UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
JULY 1, 1996
COMMUNITY BANKSHARES INCORPORATED
(Exact name of registrant as specified in its charter)
COMMUNITY BANKSHARES INCORPORATED
200 NORTH SYCAMORE STREET
PETERSBURG, VIRGINIA 23804
(804) 861-2320
(Address and Telephone Number of Registrant's Principal Executive Offices)
VIRGINIA 0-13100 54-1290793
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
NATHAN S. JONES, 3RD
PRESIDENT AND CHIEF EXECUTIVE OFFICER
COMMUNITY BANKSHARES INCORPORATED
200 NORTH SYCAMORE STREET
PETERSBURG, VIRGINIA 23804
(804) 861-2320
(Name, address and telephone number of agent for service)
<PAGE>
Item 2. Acquisition of Assets
DATE AND MANNER OF ACQUISITION
On December 12, 1995, the Board of Directors for Community Bankshares
Incorporated (CBI) voted to enter into an Agreement and Plan for Reorganization
(the plan) with Commerce Bank of Virginia (CBOV) to combine their businesses.
CBOV is a state bank with its principal office located in Richmond, Virginia.
The combination of the two companies will be consummated through a Share
Exchange under Virginia law. Under the terms of the Plan, CBOV would become a
wholly-owned subsidiary of CBI. On June 18, 1996, the stockholders of CBI and
CBOV approved the agreement and plan for reorganization. The transaction will be
accounted for as a pooling of interest. CBI has received an opinion from its
independent accountant that the transaction does qualify for such accounting
treatment. This transaction became effective on July 1, 1996.
DESCRIPTION OF ASSETS AND IDENTITY OF THE SELLER OF THE ASSETS
COMMERCE BANK OF VIRGINIA
BUSINESS
CBOV is a community oriented financial institution headquartered in Henrico
County, Virginia. CBOV was incorporated under the laws of the Commonwealth of
Virginia on August 28, 1985, and commenced business as a commercial bank on
April 8,1986.
CBOV conducts a general commercial and a full service retail banking
business. CBOV is a local bank with a local, personal focus. It seeks to address
the problems and serve the opportunities of people and businesses within its
limited service area. CBOV provides banking services to individuals,
corporations, and others as well as services through correspondent banks and
other special services. CBOV offers a variety of transaction accounts, time and
savings accounts, as well as Individual Retirement Accounts. In the loan
division, CBOV offers commercial, residential, personal, construction and real
estate loans. In addition to the services listed above, CBOV offers other
related services such as bank by mail, VISA, U.S. Savings Bonds, and the rental
of safe deposit facilities. CBOV does not provide trust services. As of December
31, 1995, CBOV had net loans of $42.1 millino and held $66.4 million in
deposits.
<PAGE>
CBOV is a community bank that seeks to provide a wide variety of banking
services to individuals and small to medium sized businesses in an environment
that allows CBOV to respond to and meet the needs of its customers in a rapid
and efficient manner that differentiates it from larger banking organizations.
CBOV prides itself on delivering enhanced customer service that clients are not
able to obtain elsewhere. CBOV's hours of operation are generally, 9:00 a.m. to
2:00 p.m., Monday through Friday and additional hours of 4:00 p.m. to 6:00 p.m.
on Friday. Saturday banking hours are also available from 9:00 a.m. until noon.
In addition, CBOV operates two full service Automated Teller Machines (ATMs) at
its Main Office location and at the Hanover Branch location.
CBOV's three Executive Officers each have over 25 years of banking
experience, primarily in the local market and in community banking. CBOV has
hired and retained experienced people whose banking backgrounds have helped CBOV
develop and deliver excellent service.
CBOV is organized under the Virginia Banking Act, as amended. It is subject
to regulation and examination by the Virginia State Corporation Commission, the
Federal Reserve, and the Federal Deposit Insurance Corporation. Various
requirements and restrictions under the laws of the United States and the
Commonwealth of Virginia affect the operations of CBOV, including the
requirement to maintain reserves against deposits, restrictions on the nature
and amount of loans which may be made and the interest that may be charged
thereon, and restrictions relating to investments and other activities of CBOV.
The accounts of CBOV's depositors are insured up to $100,000 for each
account holder by the Federal Deposit Insurance Corporation, an instrumentality
of the United States Government. Insurance of CBOV's accounts is subject to the
statutes and regulations governing insured banks, to examination by the Federal
Deposit Insurance Corporation, and to certain limitations and restrictions
imposed by that agency.
As of June 30, 1996, there were 527,840 shares of Common Stock outstanding
held by 421 holders of record.
<PAGE>
PROPERTIES
CBOV's principal office is located in Henrico County at 11500 West Broad
Street, Richmond, Virginia 23233. The mailing address is Commerce Bank of
Virginia, Post Office Box 29569, Richmond, Virginia 23242. In addition to its
principal office in Henrico County, branches are located in Hanover County,
Goochland County, and in the City of Richmond. Branch addresses are provided
below:
Hanover Branch Riverfront Tower Branch
10035 Sliding Hill Road 901 East Byrd Street
Suite 101 Suite 1150
Ashland, Virginia 23005 Richmond, Virginia 23219
(Hanover County) (City of Richmond)
Opened October 1988 Opened November 1992
Centerville Branch Goochland Courthouse Branch
27 Broad Street Road 3018 River Road West
Manakin, Virginia 23103 Goochland, Virginia 23063
(Goochland County) (Goochland County)
Opened June 1993 Opened June 1993
The Goochland Courthouse Branch opened for business in a temporary banking
facility in 1993, and moved to a newly constructed permanent facility in
December 1995.
CBOV holds the real property at its principal office pursuant to a ground
lease and owns the improvements that have been constructed thereon. CBOV's
Hanover County branch is owned by the Atlee Station Co., of which Sam T. Beale,
a Director of CBOV, is the principal shareholder. See "Commerce Bank of Virginia
- - Election of Directors; Management - Interest of Directors and Officers in
Certain Transactions". CBOV also leases the space where the Riverfront Tower
branch is located. CBOV owns the property for its two other branches.
The primary service area of CBOV consists of the City of Richmond, Virginia
and the Counties of Goochland, Hanover, and Henrico.
EMPLOYEES
CBOV employed 42 persons at December 31, 1995. Of these 35 were full-time
employees and 7 were part-time employees. The relationship between CBOV and its
employees is good.
<PAGE>
AMOUNT OF CONSIDERATION AND SOURCES OF FUNDS USED FOR THE ACQUISITION
McKinnon & Company, Inc. (McKinnon), an investment banking firm, was
engaged by CBI and CBOV in November 1995 to serve as their financial advisor and
to determine a fair exchange ratio of shares of CBI for each share of CBOV
common stock and each option of CBOV outstanding. After several meetings with
the management of CBI and CBOV in November 1995 and a review of relevant public
and private information, McKinnon determined a fair exchange ratio from a
financial point of view. On November 21, 1995, McKinnon met with the Boards of
Directors of CBI and CBOV respectively to present its analysis and evaluation of
a fair exchange ratio. On December 12, 1995, McKinnon met with the Boards of
Directors of CBI and CBOV, along with respective legal and accounting
representatives, and gave its verbal opinion that the Share Exchange as
specified in the Agreement and Plan of Reorganization dated December 12, 1995,
whereby each share of CBOV would be exchanged for 1.4044 shares of CBI Common
Stock, was fair to the shareholders of CBI and CBOV from a financial point of
view at such date.
At the effective date of the Reorganization, each outstanding share of CBOV
Common Stock, except for shares as to which dissenters' rights have been duly
exercised, shall be exchanged for 1.4044 shares of CBI Common Stock and cash in
lieu of any fractional share. Thus the lower the price of CBI Common Stock at
the effective date of the Reorganization, the lower the dollar value of CBI
Common Stock CBOV shareholders will receive as a result of the Reorganization.
Conversely the higher the price of CBI Common Stock at the effective date of the
Reorganization, the higher the dollar value of CBI Common Stock CBOV
shareholders will receive as a result of the Reorganization.
As of June 30, 1996, CBI's closing price on the OTC Bulletin Board was
$15.50, which calculates to a price for CBOV Shareholders of $21.77 per share of
CBOV Common Stock.
<PAGE>
Item 7. Financial Statements and Exhibits
COMMERCE BANK OF VIRGINIA FINANCIAL INFORMATION
A. Annual Report 1995
B. Interim Financial Statements (Unaudited):
Statements of Condition - March 31, 1996 and 1995
Statements of Operations - Three Months Ended March 31, 1996 and 1995
PRO FORMA CONDENSED FINANCIAL INFORMATION (UNAUDITED)
A. Pro Forma Condensed Balance Sheets
B. Pro Forma Condensed Statements of Income
<PAGE>
COMMERCE BANK OF VIRGINIA
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995 AND 1994 AND
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<PAGE>
COMMERCE BANK OF VIRGINIA
CONTENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS C - 2
FINANCIAL STATEMENTS
Statements of Condition C - 4
Statements of Operations C - 5
Statements of Stockholders' Equity C - 7
Statements of Cash Flows C - 8
NOTES TO FINANCIAL STATEMENTS C - 10
C-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Commerce Bank of Virginia
Richmond, Virginia
We have audited the accompanying statements of condition of Commerce Bank of
Virginia as of December 31, 1995 and 1994, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our 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 financial position of Commerce Bank of Virginia at
December 31, 1995 and 1994, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.
BDO Seidman, LLP
February 7, 1996
Richmond, Virginia
C-2
<PAGE>
COMMERCE BANK OF VIRGINIA
STATEMENTS OF CONDITION
December 31, 1995 1994
- -------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 3,971,894 $ 4,982,284
Federal funds sold 3,763,000 -
Investment securities (Note 2)
Held to maturity 10,923,360 15,164,608
Available for sale 9,222,655 -
Loans receivable, net (Note 3) 42,149,438 38,801,575
Other real estate owned 316,855 -
Bank premises and equipment, net (Note 4) 1,823,125 1,461,589
Accrued interest receivable 463,719 432,102
Other assets 306,345 243,544
- -------------------------------------------------------------------------------
$72,940,391 $61,085,702
- -------------------------------------------------------------------------------
C-3
<PAGE>
COMMERCE BANK OF VIRGINIA
STATEMENTS OF CONDITION
December 31, 1995 1994
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Note 5) $66,357,577 $55,811,525
Federal funds purchased (Note 7) - 793,000
Accrued interest payable 72,042 37,346
Deferred income taxes (Note 8) 34,746 64,436
Other liabilities 367,392 120,682
- --------------------------------------------------------------------------------
Total liabilities 66,831,757 56,826,989
- --------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 9, 10, 12 and 13)
- --------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (Notes 9, 10 and 11)
Common stock, $3.50 par value; authorized
1,500,000 shares issued; and outstanding
501,264 and 431,223 shares 1,754,424 1,509,281
Capital surplus 2,045,823 1,240,352
Retained earnings 2,240,940 1,509,080
Net unrealized gain on securities available
for sale (Note 2) 67,447 -
- --------------------------------------------------------------------------------
Total stockholders' equity 6,108,634 4,258,713
- --------------------------------------------------------------------------------
$72,940,391 $61,085,702
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
C-4
<PAGE>
COMMERCE BANK OF VIRGINIA
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 1994 1993
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans $4,207,636 $3,266,997 $2,786,466
Investment securities
U. S. Government agencies (taxable) 837,331 605,141 322,644
Other securities (taxable) 122,152 143,937 144,723
State and County municipals (tax exempt) 47,513 64,655 56,439
Federal Reserve Bank 4,947 5,246 4,251
Federal funds sold 100,392 118,692 195,634
- -------------------------------------------------------------------------------------------
Total interest and dividend income 5,319,971 4,204,668 3,510,157
- -------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 2,197,051 1,495,867 1,324,068
Federal funds purchased (Note 7) 10,159 3,674 -
- -------------------------------------------------------------------------------------------
Total interest expense 2,207,210 1,499,541 1,324,068
- -------------------------------------------------------------------------------------------
NET INTEREST INCOME 3,112,761 2,705,127 2,186,089
PROVISION FOR LOAN LOSSES (NOTE 3) 195,000 199,838 75,000
- -------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 2,917,761 2,505,289 2,111,089
- -------------------------------------------------------------------------------------------
NONINTEREST INCOME
Service charges on deposit accounts 305,346 289,406 200,568
Other 76,698 140,450 63,268
- -------------------------------------------------------------------------------------------
Total noninterest income 382,044 429,856 263,836
- -------------------------------------------------------------------------------------------
</TABLE>
continued
C-5
<PAGE>
COMMERCE BANK OF VIRGINIA
STATEMENTS OF OPERATIONS
(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 1994 1993
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NONINTEREST EXPENSES
Salaries and employee benefits
(Notes 9, 10 and 12) $1,279,469 $1,187,014 $1,002,556
Occupancy (Note 13) 157,950 154,624 169,688
Depreciation and amortization 129,296 227,875 186,883
Other 633,624 653,203 635,207
- -------------------------------------------------------------------------------------------
Total noninterest expenses 2,200,339 2,222,716 1,994,334
- -------------------------------------------------------------------------------------------
Income before income taxes 1,099,466 712,429 380,591
INCOME TAXES (Note 8) 367,800 225,600 103,000
- -------------------------------------------------------------------------------------------
NET INCOME $ 731,666 $ 486,829 $ 277,591
- -------------------------------------------------------------------------------------------
EARNINGS PER SHARE $ 1.60 $ 1.13 $ 0.68
- -------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
C-6
<PAGE>
COMMERCE BANK OF VIRGINIA
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net Unrealized
Gain on
Securities Total
COMMON CAPITAL RETAINED AVAILABLE STOCKHOLDERS'
STOCK SURPLUS EARNINGS FOR SALE EQUITY
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1992 $1,360,958 $ 994,088 $1,115,179 $ - $3,470,225
Issuance of 1,176
shares of common stock
to ESOP (Note 9) 4,116 8,232 - - 12,348
10% common stock
dividend (39,002
shares) (Note 11) 136,507 234,012 (370,519) - -
Net income - - 277,591 - 277,591
- -------------------------------------------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1993 1,501,581 1,236,332 1,022,251 - 3,760,164
Exercise of stock
options (Note 10) 7,700 4,020 - - 11,720
Net income - - 486,829 - 486,829
- -------------------------------------------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1994 1,509,281 1,240,352 1,509,080 - 4,258,713
Proceeds from stock
sale (Note 11) 245,143 805,471 194 - 1,050,808
Net income - - 731,666 - 731,666
Net unrealized gain
on securities
available for
sale (Note 2) - - - 67,447 67,447
- -------------------------------------------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1995 $1,754,424 $2,045,823 $2,240,940 $67,447 $6,108,634
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
C-7
<PAGE>
COMMERCE BANK OF VIRGINIA
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 731,666 $ 486,829 $ 277,591
Adjustments to reconcile net income to net
cash provided by operating activities
Provisions for loan losses 195,000 199,838 75,000
Depreciation and amortization 129,296 227,875 186,883
Amortization and accretion of premiums
and discounts, net (3,871) 14,045 17,682
Net (increase) decrease in mortgage loans
held for sale - 2,125,261 (810,824)
(Increase) decrease in accrued interest
receivable 31,617 (173,154) 23,495
Increase (decrease) in accrued interest payable 34,696 (8,049) 8,766
Increase (decrease) in deferred income taxes (29,690) 32,720 (31,000)
Increase (decrease) in income taxes payable 163,822 52,527 (107,296)
Other (132,036) (105,496) (49,480)
- -------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (ABSORBED) BY OPERATING ACTIVITIES 1,120,500 2,852,396 (409,183)
- -------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of investment securities available for sale (9,222,655) - -
Purchases of securities held to maturity (3,008,000) (6,985,198) (6,557,553)
Proceeds from principal payments and maturities
of investment securities 7,355,312 5,186,390 1,155,000
Loan originations, net of principal collected (3,542,863) (8,223,052) (5,738,483)
Proceeds from sale of real estate - 19,603 -
Purchase of other real estate (316,855) - -
Purchases of bank premises and equipment (436,689) (59,356) (562,401)
- -------------------------------------------------------------------------------------------------------
NET CASH ABSORBED BY INVESTING ACTIVITIES (9,171,750) (10,061,613) (11,703,437)
- -------------------------------------------------------------------------------------------------------
</TABLE>
continued
C-8
<PAGE>
COMMERCE BANK OF VIRGINIA
STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net increase in deposits $10,546,052 $2,514,022 $15,291,065
Net increase (decrease) in federal funds purchased (793,000) 793,000 -
Proceeds from stock sale 1,050,808 - -
Proceeds from exercise of stock options - 11,720 -
Repurchase of common stock for issuance to ESOP - - (12,652)
- -------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10,803,860 3,318,742 15,278,413
- -------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,752,610 (3,890,475) 3,165,793
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 4,982,284 8,872,759 5,706,966
- -------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 7,734,894 $4,982,284 $ 8,872,759
- -------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
- -------------------------------------------------------------------------------------------------------
Cash payments of interest expense $ 2,173,000 $1,508,000 $ 1,315,000
- -------------------------------------------------------------------------------------------------------
Cash payments of income taxes $ 268,000 $ 140,000 $ 241,000
- -------------------------------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND
FINANCING ACTIVITIES
- -------------------------------------------------------------------------------------------------------
Transfers from loans to real estate acquired
through foreclosure $ - $ 25,000 $ -
- -------------------------------------------------------------------------------------------------------
Issuance of common stock through contribution
to ESOP $ - $ - $ 12,348
- -------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
C-9
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Commerce Bank of Virginia conform to
generally accepted accounting principles and general practices within the
banking industry. A summary of the more significant policies follows:
GENERAL
Commerce Bank of Virginia (the "Bank") is a state-chartered member bank subject
to examination and regulation by the Federal Reserve Bank of Richmond and Bureau
of Financial Institutions of the Commonwealth of Virginia.
REGULATION
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was
enacted on December 19, 1991. Provisions of the legislation became effective
January 1, 1993.
Specifically, FDICIA contains provisions which allows regulators to impose
prompt corrective action on undercapitalized institutions in accordance with a
categorized capital-based system. In addition, FDICIA includes provisions for
revising capital requirements to include the effect of interest rate risk,
operating standards in key areas of the Bank's operations, standards for
compensating executives, audit expansion and increased frequency of regulatory
examinations, reducing the scope of deposit insurance coverage, risk-based
deposit insurance assessments, and restricting state banking activities.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
C-10
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENT SECURITIES
Investment securities are classified as either held-to-maturity, trading or
available for sale. Investment securities classified as held for investment are
stated at cost, adjusted for amortization of premiums and accretion of discounts
using the level yield method. It is management's intention and it has the
ability to hold investment securities classified as held for investment to
maturity and, accordingly, adjustments are not made for temporary declines in
their market value below amortized cost. Securities held for sale are carried at
their estimated market value with unrealized holding gains and losses, net of
tax, reported as a separate component of stockholders' equity until realized.
Trading account assets are carried at estimated market value. Gains and losses
on securities sold are determined based on the specific identification of the
securities sold.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are granted to borrowers predominantly in the Richmond metropolitan area
and are stated at the amount of unpaid principal reduced by an allowance for
loan losses. Interest on loans is calculated by using the simple interest method
on daily balances of the principal amount outstanding. The accrual of interest
on loans is discontinued when, in the opinion of management, there is an
indication that the borrower may be unable to meet payments as they become due.
The allowance for loan losses is maintained at a level considered by management
to be adequate to absorb future loan losses currently inherent in the loan
portfolio. Management's assessment of the adequacy of the allowance is based
upon type and volume of the loan portfolio, past loan loss experience, existing
and anticipated economic conditions, and other factors which deserve current
recognition in estimating future loan losses. Additions to the allowance are
charged to operations. Management's assessment of the adequacy of the allowance
is subject to evaluation and adjustment by the Bank's regulators.
Effective January 1, 1995, the Bank adopted Statement of Financial Accounting
Standards No. 114 (SFAS 114), "Accounting by Creditors for Impairment of a Loan
(as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures). The effect of adopting these new
accounting standards were immaterial to the operating results of the Bank
for the year ended December 31, 1995. Prior financial statements have not
been restated to apply the provision of the new accounting standard.
C-11
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
Under the new accounting standard, a loan is considered to be impaired when it
is probable that the Bank will be unable to collect all principal and interest
amounts according to the contractual terms of the loan agreement. The allowance
for loan losses related to loans identified as impaired is primarily based on
the excess of the loan's current outstanding principal balance over the
estimated fair market value of the related collateral. For a loan that is not
collateral-dependent, the allowance is recorded at the amount by which the
outstanding principal balance exceeds the current best estimate of the future
cash flows on the loan discounted at the loan's original effective interest
rate. Prior to 1995, the allowance for loan losses for all loans which would
have qualified as impaired under the new accounting standard was primarily based
upon the estimated fair market value of the related collateral.
For impaired loans that are on nonaccrual status, cash payments received are
generally applied to reduce the outstanding principal balance. However, all or a
portion of a cash payment received on a nonaccrual loan may be recognized as
interest income to the extent allowed by the loan contract, assuming management
expects to fully collect the remaining principal balance on the loan.
As of December 31, 1995, the Bank had no loans that were considered as impaired.
The Bank defers loan origination and commitment fees, net of certain direct loan
origination costs, and the net deferred fees are amortized into interest income
over the lives of the related loans as yield adjustments. Any unamortized net
fees on loans fully repaid or sold are recognized as income in the year of
repayment or sale. Deferred fees on permanent adjustable-rate loans are
amortized into income over the period necessary to adjust the yield on the loans
to market rates using the level yield method.
FORECLOSED REAL ESTATE
Foreclosed real estate is initially recorded at the lower of fair value less
estimated selling costs or the balance of the loan on the property at date of
foreclosure. Costs related to capital additions or improvements are capitalized,
whereas those relating to holding the property are charged to operations.
Valuations are periodically performed by management, and an allowance for losses
is established by a charge to operations if the carrying value of the property
exceeds its fair value.
C-12
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated depreciation and
amortization. For financial reporting purposes, provisions for depreciation and
amortization are computed using the straight-line method over the estimated
useful lives of the individual assets or the terms of the related leases, if
shorter, for leasehold improvements. Accelerated depreciation methods are used
for income tax purposes. Expenditures for betterments and major renewals are
capitalized and ordinary maintenance and repairs are charged to operations as
incurred.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences of "temporary
differences" between the financial statement carrying amounts and the tax basis
of existing assets and liabilities by applying enacted statutory rates
applicable to future years to those differences.
EARNINGS PER SHARE
Earnings per share is computed by dividing net income by the weighted average
number of shares outstanding during the year. The weighted average number of
shares outstanding for the years ended December 31, 1995, 1994 and 1993 were
459,239, 429,399 and 409,463, respectively. Existing stock options are not
considered in the computation as their dilutive effect is less than three
percent.
CASH EQUIVALENTS
For purposes of this presentation, cash equivalents include federal funds sold.
C-13
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued its Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and For Long-Lived Assets to Be Disposed Of".
SFAS 121 requires that long-lived assets and certain intangibles to be held and
used by an entity be reviewed for impairment when events or changes in
circumstances indicate that the carrying amount may not be recoverable. In
addition, SFAS 121 requires long-lived assets and certain intangibles to be
disposed of to be reported at the lower of carrying amount or fair value less
costs to sell. SFAS 121 is effective for fiscal years beginning after December
15, 1995. Management does not expect the application of this pronouncement to
have a material effect on the financial statements of the Bank.
In May 1995, the Financial Accounting Standards Board issued its Statement of
Financial Accounting Standards No. 122 (SFAS 122), "Accounting for Mortgage
Servicing Rights an Amendment of FASB Statement No. 65". SFAS 122 requires
entities to allocate the cost of acquiring or originating mortgage loans between
the mortgage servicing rights and the loans, based on their relative fair
values, if the bank sells or securitizes the loans and retains the mortgage
servicing rights. In addition, SFAS 122 requires entities to assess its
capitalized mortgage servicing rights for impairment based on the fair value of
those rights. SFAS 122 is effective for fiscal years beginning after December
15, 1995. Management does not expect the application of this pronouncement to
have a material effect on the financial statements of the Bank.
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation." SFAS No. 123 allows companies to continue to account for their
stock option plans in accordance with APB Opinion 25 but encourages the adoption
of a new accounting method based on the estimated fair value of employee stock
options. Companies electing not to follow the new fair value based method are
required to provide expanded footnote disclosures, including pro forma net
income and earnings per share, determined as if the company had applied the new
method. SFAS No. 123 is required to be adopted prospectively beginning January
1, 1996. Management does not expect the application of this pronouncement to
have a material effect on the financial statements of the Bank.
C-14
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER
Certain reclassifications have been made in the prior years' financial
statements to conform to the December 31, 1995 presentation.
2. INVESTMENT SECURITIES
A summary of the amortized cost and estimated market values of investment
securities is as follows:
DECEMBER 31, 1995
- -------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------
HELD TO MATURITY
U. S. Treasury and agency
securities $ 7,990,490 $ 48,438 $ 9,883 $ 8,029,045
Mortgage-backed securities 540,935 9,360 - 550,295
Corporate securities 1,256,485 13,647 392 1,269,740
State and county
Municipal bonds 1,135,450 41,585 2,015 1,175,020
- --------------------------------------------------------------------------------
10,923,360 113,030 12,290 11,024,100
- --------------------------------------------------------------------------------
AVAILABLE FOR SALE
U.S. Treasury and agency
securities 5,253,137 51,368 3,970 5,300,535
Mortgage-backed
Securities 3,734,825 54,795 - 3,789,620
Other 132,500 - - 132,500
- --------------------------------------------------------------------------------
9,120,462 106,163 3,970 9,222,655
- --------------------------------------------------------------------------------
$20,043,822 $219,193 $16,260 $20,246,755
- --------------------------------------------------------------------------------
C-15
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
2. INVESTMENT SECURITIES (CONTINUED)
The amortized cost and estimated market values at December 31, 1995, by
contractual maturity, are as follows:
ESTIMATED
AMORTIZED MARKET
COST VALUE
- -------------------------------------------------------------------
HELD TO MATURITY
Due in one year or less $ 5,455,790 $ 5,457,585
Due after one year through five years 3,691,391 3,729,530
Due after five years through ten years 399,634 419,971
Due after ten years 835,610 866,719
- -------------------------------------------------------------------
10,382,425 10,473,805
- -------------------------------------------------------------------
AVAILABLE FOR SALE
Due in one year or less 250,000 250,000
Due after one year through five years 2,650,939 2,672,020
Due after five years through ten years 1,852,198 1,874,609
Due after ten years 500,000 503,906
- -------------------------------------------------------------------
5,253,137 5,300,535
- -------------------------------------------------------------------
OTHER
Mortgage-backed securities 4,275,760 4,339,915
Other 132,500 132,500
- -------------------------------------------------------------------
4,408,260 4,472,415
- -------------------------------------------------------------------
$20,043,822 $20,246,755
- -------------------------------------------------------------------
C-16
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
2. INVESTMENT SECURITIES (CONTINUED)
DECEMBER 31, 1994
- -------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------
HELD TO MATURITY
U. S. Treasury and agency
securities $11,041,123 $ - $343,369 $10,697,754
Mortgage-backed securities 1,146,932 - 97,312 1,049,620
Corporate securities 1,577,160 - 37,388 1,539,772
State and county
Municipal bonds 1,267,243 7,307 27,846 1,246,704
Other 132,150 - - 132,150
- -------------------------------------------------------------------------------
$15,164,608 $7,307 $505,915 $14,666,000
- -------------------------------------------------------------------------------
At December 31, 1995 and 1994, securities with an amortized cost of $6,347,304
and $5,005,000 and a market value of approximately $6,367,000 and $4,902,000,
respectively, were pledged as collateral to secure public funds as required by
law.
3. LOANS
Loans receivable are summarized as follows:
DECEMBER 31, 1995 1994
- ---------------------------------------------------------------------------
Commercial and industrial $ 5,667,207 $ 3,682,996
Real estate - construction and
land development 2,959,741 4,113,018
Real estate - other 25,480,625 21,812,940
Consumer 5,986,000 7,588,973
Other 2,529,000 1,977,990
- ---------------------------------------------------------------------------
42,622,573 39,175,917
Less allowance for loan losses 473,135 374,342
- ---------------------------------------------------------------------------
$42,149,438 $38,801,575
- ---------------------------------------------------------------------------
C-17
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
3. LOANS (CONTINUED)
Loans to directors, executive officers, and those individuals or organizations
that are related to them, are made in the ordinary course of business on
substantially the same terms as those loans prevailing at the time for
comparable transactions with others and do not involve more than normal risk of
collectibility or present other unfavorable features. The activity in such loans
was as follows:
YEAR ENDED DECEMBER 31, 1995 1994
- -------------------------------------------------------------------------------
Beginning balance $ 963,000 $1,052,000
Additions 628,000 363,500
Repayments (526,000) (452,500)
- -------------------------------------------------------------------------------
Ending balance $1,065,000 $ 963,000
- -------------------------------------------------------------------------------
Activity in the allowance for loan losses are as follows:
YEAR ENDED DECEMBER 31, 1995 1994 1993
- -------------------------------------------------------------------------------
Balance, beginning of year $374,342 $330,333 $300,692
Provision charged to expense 195,000 199,838 75,000
Charge-offs, net of recoveries (96,207) (155,829) (45,359)
- -------------------------------------------------------------------------------
Balance, end of year $473,135 $374,342 $330,333
- -------------------------------------------------------------------------------
C-18
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
4. BANK PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
DECEMBER 31, 1995 1994
- --------------------------------------------------------------------------------
Land $ 192,177 $ 192,177
Building and leasehold improvements 1,577,064 1,172,059
Furniture and equipment 1,081,281 993,402
- --------------------------------------------------------------------------------
2,850,522 2,357,638
Less allowance for depreciation
and amortization 1,027,397 896,049
- --------------------------------------------------------------------------------
$1,823,125 $1,461,589
- --------------------------------------------------------------------------------
5. DEPOSITS
Deposits are summarized as follows:
DECEMBER 31, 1995 1994
- --------------------------------------------------------------------------------
Demand $10,848,734 $ 9,019,064
Interest-bearing transaction accounts 19,054,387 11,985,232
Savings 16,978,183 20,803,498
Certificates of deposit 19,476,273 14,003,731
- --------------------------------------------------------------------------------
Total deposits $66,357,577 $55,811,525
- --------------------------------------------------------------------------------
Certificates of deposits with balances of $100,000 or more totalled $4,047,014
and $2,992,516 at December 31, 1995 and 1994, respectively.
Certificates of deposit mature as follows:
YEAR ENDING DECEMBER 31, 1995
- --------------------------------------------------------------------------------
Within one year $11,320,983
One to two years 6,596,970
More than two years 1,558,320
- --------------------------------------------------------------------------------
$19,476,273
- --------------------------------------------------------------------------------
C-19
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
In December 1991, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 107, "Disclosures about Fair Value of
Financial Instruments", effective for fiscal years ending after December 15,
1992. This statement requires disclosure of the fair values of financial
instruments, both assets and liabilities recognized and not recognized in the
statement of condition, where it is practicable to estimate fair value.
The estimated fair values of the Bank's financial instruments as of December 31,
1995, are as follows:
Carrying Fair
Amount Value
- --------------------------------------------------------------------------------
FINANCIAL ASSETS
Cash and short-term investments $ 3,971,894 $ 3,971,894
Federal funds sold 3,763,000 3,763,000
Investment securities 20,043,822 20,247,000
Loans, net of allowance for loan losses 42,149,438 41,989,000
FINANCIAL LIABILITIES
DEPOSITS 66,357,577 66,501,000
UNRECOGNIZED FINANCIAL INSTRUMENTS
Commitments to extend credit N/A N/A
Standby letters of credit N/A 10,700
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value.
Cash and short-term investments
For those short-term investments, the carrying amount is a reasonable estimate
of fair value.
Investment securities
Fair values are based on quoted market prices or dealer quotes. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities.
C-20
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
6. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Loan receivables
The fair value of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with similar
remaining maturities. This calculation ignores loan fees and certain factors
affecting the interest rates charged on various loans such as the borrower's
creditworthiness and compensating balances and dissimilar types of real estate
held as collateral.
Deposit liabilities
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the reporting date. The fair value
of fixed-maturity certificates of deposit is estimated using the rates currently
offered for deposits of similar remaining maturities.
Commitments to extend credit and standby letters of credit
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the borrowers. For fixed-rate
loan commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. Because of the competitive
nature of the marketplace loan fees vary greatly with no fees charged in many
cases. Therefore, management has concluded no value should be assigned.
The fair value of letters of credit is based on fees currently charged for
similar agreements or on the estimated cost to terminate them or otherwise
settle the obligations with the borrowers at the reporting date.
C-21
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
7. FEDERAL FUNDS PURCHASED
The following is a summary of certain information regarding the Bank's federal
funds purchased:
DECEMBER 31, 1995 1994
- --------------------------------------------------------------------------------
Balance at end of year $ - $793,000
Weighted average interest rate
at end of year - 5.56%
Average amount outstanding
during the year $ 166,100 $ 66,000
Maximum amount outstanding at
any month end during the
year $1,052,000 $793,000
8. INCOME TAXES
The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31, 1995 1994 1993
- -------------------------------------------------------------------------------
Current $432,200 $192,900 $134,000
Deferred expense (benefit) (64,400) 32,700 (31,000)
- -------------------------------------------------------------------------------
Total provision for income taxes $367,800 $225,600 $103,000
- -------------------------------------------------------------------------------
A reconciliation of income taxes computed at the statutory income tax rate to
the effective rate is as follows:
YEAR ENDED DECEMBER 31, 1995 1994 1993
- -------------------------------------------------------------------------------
Income taxes at the statutory rate $373,800 $242,200 $129,401
Increase (decrease) in taxes:
Municipal bond interest (9,562) (22,000) (15,956)
Other 3,562 5,400 (10,445)
- -------------------------------------------------------------------------------
$367,800 $225,600 $103,000
- -------------------------------------------------------------------------------
C-22
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
8. INCOME TAXES (CONTINUED)
Deferred tax assets (liabilities) are as follows:
DECEMBER 31, 1995 1994 1993
- -------------------------------------------------------------------------------
Accrual to cash basis adjustment $(130,031) $(150,515) $(79,463)
Bad debt deduction 109,825 74,224 61,679
Depreciation and amortization (31,146) (16,187) (33,797)
Deferred compensation 51,352 28,042 19,865
Available for sale securities (34,746) - -
- -------------------------------------------------------------------------------
Deferred tax liability, net $ (34,746) $ (64,436) $(31,716)
- -------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS
The Bank sponsors a non-contributory Employee Stock Ownership Plan (ESOP)
covering substantially all employees. Contributions to the ESOP, which are
recorded as compensation expense, and can be cash or stock at fair value, are at
the discretion of the Board of Directors and amounted to $40,000, $30,000 and
$25,000 for the years ended December 31, 1995, 1994 and 1993, respectively. At
December 31, 1995, there were 10,765 shares allocated to participants which are
considered outstanding for purposes of computation of earnings per share.
Effective June 1, 1992, the Bank adopted a 401(k) profit-sharing plan (the
"Plan") covering substantially all employees. Participants may contribute up to
15% of their compensation to the Plan. The Bank contributes 50% of the
participant's contribution, up to 6% of the participant's compensation, as a
matching contribution. Contributions to the Plan by the Bank were approximately
$16,800, $12,100 and $12,100 for the years ending December 31, 1995, 1994 and
1993, respectively.
C-23
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
10. STOCK OPTION PLAN
The Bank has a noncompensatory Incentive Stock Option Plan (the "Plan") designed
to provide long-term incentives to officers, directors and key employees.
Pursuant to the Plan, 50,000 shares of the Bank's common stock were made
available for awards on April 21, 1986. In June 1993, the Board of Directors
declared a 10% stock dividend. The Plan requires that in the event of a stock
dividend that the number of shares of common stock then covered by each
outstanding option granted shall be increased proportionately with no increase
in option price. In accordance with the Plan and in connection with the stock
dividend, 5,000 additional shares of the Bank's common stock have been made
available for awards and 3,000 options to purchase common stock were granted.
The Bank also granted an additional 2,000 options to purchase common stock
during 1993. All options granted under the Plan were at the estimated market
value of the Bank's stock on the date of grant.
The following table presents options exercisable and outstanding under the Plan:
YEAR ENDED DECEMBER 31, 1995 1994 1993
- -------------------------------------------------------------------------------
OPTION PRICE
- -------------------------------------------------------------------------------
Outstanding at beginning of year $5.33 - $6.12 24,000 26,200 23,400
Options granted 5.33 - 8.63 - - 5,000
Options exercised 5.33 - (2,200) -
Options terminated 5.33 - - (2,200)
- -------------------------------------------------------------------------------
Outstanding at end of year $5.33 - $8.63 24,000 24,000 26,200
- -------------------------------------------------------------------------------
11. STOCKHOLDERS' EQUITY
During June 1993, the Board of Directors declared a 10% stock dividend.
Accordingly, amounts equal to the fair market value of the additional shares
issued have been charged to retained earnings and credited to common stock and
capital surplus.
In August 1995, the Bank completed an offering of 70,041 shares of common stock
to existing shareholders which provided the Bank with proceeds of $1,050,808 net
of expenses.
C-24
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
11. STOCKHOLDERS' EQUITY (CONTINUED)
On December 12, 1995, the Bank entered into an Agreement and Plan of
Reorganization (the "Agreement") with Community Bankshares, Inc. ("CBI"), a bank
holding company headquartered in Petersburg, Virginia, pursuant to which the
Bank will engage in a Share Exchange with CBI (the "Reorganization"). Under the
terms of the Agreement, each share of common stock of the Bank outstanding
immediately prior to consummation of the Reorganization will be exchanged for
1.4044 shares of CBI Common Stock, with cash being paid in lieu of issuing
fractional shares. Following the Reorganization, the Bank will continue its
banking business as a wholly-owned subsidiary of CBI in substantially the same
manner as before the Reorganization. This Agreement is subject to approval by
the shareholders of both the Bank and CBI.
Banking laws and regulations place certain restrictions on the amount of
dividends that a bank may pay to its stockholders. Of the $6,041,187 in total
stockholders' equity at December 31, 1995 $1,496,086 is available for dividends
and the remaining $4,545,101 is restricted based on minimum capital
requirements.
12. DEFERRED COMPENSATION PLAN
The Bank has a Deferred Compensation Plan (the "Plan") for the benefit of its
directors. Contributions amounted to approximately $38,900, $24,000 and $16,400
for the years ended December 31, 1995, 1994 and 1993, respectively. The Plan
provides each director with an annual benefit payment upon attaining 70 years of
age. In addition, benefit payments are available upon early retirement,
termination and death as defined by the Plan Document.
During 1995, the Bank adopted a Deferred Compensation Plan (the "Officers Plan")
for the benefit of certain officers. Contributions of approximately $29,600 were
made to the Plan during the year ended December 31, 1995. The Officers Plan
provides each officer an annual benefit payment upon retirement. In addition,
benefit payments are available upon death or early termination as defined by the
Plan Document.
C-25
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
13. COMMITMENTS AND CONTINGENCIES
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers,
primarily in the Richmond metropolitan area. These financial instruments include
commitments to extend credit and standby letters of credit. Those instruments
involve, to varying degrees, elements of credit risk in excess of the amount
recognized on the statement of condition. Financial instruments with
off-balance-sheet risk are summarized as follows:
DECEMBER 31, 1995 1994
- --------------------------------------------------------------------------------
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $7,894,000 $6,873,000
- --------------------------------------------------------------------------------
Standby letters of credit $ 777,000 $ 596,000
- --------------------------------------------------------------------------------
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual notional amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The Bank evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on management's credit evaluation of
the counterparty. Collateral held varies but may include personal property,
commercial property, residential property, land and accounts receivable.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers.
C-26
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Bank has entered into employment agreements with its President and Chief
Executive Officer and with two Senior Vice Presidents which expire at dates
through December 31, 1997. These agreements, which contain continual
self-renewing terms of one year subject to cancellation by the Bank, provide
minimum salaries during the terms of the agreements and certain severance
benefits if a change of control and termination occurs as defined in the
agreements. The maximum severance benefits payable, if such a termination upon
change in control occurred at December 31, 1995, would have been approximately
$423,000.
The Bank leases land, tenant space and certain equipment under operating leases
expiring at various dates to 2006. Total rental expense amounted to
approximately $68,500, $84,700 and $96,855 for the years ended December 31,
1995, 1994 and 1993, respectively. At December 31, 1995, minimum annual lease
payments in the aggregate were as follows:
YEAR ENDING DECEMBER 31,
----------------------------------------------------
1996 $ 81,900
1997 74,000
1998 55,500
1999 15,000
2000 15,000
Thereafter 76,300
----------------------------------------------------
$317,700
----------------------------------------------------
The Hanover branch facility is owned by a company whose principal shareholder is
the Bank's Chairman. The base annual rent is $36,000 per year.
C-27
<PAGE>
COMMERCE BANK OF VIRGINIA
<TABLE>
<CAPTION>
STATEMENTS OF CONDITION
MARCH 31, 1996 AND 1995
ASSETS 1996 1995
<S> <C>
- ---------------------------------------------------------------------------------------------------
Cash and due from banks $ 2,975,229 $ 3,944,671
Federal funds sold - 2,153,000
----------------------------------
TOTAL CASH AND CASH EQUIVALENTS 2,975,229 6,097,671
Securities available for sale 13,377,847 1,318,500
Securities held to maturity (approximate market value,
$7,777,000 in 1996 and $14,427,000 in 1995) 7,749,725 14,656,127
Loans, net 44,658,705 40,951,937
Bank premises and equipment, net 1,800,672 1,472,993
Accrued interest receivable 594,933 512,234
Other assets 684,886 320,319
----------------------------------
$ 71,841,997 $ 65,329,781
----------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits $ 9,273,642 $ 9,812,105
Interest-bearing demand deposits 18,116,606 14,358,324
Savings deposits 17,246,896 17,562,375
Time deposits, $100,000 and over 4,212,337 5,258,819
Other time deposits 15,620,948 13,653,863
----------------------------------
64,470,429 60,645,486
Federal funds purchased 720,000 -
Accrued interest payable 78,421 82,765
Other liabilities 293,940 192,522
----------------------------------
65,562,790 60,920,773
----------------------------------
Stockholders' Equity
Capital stock 1,763,475 1,509,281
Surplus 2,076,855 1,240,352
Retained earnings 2,492,337 1,653,375
Net unrealized gain (loss) on available for sale securities,
net of tax (53,460) 6,000
----------------------------------
6,279,207 4,409,008
----------------------------------
$ 71,841,997 $ 65,329,781
----------------------------------
</TABLE>
<PAGE>
COMMERCE BANK OF VIRGINIA
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
1996 1995
<S> <C>
- ----------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $ 1,100,170 $ 972,630
Interest on investment securities:
U. S. Government agencies and corporations 277,907 175,194
Other securities 24,604 36,670
States and political subdivisions 12,131 12,558
Interest on federal funds sold and securities
purchased under agreements to resell 22,084 8,106
-------------------------------------
TOTAL INTEREST INCOME 1,436,896 1,205,158
-------------------------------------
Interest expense:
Interest on deposits 581,680 470,426
Interest on federal funds purchased and securities
sold under agreements to repurchase 1,776 6,418
-------------------------------------
TOTAL INTEREST EXPENSE 583,456 476,844
-------------------------------------
NET INTEREST INCOME 853,440 728,314
Provision for loan losses 15,000 75,000
-------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 838,440 653,314
-------------------------------------
Other income:
Service charges, commissions and fees 75,929 76,307
Security gains (losses) 28,649 (6,788)
Other operating income 14,525 16,247
-------------------------------------
TOTAL OTHER INCOME 119,103 85,766
-------------------------------------
Other expenses:
Salaries and employee benefits 340,463 304,251
Net occupancy expense 58,075 52,047
Furniture and equipment expense 54,765 33,936
Other operating expenses 131,143 133,544
-------------------------------------
TOTAL OTHER EXPENSES $ 584,446 $ 523,778
-------------------------------------
(Continued)
</TABLE>
<PAGE>
COMMERCE BANK OF VIRGINIA
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
1996 1995
<S> <C>
- ----------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES $ 373,097 $ 215,302
Income taxes 121,700 71,200
-------------------------------------
NET INCOME $ 251,397 $ 144,102
-------------------------------------
Earnings per common and common equivalent
share based on 503,187 and 431,223 shares
respectively $ 0.50 $ 0.33
-------------------------------------
Earnings per common share, assuming full dilution
based on 503,187 and 431,223 shares respectively $ 0.50 $ 0.33
-------------------------------------
</TABLE>
<PAGE>
COMMUNITY BANKSHARES INCORPORATED AND COMMERCE BANK OF VIRGINIA
<TABLE>
<CAPTION>
PRO FORMA CONDENSED BALANCE SHEET
AS OF MARCH 31, 1996
PRO FORMA PRO FORMA
ASSETS CBI CBOV ADJUSTMENTS COMBINED
<S> <C>-------------------------------------------------------------------------------------------------------------------------
Cash and due from banks $ 3,435,150 $ 2,975,229 $ 6,410,379
Federal funds sold 4,182,000 - 4,182,000
------------------------------------------------------
TOTAL CASH AND CASH EQUIVALENTS 7,617,150 2,975,229 - 10,592,379
Investment securities:
Available for sale 1,658,346 13,377,847 15,036,193
Held to maturity (approximate market value, $34,617,978) 11,959,010 7,749,725 19,708,735
Loans, net 66,157,949 44,658,705 110,816,654
Bank premises and equipment, net 992,939 1,800,672 2,793,611
Accrued interest receivable 482,948 594,933 1,077,881
Other assets 1,074,397 684,886 1,759,283
------------------------------------------------------
$89,942,739 $71,841,997 $ - $161,784,736
------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits $14,040,675 $ 9,273,642 23,314,317
Interest bearing demand deposits 22,178,622 18,116,606 40,295,228
Savings deposit 7,851,295 17,246,896 25,098,191
Time deposits, $100,000 and over 6,740,078 4,212,337 10,952,415
Other time deposits 27,830,644 15,620,948 43,451,592
------------------------------------------------------
78,641,314 64,470,429 - 143,111,743
Federal funds purchased - 720,000 720,000
Accrued interest payable 391,089 78,421 469,510
Other liabilities 312,556 293,940 606,496
Guaranteed debt of Employee Stock Ownership Trust 330,000 - 330,000
------------------------------------------------------
79,674,959 65,562,790 - 145,237,749
------------------------------------------------------
Stockholders' Equity
Capital stock, par value $3 3,480,000 - 2,122,821 5,602,821
Captial stock, par value $3.50 - 1,763,475 (1,763,475) -
Surplus 32,500 2,076,855 (359,346) 1,750,009
Retained earnings 7,084,982 2,492,337 9,577,319
Net unrealized losses on available for sale securities,
net of tax 298 (53,460) (53,162)
--------------------------- --------------------------
10,597,780 6,279,207 - 16,876,987
Unearned ESOP shares (330,000) - (330,000)
-------------------------- --------------------------
10,267,780 6,279,207 - 16,546,987
-------------------------- --------------------------
$89,942,739 $71,841,997 $ - $161,784,736
-------------------------- --------------------------
</TABLE>
<PAGE>
COMMUNITY BANKSHARES INCORPORATED AND COMMERCE BANK OF VIRGINIA
<TABLE>
<CAPTION>
PRO FORMA CONDENSED STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 1996
PRO FORMA PRO FORMA
CBI CBOV ADJUSTMENTS COMBINED
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Interest income:
Interest and fees on loans $1,653,871 $1,100,170 $ - $2,754,041
Interest on investment securities:
U. S. Government agencies and corporations 238,315 277,907 - 516,222
Other securities 2,083 24,604 - 26,687
States and political subdivisions - 12,131 - 12,131
Interest on federal funds sold and securities
purchased under agreements to resell 51,451 22,084 - 73,535
-----------------------------------------------------------
TOTAL INTEREST INCOME 1,945,720 1,436,896 - 3,382,616
-----------------------------------------------------------
Interest expense:
Interest on deposits 764,908 581,680 - 1,346,588
Interest on federal funds purchased and securities
sold under agreements to repurchase - 1,776 - 1,776
-----------------------------------------------------------
TOTAL INTEREST EXPENSE 764,908 583,456 - 1,348,364
-----------------------------------------------------------
NET INTEREST INCOME 1,180,812 853,440 - 2,034,252
Provision for loan losses 35,000 15,000 - 50,000
-----------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 1,145,812 838,440 - 1,984,252
-----------------------------------------------------------
Other income:
Service charges, commissions and fees 150,426 75,929 - 226,355
Security gains (losses) - 28,649 - 28,649
Other operating income 45,109 14,525 - 59,634
-----------------------------------------------------------
TOTAL OTHER INCOME 195,535 119,103 - 314,638
-----------------------------------------------------------
Other expenses:
Salaries and employee benefits 367,165 340,463 - 707,628
Net occupancy expense 50,351 58,075 - 108,426
Furniture and equipment expense 46,291 54,765 - 101,056
Other operating expenses 185,424 131,143 - 316,567
-----------------------------------------------------------
TOTAL OTHER EXPENSES $ 649,231 $ 584,446 $ - $1,233,677
-----------------------------------------------------------
</TABLE>
(Continued)
<PAGE>
COMMUNITY BANKSHARES INCORPORATED AND COMMERCE BANK OF VIRGINIA
<TABLE>
<CAPTION>
PRO FORMA CONDENSED STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 1996
CBI CBOV PRO FORMA PRO FORMA
<S> <C> ADJUSTMENTS COMBINED
- -----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES $ 692,116 $ 373,097 - $1,065,213
Income taxes 252,170 121,700 - 373,870
-----------------------------------------------------------
NET INCOME $ 439,946 $ 251,397 - $ 691,343
-----------------------------------------------------------
Earnings per share (based on 1,249,672 shares
outstanding CBI: 503,187 shares outstanding CBOV) $ 0.35 $ 0.50 - $ 0.35
-----------------------------------------------------------
Earnings per share (based on 1,249,672 shares
outstanding CBI; 503,187 shares outstanding CBOV),
assuming full dilution $ 0.35 $ 0.50 - $ 0.35
-----------------------------------------------------------
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
COMMUNITY BANKSHARES INCORPORATED AND COMMERCE BANK OF VIRGINIA
PRO FORMA COMBINED FINANCIAL STATEMENTS
ASSUMPTIONS
MARCH 31, 1996
BALANCE SHEET
(a) It is assumed that the Reorganization will be accounted for on a pooling of
interests accounting basis and, accordingly, the related pro forma adjustments
have been calculated using the exchange ratio, whereby CBI will issue 1.4044
shares of stock for each share of CBOV stock.
As a result, as of March 31, 1996, information was appropriately adjusted for
the Reorganization by the (a) addition of 707,607 shares of CBI common stock
amounting to $2,122,821, (b) elimination of 503,850 shares of CBOV common stock
amounting to $1,763,475, and (c) recordation of the remaining amount of $359,346
as a decrease in capital surplus.
INCOME STATEMENT
No significant assumptions.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
COMMUNITY BANKSHARES INCORPORATED
July 12, 1996
Nathan S. Jones, 3rd
President and Chief Executive Officer
Lillian M. Umphlett
Vice President/Chief Financial Officer
