
Other investments ........................................... 25,576 26,975 26,130
---------- ---------- ----------
Total interest income ................................ 4,225,559 4,302,031 4,222,063
---------- ---------- ----------
Interest expense
Time deposits $100,000 and over ............................. 201,113 208,304 207,534
Other deposits .............................................. 1,204,309 1,375,007 1,405,942
Federal funds purchased ..................................... 161 3,012 2,039
Long-term debt .............................................. 213,458 228,377 231,674
---------- ---------- ----------
Total interest expense ............................... 1,619,041 1,814,700 1,847,189
---------- ---------- ----------
Net interest income .............................................. 2,606,518 2,487,331 2,374,874
Provision for loan losses (Note F) ............................... - - 5,000
---------- ---------- ----------
Net interest income after provision .............................. 2,606,518 2,487,331 2,369,874
---------- ---------- ----------
Other income
Service charges on deposit accounts ......................... 400,383 349,143 294,572
Credit life insurance commissions ........................... 16,723 9,059 25,474
Other income ................................................ 59,045 53,090 20,648
---------- ---------- ----------
Total other income ................................... 476,151 411,292 340,694
---------- ---------- ----------
Other expenses (Notes K and M)
Salaries and employee benefits .............................. 859,406 791,958 757,882
Net occupancy expense ....................................... 63,647 65,083 48,091
Furniture and equipment expense ............................. 217,801 206,186 200,247
Other expense ............................................... 429,592 445,385 368,750
---------- ---------- ----------
Total other expenses ................................. 1,570,446 1,508,612 1,374,970
---------- ---------- ----------
Income before income taxes ....................................... 1,512,223 1,390,011 1,335,598
Income tax expense (Note L) ...................................... 492,907 458,660 432,382
---------- ---------- ----------
Net income ....................................................... $1,019,316 $ 931,351 $ 903,216
========== ========== ==========
Per share
Average shares outstanding .................................. 1,014,655 1,011,020 1,011,020
Net income .................................................. $ 1.00 $ 0.92 $ 0.89
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
Consolidated Statement of Changes in Shareholders' Equity
Clover Community Bankshares, Inc.
<TABLE>
<CAPTION>
Common Stock
------------- Accumulated
Number of Capital Retained Other Comprehensive
Shares Amount Surplus Earnings Income or (Loss) Total
------- ------ ------- -------- ---------------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 ................. 1,011,020 $ 1,263,775 $ 2,070,196 $ 2,640,951 $ 62,560 $ 6,037,482
Comprehensive income:
Net income .......................... - - - 903,216 - 903,216
Change in unrealized holding gains
and losses on available-for-sale
securities, net of income tax effects - - - - 105,379 105,379
-----------
Total comprehensive income ..... - - - - - 1,008,595
-----------
Cash dividends declared - $.50 per share . - - - (505,509) - (505,509)
---------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 ............... 1,011,020 1,263,775 2,070,196 3,038,658 167,939 6,540,568
Comprehensive income:
Net income .......................... - - - 931,351 - 931,351
Change in unrealized holding gains
and losses on available-for-sale
securities, net of income tax effects - - - - (44,411) (44,411)
-----------
Total comprehensive income ..... - - - - - 886,940
-----------
Cash dividends declared - $.50 per share . - - - (505,510) - (505,510)
Exchange of $.01 par value common stock
of Clover Community Bankshares, Inc.
for all of the outstanding shares
of Clover Community Bank (Note B) ... - (1,253,665) 1,253,665 - - -
---------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 ............... 1,011,020 10,110 3,323,861 3,464,499 123,528 6,921,998
Comprehensive income:
Net income .......................... - - - 1,019,316 - 1,019,316
Change in unrealized holding gains
and losses on available-for-sale
securities, net of income tax effects - - - - (239,064) (239,064)
-----------
Total comprehensive income ..... - - - - - 780,252
-----------
Cash dividends declared - $.60 per share . - - - (606,612) - (606,612)
Sales of common stock under dividend
reinvestment plan, net of plan
expenses of $13,580 (Note J) ........ 4,778 48 118,043 - - 118,091
Repurchase and retirement of common stock (1,702) (17) (51,468) - - (51,485)
---------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1999 ............... 1,014,096 $ 10,141 $ 3,390,436 $ 3,877,203 $ (115,536) $ 7,162,244
========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
Consolidated Statement of Cash Flows
Clover Community Bankshares, Inc.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
Operating Activities
<S> <C> <C> <C>
Net income .............................................................. $ 1,019,316 $ 931,351 $ 903,216
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses ........................................ - - 5,000
Depreciation ..................................................... 121,198 119,406 114,672
Deferred income taxes ............................................ 77,119 (38,286) 32,804
Securities accretion and premium amortization .................... (28,426) 15,891 22,116
Amortization of net loan fees and costs .......................... (13,163) (2,236) (42,496)
(Gain) loss on disposal of fixed assets .......................... - (10,890) 117
(Increase) decrease in interest receivable ....................... (45,224) 28,351 (11,410)
(Decrease) increase in interest payable .......................... (73,195) 41,298 5,966
(Increase) decrease in prepaid expenses
and other assets ............................................. (55,435) 20,834 (51,404)
Increase (decrease) in other liabilities
and accrued expenses ......................................... 768 - (8,249)
----------- ----------- -----------
Net cash provided by operating activities .................... 1,002,958 1,105,719 970,332
----------- ----------- -----------
Investing activities
Net decrease in interest-bearing deposits in other banks ................ 294,000 98,000 98,000
Purchases of available-for-sale securities .............................. (7,508,873) (1,803,179) (1,120,031)
Maturities of available-for-sale securities ............................. 5,909,764 1,554,038 1,141,966
Sales of other investments .............................................. 127,400 - -
Net (increase) decrease in loans made to customers ...................... (421,865) 2,766,591 (294,985)
Purchases of premises and equipment ..................................... (279,945) (78,415) (32,441)
Proceeds from sale of other assets ...................................... 14,500 - -
Proceeds from sale of equipment ......................................... - 14,000 -
----------- ----------- -----------
Net cash (used) provided by investing activities ............. (1,865,019) 2,551,035 (207,491)
----------- ----------- -----------
Financing activities
Net (decrease) increase in demand deposits, interest
bearing transaction accounts and savings accounts ................... (2,037,802) 1,745,816 736,734
Net (decrease) increase in certificates of deposit and other
time deposits ....................................................... (2,711,309) 1,892,447 (988,091)
Proceeds from long-term debt ............................................ - - 4,000,000
Repayment of long-term debt ............................................. - - (4,000,000)
Sales of common stock under dividend reinvestment plan,
net of plan expenses ................................................ 118,091 - -
Repurchase and retirement of common stock ............................... (51,485) - -
Cash dividends paid ..................................................... (606,612) (505,510) (505,509)
----------- ----------- -----------
Net cash (used) provided by financing activities ............. (5,289,117) 3,132,753 (756,866)
----------- ----------- -----------
(Decrease) increase in cash and cash equivalents ............................. (6,151,178) 6,789,507 5,975
Cash and cash equivalents, beginning ......................................... 9,823,658 3,034,151 3,028,176
----------- ----------- -----------
Cash and cash equivalents, ending ............................................ $ 3,672,480 $ 9,823,658 $ 3,034,151
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
Notes to Consolidated Financial Statements
Clover Community Bankshares, Inc.
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization. Clover Community Bankshares, Inc. (the "Company"), a bank holding
company, and its wholly-owned subsidiary, Clover Community Bank (the "Bank"),
are engaged in providing domestic commercial banking services from their
headquarters office in Clover, South Carolina. The Company is a South Carolina
corporation and its banking subsidiary is a state chartered commercial bank with
its deposits insured by the Federal Deposit Insurance Corporation (the "FDIC").
Therefore, the Company and its bank subsidiary operate under the supervision,
rules and regulations of the Federal Reserve Board, FDIC and South Carolina
State Board of Financial Institutions. The holding company was incorporated on
March 4, 1998, pursuant to a plan of reorganization as described in Note B to
the consolidated financial statements. Clover Community Bank was organized in
1986 and first commenced commercial operations on October 1, 1987.
The subsidiary, Clover Community Bank, is a community-oriented institution
offering a full range of traditional banking services, with the exception of
trust services. Substantially all of its loans are made to individuals and
businesses within the Clover area of York County, South Carolina. Also,
substantially all of its deposits are acquired within its local market area and
no brokered deposits are accepted.
Principles of Consolidation and Basis of Presentation. The consolidated
financial statements include the accounts of the parent company and its banking
subsidiary after elimination of all significant intercompany balances and
transactions. The accounting and reporting policies of the Company and its
subsidiary are in conformity with generally accepted accounting principles and
general practices within the banking industry.
Securities. Equity securities that have readily determinable fair values and all
debt securities are classified generally at the time of purchase into one of
three categories: held-to-maturity, trading or available-for-sale. Debt
securities which the Company has the positive intent and ability to hold to
ultimate maturity are classified as held-to-maturity and accounted for at
amortized cost. Debt and equity securities that are bought and held primarily
for sale in the near term are classified as trading and are accounted for on an
estimated fair value basis, with unrealized gains and losses included in other
income. However, the Company has never held any securities for trading purposes.
Securities not classified as either held-to-maturity or trading are classified
as available-for-sale and are accounted for at estimated fair value. Unrealized
holding gains and losses on available-for-sale securities are excluded from
earnings and recorded as other comprehensive income, net of applicable income
tax effects. Dividend and interest income, including amortization of any premium
or accretion of discount arising at acquisition, is included in earnings for all
three categories of securities. Realized gains and losses on all categories of
securities are included in other operating income, based on the amortized cost
of the specific security on a trade date basis.
Other Investments. Other investments consist of restricted securities which are
carried at cost. Management periodically evaluates these securities for
impairment, with any appropriate downward valuation adjustments being made when
necessary.
Loans and Interest. Income Loans are carried at principal amounts outstanding,
increased or reduced by deferred net loan costs or fees. Interest income on
loans is recognized using the interest method based upon the principal amounts
outstanding. Loan origination and commitment fees and certain direct loan
origination costs (principally salaries and employee benefits) are deferred and
amortized as an adjustment of the related loan's yield. Generally, these amounts
are amortized over the contractual life of the related loans or commitments.
A loan is considered to be impaired when, in management's judgment based on
current information and events, it is probable that the obligation's principal
or interest will not be collectible in accordance with the terms of the original
loan agreement. Impaired loans, when not material, are carried in the balance
sheet at a value not to exceed their observable market price or the fair value
of the collateral if the repayment of the loan is expected to be provided solely
by the underlying collateral. The carrying value of any material impaired loan
is measured based on the present value of expected future cash flows discounted
34
<PAGE>
at the loan's effective interest rate, which is the contractual interest rate
adjusted for any deferred loan fees or costs, premium or discount existing at
the inception or acquisition of the loan. Generally, the accrual of interest is
discontinued on impaired loans and any previously accrued interest on such loans
is reversed against current income. Any subsequent interest income is recognized
on a cash basis when received unless collectibility of a significant amount of
principal is in serious doubt. In such cases, collections are credited first to
the remaining principal balance on a cost recovery basis. An impaired loan is
not returned to accrual status unless principal and interest are current and the
borrower has demonstrated the ability to continue making payments as agreed.
Allowance for Loan Losses. An allowance for possible loan losses is maintained
at a level deemed appropriate by management to provide adequately for known and
inherent risks in the loan portfolio. When management determines that a loan
will not perform substantially as agreed, a review of the loan is initiated to
ascertain whether it is more likely than not that a loss has occurred. If it is
determined that a loss is likely, the estimated amount of the loss is charged
off and deducted from the allowance. The provision for possible loan losses and
recoveries on loans previously charged off are added to the allowance.
Determining the amount and adequacy of the allowance for loan losses involves
estimating uncertain future events and their effects based on judgment applied
to currently known facts and circumstances. Changes in the estimated allowance
for loan losses necessitated as new events occur or more information is obtained
are accounted for as changes in accounting estimates in the accounting period in
which the change occurs.
Management considers the Company's historical loan loss experience, current
national and local economic conditions affecting the borrowers' ability to
repay, the volume of loans, the trends in delinquent, impaired and potential
problem loans, and the amount and quality of collateral securing such loans in
reviewing the adequacy of the allowance for loan losses. In calculating its
estimate, management applies a consistent methodology that is updated quarterly.
The calculation involves applying various estimated percentage factors to the
loan portfolio categorized by purpose and type of underlying collateral and
utilizing assessed risk grades from the Company's ongoing system of detailed
loan reviews. For some loans, particularly those identified as impaired or
potential problem, specific allocations are made in the calculation. The
methodology also includes assessing the risk associated with off-balance-sheet
extensions of credit such as loan commitments and standby letters of credit.
Premises and Equipment. Premises and equipment are stated at cost, less
accumulated depreciation. The provision for depreciation is computed
predominantly using the straight-line method. Rates of depreciation are
generally based on the following estimated useful lives: building - 31.5 years;
furniture and equipment - 5 to 7 years. The cost of assets sold or otherwise
disposed of, and the related allowance for depreciation is eliminated from the
accounts and the resulting gains or losses are reflected in the consolidated
income statement. Maintenance and repairs are charged to current expense as
incurred and the costs of major renewals and improvements are capitalized.
Other Real Estate. Other real estate includes properties acquired through
foreclosure or acceptance of a deed in lieu of foreclosure. Other real estate is
initially recorded at the lower of cost or the estimated fair market value, less
estimated selling costs. Loan losses arising from the acquisition of such
property are charged to the allowance for loan losses. An allowance for losses
on other real estate is maintained for subsequent downward valuation
adjustments. Gains or losses on other real estate sold, writedowns from
subsequent reevaluation and other holding costs are charged to other operating
expense as incurred.
Retirement Plan. The Company has a salary reduction profit sharing plan pursuant
to Section 401(k) of the Internal Revenue Code as more fully described in Note
M. The Company does not sponsor any postretirement or postemployment benefits.
35
<PAGE>
Deferred Income Taxes. The Company uses an asset and liability approach for
financial accounting and reporting of deferred income taxes. Deferred tax assets
and liabilities are determined based on the difference between the financial
statement and income tax bases of assets and liabilities as measured by the
currently enacted tax rates which are assumed will be in effect when these
differences reverse. If it is more likely than not that some portion or all of a
deferred tax asset will not be realized, a valuation allowance is recognized.
Deferred income tax expense or credit is the result of changes in deferred tax
assets and liabilities.
Earnings Per Share. Net income per share is calculated by dividing net income by
the weighted average number of shares of the Company's common stock outstanding
during the period. The Company has no dilutive potential common shares, stock
options or warrants outstanding.
Comprehensive Income. In June, 1997, the Financial Accounting Standards Board
issued its Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income". As required, the Company adopted the
provisions of this SFAS beginning January 1, 1998, with reclassifications
included for any earlier comparative accounting periods presented. Comprehensive
income consists of net income or loss for the current period and other
comprehensive income, defined as income, expenses, gains and losses that bypass
the consolidated statement of income and are reported directly in a separate
component of shareholders' equity. SFAS No. 130 provides that the Company is to
classify and report items of other comprehensive income by their nature, and
report total comprehensive income in a financial statement and display the
accumulated balance of other comprehensive income separately in the
shareholders' equity section of the consolidated balance sheet. However, the
adoption of SFAS No. 130 had no effect on the Company's net income or total
shareholders' equity. See Note J.
The components of other comprehensive income or loss and related tax effects are
as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Change in unrealized holding gains and
losses on available-for-sale securities .................... $(372,955) $ (69,285) $ 164,399
Income tax expense (benefit) on other
comprehensive income (loss) .................................. (133,891) (24,874) 59,020
--------- --------- ---------
Net-of-tax amount ........................................ $(239,064) $ (44,411) $ 105,379
========= ========= =========
</TABLE>
Consolidated Statement of Cash Flows. The consolidated statement of cash flows
reports net cash provided or used by operating, investing and financing
activities and the net effect of those flows on cash and cash equivalents. Cash
equivalents include amounts due from banks, federal funds sold and securities
purchased under agreements to resell.
36
<PAGE>
During 1999, 1998 and 1997, interest paid on deposits and other borrowings
amounted to $1,692,236, $1,773,402 and $1,841,223, respectively. Income tax
payments of $422,800, $502,440 and $426,056 were made during 1999, 1998 and
1997, respectively. In 1999, a non-cash transfer of $25,086 was made from loans
to other assets for the repossession of loan collateral. Effective June 5, 1998,
Clover Community Bankshares, Inc. acquired all of the then outstanding shares of
Clover Community Bank's $1.25 par value common stock in exchange for shares of
Clover Community Bankshares, Inc.'s $.01 par value common stock. As a result, a
noncash transfer of $1,253,665 was made from common stock to capital surplus.
During 1999, 1998 and 1997, noncash valuation adjustments totaling $372,955,
$69,285 and $164,399 were made which decreased, decreased and increased,
respectively, the carrying amount of available-for-sale securities. In 1999,
accumulated other comprehensive income decreased $239,064 and deferred tax
assets increased $133,891; in 1998, accumulated other comprehensive income
decreased $44,411 and deferred tax assets increased $24,874; and, in 1997,
accumulated other comprehensive income increased $105,379 and deferred tax
assets decreased $59,020.
Fair Value Estimates. Fair value estimates are made at a specific point in time
based on relevant market information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Because no active trading market exists for a significant portion of
the Company's financial instruments, fair value estimates are based on
management's judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial instruments, and
other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly affect the
estimates.
Fair value estimates are based on existing on and off-balance-sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not
considered financial assets or liabilities include net deferred tax assets and
premises and equipment. In addition, the income tax ramifications related to the
realization of unrealized gains and losses can have a significant effect on fair
value estimates and have not been considered in the estimates.
For cash and due from banks, interest-bearing deposits in other banks, federal
funds sold, other investments, and accrued interest receivable and payable, the
carrying amount approximates estimated fair value.
NOTE B - CORPORATE REORGANIZATION
Clover Community Bankshares, Inc. was incorporated on March 4, 1998 at the
direction of Clover Community Bank's management. On April 20, 1998, the
shareholders of Clover Community Bank approved a plan of corporate
reorganization under which Clover Community Bank would become a wholly-owned
subsidiary of Clover Community Bankshares, Inc. The authorized common stock of
Clover Community Bankshares, Inc. is 10,000,000 shares with a par value of $.01
per share. Pursuant to the reorganization, which was effected on June 5, 1998,
the parent company issued 1,011,020 shares of its common stock in exchange for
all of the 1,011,020 then outstanding common shares of Clover Community Bank.
The reorganization was accounted for as if it were a pooling-of-interests. As a
result, the consolidated financial statements for the year ended December 31,
1998 are presented as if the reorganization had occurred on January 1, 1998. The
consolidated financial statements for the year ended December 31, 1997 are
unchanged from the amounts previously reported by Clover Community Bank. There
were no changes in earnings per share computations.
NOTE C - CASH AND DUE FROM BANKS
Banks are generally required by regulation to maintain an average cash reserve
balance based on a percentage of deposits. The average amounts of the cash
reserve balances at December 31, 1999 and 1998, were approximately $193,000 and
$253,000, respectively.
37
<PAGE>
NOTE D - SECURITIES
The aggregate amortized cost and estimated fair values of securities, as well as
gross unrealized gains and losses of securities were as follows:
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
---- ----
Gross Gross Gross Gross
Unrealized Unrealized Estimated Unrealized Unrealized Estimated
Amortized Holding Holding Fair Amortized Holding Holding Fair
Cost Gains Losses Value Cost Gains Losses Value
---- ----- ------ ----- ---- ----- ------ -----
Available-for-sale
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury ...... $ - $ $ - $ - $ 999,576 $ 2,299 $ - $ 1,001,875
U.S. Government
agencies ....... 7,022,489 1,250 220,803 6,802,936 2,956,378 23,439 312 2,979,505
State, county and
municipal ...... 4,308,730 32,945 14,602 4,327,073 5,079,713 118,158 - 5,197,871
Mortgage-backed
securities ..... 6,403,484 170,945 149,978 6,424,451 7,071,501 197,835 148,707 7,120,629
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total ...... $17,734,703 $ 205,140 $ 385,383 $17,554,460 $16,107,168 $ 341,731 $ 149,019 $16,299,880
=========== =========== =========== =========== =========== =========== =========== ===========
</TABLE>
The amortized cost and estimated fair value of securities by contractual
maturity are shown below:
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
---- ----
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
Available-for-sale
<S> <C> <C> <C> <C>
Due in one year or less ....................... $ 655,000 $ 656,351 $ 3,952,424 $ 3,958,478
Due after one through five years .............. 3,410,510 3,342,513 1,589,098 1,625,561
Due after five through ten years .............. 6,248,433 6,125,214 3,379,145 3,480,212
Due after ten years ........................... 1,017,276 1,005,931 115,000 115,000
----------- ----------- ----------- -----------
11,331,219 11,130,009 9,035,667 9,179,251
Mortgage-backed securities .................... 6,403,484 6,424,451 7,071,501 7,120,629
----------- ----------- ----------- -----------
Total .................................... $17,734,703 $17,554,460 $16,107,168 $16,299,880
=========== =========== =========== ===========
</TABLE>
The fair value of U.S. Treasury and U.S. Government agencies debt securities is
estimated based on published closing quotations. The fair value of state, county
and municipal securities is generally not available from published quotations;
consequently, their fair value estimates are based on matrix pricing or quoted
market prices of similar instruments adjusted for credit quality differences
between the quoted instruments and the securities being valued. Fair value for
mortgage-backed securities is estimated primarily using dealers' quotes.
There were no transfers to other categories of available-for-sale securities in
1999, 1998 and 1997.
At December 31, 1999 and 1998, securities with a carrying amount of $1,796,775
and $1,954,744, respectively, were pledged as collateral to secure public
deposits.
38
<PAGE>
As of December 31, 1999 and 1998, the Company had concentrated investments in
state, county and municipal obligations secured by or payable from the same
taxing authority or revenue source and that exceeded ten percent of
shareholders' equity as follows:
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
---- ----
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
<S> <C> <C> <C> <C>
Clover, S.C. School District (Moody's rating AA) ....................... $ - $ - $750,000 $752,000
Fairfield County, S.C. School District (Moody's rating AAA) ............ - - 686,000 689,000
Town of Clover, S.C. (Not rated) ....................................... 885,000 885,000 945,000 945,000
</TABLE>
NOTE E - OTHER INVESTMENTS
Other investments consisted of:
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
---- ----
<S> <C> <C>
Federal Home Loan Bank stock ................................................... $200,000 $327,400
Community Financial Services, Inc. stock ....................................... 50,000 50,000
-------- --------
Total ............................................................ $250,000 $377,400
======== ========
</TABLE>
NOTE F - LOANS
Loans consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ---------
<S> <C> <C> <C> <C>
Commercial and industrial ........................ $ 5,822,313 $ 5,756,295 $ 4,540,039 $ 4,499,442
Real estate- construction ........................ 4,992,536 4,939,899 4,965,677 4,934,277
Real estate - mortgage ........................... 14,764,030 14,510,386 16,509,049 16,415,371
Consumer installment ............................. 3,954,281 3,889,967 3,128,003 3,096,106
------------ ------------ ------------ ------------
Total .................................. 29,533,160 29,096,547 29,142,768 28,945,196
Less
Allowance for loan losses .................. (258,762) - (265,149) -
Deferred net loan fees ..................... (14,792) - (27,955) -
------------ ------------ ------------ ------------
Loans - net ............................ $ 29,259,606 $ 29,096,547 $ 28,849,664 $ 28,945,196
============ ============ ============ ============
</TABLE>
39
<PAGE>
Fair values are estimated for loan categories with similar financial
characteristics. Within each category, the fair value of loans is calculated by
discounting estimated cash flows through the estimated maturity using estimated
market discount rates that reflect the credit and interest rate risk inherent in
the loan. For certain categories of loans, such as variable rate loans, credit
card receivables, and other lines of credit, the carrying amount, adjusted for
credit risk, is a reasonable estimate of fair value because there is no
contractual maturity or because the Company has the ability to reprice the loans
as interest rate changes occur. Since the discount rates are based on current
loan rates offered as well as management's estimates, the fair values presented
may not necessarily be indicative of the value negotiated in an actual sale.
Loans which management has identified as impaired generally are nonperforming
loans. Nonperforming loans include nonaccrual loans or loans which are 90 days
or more delinquent as to principal or interest payments. Following is a summary
of activity regarding the Company's impaired loans:
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
---- ----
Investment in impaired loans
<S> <C> <C>
Nonaccrual ....................................................................... $ 8,476 $ 118
Accruing 90 days and over past due ............................................... 1,798 1,214
------- -------
Total ........................................................................ $10,274 $ 1,332
======= =======
Average total investment in impaired loans during the year ............................. $ 3,500 $25,250
Allowance for loan losses on impaired loans ............................................ - -
</TABLE>
The average total investment in impaired loans during 1997 was $55,250. There
were no outstanding commitments at December 31, 1999, to lend additional funds
to debtors owing amounts on impaired loans.
As of December 31, 1999 and 1998, there were no significant concentrations of
credit risk in any single borrower or groups of borrowers. The Company's loan
portfolio consists primarily of extensions of credit to businesses and
individuals in its market area within York County, South Carolina. The economy
of this area is diversified and does not depend on any one industry or group of
related industries. Management has established loan policies and practices that
include set limitations on loan-to-collateral value for different types of
collateral, requirements for appraisals, obtaining and maintaining current
credit and financial information on borrowers, and credit approvals.
Transactions in the allowance for loan losses are summarized below:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance at January 1 .................................... $ 265,149 $ 272,096 $ 270,393
Provision charged to expense ............................ - - 5,000
Recoveries .............................................. 2,365 2,650 7,092
Charge-offs ............................................. (8,752) (9,597) (10,389)
--------- --------- ---------
Balance at December 31 .................................. $ 258,762 $ 265,149 $ 272,096
========= ========= =========
</TABLE>
Certain officers and directors of the Company and its subsidiary, their
immediate families and business interests were loan customers of, and had other
transactions with the banking subsidiary in the normal course of business.
Related party loans are made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with unrelated parties and do not involve more than normal risk of
collectibility. The aggregate dollar amount of these loans was $1,727,544 and
$1,495,770 at December 31, 1999 and 1998, respectively. During 1999, $1,456,636
of new loans were made and repayments totaled $1,224,862.
40
<PAGE>
NOTE G - PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
Net
Accumulated Book
Cost Depreciation Value
---- ------------ -----
December 31, 1999
<S> <C> <C> <C>
Land ..................................................... $ 309,050 $ - $ 309,050
Buildings and land improvements .......................... 566,959 228,294 338,665
Furniture and equipment .................................. 1,051,959 825,295 226,664
---------- ---------- ----------
Total ................................................. $1,927,968 $1,053,589 $ 874,379
========== ========== ==========
December 31, 1998
Land ..................................................... $ 88,030 $ - $ 88,030
Buildings and land improvements .......................... 563,459 208,226 355,233
Furniture and equipment .................................. 996,533 724,164 272,369
---------- ---------- ----------
Total ................................................. $1,648,022 $ 932,390 $ 715,632
========== ========== ==========
</TABLE>
Depreciation expense for the years ended December 31, 1999, 1998 and 1997 was
$121,198, $119,406, and $114,672, respectively.
NOTE H - DEPOSITS
A summary of deposits follows:
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Noninterest bearing demand ............................. $ 3,083,477 $ 3,083,477 $ 3,962,262 $ 3,962,262
Interest bearing transaction accounts .................. 12,888,643 12,888,643 13,844,565 13,844,565
Savings ................................................ 2,360,157 2,360,157 2,563,252 2,563,252
Time deposits $100,000 and over ........................ 4,095,215 4,096,004 5,689,420 5,729,557
Other time deposits .................................... 18,430,032 18,426,405 19,547,136 19,583,041
----------- ----------- ----------- -----------
Total deposits ................................... $40,857,524 $40,854,686 $45,606,635 $45,682,677
=========== =========== =========== ===========
</TABLE>
The fair value of deposits with no stated maturity (noninterest bearing demand,
interest bearing transaction accounts and savings) is equal to the amount
payable on demand, or carrying amount, as of December 31, 1999 and 1998. The
fair value of time deposits is estimated based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates currently
offered as of December, 31, 1999 and 1998, for deposits of similar remaining
maturities.
At December 31, 1999, the scheduled maturities of time deposits were as follows:
Year Amount
---- ------
2000 $ 19,896,296
2001 2,188,964
2002 163,923
2003 274,212
2004 and thereafter 1,852
41
<PAGE>
NOTE I - LONG-TERM DEBT
Long-term debt at December 31, 1999 and 1998 consisted of a $4,000,000 note
issued by the Bank to the Federal Home Loan Bank of Atlanta (the "FHLB"). The
note is due on November 28, 2000, and has a variable interest rate which was
6.55% at the end of 1999 and 5.69% at the end of 1998. The note is secured by a
lien on all of the Bank's 1-4 family residential first lien mortgage loans which
had a carrying value of approximately $7,805,000 as of December 31, 1999. The
Bank has an additional long-term debt availability of approximately $2,054,000
from the FHLB that had not been drawn at December 31, 1999.
The fair value of the variable rate long-term debt is estimated at the carrying
amount because the interest rate associated with such debt reprices immediately
with changes in the lender's program rate, and management is not aware of any
significant change in the credit risk associated with the debt.
NOTE J - SHAREHOLDERS' EQUITY
Restrictions on Subsidiary Dividends, Loans or Advances. South Carolina
regulations restrict the amount of dividends that banks can pay to shareholders.
Any of the Bank's dividends to the parent company in an amount exceeding the
amount of the current year's earnings are subject to the prior approval of the
South Carolina Commissioner of Banking and are generally payable only from its
undivided profits. At December 31, 1999, the Bank's undivided profits totaled
$3,423,090. Under Federal Reserve Board regulations, the amounts of loans or
advances from the banking subsidiary to the parent company are also restricted.
Accumulated Other Comprehensive Income. As of December 31, 1999 and 1998,
accumulated other comprehensive income or loss included as an increase or
decrease in shareholders' equity in the accompanying consolidated balance sheet
consisted of the accumulated changes in the unrealized holding gains and losses
on available-for-sale securities.
Dividend Reinvestment Plan. As of February 4, 1999, the Company registered
50,000 shares of its authorized but unissued common stock for sale through its
Dividend Reinvestment Plan (the "Plan"). Under the Plan, which is open only to
residents of South Carolina, shareholders may purchase additional shares by
foregoing the payment in cash of cash dividends declared by the Company and
instead accepting additional shares of common stock. Such shares of additional
stock are issued at a price set arbitrarily by the Company at four times the per
share book value of the common stock at the end of the month preceding the
purchase. There are no provisions for other periodic stock purchases under the
Plan. Shares issued under the Plan are newly issued shares.
Regulatory Capital. All bank holding companies 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 Company's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, bank holding companies and banks must meet specific
capital guidelines that involve quantitative measures of their assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. Capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and its banking subsidiary to maintain minimum amounts and
ratios set forth in the table below of Total and Tier 1 Capital, as defined in
the regulations, to risk weighted assets, as defined, and of Tier 1 Capital, as
defined, to average assets, as defined. Management believes, as of December 31,
1999 and 1998, that the Company and its subsidiary bank exceeded all capital
adequacy minimum requirements.
As of December 31, 1999, the most recent notification from the FDIC categorized
Clover Community Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Company and
its banking subsidiary must maintain minimum Total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed Clover Community Bank's category. The Company's and Clover Community
Bank's actual capital amounts and ratios are also presented in the table.
42
<PAGE>
<TABLE>
<CAPTION>
Minimum for Minimum to be
Actual Capital Adequacy Well Capitalized
------ ---------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 1999 (Dollars in thousands)
The Company
<S> <C> <C> <C> <C> <C> <C>
Total Capital to risk weighted assets ................ $7,421 22.6% $2,627 8.0% $3,284 10.0%
Tier 1 Capital to risk weighted assets ............... $7,162 21.8% $1,314 4.0% $1,970 6.0%
Tier 1 Capital to average assets (leverage) .......... $7,162 13.1% $1,643 3.0% $2,738 5.0%
Clover Community Bank
Total Capital to risk weighted assets ................ $6,900 21.2% $2,610 8.0% $3,262 10.0%
Tier 1 Capital to risk weighted assets ............... $6,641 20.4% $1,305 4.0% $1,957 6.0%
Tier 1 Capital to average assets (leverage) .......... $6,641 12.1% $1,641 3.0% $2,734 5.0%
December 31, 1998
The Company
Total Capital to risk weighted assets ................ $7,063 21.3% $2,657 8.0% $3,321 10.0%
Tier 1 Capital to risk weighted assets ............... $6,798 20.5% $1,328 4.0% $1,992 6.0%
Tier 1 Capital to average assets (leverage) .......... $6,798 11.9% $1,717 3.0% $2,862 5.0%
Clover Community Bank
Total Capital to risk weighted assets ................ $6,603 19.9% $2,657 8.0% $3,321 10.0%
Tier 1 Capital to risk weighted assets ............... $6,338 19.1% $1,328 4.0% $1,992 6.0%
Tier 1 Capital to average assets (leverage) .......... $6,338 11.1% $1,717 3.0% $2,862 5.0%
</TABLE>
NOTE K - OTHER EXPENSES
Other expenses are summarized below:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Salaries and employee benefits ................................... $ 859,406 $ 791,958 $ 757,882
Net occupancy expense ............................................ 63,647 65,083 48,091
Furniture and equipment expense .................................. 217,801 206,186 200,247
Other expense
Stationery, printing and postage ........................... 110,717 96,286 84,725
Telephone .................................................. 16,662 15,707 11,735
Advertising ................................................ 9,082 8,613 9,667
Professional services ...................................... 65,699 88,540 50,636
Insurance .................................................. 10,840 11,266 11,858
FDIC insurance assessment .................................. 5,312 3,824 5,313
Directors' fees ............................................ 33,600 33,600 31,200
Data processing expenses ................................... 58,104 46,295 42,985
Other ...................................................... 119,576 141,254 120,631
---------- ---------- ----------
Total .................................................. $1,570,446 $1,508,612 $1,374,970
========== ========== ==========
</TABLE>
43
<PAGE>
NOTE L - INCOME TAXES
Income tax expense consisted of:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
Current
<S> <C> <C> <C>
Federal ...................................................... $ 375,584 $ 449,969 $ 361,308
State ........................................................ 40,204 46,977 38,270
--------- --------- ---------
Total current ..................................... 415,788 496,946 399,578
--------- --------- ---------
Deferred
Federal ...................................................... 70,932 (35,215) 30,173
State ........................................................ 6,187 (3,071) 2,631
--------- --------- ---------
Total deferred .................................... 77,119 (38,286) 32,804
--------- --------- ---------
Total income tax expense .......................... $ 492,907 $ 458,660 $ 432,382
========= ========= =========
</TABLE>
Income before income taxes presented in the consolidated statement of income for
the years ended December 31, 1999, 1998 and 1997 included no foreign component.
A reconciliation between the income tax expense and the amount computed by
applying the federal statutory rate of 34% to income before income taxes
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Tax expense at statutory rate ................................. $ 514,156 $ 472,604 $ 454,103
State income tax, net of federal
income tax benefit ...................................... 30,618 28,977 26,995
Tax-exempt interest income .................................... (60,542) (64,778) (61,020)
Non-deductible interest expense to
carry tax-exempt instruments ............................ 8,111 9,408 9,762
Non-deductible corporate
reorganization expenses ................................. - 11,513 -
Other, net .................................................... 564 936 2,542
--------- --------- ---------
Total ........................................ $ 492,907 $ 458,660 $ 432,382
========= ========= =========
</TABLE>
44
<PAGE>
Deferred tax assets and liabilities included in the consolidated balance sheet
consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
---- ----
Deferred tax assets
<S> <C> <C>
Allowance for loan losses .................................................. $ 67,026 $ 69,319
Net deferred loan fees ..................................................... 5,310 10,036
Accrued interest payable ................................................... 114,682 140,959
Unrealized holding gains and losses on
available-for-sale securities ............................................ 64,707 -
-------- --------
Gross deferred tax assets ....................................... 251,725 220,314
Valuation allowance ........................................................ - -
-------- --------
Total ........................................................... 251,725 220,314
-------- --------
Deferred tax liabilities
Accrued interest receivable ................................................ 110,278 86,497
Prepaid expenses ........................................................... 56,416 29,556
Accelerated depreciation ................................................... 12,140 19,006
Unrealized holding gains and losses on
available-for-sale securities ............................................ - 69,183
Other ...................................................................... 1,313 1,265
-------- --------
Gross deferred tax liabilities .................................. 180,147 205,507
-------- --------
Net deferred income tax assets ................................................... $ 71,578 $ 14,807
======== ========
</TABLE>
A portion of the change in net deferred tax assets or liabilities related to
unrealized holding gains and losses on available-for-sale securities is charged
or credited directly to other comprehensive income. The balance of the change in
net deferred tax assets is charged or credited to income tax expense. In 1999,
1998 and 1997, $133,891 was credited, $24,874 was credited, and $59,020 was
charged to other comprehensive income, respectively. In 1999, 1998 and 1997,
$77,119 was charged, $38,286 was credited, and $32,804 was charged to income tax
expense, respectively.
Management believes that the Company will fully realize the deferred tax assets
as of December 31, 1999 and 1998 based on refundable income taxes available from
carryback years, as well as estimates of future taxable income.
NOTE M - RETIREMENT PLAN
In 1993, the Company established the Clover Community Bank Employees'
Retirement Savings Plan (the "Plan") for the exclusive benefit of all eligible
employees and their beneficiaries. Employees are eligible to participate in the
Plan after attaining age 21 and completing twelve months of service, and are
credited with at least 1000 hours of service during the eligibility computation
period. Employees are allowed to defer their salary up to the maximum dollar
amount determined by federal government laws and regulations each year. The
Company matches $.50 for each dollar contributed by the employees up to 6% of
their total pay. The Board of Directors can also elect to make discretionary
contributions. Employees are fully vested in both the matching and any
discretionary contributions after six years of service. The employer
contributions to the plan for 1999, 1998 and 1997 totaled $16,475, $15,228 and
$16,681, respectively.
45
<PAGE>
NOTE N - COMMITMENTS AND CONTINGENCIES
Commitments to Extend Credit. In the normal course of business, the banking
subsidiary is party to financial instruments with off-balance-sheet risk. These
financial instruments include commitments to extend credit and standby letters
of credit, and have elements of credit risk in excess of the amount recognized
in the balance sheet. The exposure to credit loss in the event of nonperformance
by the other parties to the financial instruments for commitments to extend
credit and standby letters of credit is represented by the contractual notional
amount of those instruments. Generally, the same credit policies used for
on-balance-sheet instruments, such as loans, are used in extending loan
commitments and standby letters of credit.
Following are the off-balance-sheet financial instruments whose contract amounts
represent credit risk:
December 31,
------------
1999 1998
---- ----
Loan commitments ..................... $6,951,821 $5,471,229
Standby letters of credit ............ 42,075 62,075
Loan commitments involve agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and some involve
payment of a fee. Many of the commitments are expected to expire without being
fully drawn; therefore, the total amount of loan commitments does not
necessarily represent future cash requirements. Each customer's creditworthiness
is evaluated on a case-by-case basis. The amount of collateral obtained, if any,
upon extension of credit is based on management's credit evaluation of the
borrower. Collateral held varies but may include commercial and residential real
properties, accounts receivable, inventory and equipment.
Standby letters of credit are conditional commitments to guarantee the
performance of a customer to a third party. The credit risk involved in issuing
standby letters of credit is the same as that involved in making loan
commitments to customers.
The estimated fair values of off-balance-sheet financial instruments such as
loan commitments and standby letters of credit are generally based upon fees
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the counterparties' creditworthiness. The vast
majority of the banking subsidiary's loan commitments do not involve the
charging of a fee, and fees associated with outstanding standby letters of
credit are not material. Therefore, as of December 31, 1999 and 1998, the
estimated fair values of these off-balance-sheet financial instruments is
nominal. For loan commitments and standby letters of credit, the committed
interest rates are either variable or approximate current interest rates offered
for similar commitments. Management is not aware of any significant change in
the credit risk associated with these commitments.
Short-term Borrowing Commitments. At December 31, 1999, the banking subsidiary
had unused short-term lines of credit to purchase up to $2,750,000 in federal
funds from correspondent financial institutions One line for $2,000,000 expires
October 1, 2000; however, all lenders reserve the right to withdraw the
accommodations at any time.
Litigation. The Company and its subsidiary were not involved as defendants in
any litigation at December 31, 1999. Management is not aware of any pending or
threatened litigation, or unasserted claims or assessments that are expected to
result in losses, if any, that would be material to the consolidated financial
statements.
Accounting Estimates. In preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of revenues and
expenses during the reporting period. Actual results could differ significantly
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. In connection with the determination of the allowance for loan
losses, management has identified specific loans as well as adopting a policy of
providing amounts for loan valuation purposes which are not identified with any
specific loans but are derived from actual loss experience ratios, loan types,
loan volume, economic conditions and industry standards.
46
<PAGE>
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the banking subsidiary's allowance for
loan losses. Such agencies may require the recognition of additions to the
allowance based on their judgments about information available to them at the
time of their examination.
NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS
Following is summary information on the estimated fair value of financial
instruments, cross referenced to the location in the consolidated financial
statements and notes where more detailed information can be obtained:
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
of Assets of Assets of Assets of Assets
(Liabilities) (Liabilities) (Liabilities) (Liabilities)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash and due from banks (Note A) ........................... $ 1,197,482 $ 1,197,482 $ 1,727,391 $ 1,727,391
Interest-bearing deposits in other banks (Note A) .......... 34,998 34,998 320,267 320,267
Federal funds sold (Note A) ................................ 2,440,000 2,440,000 8,070,000 8,070,000
Securities (Note C) ........................................ 17,554,460 17,554,460 16,299,880 16,299,880
Other investments (Notes A and E) .......................... 250,000 250,000 377,400 377,400
Loans (Note F) ............................................. 29,259,606 29,096,547 28,849,664 28,945,196
Accrued interest receivable (Note A) ....................... 361,463 361,463 316,239 316,239
Deposits (Note H) .......................................... (40,857,524) (40,854,686) (45,606,635) (45,682,677)
Long-term debt (Note I) .................................... (4,000,000) (4,000,000) (4,000,000) (4,000,000)
Accrued interest payable (Note A) .......................... (319,449) (319,449) (392,644) (392,644)
Loan commitments (Note N) .................................. (6,951,821) (5,471,229)
Standby letters of credit (Note N) ......................... (42,075) (62,075)
</TABLE>
NOTE P - CLOVER COMMUNITY BANKSHARES, INC. (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
---- ----
Condensed Balance Sheet
Assets
<S> <C> <C>
Cash ......................................................................... $ 296,393 $ 457,645
Investment in banking subsidiary ............................................. 6,641,524 6,461,466
Land ......................................................................... 221,020 -
Other assets ................................................................. 3,306 2,887
---------- ----------
Total assets ............................................................. $7,162,243 $6,921,998
========== ==========
Liabilities
Other liabilities ............................................................ $ - $ -
Shareholders' equity ............................................................. 7,162,243 6,921,998
---------- ----------
Total liabilities and shareholders' equity ............................... $7,162,243 $6,921,998
========== ==========
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1999 1998
---- ----
Condensed Statement of Income
Income
<S> <C> <C>
Dividends received from banking subsidiary ............................... $ 606,612 $ 1,005,510
Interest income .......................................................... 10,833 2,319
----------- -----------
Total income ......................................................... 617,445 1,007,829
----------- -----------
Expenses
Other expenses ........................................................... 20,558 44,674
----------- -----------
Total expenses ....................................................... 20,558 44,674
----------- -----------
Income before income taxes and equity in
undistributed earnings of banking subsidiary ............................. 596,887 963,155
Income tax expense (credit) .................................................. (3,306) (2,887)
Equity in undistributed earnings
of banking subsidiary .................................................... 419,123 (34,691)
----------- -----------
Net income ................................................................... $ 1,019,316 $ 931,351
=========== ===========
<CAPTION>
Years Ended December 31,
------------------------
1999 1998
---- ----
Condensed Statement of Cash Flows
Operating activities
Net income ............................................................... $ 1,019,316 $ 931,351
Adjustments to reconcile net income to net
cash provided by operating activities
Equity in undistributed earnings
of banking subsidiary ....................................... (419,123) 34,691
Increase in other assets ...................................... (419) (2,887)
----------- -----------
Net cash provided by operating activities ................ 599,774 963,155
----------- -----------
Investing activities
Purchase of land ......................................................... (221,020) -
----------- -----------
Net cash used by investing activities .................... (221,020) -
----------- -----------
Financing activities
Sales of common stock under dividend reinvestment plan, net .............. 118,091 -
Repurchase and retirement of common stock ................................ (51,485) -
Cash dividends paid ...................................................... (606,612) (505,510)
----------- -----------
Net cash used by financing activities .................... (540,006) (505,510)
----------- -----------
(Decrease) increase in cash and cash equivalents ............................. (161,252) 457,645
Cash and cash equivalents, beginning ......................................... 457,645 -
----------- -----------
Cash and cash equivalents, ending ............................................ $ 296,393 $ 457,645
=========== ===========
</TABLE>
48
Exhibit 21
Subsidiaries of the Registrant
Clover Community Bank
49
INDEPENDENT AUDITORS' CONSENT
Board of Directors
Clover Community Bankshares, Inc.
We consent to the incorporation by reference in Clover Community
Bankshares, Inc.'s Registration Statement on Form S-3 (No. 333-71777), relating
to the registration of up to 50,000 shares of its common stock for issuance
pursuant to the Clover Community Bankshares, Inc. Dividend Reinvestment Plan, of
our report dated January 14, 2000, which is included in Clover Community
Bankshares, Inc.'s Annual Report on Form 10-KSB for the year ended December 31,
1999.
s/Donald G. Jones and Company, P.A.
Columbia, South Carolina
March 20, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet at December 31, 1999 and the Consolidated Statement
of Income for the year ended December 31, 1999 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,197
<INT-BEARING-DEPOSITS> 35
<FED-FUNDS-SOLD> 2,440
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 17,554
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 0
<ALLOWANCE> 29,519
<TOTAL-ASSETS> 259
<DEPOSITS> 52,340
<SHORT-TERM> 40,858
<LIABILITIES-OTHER> 0
<LONG-TERM> 4,000
0
0
<COMMON> 10
<OTHER-SE> 7,152
<TOTAL-LIABILITIES-AND-EQUITY> 52,340
<INTEREST-LOAN> 2,850
<INTEREST-INVEST> 974
<INTEREST-OTHER> 402
<INTEREST-TOTAL> 4,226
<INTEREST-DEPOSIT> 1,405
<INTEREST-EXPENSE> 1,619
<INTEREST-INCOME-NET> 2,607
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,571
<INCOME-PRETAX> 1,512
<INCOME-PRE-EXTRAORDINARY> 1,019
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,019
<EPS-BASIC> 1.00
<EPS-DILUTED> 1.00
<YIELD-ACTUAL> 5.05
<LOANS-NON> 8
<LOANS-PAST> 2
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 44
<ALLOWANCE-OPEN> 265
<CHARGE-OFFS> 9
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<ALLOWANCE-CLOSE> 259
<ALLOWANCE-DOMESTIC> 259
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
