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, 1997
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 January 14, 1997, the Board of Directors for Community Bankshares
Incorporated (CBI) voted to enter into an Agreement and Plan for Reorganization
(the plan) with County Bank of Chesterfield (CBOC) to combine their businesses.
CBOC is a state bank with its principal office located in Chesterfield County,
Virginia. The combination of the two companies will be consummated through a
Share Exchange under Virginia law. Under the terms of the Plan, CBOC would
become a wholly-owned subsidiary of CBI. On June 4, 1997, the stockholders of
CBI and CBOC 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.
Description of Assets and Identity of the Seller of the Assets
COUNTY BANK OF CHESTERFIELD
Business
CBOC is a full service commercial bank operating in Chesterfield
County, Virginia. CBOC opened for business in September 1986 with one location
at 10400 Hull Street Road. In July 1988, it opened a second location at 6435
Ironbridge Road. A third branch office, located at 13241 River's Bend Boulevard,
opened in March 1997. CBOC expects to continue to provide the banking services
described herein.
In October 1995, CBOC sold 258,750 shares of common stock in a public
offering. In 1994 and the first six months of 1995, CBOC's total assets were
expanding and, additionally, it was considering a third branch location. The
purpose of the offering was to support continued asset growth and the investment
in a third branch.
The primary service areas of CBOC consist of the major traffic
corridors upon which its three banking facilities are located, 10400 Hull Street
Road (Route 360), 6435 Ironbridge Road (Route 10) and 13241 River's Bend
Boulevard. According to deposit statistics reported as of June 30, 1994, CBOC
had deposits of approximately $63.9 million in Chesterfield County, or
approximately 3.7% of all deposits maintained by financial institutions within
the County. CBOC solicits business from individuals and small- to medium-sized
businesses in these primary service areas. CBOC's present intention is to
continue to concentrate its activities in its current service area, which CBOC
believes is an attractive area in which to operate.
CBOC provides a wide range of banking and related services, including
checking and savings accounts, certificates of deposit and other depository
services and loan services to individuals and businesses. No material portion of
CBOC's deposits has been obtained from a single or small group of customers and
the loss of deposits of any one customer or of a small group of customers would
not have a material adverse effect on the business of CBOC. During 1993, CBOC
formed CBC Insurance Agency, Inc., a wholly-owned subsidiary. CBC Insurance
Agency, Inc. owns a 6.0% interest in Bankers Title, Inc., a title agency owned
by financial institutions in central Virginia.
<PAGE>
CBOC 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 CBOC, 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 CBOC.
The accounts of CBOC'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 CBOC'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, 1997, there were 793,175 shares of Common Stock
outstanding held by 724 holders of record.
Properties
CBOC's principal office is located in Chesterfield County at 10400 Hull
Street Road, Midlothian, Virginia 23112. The mailing address is County Bank of
Chesterfield, 10400 Hull Street Road, Midlothian, Virginia 23112. In addition to
its principal office, all branches are located in Chesterfield County. Branch
addresses are provided below:
Irongate Branch River's Bend Branch
6435 Ironbridge Road 13241 River's Bend Boulevard
Richmond, Virginia 23234 Chester, Virginia 23831
(Chesterfield County) (Chesterfield County)
Opened July 1988 Opened March 1997
The primary service area of CBOC consists of Chesterfield County,
Virginia.
Employees
CBOC employed 43 persons at December 31, 1996. Of these 38 were
full-time employees and 5 were part-time employees. The relationship between
CBOC 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 CBOC in November 1996 to serve as their financial advisor and
to determine a fair exchange ratio of shares of CBI for each share of CBOC
common stock and each option of CBOC outstanding. After several meetings with
the management of CBI and CBOC in November and December 1996 and a review of
relevant public and private information, McKinnon determined a fair exchange
ratio from a financial point of view. On November 29, 1996, McKinnon met with
the Boards of Directors of CBI and CBOC respectively to present its analysis and
evaluation of a fair exchange ratio. On December 23, 1996, McKinnon met with the
Boards of Directors of CBI and CBOC, 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 January 14, 1997,
whereby each share of CBOC would be exchanged for 1.1054 shares of CBI Common
Stock, was fair to the shareholders of CBI and CBOC from a financial point of
view at such date.
At the effective date of the Reorganization, each outstanding share of
CBOC Common Stock, except for shares as to which dissenters' rights have been
duly exercised, shall be exchanged for 1.1054 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 CBOC 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 CBOC shareholders will receive as a result of the Reorganization.
As of June 30, 1997, CBI's closing price on the OTC Bulletin Board was
$19.00, which calculates to a price for CBOC Shareholders of $21.00 per share of
CBOC Common Stock.
<PAGE>
Item 7. Financial Statements and Exhibits
County Bank of Chesterfield Financial Information
A. Annual Report 1996
B. Interim Financial Statements (Unaudited):
Statements of Condition - June 30, 1997 and 1996
Statements of Operations - Six Months Ended June 30, 1997 and 1996
Pro Forma Condensed Financial Information (Unaudited)
A. Pro Forma Condensed Balance Sheets
B. Pro Forma Condensed Statements of Income
<PAGE>
[KPMG LOGO]
COUNTY BANK OF CHESTERFIELD
AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1996, 1995 and 1994
(With Independent Auditors' Report Thereon)
<PAGE>
[KPMG Peat Marwick LLP LOGO]
Suite 1900
1021 East Cary Street
Richmond, VA 23219-4023
Independent Auditors' Report
The Board of Directors
County Bank of Chesterfield:
We have audited the consolidated balance sheets of County Bank of Chesterfield
and subsidiary (the Company) as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of County Bank of
Chesterfield and subsidiary as of December 31, 1996 and 1995 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
January 14, 1997
<PAGE>
COUNTY BANK OF CHESTERFIELD AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Assets 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C>
Cash and due from banks (notes 2 and 11) $ 3,552,843 2,282,871
Federal funds sold (note 11) 4,418,000 3,228,000
Interest-bearing deposits in other depository institutions (note 11) 1,170,024 865,226
Investment securities, at amortized cost (fair value of
$1,320,854 in 1996 and $1,295,000 in 1995) (notes 3 and 11) 1,398,813 1,398,371
Securities available for sale, at fair value (notes 3 and 11) 17,992,834 21,055,076
Loans (notes 4 and 11) 48,480,067 42,624,204
Less allowance for loan losses (note 4) 754,337 614,604
- ------------------------------------------------------------------------------------------------------
Net loans 47,725,730 42,009,600
- ------------------------------------------------------------------------------------------------------
Premises and equipment, net (note 5) 1,802,213 1,285,274
Accrued interest receivable 564,832 576,053
Other real estate owned, net 563,265 755,543
Deferred income tax benefit (note 6) 201,150 8,743
Prepaid expenses and other assets 106,785 103,717
- ------------------------------------------------------------------------------------------------------
Total assets $ 79,496,489 73,568,474
- ------------------------------------------------------------------------------------------------------
(Continued)
</TABLE>
<PAGE>
COUNTY BANK OF CHESTERFIELD AND SUBSIDIARY
Consolidated Balance Sheets, Continued
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C>
Deposits (note 11):
Demand $ 10,612,482 8,165,116
Interest-bearing transaction accounts 12,197,589 10,452,624
Savings 3,791,319 3,622,058
Consumer certificates 34,988,425 34,632,957
Certificates of deposit $100,000 and over 8,812,277 8,196,133
- ------------------------------------------------------------------------------------------------------
Total deposits 70,402,092 65,068,888
Accrued interest and other liabilities 503,865 497,750
- ------------------------------------------------------------------------------------------------------
Total liabilities 70,905,957 65,566,638
- ------------------------------------------------------------------------------------------------------
Stockholders' equity (notes 7 and 9):
Common stock, $5 par value. Authorized 3,000,000
shares; issued and outstanding 793,175 shares 3,965,875 3,965,875
Surplus 2,609,615 2,609,615
Retained earnings 2,135,348 1,352,421
Net unrealized gain (loss) on securities available
for sale (net of income tax benefit of $61,976 in 1996
and income tax expense of $38,083 in 1995) (120,306) 73,925
- ------------------------------------------------------------------------------------------------------
Total stockholders' equity 8,590,532 8,001,836
Commitments and contingencies (notes 8 and 10)
- ------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 79,496,489 73,568,474
- ------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COUNTY BANK OF CHESTERFIELD AND SUBSIDIARY
Consolidated Statements of Income
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
Income from earning assets:
Interest and fees on loans (note 4) $ 4,746,354 4,116,700 3,593,865
Interest on deposits in other institutions 53,341 47,034 63,602
Interest on federal funds sold 108,905 158,456 42,158
Interest on investment securities and securities available
for sale 1,258,581 1,171,622 1,002,433
- -----------------------------------------------------------------------------------------------------------------
Total income from earning assets 6,167,181 5,493,812 4,702,058
- -----------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on savings and other time deposits 2,497,143 2,409,835 1,810,512
Interest on certificates of deposit $100,000 and over 495,187 395,740 336,429
- -----------------------------------------------------------------------------------------------------------------
Total interest expense 2,992,330 2,805,575 2,146,941
- -----------------------------------------------------------------------------------------------------------------
Net interest income from earning assets 3,174,851 2,688,237 2,555,117
Provision for loan losses (note 4) 130,000 50,000 245,000
- -----------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 3,044,851 2,638,237 2,310,117
- -----------------------------------------------------------------------------------------------------------------
Other operating income:
Service charges on deposit accounts 337,535 328,723 287,592
Other fees and commissions 127,832 131,372 141,243
Gain on sales of securities, net (note 3) 2,978 8,656 4,706
- -----------------------------------------------------------------------------------------------------------------
Total other operating income 468,345 468,751 433,541
- -----------------------------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 1,313,249 1,120,649 1,052,698
Occupancy expenses 309,002 320,092 279,712
FDIC assessments 2,000 69,439 125,614
Other expenses 768,428 781,535 616,016
- -----------------------------------------------------------------------------------------------------------------
Total other operating expenses 2,392,679 2,291,715 2,074,040
- -----------------------------------------------------------------------------------------------------------------
Income before income taxes 1,120,517 815,273 669,618
Income tax expense (note 6) 290,000 190,000 155,000
- -----------------------------------------------------------------------------------------------------------------
Net income $ 830,517 625,273 514,618
- -----------------------------------------------------------------------------------------------------------------
Net income per share $ 1.05 1.03 .96
- -----------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 793,175 609,741 534,100
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COUNTY BANK OF CHESTERFIELD AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net
unrealized
gain (loss)
Common stock on securities
---------------------------- Retained available
Shares Amount Surplus earnings for sale Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Balance at December 31, 1993 534,100 $ 2,670,500 1,335,287 239,235 - 4,245,022
Cumulative effect of change in
accounting for securities available
for sale, net of income taxes of
$49,265 - - - - 95,631 95,631
Net income - - - 514,618 - 514,618
Change in net unrealized gain (loss)
on securities available for sale, net
of income taxes of $173,445 - - - - (336,687) (336,687)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 534,100 2,670,500 1,335,287 753,853 (241,056) 4,518,584
Cash dividends declared on common
stock ($.05 per share) - - - (26,705) - (26,705)
Sale of common stock (note 7) 259,075 1,295,375 1,274,328 - - 2,569,703
Net income - - - 625,273 - 625,273
Change in net unrealized gain (loss)
on securities available for sale, net
of income taxes of $162,263 - - - - 314,981 314,981
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 793,175 3,965,875 2,609,615 1,352,421 73,925 8,001,836
Cash dividends declared on common
stock ($.06 per share) - - - (47,590) - (47,590)
Net income - - - 830,517 - 830,517
Change in net unrealized gain (loss)
on securities available for sale, net
of income taxes of $100,059 - - - - (194,231) (194,231)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 793,175 $ 3,965,875 2,609,615 2,135,348 (120,306) 8,590,532
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COUNTY BANK OF CHESTERFIELD AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Cash flows from operating activities:
Net income $ 830,517 625,273 514,618
Adjustments to reconcile net income to net cash and
cash equivalents provided by operating activities:
Depreciation of premises and equipment 139,911 143,672 141,853
Amortization of purchased software 19,955 21,865 21,569
Provision for loan losses 130,000 50,000 245,000
Provision for losses on other real estate owned 33,000 120,000 -
Provision for deferred income tax expense (benefit) (92,348) (70,234) 31,740
Gains on sales of securities, net (2,978) (8,656) (4,706)
(Increase) decrease in accrued interest receivable 11,221 (115,153) (94,361)
Loss on sales of other real estate owned - - 5,000
(Increase) decrease in prepaid expenses and other assets (11,791) 112,237 (64,143)
Increase (decrease) in accrued interest and other liabilities 6,115 201,432 81,910
Other, net 16,074 11,742 3,274
- -------------------------------------------------------------------------------------------------------------------------------
Total adjustments 249,159 466,905 367,136
- -------------------------------------------------------------------------------------------------------------------------------
Net cash and cash equivalents provided by operating activities 1,079,676 1,092,178 881,754
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of interest-bearing deposits in other depository institutions (595,000) (285,886) (289,782)
Maturities of interest-bearing deposits in other depository institutions 295,000 99,000 730,000
Sales of interest-bearing deposits in other depository institutions - 96,819 297,823
Purchases of investment securities - - (6,382,797)
Maturities and repayments of investment securities - 147,814 1,682,361
Purchase of securities available for sale (5,540,708) (6,421,806) (1,496,190)
Proceeds from sales of securities available for sale 6,927,717 2,011,599 1,896,084
Maturities and repayments of securities available for sale 1,362,607 615,258 331,631
Net increase in loans (5,846,130) (5,017,560) (2,571,099)
Purchases of premises and equipment (656,850) (67,653) (38,930)
Proceeds from the disposition of other real estate owned 159,278 62,188 90,939
Purchases of software (11,232) (9,437) -
- -------------------------------------------------------------------------------------------------------------------------------
Net cash and cash equivalents used in investing activities (3,905,318) (8,769,664) (5,749,960)
- -------------------------------------------------------------------------------------------------------------------------------
(Continued)
</TABLE>
<PAGE>
COUNTY BANK OF CHESTERFIELD AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Cash flows from financing activities:
Net increase (decrease) in demand and savings accounts $ 4,361,592 246,956 (1,897,026)
Net increase in certificates of deposit 971,612 5,659,534 4,973,241
Proceeds from issuance of stock, net - 2,569,703 -
Dividends paid (47,590) (26,705) -
- -------------------------------------------------------------------------------------------------------------------------------
Net cash and cash equivalents provided by financing activities 5,285,614 8,449,488 3,076,215
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,459,972 772,002 (1,791,991)
Cash and cash equivalents at the beginning of year 5,510,871 4,738,869 6,530,860
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of year $ 7,970,843 5,510,871 4,738,869
- -------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Interest paid $ 2,967,083 2,717,708 2,104,741
Income taxes paid 255,000 143,825 61,900
- -------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of non-cash investing activities:
Increase in other real estate owned as a result of loan
foreclosures $ - 130,000 -
Increase in securities available for sale as a result of
transfers from investment securities - 12,845,033 -
Loans charged off 120,387 148,279 270,155
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COUNTY BANK OF CHESTERFIELD AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
(1) Summary of Significant Accounting Policies
County Bank of Chesterfield ("the Bank") and subsidiary (together "the
Company") was incorporated on September 27, 1985 and opened for
business on September 8, 1986. The Bank provides a full range of
banking services to individuals and corporate customers and is subject
to competition from other financial institutions. The Bank is also
subject to the regulations of the Federal Reserve System and the State
Corporation Commission of Virginia, and it undergoes periodic
examinations by these regulatory authorities. The most recent
regulatory examination was conducted as of September 30, 1995. During
1993, County Bank of Chesterfield formed CBC Insurance Agency, Inc., a
wholly-owned subsidiary. CBC Insurance Agency, Inc. owns a 6% interest
in Bankers Title Inc., a title agency owned by financial institutions
in central Virginia.
Use of Estimates
The consolidated financial statements of the Company have been prepared
in conformity with generally accepted accounting principles which
require management to make estimates and assumptions when preparing the
consolidated financial statements. Actual results could differ from
those estimates.
Material estimates that are particularly susceptible to significant
change in the near-term relate to the determination of the allowance
for loan losses and the valuation of real estate acquired in connection
with foreclosures or in satisfaction of loans. These areas and other
significant accounting policies affecting the consolidated financial
statements are discussed below.
Cash and Cash Equivalents
For purposes of the statement of cash flows, cash and cash equivalents
include cash on hand, amounts due from banks with original maturities
of three months or less, and federal funds sold. Generally, federal
funds are sold for one day periods.
Investment Securities and Securities Available for Sale
Effective January 1, 1994, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 115, Accounting
for Certain Investments in Debt and Equity Securities. In accordance
with SFAS No. 115, when securities are purchased, they are classified
as investment securities when management has the positive intent and
the Company has the ability at the time of purchase to hold them until
maturity. Investment securities are carried at cost adjusted for
amortization of premiums and accretion of discounts. Unrealized losses
in this portfolio are not recognized unless management believes that
other than a temporary decline in value has occurred.
(Continued)
<PAGE>
COUNTY BANK OF CHESTERFIELD AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) Continued
Securities to be held for indefinite periods of time and not intended
to be held to maturity or on a long-term basis are classified as
available for sale. Securities available for sale are recorded at fair
value, based on quoted market prices. The net unrealized holding gain
or loss on securities available for sale, net of deferred income taxes,
is included as a separate component of stockholders' equity. A decline
in the fair value of any securities available for sale below cost, that
is deemed other than temporary, is charged to earnings resulting in a
new cost basis for the security. Costs of securities sold are
determined on the basis of specific identification.
Loans
Loans are stated at the amount of unpaid principal reduced by an
allowance for loan losses. Interest on loans is computed by methods
that generally result in level rates of return on outstanding principal
balances. The accrual of interest on loans is discontinued when the
collection of principal or interest is legally barred or considered by
management to be highly unlikely. When interest accruals are
discontinued, interest credited to income in the current year is
reversed and interest accrued in prior years and uncollected is charged
to the allowance for loan losses.
Certain loan fees and related direct costs of loan origination are
netted and amortized as a component of interest income on loans over
the life of the related loans in accordance with Statement of Financial
Accounting Standards No. 91.
Allowance for Loan Losses
The Bank maintains an allowance for loan losses through a provision for
loan losses charged to expense. Loans are charged against the allowance
when management believes that the collectibility of the principal is
unlikely. Recoveries of amounts previously charged off are credited to
the allowance. The charge to expense is based on management's periodic
evaluation of the loan portfolio with consideration given to the
overall loss experience, delinquency data, financial condition of the
borrowers, impairment analysis of certain specific loans, and general
economic conditions.
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, particularly those affecting real
estate values.
(Continued)
<PAGE>
(1) Continued
In addition, regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize additions to
the allowance based on their judgments about information available to
them at the time of their examination.
On January 1, 1995, the Bank adopted Statement of Financial Accounting
Standards No. 114, Accounting by Creditors for Impairment of a Loan
(SFAS 114), as amended by SFAS 118. SFAS 114, as amended by SFAS 118,
requires that impaired loans within the scope of the statements be
presented in the Company's financial statements at the present value of
expected future cash flows or at the fair value of the loan's
collateral. A valuation allowance is required to the extent that the
measure of the impaired loans is less than the recorded investment.
SFAS 114 does not apply to larger groups of homogeneous loans such as
real estate mortgage, installment, home equity and card loans, which
are collectively evaluated for impairment. The impact of adopting SFAS
114, as amended, was immaterial to the Bank's consolidated financial
statements as of and for the year ended December 31, 1995.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization are
charged to expense over the estimated useful lives of the assets and
are computed using the straight-line method for financial reporting
purposes and accelerated methods for tax purposes. The costs of major
improvements are capitalized, while the costs of ordinary maintenance
and repairs are charged to expense as incurred.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes
the enactment date.
Other Real Estate Owned
Other real estate owned consists of real estate held for resale which
was acquired through foreclosure on loans secured by real estate and
land previously held for future branch development. Other real estate
owned is initially recorded at the lower of the recorded investment in
the loan or fair market value of the property less estimated selling
costs. Loan losses arising from the acquisition of such property are
charged against the allowance for loan losses. Subsequent declines in
market value of foreclosed property held in other real estate are
recognized through an allowance for losses and a charge to earnings.
(Continued)
<PAGE>
(1) Continued
Expenses incurred in connection with operating the properties and gains
or losses upon sale are included in other expenses.
Earnings Per Share
Earnings per share have been computed on the basis of the weighted
average number of shares outstanding during the year. The assumed
exercise of stock options has not been included in the computations
because the resulting dilution is not material.
(2) Cash and Due from Banks
As a member of the Federal Reserve System, the Bank is required to
maintain certain daily reserve balances. The average reserve balances
maintained in accordance with such requirements for the weeks including
December 31, 1996 and 1995 were approximately $103,600 and $94,300,
respectively.
(3) Investment Securities and Securities Available for Sale
The following table shows amortized cost, gross unrealized gains and
losses and fair value of investment securities as of December 31, 1996
and 1995:
<TABLE>
<CAPTION>
1996
--------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- -----------------------------------------------------------------------------------------------------------
<S> <C>
Investment securities - U.S. Government
and agencies $ 1,398,813 2,243 80,202 1,320,854
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1995
--------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- -----------------------------------------------------------------------------------------------------------
<S> <C>
Investment securities - U.S. Government
and agencies $ 1,398,371 1,629 105,000 1,295,000
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
<PAGE>
(3) Continued
The following table shows amortized cost, gross unrealized gains and
losses and fair value of securities available for sale as of December
31, 1996 and 1995:
<TABLE>
<CAPTION>
1996
--------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- -----------------------------------------------------------------------------------------------------------
<S> <C>
U.S. Government and agencies $ 11,706,771 2,871 224,463 11,485,179
States and political subdivisions 5,550,490 79,852 28,658 5,601,684
Federal Reserve Bank stock 197,250 - - 197,250
Other securities 720,605 61 11,945 708,721
- -----------------------------------------------------------------------------------------------------------
Total securities available for sale $ 18,175,116 82,784 265,066 17,992,834
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1995
--------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- -----------------------------------------------------------------------------------------------------------
<S> <C>
U.S. Government and agencies $ 12,133,557 91,583 104,674 12,120,466
States and political subdivisions 7,196,079 156,872 28,326 7,324,625
Federal Reserve Bank stock 120,150 - - 120,150
Other securities 1,493,282 16,388 19,835 1,489,835
- -----------------------------------------------------------------------------------------------------------
Total securities available for sale $ 20,943,068 264,843 152,835 21,055,076
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Proceeds from sales of securities available for sale were $6,927,717,
$2,011,599 and $1,896,084 in 1996, 1995 and 1994, respectively. These
sales resulted in gross gains of $45,184, $8,656 and $5,270 in 1996,
1995 and 1994, respectively, and gross losses of $42,206 and $564 in
1996 and 1994, respectively.
As a member of the Federal Reserve System, the Bank is required to hold
capital stock of the Federal Reserve Bank of Richmond. The amount
required to be held is based on six percent of qualifying capital and
surplus.
In December 1995, upon issuance of implementation guidance for SFAS No.
115 by the Financial Accounting Standards Board, the Company
transferred investment securities with an amortized cost of $12,845,033
and fair value of $12,932,782 to securities available for sale.
Securities available for sale having a fair value of $992,499 at
December 31, 1996 and 1995 were pledged to secure deposits and to meet
other legal requirements.
(Continued)
<PAGE>
(3) Continued
The amortized cost and fair value of investment securities and
securities available for sale at December 31, 1996, by contractual
maturity, are shown below. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Amortized Fair
cost value
- --------------------------------------------------------------------------------
Investment securities:
Due within one year $ 250,000 249,395
Due after one year through five years 398,813 389,806
Due after five years through ten years 500,000 432,278
Due after ten years 250,000 249,375
- --------------------------------------------------------------------------------
$ 1,398,813 1,320,854
- --------------------------------------------------------------------------------
Securities available for sale:
Due within one year 221,176 221,481
Due after one year through five years 2,972,946 2,961,533
Due after five years through ten years 8,179,941 8,109,219
Due after ten years 6,801,053 6,700,601
- --------------------------------------------------------------------------------
$ 18,175,116 17,992,834
- --------------------------------------------------------------------------------
(4) Loans and Allowance for Loan Losses
The composition of loans at December 31, 1996 and 1995 is as follows:
1996 1995
- ------------------------------------------------------------------
Commercial $ 35,104,371 32,143,461
Real estate - construction 3,399,801 3,118,769
Real estate - mortgage 2,885,286 2,702,213
Installment 6,384,310 4,105,772
Home equity 325,138 217,937
Bank card 381,161 336,052
- ------------------------------------------------------------------
$ 48,480,067 42,624,204
- ------------------------------------------------------------------
(Continued)
<PAGE>
(4) Continued
Activity in the allowance for loan losses for the years ended December
31, 1996, 1995 and 1994 is as follows:
1996 1995 1994
- ------------------------------------------------------------------------
Balance, beginning of year $ 614,604 581,303 575,734
Provision charged to expense 130,000 50,000 245,000
Loans charged off (120,387) (148,279) (270,155)
Recoveries 130,120 131,580 30,724
- ------------------------------------------------------------------------
Balance, end of year $ 754,337 614,604 581,303
- ------------------------------------------------------------------------
Loans for which the accrual of interest has been discontinued totaled
approximately $755,920 at December 31, 1996 and $266,850 at December
31, 1995. The effect on interest income from non-accrual loans was
approximately $43,900, $20,000 and $35,700 for the years ended in 1996,
1995 and 1994, respectively.
At December 31, 1996 and 1995, the recorded investment in loans which
have been identified as impaired loans, in accordance with SFAS 114, as
amended, totaled $755,920 and $266,850, respectively. Of this amount at
December 31, 1996, $110,852 related to loans with no valuation
allowance and $645,068 related to loans with a corresponding valuation
allowance of $73,300. At December 31, 1995, $30,000 related to loans
with no valuation allowance and $236,850 related to loans with a
corresponding valuation allowance of $24,185.
For the years ended December 31, 1996 and 1995, the average recorded
investment in impaired loans was approximately $799,500 and $237,850,
respectively, and no interest income was recognized on these impaired
loans. Impaired loans at January 1, 1995, the date the Bank adopted
SFAS 114, as amended, totaled approximately $32,900. The initial
adoption of SFAS 114, as amended, did not require an increase to the
Bank's allowance for loan losses.
(Continued)
<PAGE>
(4) Continued
The Bank, in the normal course of business, makes loans to certain
directors and executive officers of the Company and certain
corporations and individuals related to such persons. These loans have
been made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions
with other customers and did not involve more than the normal risk of
collectibility at the time made. Following is a summary of activity
during 1996 and 1995 for such loans:
Balance Balance
Year January 1 Additions Repayments December 31
--------------------------------------------------------------------
1996 $ 3,071,819 4,613,881 4,437,195 3,248,505
1995 2,500,994 5,241,837 4,671,012 3,071,819
--------------------------------------------------------
(5) Premises and Equipment
Premises and equipment at December 31, 1996 and 1995 is composed of the
following:
Estimated
lives
(years) 1996 1995
- ------------------------------------------------------------------------------
Land - $ 447,988 447,988
Building and improvements 1-40 871,790 871,790
Furniture, fixtures and equipment 3-40 940,932 873,958
Computer equipment 5 355,569 341,168
Vehicles 5 24,505 26,835
Construction in progress (new branch) - 560,427 -
--------------------------------------
3,201,211 2,561,739
Less accumulated depreciation 1,398,998 1,276,465
- ------------------------------------------------------------------------------
Premises and equipment, net $ 1,802,213 1,285,274
- ------------------------------------------------------------------------------
(Continued)
<PAGE>
(6) Income Taxes
Income tax expense (benefit) for the years ended December 31, 1996,
1995 and 1994 consists of:
1996 1995 1994
- ---------------------------------------------------------------------
Current - federal $ 382,348 260,234 123,260
Deferred - federal (92,348) (70,234) 31,740
- ---------------------------------------------------------------------
$ 290,000 190,000 155,000
- ---------------------------------------------------------------------
The actual income tax expense for 1996, 1995 and 1994 differs from the
"expected" income tax expense (computed by applying the statutory U.S.
federal corporate income tax rate to "income before income taxes") as
follows:
Percent of pretax income
-------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------
Statutory federal income tax rate 34.0% 34.0% 34.0%
Increase (reduction) in taxes resulting from:
Tax-exempt income (8.0) (11.3) (10.7)
Other, net (.1) .6 (.1)
- -----------------------------------------------------------------------------
25.9% 23.3% 23.2%
- -----------------------------------------------------------------------------
(Continued)
<PAGE>
(6) Continued
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
<S> <C>
Deferred tax assets:
Loans, principally due to the allowance for loan losses $ 132,948 64,792
Deferred loan fees 1,775 6,238
Other real estate owned, principally due to the allowance for losses 50,268 26,096
Unrealized losses on securities available for sale 61,976 -
- -----------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 246,967 97,126
Deferred tax liabilities:
Unrealized gains on securities available for sale - 38,083
Premises and equipment, principally due to depreciation 45,817 50,300
- -----------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities 45,817 88,383
- -----------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 201,150 8,743
- -----------------------------------------------------------------------------------------------------------
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon
recent levels of taxable income and projections for future taxable
income over the periods in which the deferred tax assets are expected
to become deductible, management believes it is more likely than not
the Company will realize the benefits of all deductible differences.
(7) Stockholders' Equity and Regulatory Matters
In October 1995, through a public and rights offering, the Company
issued 259,075 shares of its common stock and realized $2,569,703 in
net proceeds.
The Bank is 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 Bank's consolidated
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities and certain off-balance-sheet items as
calculated
(Continued)
<PAGE>
(7) Continued
under regulatory accounting practices. The Bank's 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 Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined) to
average assets (as defined). Management believes, as of December 31,
1996, that the Bank meets all capital adequacy requirements to which it
is subject.
The most recent notification from the Federal Reserve Bank as of
September 30, 1995, categorized the Bank as adequately capitalized
under the regulatory framework for prompt corrective action (PCA). To
be categorized as adequately capitalized the Bank must maintain minimum
total risk-based, Tier I risk-based and Tier I leverage ratios as set
forth in the table. There are no conditions or events since that
notification that management believes have changed the Bank's category.
The Bank's actual capital amounts and ratios are also presented in the
table.
<TABLE>
<CAPTION>
Required in order
Required to be well
for capital capitalized under
As of December 31, 1996 Actual adequacy purposes PCA provisions
- --------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------------------------------
<S> <C>
Total capital
(to risk weighted asets) $8,710,838 14.9% 4,672,657 8.0% 5,840,821 10.0%
Tier 1 capital
(to risk weighted assets) 8,710,838 14.9% 2,336,329 4.0% 3,504,493 6.0%
Tier 1 capital
(to average assets) 8,710,838 11.5% 2,988,226 4.0% 3,735,283 5.0%
- --------------------------------------------------------------------------------------------------------
As of December 31, 1995
Total capital
(to risk weighted assets) 7,927,911 15.6% 4,062,572 8.0% 5,078,215 10.0%
Tier 1 capital
(to risk weighted assets) 7,927,911 15.6% 2,031,286 4.0% 3,046,929 6.0%
Tier 1 capital
(to average assets) 7,927,911 11.6% 2,712,649 4.0% 3,390,811 5.0%
- --------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
<PAGE>
(8) Financial Instruments with Off-Balance-Sheet Risk
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. These financial instruments include commitments to
extend credit and standby letters of credit. Those instruments involve,
to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the consolidated balance sheets. The
contract or notional amounts of those instruments reflect the extent of
involvement the Bank has in particular classes of financial
instruments.
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 written is represented by the
contractual amount of those instruments. The Bank uses the same credit
policies in making commitments and standby letters of credit as it does
for on-balance-sheet instruments.
Unless noted otherwise, the Bank does not require collateral or other
security to support financial instruments with credit risk.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The 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 accounts receivable, inventory, property, plant,
and equipment, and income-producing commercial properties. At December
31, 1996 and 1995, the Bank had approximately $2,493,446 and $2,603,722
in outstanding commitments to extend credit, respectively.
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing, and similar
transactions. The credit risk involved in issuing standby letters of
credit is essentially the same as that involved in extending loan
facilities to customers. The Bank had outstanding standby letters of
credit of approximately $1,011,943 and $642,611 at December 31, 1996
and 1995, respectively.
A geographic concentration exists within the Bank's loan portfolio as
most of the Bank's business activity is with customers located in
Chesterfield County, Virginia.
(Continued)
<PAGE>
(9) Stock Option Plan
During 1994, the Company adopted a stock option plan which provides for
the granting of options to key executives and directors of the Company
to purchase shares of the Company's common stock at the greater of book
value or fair market value at the date of grant. The plan provides for
the granting of stock options for 90,000 shares of the Company's common
stock and an option's maximum term is 10 years.
A summary of the status of the Company's stock option plan as of
December 31, 1996, 1995 and 1994, and changes during those years is
presented as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------ ---------------------- ------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
- ------------------------------------------------------------------------------------------
<S> <C>
Options outstanding at
beginning of year 72,000 $ 8.19 72,000 8.19 - -
Options granted 18,000 13.50 - - 72,000 8.19
Options exercised - - - - - -
- ------------------------------------------------------------------------------------------
Options outstanding at
end of year 90,000 $ 9.25 72,000 8.19 72,000 8.19
- ------------------------------------------------------------------------------------------
</TABLE>
All options are exercisable upon date of grant. The remaining
contractual lives of the options granted in 1996 and 1994 are 9.8 years
and 7.5 years, respectively, at December 31, 1996. The weighted average
remaining contractual life of total options is 8.0 years at December
31, 1996.
The Company applies APB Opinion 25 and related interpretations in
accounting for its plan. Accordingly, no compensation cost has been
recognized. Had compensation cost for the Company's stock option plan
been determined based on the fair value at the grant date consistent
with the methods of FASB Statement 123, the Company's net income and
net income per share would have been reduced to the pro forma amounts
indicated below. In accordance with the transition provisions of FASB
Statement 123, the pro forma amounts reflect options with grant dates
subsequent to January 1, 1995 (none in 1995).
(Continued)
<PAGE>
(9) Continued
Year ended
December 31, 1996
- -----------------------------------------------------------------
Net income:
As reported $ 830,517
Pro forma 782,047
Net income per share:
As reported 1.05
Pro forma .99
- -----------------------------------------------------------------
For purposes of computing the pro forma amounts indicated above, the
fair value of each option on the date of grant is estimated using the
Black-Scholes option-pricing model with the following assumptions for
the grant in 1996: dividend yield of 2%, expected volatility of 30%,
risk-free interest rate of 5.8% and an expected option life of 5 years.
The fair value of each option granted during 1996 was $4.
(10) Employee Benefit Plans
Under the Company's 401(k) Plan, all full-time employees over 21 years
who have completed 90 days of service may elect to contribute up to 19%
of their salaries. Participants have the option of investing in several
investment funds. The Company contributed an amount equal to 100% of
the participant's contribution limited to 3% of the employee's
compensation along with a discretionary contribution at year end as
authorized by the Board of Directors. The Company's contributions are
fully vested to the participant after 7 years. The Company's
contributions to the Plan approximated $40,800, $27,500 and $11,600 in
1996, 1995 and 1994, respectively.
In 1996, the Company established a nonqualified deferred compensation
plan for executives providing for fixed annual benefits payable over a
period of 10 years in the event of death, disability or retirement at
age 65. Benefits will be funded by the Company. The cost of these
benefits is being charged to expense and accrued using a present value
method over the expected term of employment. During the year ended
December 31, 1996, the Company expensed approximately $16,000
associated with this plan.
(Continued)
<PAGE>
(11) Disclosures About Fair Values of Financial Instruments
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 fair value.
Cash and Due from Banks, Federal Funds Sold and Interest-Bearing
Deposits in Other Depository Institutions
For those short-term investments, the carrying amount is a reasonable
estimate of fair value.
Investment Securities and Securities Available for Sale
For investment securities and securities available for sale, fair value
is determined by quoted market price. If a quoted market price is not
available, fair value is estimated using quoted market prices for
similar securities.
Loans
The fair value of performing loans is estimated by discounting the
future cash flows using the current rates at which similar loans would
be made to borrowers with similar credit ratings and for the same
remaining maturities. Fair values for significant nonperforming loans
is based on recent external appraisals. If appraisals are not
available, estimated cash flows are discounted using a rate
commensurate with the risk associated with the estimated cash flows.
Deposits
The fair value of demand deposits, interest-bearing transaction
accounts and savings accounts is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of
deposit is estimated by discounting the future cash flows using the
rates currently offered for deposits of similar terms and remaining
maturities.
(Continued)
<PAGE>
(11) Continued
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 counterparties. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates and
the committed rates. The fair value of letters of credit is based on
fees currently charged for similar agreements or on the estimated costs
to terminate them or otherwise settle the obligations with the
counterparties at the reporting date. At December 31, 1996, the
carrying amount and fair value of loan commitments and standby letters
of credit were immaterial.
The carrying amount and estimated fair values of the Company's
financial instruments as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996
--------------------------------
Carrying Fair
Amount Value
- ---------------------------------------------------------------------------------------------------
<S> <C>
Financial assets:
Cash and due from banks $ 3,552,843 3,552,843
Federal funds sold 4,418,000 4,418,000
Interest-bearing deposits in other depository institutions 1,170,024 1,170,024
Investment securities 1,398,813 1,320,854
Securities available for sale 17,992,834 17,992,834
Net loans 47,725,730 47,006,228
- ---------------------------------------------------------------------------------------------------
Financial liabilities -
Deposits $ 70,402,092 71,689,242
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1995
--------------------------------
Carrying Fair
Amount Value
- --------------------------------------------------------------------------------------------------
<S> <C>
Financial assets:
Cash and due from banks $ 2,282,871 2,282,871
Federal funds sold 3,228,000 3,228,000
Interest-bearing deposits in other depository institutions 865,226 865,226
Investment securities 1,398,371 1,295,000
Securities available for sale 21,055,076 21,055,076
Net loans 42,009,600 42,473,752
- --------------------------------------------------------------------------------------------------
Financial liabilities -
Deposits $ 65,068,888 65,642,464
- --------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
<PAGE>
(12) Subsequent Event
On January 14, 1997, the Board of Directors voted to enter into an
Agreement and Plan of Reorganization (the Agreement) with Community
Bankshares Incorporated, a two-bank holding company with operations
principally in Petersburg and Richmond, Virginia. In accordance with
the Agreement the Company will become a wholly-owned subsidiary of
Community Bankshares Incorporated through the exchange of each
outstanding share of common stock of the Company for 1.1054 shares of
the common stock of Community Bankshares Incorporated. The consummation
of the Agreement is subject to a number of conditions including
shareholder and regulatory approvals.
<PAGE>
COUNTY BANK OF CHESTERFIELD
STATEMENTS OF CONDITION
(In Thousands)
June 30, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C>
Cash and due from banks $ 4,330 $ 2,100
Federal funds sold 1,441 5,424
----------------------------
Total cash and cash equivalents 5,771 7,524
Investment securities:
Interest-bearing deposits in other depository
institutions 770 868
Available for sale 17,823 20,389
Held to maturity 899 1,399
Loans, net 54,345 44,491
Bank premises and equipment, net 2,347 1,320
Other real estate owned 931 732
Other assets 925 758
----------------------------
$ 83,811 $ 77,481
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing deposits $ 10,893 $ 10,628
Interest-bearing demand deposits 63,601 58,489
----------------------------
74,494 69,117
Other liabilities 426 360
----------------------------
74,920 69,477
----------------------------
Commitments and Contingencies
Stockholders' Equity
Capital stock 3,966 3,966
Surplus 2,609 2,610
Retained earnings 2,447 1,704
Net unrealized losses on available for sale securities,
net of tax (131) (276)
----------------------------
8,891 8,004
----------------------------
$ 83,811 $ 77,481
============================
</TABLE>
<PAGE>
COUNTY BANK OF CHESTERFIELD
STATEMENTS OF OPERATIONS
(In Thousands)
Six months ended June 30, 1997 and 1996
1997 1996
- -------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $ 2,592 $ 2,261
Interest on investment securities:
U. S. Government agencies and corporations 454 461
Other securities 36 32
States and political subdivisions 136 171
Interest on federal funds sold and securities
purchased under agreements to resell 34 62
------------------------
Total interest income 3,252 2,987
------------------------
Interest expense:
Interest on deposits 1,524 1,498
Interest on federal funds purchased and securities
sold under agreements to repurchase 3 -
------------------------
Total interest expense 1,527 1,498
------------------------
Net interest income 1,725 1,489
Provision for loan losses 25 36
------------------------
Net interest income after provision for
loan losses 1,700 1,453
------------------------
Other income:
Service charges, commissions and fees 190 188
Security gains - 2
Other operating income 58 33
------------------------
Total other income 248 223
------------------------
Other expenses:
Salaries and employee benefits 748 611
Expense on premises and fixed assets, net 181 148
Other operating expenses 503 374
------------------------
Total other expenses 1,432 1,133
------------------------
Income before income taxes 516 543
Income taxes 140 143
------------------------
Net income $ 376 $ 400
========================
Earnings per common and common equivalent
share based on 793,175 shares outstanding $ 0.47 $ 0.50
========================
Earnings per common share, assuming full dilution
based on 793,175 shares $ 0.47 $ 0.50
========================
<PAGE>
COMMUNITY BANKSHARES INCORPORATED AND COUNTY BANK OF CHESTERFIELD
PRO FORMA CONDENSED BALANCE SHEET
(In Thousands)
AS OF JUNE 30, 1997
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ASSETS CBI CBOC ADJUSTMENTS COMBINED
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
Cash and due from banks $ 8,388 $ 4,330 $ - $ 12,718
Federal funds sold 5,021 1,441 - 6,462
------------------------------------------------------------
Total cash and cash equivalents 13,409 5,771 - 19,180
Investment securities:
Interest-bearing deposits in other depository institutions - 770 - 770
Available for sale 21,368 17,823 - 39,191
Held to maturity 14,234 899 - 15,133
Loans, net 118,097 54,345 - 172,442
Bank premises and equipment, net 2,545 2,347 - 4,892
Other real estate owned 198 931 - 1,129
Other assets 2,709 925 - 3,634
------------------------------------------------------------
$ 172,560 $ 83,811 $ - $ 256,371
============================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing deposits $ 26,742 $ 10,893 $ - 37,635
Interest-bearing deposits 123,980 63,601 - 187,581
------------------------------------------------------------
150,722 74,494 - 225,216
Securities sold under agreements to repurchase 1,044 - - 1,044
Other liabilities 952 426 - 1,378
Guaranteed debt of Employee Stock Ownership Trust 220 - - 220
------------------------------------------------------------
152,938 74,920 - 227,858
------------------------------------------------------------
Commitments and Contingencies
Stockholders' Equity
Capital stock, par value $3 5,677 - 2,630 8,307
Capital stock, par value $5 - 3,966 (3,966) -
Surplus 1,712 2,609 1,336 5,657
Retained earnings 12,600 2,447 - 15,047
Net unrealized losses on available for sale securities,
net of tax (149) (131) - (280)
------------------------------------------------------------
19,840 8,891 - 28,731
Unearned ESOP shares (218) - - (218)
------------------------------------------------------------
19,622 8,891 - 28,513
------------------------------------------------------------
$ 172,560 $ 83,811 - $ 256,371
============================================================
</TABLE>
See Notes to Pro Forma Consolidated Financial Information.
<PAGE>
COMMUNITY BANKSHARES INCORPORATED AND COUNTY BANK OF CHESTERFIELD
PRO FORMA CONDENSED STATEMENT OF INCOME
(In Thousands)
Six months ended June 30, 1997
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
CBI CBOC ADJUSTMENTS COMBINED
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
Interest income:
Interest and fees on loans $ 5,741 $ 2,592 $ - $ 8,333
Interest on investment securities:
U. S. Government agencies and corporations 1,131 454 - 1,585
Other securities 29 36 - 65
States and political subdivisions 60 136 - 196
Interest on federal funds sold and securities
purchased under agreements to resell 135 34 - 169
-------------------------------------------------------------
Total interest income 7,096 3,252 - 10,348
-------------------------------------------------------------
Interest expense:
Interest on deposits 2,692 1,524 - 4,216
Interest on federal funds purchased and securities
sold under agreements to repurchase 19 3 - 22
-------------------------------------------------------------
Total interest expense 2,711 1,527 - 4,238
-------------------------------------------------------------
Net interest income 4,385 1,725 - 6,110
Provision for loan losses - 25 - 25
-------------------------------------------------------------
Net interest income after provision for
loan losses 4,385 1,700 - 6,085
-------------------------------------------------------------
Other income:
Service charges, commissions and fees 480 190 - 670
Security losses (7) - (7)
Other operating income 116 58 - 174
-------------------------------------------------------------
Total other income 589 248 - 837
-------------------------------------------------------------
Other expenses:
Salaries and employee benefits 1,514 748 - 2,262
Expense on premises and fixed assets, net 402 181 - 583
Other operating expenses 833 503 - 1,336
-------------------------------------------------------------
Total other expenses 2,749 1,432 - 4,181
-------------------------------------------------------------
Income before income taxes 2,225 516 - 2,741
Income taxes 836 140 - 976
-------------------------------------------------------------
Net income $ 1,389 $ 376 $ - $ 1,765
-------------------------------------------------------------
Earnings per share (based on 1,972,509 shares
outstanding CBI: 793,175 shares outstanding CBOC) $ 0.70 $ 0.47 $ 0.62
------------------------- ------------
Earnings per share (based on 1,982,163 shares
outstanding CBI; 793,175 shares outstanding CBOC),
assuming full dilution $ 0.70 $ 0.47 $ 0.62
------------------------- ------------
</TABLE>
See Notes to Pro Forma Consolidated Financial Information.
<PAGE>
Community Bankshares Incorporated and County Bank of Chesterfield
Pro Forma Combined Financial Statements
Assumptions
June 30, 1997
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 1.1054
shares of stock for each share of CBOC stock.
As a result, as of June 30, 1997, information was appropriately adjusted for the
Reorganization by the (a) addition of 876,776 shares of CBI common stock
amounting to $2,630,328, (b) elimination of 793,175 shares of CBOC common stock
amounting to $3,965,875 and (c) recordation of the remaining amount of
$1,335,548 as an increase 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
October 20, 1997 /s/ Nathan S. Jones, 3rd
--------------------
Nathan S. Jones, 3rd
President and Chief Executive Officer
/s/ Thomas H. Caffrey, Jr.
----------------------
Thomas H. Caffrey, Jr.
Chief Financial Officer
