SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT
SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission File Number 0-13100
COMMUNITY BANKSHARES INCORPORATED
(Exact name of registrant as specified in its charter)
Virginia 54-1290793
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(State of incorporation) (I.R.S. Employer Identification No.)
200 North Sycamore Street, P. O. Box 2166, Petersburg, Virginia 23803
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(Address of principal executive offices)
Registrant's telephone number, including area code: (804) 861-2320
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
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Common Stock, $3 par value Over the Counter
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ . No___ .
Indicate by a check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X).
State the aggregate market value of the voting stock held by non-affiliates of
the registrant:
$32,793,630 at March 21, 1997.
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APPLICABLE TO CORPORATE ISSUERS: Indicate the number of shares outstanding of
each of the issuer's classes of common stock:
1,901,080 shares of Common Stock, $3 par value, as of December 31, 1996.
DOCUMENTS INCORPORATED BY REFERENCE. The following documents are incorporated by
reference in this Form 10-K in the Parts indicated:
1. Those portions of the Annual Report to Stockholders for fiscal year ended
December 31, 1996, incorporated herein by reference in Items 6, 7 and 8.
2. Proxy Statement for 1997 Annual Meeting of Stockholders of the Company.
Total number of pages, including cover page - 74
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Community Bankshares Incorporated
Item 1. Business
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General
Community Bankshares Incorporated (CBI) , The Community Bank and
Commerce Bank of Virginia. CBI's sole business is to serve as a multi-bank
holding company for its wholly-owned subsidiaries, The Community Bank and
Commerce Bank of Virginia. CBI was incorporated as a Virginia corporation on
January 24, 1984, and on January 1, 1985, it acquired all of the issued and
outstanding shares of The Community Bank's capital stock. CBI acquired all of
the outstanding stock of Commerce Bank of Virginia through a share exchange
agreement effective July 1, 1996.
The Community Bank was incorporated in 1973 under the laws of the
Commonwealth of Virginia. Since The Community Bank opened for business on June
10, 1974, its main banking and administrative office has been located at 200
North Sycamore Street, Petersburg, Virginia.
Commerce Bank of Virginia is a community oriented financial
organization headquartered in Henrico County, Virginia. CBOV was incorporated
under the laws of the Commonwealth of Virginia on August 28, 1984 and commenced
business as a commercial bank on April 8, 1986.
The Community Bank's main banking and administrative office is in
Petersburg, Virginia and it has branch offices in Colonial Heights, Virginia and
in the village of Chester in Chesterfield County, Virginia. Its primary service
area, consisting of the Cities of Petersburg and Colonial Heights and
Chesterfield County, had a population of approximately 287,000 at December 31,
1996. The Community Bank is insured by the FDIC and is supervised and examined
by the Federal Reserve and the SCC. It engages in a general commercial banking
business and offers a range of banking services that can be expected of a
banking organization of its size. Total assets of The Community Bank were $91.8
million at December 31, 1996.
Commerce Bank of Virginia's main banking office is in Henrico County,
Virginia. It operates four branch offices in the City of Richmond and Hanover
and Goochland Counties. Its primary service area had a population of
approximately 516,000 at December 31, 1996. Commerce Bank of Virginia is insured
by the FDIC and is supervised and examined by the Federal Reserve and the SCC.
It also engages in a general commercial banking business and offers a range of
banking services that can be expected of a banking organization its size. Its
total assets at December 31, 1996 were $80.645.
Banking Services. Through its network of banking facilities, The
Community Bank and Commerce Bank of Virginia provide a wide range of commercial
banking services to individuals and small and medium-sized businesses. The
Community Bank and Commerce Bank of Virginia conduct substantially all of the
business operations of a typical independent, commercial bank, including the
acceptance of checking and savings deposits, and the making of commercial real
estate, personal, home improvement, automobile and other installment and term
loans. The Community Bank and Commerce Bank of Virginia also offer other related
services, such as travelers' checks, safe deposit, lock box, depositor transfer,
customer note payment, collection, notary public, escrow, drive-in facility and
other customary banking services. Trust services are not offered by The
Community Bank and Commerce Bank of Virginia.
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The accounts of The Community Bank's and Commerce Bank of Virginia's
depositors are insured up to $100,00 for each account holder by the Federal
Deposit Insurance Corporation, an instrumentality of the United States
Government. Insurance of The Community Bank's and Commerce Bank of Virginia's
accounts are subject to the statutes and regulations governing insured banks, to
examination by the Federal Deposit Insurance Corporation, and to certain
limitations and restriction imposed by that agency.
Lending Activities
Loan Portfolios. CBI is a residential mortgage and residential
construction lender and also extends commercial loans to small and medium-sized
businesses within its primary service area. Consistent with its focus on
providing community-based financial services, CBI does not attempt to diversify
its loan portfolio geographically by making significant amounts of loans to
borrowers outside its primary service area.
The principal economic risk associated with each of the categories of
loans in CBI's portfolio is the creditworthiness of its borrowers. Within each
category, such risk is increased or decreased depending on prevailing economic
conditions. In an effort to manage the risk, CBI's policy gives loan amount
approval limits to individual loan officers based on their level of experience.
The risk associated with real estate mortgage loans and installment loans to
individuals varies based upon employment levels, consumer confidence,
fluctuations and value of residential real estate and other conditions that
affect the ability of consumers to repay indebtedness. The risk associated with
commercial loans varies based upon the strength and activity of the local
economy of CBI's market area. The risk associated with real estate construction
loans varies based upon the supply and demand for the type of real estate under
construction. Most of CBI's residential real estate construction loans are for
pre-sold and contract homes.
Residential Mortgage Lending. CBI originates conventional fixed rate
and adjustable rate residential mortgage loans. All fixed rate loans are short
term usually three years or less, unless the loan is to be fully amortized in 60
equal monthly payments. In addition, CBI, through its subsidiary, CBOV offers
both conventional and government fixed rate and adjustable rate residential
mortgage loans primarily for resale in the secondary market. CBOV is an approved
seller/servicer for the Federal Home Loan Mortgage Corporation ("FHLMC") and the
Federal National Morgage Association ("FNMA").
Residential Construction Lending. Because of the attractive adjustable
rates available, CBI makes construction loans for residential purposes. These
include both construction loans to experienced builders and loans to consumers
for owner-occupied residences. CBI does not actively solicit loans to builders
for homes that are not pre-sold. Construction lending entails significant
additional risk as compared with residential mortgage lending. Construction
loans to builders can involve larger loan balances concentrated with single
borrowers or groups of related borrowers. Also, with construction loans, funds
are advanced upon the security of the home under construction, which is of
uncertain value prior to the completion of construction. Thus, it is more
difficult to evaluate accurately the total loan funds required to complete a
project and related loan-to-value ratios. Residential construction loans to
customers, for which a permanent loan commitment from another lender approved
prior to loan closing is required, are subject to the additional risk of the
permanent lender failing to provide the necessary funds at closing,
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either due to the borrower's inability to fulfill the terms of his commitment or
due to the permanent lender's inability to meet its funding commitments. In
addition to its unusual credit analysis of the borrowers, CBI seeks to obtain a
first lien on the property as security for its construction loans.
Commercial Real Estate Lending. CBI provides permanent mortgage
financing for a variety of commercial projects. In the normal course of
business, CBI will provide financing for owner-occupied properties and for
income producing, non-owner occupied projects which meet all the guidelines
established by loan policy. These loans generally do not exceed 65% of current
appraised or market value, whichever is lower, for unimproved land and 75% for
improved commercial real estate. Such loans are written on terms which provide
for a maturity provision of from one to three years.
Construction loans for the purpose of constructing commercial projects
are provided for periods of not greater than one year, at floating rates of
interest and are convertible to permanent financing consistent with terms
outlined in CBI loan policy. When a construction loan agreement is entered into,
particular care is taken to govern the process of the loan and, both initial
project review and periodic inspections are conducted by competent personnel who
are independent of CBI. Advance ratios are closely monitored and appropriate
construction reserves are established.
Consumer Lending. CBI currently offers most types of consumer demand,
time and installment loans, including automobile loans.
Commercial Business Lending. As a full-service community bank, CBI
makes commercial loans to qualified small businesses in CBI's market area.
Commercial business loans generally have a higher degree of risk than
residential mortgage loans but have commensurately higher yields. To manage
these risks, CBI generally secures appropriate collateral and carefully monitors
the financial condition of its business borrowers and the concentration of such
loans in CBI's portfolio. Most of CBI's commercial loans are secured by real
estate, which is viewed by CBI as the principal collateral securing such loans.
Residential mortgage loans generally are made on the basis of the borrower's
ability to make repayment from his employment and other income and are secured
by real estate or real estate whose value tends to be easily ascertainable. In
contrast, commercial business loans typically are made on the basis of the
borrower's ability to make repayment from cash flow from its business and are
either unsecured or secured by business assets, such as real estate, accounts
receivable, equipment and inventory. As a result, the availability of funds for
the repayment of commercial business loans may be substantially dependent on the
success of the business itself. Further, the collateral for secured commercial
business loans may depreciate over time and cannot be appraised with as much
precision as residential real estate.
Collection Practices. Often, CBI will not immediately proceed to
foreclose on real estate loans that become more than 90 days past due. Instead,
CBI will permit the borrower to market and sell the collateral in any orderly
manner. If the borrower does not sell the collateral within a reasonable time,
CBI will foreclose and sell the collateral. CBI's experience has been that
losses on well collateralized real estate loans are minimized when it works with
borrowers in this manner, although its practice of working with borrowers at
times results in relatively high
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balances of past due loans. CBI also has found that its loan collection
practices enable it to compete with larger and less flexible financial
institutions that are not based in the community. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Nonperforming
Assets".
Competition
CBI encounters strong competition for its banking services within its
primary market area. There are 15 commercial banks actively engaged in business
in its market area, including approximately eight major statewide banking
organizations. Finance companies, mortgage companies, credit unions and savings
and loan associations also compete with the Banks for loans and deposits. In
addition, in some instances, the Banks must compete for deposits with money
market mutual funds that are marketed nationally. CBI's competitors have
substantially greater resources than CBI.
Employees
As of December 31, 1996, The Community Bank and Commerce Bank of
Virginia had 68 full-time and 19 part-time employees. Management of The
Community Bank and Commerce Bank of Virginia considers its relations with
employees to be excellent. No employees are represented by a union or any
similar group, and The Community Bank and Commerce Bank of Virginia have never
experienced any strike or labor dispute.
Supervision and Regulation
Banks and their holding companies are extensively regulated entities.
CBI is currently a holding company subject to supervision and regulation by the
Board of Governors of the Federal Reserve System (the Federal Reserve). CBI's
subsidiaries include The Community Bank and Commerce Bank of Virginia, both
Virginia chartered banks which are subject to supervision and regulation by the
Federal Reserve and the Bureau of Financial Institutions of the State
Corporation Commission of the Commonwealth of Virginia (the SCC).
The regulatory discussion is divided into two major subject areas.
First, the discussion addresses the general regulatory considerations governing
bank holding companies. This focuses on the primary regulatory considerations
applicable to CBI as a bank holding company. Second, the discussion addresses
the general regulatory provisions governing depository institutions. This
focuses on the regulatory considerations of The Community Bank and Commerce Bank
of Virginia.
The discussion below is only a summary of the principal laws and
regulations that comprise the regulatory framework. The descriptions of these
laws and regulations, as well as descriptions of laws and regulations contained
elsewhere herein, do not purport to be complete and are qualified in their
entirety by reference to applicable laws and regulations.
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Bank Holding Companies
The BHC Act generally limits the activities of the bank holding company
and its subsidiaries to that of banking, managing or controlling banks, or any
other activity which is so closely related to banking or to managing or
controlling banks as to be a proper incident thereto.
Formerly the BHC Act prohibited the Federal Reserve from approving an
application from a bank holding company to acquire shares of a bank located
outside the state in which the operations of the holding company's banking
subsidiaries are principally conducted, unless such an acquisition was
authorized by statute of the state where the bank whose shares were to be
acquired was located. However, under federal legislation enacted in 1994, the
restriction on interstate acquisitions was abolished, effective September 1995.
A bank holding company from any state now may acquire banks and bank holding
companies located in any other state, subject to certain conditions, including
nationwide and state imposed concentration limits. Banks also will be able to
branch across state lines by acquisition, merger or de novo, effective June 1,
1997 (unless state law would permit such interstate branching at an earlier
date), provided certain conditions are met, including that applicable state law
must expressly permit such interstate branching.
There are a number of obligations and restrictions imposed on bank
holding companies and their depository institution subsidiaries that are
designed to reduce potential loss exposure to the depositors of the depository
institutions and to the FDIC insurance fund. For example, under a policy of the
Federal Reserve with respect to bank holding company operations, a bank holding
company is required to serve as a source of financial strength to its subsidiary
depository institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. In addition, the
"cross-guarantee" provisions of federal law require insured depository
institutions under common control to reimburse the FDIC for any loss suffered or
reasonably anticipated by the FDIC as a result of the default of a commonly
controlled insured depository institution or for any assistance provided by the
FDIC to a commonly controlled insured depository institution in danger of
default. The FDIC may decline to enforce the cross-guarantee provisions if it
determines that a waiver is in the best interest of the Bank Insurance Fund
(BIF). The FDIC's claim for damages is superior to claims of stockholders of the
insured depository institution or its holding company but is subordinate to
claims of depositors, secured creditors and holders of subordinated debt (other
than affiliates) of the commonly controlled insured depository institutions.
Banking laws also provide that amounts received from the liquidation or
other resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or stockholder. This
provision would give depositors a preference over general and subordinated
creditors and stockholders in the event a receiver is appointed to distribute
the assets of any bank subsidiaries.
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Certain Regulatory Considerations
Regulatory Capital Requirements. All financial institutions are
required to maintain minimum levels of regulatory capital. The federal bank
regulatory agencies have established substantially similar risked based and
leverage capital standards for financial institutions they regulate. These
regulatory agencies also may impose capital requirements in excess of these
standards on a case-by-case basis for various reasons, including financial
condition or actual or anticipated growth. Under the risk-based capital
requirements of these regulatory agencies, The Community Bank and Commerce Bank
of Virginia are required to maintain a minimum ratio of total capital to
risk-weighted assets of at least 8%. At least half of the total capital is
required to be "Tier 1 capital", which consists principally of common and
certain qualifying preferred shareholders' equity, less certain intangibles and
other adjustments. The remainder ("Tier 2 capital") consists of a limited amount
of subordinated and other qualifying debt (including certain hybrid capital
instruments) and a limited amount of the general loan loss allowance. The Tier 1
and total capital to risk-weighted asset ratios of The Community Bank as of
December 31, 1996 are 16.57% and 17.66%, exceeding the minimums required. The
Tier 1 and total capital to risk-weighted asset ratios of Commerce Bank of
Virginia as of December 31, 1996 are 14.31% and 15.31% exceeding the minimums
required. Based upon the applicable Federal Reserve regulations, at December 31,
1996, CBI, The Community Bank and Commerce Bank of Virginia would be considered
"well capitalized".
In addition, the federal regulatory agencies have established a minimum
leverage capital ratio (Tier 1 capital to tangible assets). These guidelines
provide for a minimum leverage capital ratio of 4% for banks and their
respective holding companies that meet certain specified criteria, including
that they have the highest regulatory examination rating and are not
contemplating significant growth or expansion. All other institutions are
expected to maintain a leverage ratio of at least 100 to 200 basis points above
that minimum. The guidelines also provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain
strong capital positions substantially above the minimum supervisory levels,
without significant reliance on intangible assets. The leverage ratio of CBI as
of December 31, 1996, was 11.51%, which is well above the minimum requirements.
Each federal regulatory agency is required to revise its risk-capital
standards to ensure that those standards take adequate account of interest rate
risk, concentration of credit risk and the risks of nontraditional activities,
as well as reflect the actual performance and expected risk of loss on
multifamily mortgages. The Federal Reserve and the FDIC have jointly solicited
comments on a proposed framework for implementing the interest rate risk
component of the risk-based capital guidelines. Under the proposal, an
institution's assets, liabilities, and off-balance sheet positions would be
weighed by risk factors that approximate the instruments' price sensitivity to a
100 basis point change in interest rates. Institutions with interest rate risk
exposure in excess of a threshold level would be required to hold additional
capital proportional to that risk. In 1994, the federal bank regulatory agencies
solicited comments on a proposed revision to the risk-based capital guidelines
to take account of concentration of credit risk and the risk of nontraditional
activities. The revision proposed to amend each agency's risk-based capital
standards by explicitly identifying concentration of credit risk and the risk
arising from nontraditional activities, as well as an institution's ability to
manage those risks, as important factors to be taken into account by the agency
in assessing an institution's overall capital adequacy. The proposal was adopted
as a final rule by the federal bank regulatory agencies and
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subsequently became effective on January 17, 1995. CBI does not expect the final
rule to have a material impact on their capital requirements; however, the
Federal regulatory agencies may, as an integral part of their examination
process, require CBI to provide additional capital based on such agency's
judgments of information available at the time of examination.
The following table summarizes the minimum regulatory and current
capital ratios for CBI on a consolidated basis, at December 31, 1996.
Capital Ratios
Regulatory CBI
Minimum Current
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Risk-based capital
Tier 1 (2) 4.00% 15.98%
Total (2) 8.00% 17.03%
Leverage (1) (2) 4.00% 11.51%
Total shareholders' equity to total assets N/A 10.90%
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(1) Leverage ratio is calculated by Tier 1 capital as a percentage of quarterly
period end assets
(2) Calculated in accordance with the Federal Reserve's capital rules, with
adjustment for net unrealized depreciation on securities available for sale.
Limits on Dividends and Other Payments. Certain state law restrictions
are imposed on distributions of dividends to shareholders of CBI. CBI
shareholders are entitled to receive dividends as declared by the CBI Board of
Directors. However, no such distribution may be made if, after giving effect to
the distribution, it would not be able to pay its debts as they become due in
the usual course of business or its total assets would be less than its total
liabilities. There are similar restrictions with respect to stock repurchases
and redemptions.
The Community Bank and Commerce Bank of Virginia are subject to legal
limitations on capital distributions including the payment of dividends, if,
after making such distribution, the institution would become "undercapitalized"
(as such term is used in the statute). For all state member banks of the Federal
Reserve seeking to pay dividends, the prior approval of the applicable Federal
Reserve Bank is required if the total of all dividends declared in any calendar
year will exceed the sum of the bank's net profits for that year and its
retained net profits for the preceding two calendar years. Federal law also
generally prohibits a depository institution from making any capital
distribution (including payment of a dividend or payment of a management fee to
its holding company) if the depository institution would thereafter fail to
maintain capital above regulatory minimums. Federal Reserve Banks are also
authorized to limit the payment of dividends by any state member bank if such
payment may be deemed to constitute an unsafe or unsound practice. In addition,
under Virginia law no dividend may be declared or paid that would impair a
Virginia chartered bank's paid-in capital. The Virginia SCC has general
authority to prohibit payment of dividends by a Virginia chartered bank if it
determines that the limitation is in the public interest and is necessary to
ensure the bank's financial soundness.
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Most of the revenues of CBI and CBI's ability to pay dividends to its
shareholders will depend on dividends paid to it by The Community Bank and
Commerce Bank of Virginia. Based on The Community Bank's and Commerce Bank of
Virginia's current financial condition, CBI expects that the above-described
provisions will have no impact on CBI's ability to obtain dividends from The
Community Bank and Commerce Bank of Virginia's or on CBI's ability to pay
dividends to its shareholders. At December 31, 1996, the Banks had $6.136
million of retained earnings legally available for the payment of dividends to
CBI.
In addition to the regulatory provisions regarding holding companies
addressed above, The Community Bank and Commerce Bank of Virginia are subject to
extensive regulation as well. The following discussion addresses certain primary
regulatory considerations affecting The Community Bank and Commerce Bank of
Virginia.
The Community Bank and Commerce Bank of Virginia are regulated
extensively under both federal and state law. The Community Bank and Commerce
Bank of Virginia are organized as Virginia chartered banking corporations and
are regulated and supervised by the Bureau of Financial Institutions of the
Virginia SCC. As members of the Federal Reserve System as well, The Community
Bank and Commerce Bank of Virginia are regulated and supervised by the Federal
Reserve Bank in Richmond. The Virginia SCC and the Federal Reserve Bank of
Richmond conduct regular examinations of The Community Bank and Commerce Bank of
Virginia, reviewing such matters as the adequacy of loan loss reserves, quality
of loans and investments, management practices, compliance with laws, and other
aspects of their operations. In addition to these regular examinations, The
Community Bank and Commerce Bank of Virginia must furnish the Virginia SCC and
the Federal Reserve with periodic reports containing a full and accurate
statement of its affairs. Supervision, regulation and examination of banks by
these agencies are intended primarily for the protection of depositors rather
than shareholders.
Insurance of Accounts, Assessments and Regulation by the FDIC. The
Community Bank's and Commerce Bank of Virginia's deposits are insured up to
$100,000 per insured depositor (as defined by law and regulation) through the
BIF. The BIF is administered and managed by the FDIC. As insurer, the FDIC is
authorized to conduct examinations of and to require reporting by BIF-insured
institutions. The actual assessment to be paid by each BIF member is based on
the institution's assessment risk classification and whether the institution is
considered by its supervisory agency to be financially sound or to have
supervisory concerns.
The FDIC is authorized to prohibit any BIF-insured institution from
engaging in any activity that the FDIC determines by regulation or order to pose
a serious threat to the respective insurance fund. Also, the FDIC may initiate
enforcement actions against banks, after first giving the institution's primary
regulatory authority an opportunity to take such action. The FDIC may terminate
the deposit insurance of any depository institution, including The Community
Bank and Commerce Bank of Virginia, if it determines, after a hearing, that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed in writing by the
FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If deposit insurance is terminated, the deposits at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period from six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances that could result
in termination of The Community Bank's deposit insurance.
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Other Safety and Soundness Regulations. The federal banking agencies
have broad powers under current federal law to take prompt corrective action to
resolve problems of insured depository institutions. The extent of these powers
depends upon whether the institutions in question are "well capitalized",
"adequately capitalized", "undercapitalized", "significantly undercapitalized"
or "critically undercapitalized", as such terms are defined under uniform
regulations defining such capital levels issued by each of the federal banking
agencies.
In addition, FDIC regulations require that management report on the
institution's responsibility to prepare financial statements, and to establish
and to maintain an internal control structure and procedures for financial
reporting and compliance with designated laws and regulations concerning safety
and soundness; and that independent auditors attest to and report separately on
assertions in management's reports concerning compliance with such laws and
regulations, using FDIC-approved audit procedures.
Each of the federal banking agencies also must develop regulations
addressing certain safety and soundness standards for insured depository
institutions and depository institution holding companies, including
compensation standards, operational and managerial standards, asset quality,
earnings and stock valuation. The federal banking agencies have issued a joint
notice of proposed rulemaking, which requested comment on the implementation of
these standards. The proposed rule sets forth general operational and management
standards in the areas of internal controls, information systems and internal
audit systems, loan documentation, credit underwriting, interest rate exposure,
asset growth and compensation, fees and benefits. The proposed contemplates that
each federal agency would determine compliance with these standards through the
examination process, and if necessary to correct weaknesses, require an
institution to file a written safety and soundness compliance plan. CBI has not
yet determined the effect that the proposed rule would have on its operations
and the operations of its depository institution subsidiary if it is enacted
substantially as proposed.
Community Reinvestment. The requirements of the Community Reinvestment
Act (CRA) affect The Community Bank. The CRA imposes on financial institutions
an affirmative and ongoing obligation to meet the credit needs of their local
communities, including low and moderate income neighborhoods, consistent with
the safe and sound operation of those institutions. Each financial institution's
efforts in meeting community credit needs currently are evaluated as part of the
examination process pursuant to twelve assessment factors. These factors also
are considered in evaluating mergers, acquisitions and applications to open a
branch or facility. To the best knowledge of The Community Bank, it is meeting
its obligations under the CRA.
Item 2. Properties.
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CBI's offices and The Community Bank's main office are located in two
3,500 square feet condominiums in a seven-story masonry building located at 200
North Sycamore Street, Petersburg, Virginia. The first floor includes a drive-in
facility, which is serviced by tellers located inside The Community Bank through
a closed circuit TV/pneumatic tube system. The Community Bank's branch office at
2618 South Crater Road in Petersburg was opened in 1979. The South Crater Road
office occupies a one and one-half story 2,100 square foot brick building of
Colonial design. In 1984, the Community Bank opened a branch office in Colonial
Heights,
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located at 2000 Snead Avenue in a 640 square foot office of contemporary design.
In 1985, The Community Bank opened its newest branch in Chester, located at 4203
West Hundred Road in a 1,600 square foot brick office of contemporary design.
The Community Bank owns the land and the building in which the South Crater Road
and Chester branches operate, and leases the Colonial Heights facility.
The Community Bank's facilities and equipment are considered adequate
for its immediate needs and for foreseeable expansion.
Commerce Bank of Virginia'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, Commerce Bank of Virginia
currently operates four branch offices in Hanover County, Goochland County (2)
and in the City of Richmond. Branch designations and 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
Goochland Courthouse Branch Centerville Branch
3018 River Road West 27 Broad Street Road
Goochland, Virginia 23063 Manakin, Virginia 23103
(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.
Commerce Bank of Virginia holds the real property at its principal
office pursuant to a ground lease and owns the improvements that have been
constructed thereon. Commerce Bank of Virginia's Hanover County branch is owned
by the Atlee Station Co., of which Sam T. Beale, a Director of CBI, is the
principal shareholder. Commerce Bank of Virginia also leases the space where the
Riverfront Tower branch is located. Commerce Bank of Virginia owns the property
for its two other branches.
The primary service area of Commerce Bank of Virginia consists of the
City of Richmond, Virginia and Goochland, Hanover and Henrico Counties.
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Item 3. Legal Proceedings.
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None.
Item 4. Submission of Matters to Vote of Security Holders.
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None.
Item 5. Market for Company's Common Stock and Related Stockholder Matters.
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As of December 31, 1996, the Company had 974 shareholders of record of
its Common Stock.
Except for one share issued for organizational purposes in 1984, the
Company did not issue any shares of its Common Stock until January 1, 1985, at
which time each share of common stock outstanding of the Bank was automatically
converted into the right to receive one-third share of the Company's Common
Stock.
The following table sets forth, for the quarters indicated, the high
and low sale prices for CBI Common Stock on the OTC Bulletin Board since May
1994 and the high and low bid prices of trades known to CBI on the
over-the-counter market for stock prices reported locally through the regional
quotation system before May 1994 and per share dividends paid during the
respective periods.
CBI Market Price and Dividends
Sales Price (1) Dividends (1)
----------------------------------
High Low
---------------------
1994:
1st quarter 8.625 8.000 .10
2nd quarter 9.125 8.500
3rd quarter 9.720 9.000
4th quarter 10.500 9.500
1995:
1st quarter 10.625 10.500 .11
2nd quarter 11.500 10.500
3rd quarter 11.250 10.500
4th quarter 13.250 10.500
1996:
1st quarter 15.500 12.250 .12
2nd quarter 17.000 14.000
3rd quarter 18.500 15.500
4th quarter 19.500 17.000
- -------------
(1) All prices and dividends are adjusted for a 100% stock dividend paid on
August 31, 1995.
-11-
<PAGE>
Dividends
The Company declared annual dividends of $232,000 and $201,250 on its
Common Stock during 1996 and 1995, respectively. The Company's management
presently intends to continue its policy of paying out 8% to 15% of the previous
year's earnings as dividends.
Limits on Dividends and Other Payments
As noted in Item 1. Business, The Community Bank and Commerce Bank of
Virginia are limited in the amount of dividends it may pay to the Company in any
given year. At December 31, 1996, The Community Bank and Commerce Bank of
Virginia had $6.136 million of retained earnings legally available for the
payment of dividends to the Company.
-12-
<PAGE>
Item 6. Selected Financial Data.
- ------- ------------------------
Comparative Summary of Earnings
The following table presents a Comparative Summary of Earnings of the
Company for the five years ended December 31, 1996. These statements should be
read in conjunction with the Consolidated Financial Statements and related Notes
appearing elsewhere in this filing.
SELECTED HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------------------------------------------------------------
(In thousands, except ratios and per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net interest income ....................... $ 8,537 $ 7,585 $ 6,489 $ 5,373 $ 4,795
Provision for loan losses ................. 401 442 266 195 499
---------------------------------------------------------------------
Net interest income after
provision for loan losses ............... $ 8,136 $ 7,143 $ 6,223 $ 5,178 $ 4,296
Noninterest income ........................ 1,214 1,135 1,231 1,123 1,035
Noninterest expense ....................... 4,872 4,699 4,770 4,275 3,582
---------------------------------------------------------------------
Income before income taxes ................ $ 4,478 $ 3,579 $ 2,684 $ 2,026 $ 1,749
Income taxes .............................. 1,422 1,224 886 669 583
---------------------------------------------------------------------
Net income ................................ $ 3,056 $ 2,355 $ 1,798 $ 1,357 $ 1,166
=====================================================================
PER SHARE DATA (1):
Net income ................................ $ 1.5 $ 1.2 $ 1.0 $ 0.79 $ 0.69
Cash dividends ............................ $ 0.1 $ 0.1 $ 0.1 $ 0.07 $ 0.05
Book value at period end .................. $ 9.8 $ 8.5 $ 7.3 $ 6.44 $ 5.91
BALANCE SHEET DATA:
Total assets .............................. 172,014 161,077 138,449 134,129 110,440
Loans, net ................................ 115,135 107,405 100,290 87,940 77,144
Securities ................................ 36,223 34,257 23,733 23,817 16,796
Deposits .................................. 152,006 143,571 123,892 122,213 98,530
Stockholder's equity (1) .................. 18,748 15,893 12,855 11,230 9,985
Shares outstanding (1) .................... 1,901,080 1,853,975 1,745,610 1,742,520 1,688,094
PERFORMANCE RATIOS:
Return on average assets .................. 1.86% 1.53% 1.31% 1.10% 1.09%
Return on average equity .................. 17.24% 16.38% 14.85% 12.78% 12.34%
Net interest margin (2) ................... 5.58% 5.35% 5.18% 4.80% 4.98%
Average loans to deposits ................. 78.67% 78.07% 78.77% 75.86% 75.70%
ASSET QUALITY RATIOS:
Allowance for loan losses to
period end loans ....................... 1.07% 1.14% 1.08% 1.04% 1.10%
Allowance for loan losses to
nonaccrual loans ....................... 5.19X 5.61X 20.35X 42.64X 6.26X
Nonperforming assets to period end
loans and other real estate owned ...... 1.77% 1.72% 0.87% 0.92% 1.04%
Net chargeoffs
to average loans ....................... 0.35% 0.29% 0.11% 0.15% 0.56%
</TABLE>
- --------------------------------------
(1) All per share information has been restated to reflect a 2 for 1 stock
split effected in the form of a 100% stock dividend paid August 31,
1995.
(2) Net interest margin is calculated as tax-equivalent net interest income
divided by average earning assets and represents CBI's net yield on
its earning assets.
-13-
<PAGE>
Certain selected financial information required by Item 6. is included
in Management's Discussion and Analysis.
Item 7. Management's Discussion and Analysis of Financial Condition
- ------- -----------------------------------------------------------
and Results of Operations.
--------------------------
The information required by Item 7 of Form 10-K is contained in the
Company's Annual Report to Stockholders for the year ended December 31, 1996,
and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
- ------- --------------------------------------------
The consolidated financial statements, together with the report thereon
of Mitchell, Wiggins & Company LLP, is contained in the Company's 1996 Annual
Report to Stockholders and is incorporated herein by reference.
Item 9. Disagreements on Accounting and Financial Disclosure.
- ------- -----------------------------------------------------
None.
Item 10. Directors and Executive Officers of the Company.
- -------- ------------------------------------------------
With respect to the directors and executive officers of the Company,
the information required by Item 10 of Form 10-K appears in the Company's Proxy
Statement for the 1997 Annual Meeting and is incorporated herein by reference.
Item 11. Executive Compensation.
- -------- -----------------------
The information required by Item 11 of Form 10-K appears in the
Company's Proxy Statement for the 1997 Annual Meeting and is incorporated herein
by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
- -------- ---------------------------------------------------
Management.
-----------
The information required by Item 12 of Form 10-K appears in the
Company's Proxy Statement for the 1997 Annual Meeting and is incorporated herein
by reference.
Item 13. Certain Relationships and Related Transactions.
- -------- -----------------------------------------------
The information required by Item 13 of Form 10-K appears in the
Company's Proxy Statement for the 1997 Annual Meeting and is incorporated herein
by reference.
-14-
<PAGE>
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
- -------- -----------------------------------------------------------
8-K.
----
(a) (1) The following documents are contained in the Company's 1996 Annual
Report and are incorporated herein by reference.
Financial Statements:
Independent Auditors' Report on the Consolidated Financial
Statements
Consolidated Statements of Condition at December 31, 1996 and
1995
Consolidated Statements of Income for the three years ended
December 31, 1996, 1995, and 1994
Consolidated Statements of Changes in Stockholders' Equity for
the three years ended December 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows for the three years ended
December 31, 1996, 1995, and 1994
Notes to Consolidated Financial Statements
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
(3) Exhibits included herein or by reference:
2 - Agreement And Plan Of Reorganization (filed as an Exhibit to
Registrant's Registration Statement on Form S-4 filed with
the Commission on February 27, 1997 and incorporated herein
by reference)
3 - Articles of Incorporation and By-laws (filed as an Exhibit to
Registrant's Registration Statement on Form S-14 and amendment
No. 1 thereto, filed with the Commission on March 14, 1984 and
July 10, 1984, respectively, and incorporated herein by
reference)
13 - Community Bankshares Incorporated 1996 Annual Report to
Stockholders
21 - Subsidiaries of the Registrant
23 - Consent of Mitchell, Wiggins & Company LLP
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the year ended December 31, 1996.
-15-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, COMMUNITY BANKSHARES INCORPORATED has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized:
COMMUNITY BANKSHARES INCORPORATED
/s/ Nathan S. Jones, 3rd. /s/ Thomas H. Caffrey, Jr.
- ------------------------------------- ----------------------------------------
Nathan S. Jones, 3rd. Thomas H. Caffrey, Jr.
President and Chief Executive Officer Chief Financial Officer
Date: March 24, 1997 Date: March 28, 1997
- ------------------------------------- ---------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ Sam T. Beale Date: March 28, 1997
- ------------------------------------- ---------------------------------------
Sam T. Beale, Director
/s/ David E. Hudgins Date: March 28, 1997
- ------------------------------------- ---------------------------------------
David E. Hudgins, Director
/s/ Richard C. Huffman Date: March 28, 1997
- ------------------------------------- ---------------------------------------
Richard C. Huffman, Director
/s/ Phillip H. Kirkpatrick Date: March 24, 1997
- ------------------------------------- ---------------------------------------
Phillip H. Kirkpatrick, Director
/s/ Alvin L. Sheffield Date: March 24, 1997
- ------------------------------------- ---------------------------------------
Alvin L. Sheffield, Director
/s/ Louis C. Shell Date: March 24, 1997
- ------------------------------------- ---------------------------------------
Louis C. Shell, Director
-71-
<PAGE>
/s/ Elinor B. Marshall Date: March 27, 1997
- ------------------------------------- ---------------------------------------
Elinor B. Marshall, Director
/s/ Lawrence F. DeSouza Date: March 27, 1997
- ------------------------------------- ---------------------------------------
Lawrence F. DeSouza, Director
/s/ W. Courtney Wells Date: March 27, 1997
- ------------------------------------- ---------------------------------------
W. Courtney Wells, Director
/s/ Nathan S. Jones 3rd. Date: March 24, 1997
- ------------------------------------- ---------------------------------------
Nathan S. Jones 3rd., Director
-72-
<PAGE>
EXHIBITS
ANNUAL REPORT ON FORM 10-K
PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMUNITY BANKSHARES INCORPORATED
COMMISSION FILE NUMBER 0-13100
-16-
<PAGE>
Exhibit Index
13 - Community Bankshares Incorporated 1996 Annual Report to Stockholders
21 - Subsidiaries of the Registrant
23 - Consent of Mitchell, Wiggins & Company LLP
-17-
C O N T E N T S
---------------
Exhibit 13
GENERAL INFORMATION
INDEPENDENT AUDITORS' REPORT ON THE
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Income for the Years Ended December 31,
1996, 1995, and 1994
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995, and 1994
Notes to Consolidated Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
POSITION AND RESULTS OF OPERATIONS
-18-
<PAGE>
CORPORATE HEADQUARTERS
Community Bankshares Incorporated
200 North Sycamore Street
Post Office Box 2166
Petersburg, Virginia 23804
SUBSIDIARY BANKS
The Community Bank Commerce Bank of Virginia
200 North Sycamore Street Post Office Box 29361
Post Office Box 2166 Richmond, Virginia 23229
Petersburg, Virginia 23804
MARKET INFORMATION
The Company Stock is listed in the National Quotation Bureau "pink
sheets", and three dealers make a work out market. These dealers are Anderson
and Strudwick, Inc., Davenport and Company of Virginia, Inc., and McKinnon and
Company, Inc.
As of March 21, 1997, the Company had 974 shareholders of record of its
Common Stock. The following table sets forth the information known to management
concerning trading in Community Bankshares Incorporated Common Stock for 1996
and 1995.
CBI Market Price and Dividends
Sales Price (1) Dividends (1)
----------------------------------
High Low
---------------------
1995:
1st quarter 10.625 10.500 .11
2nd quarter 11.500 10.500
3rd quarter 11.250 10.500
4th quarter 13.250 10.500
1996:
1st quarter 15.500 12.250 .12
2nd quarter 17.000 14.000
3rd quarter 18.500 15.500
4th quarter 19.500 17.000
- -------------
(1) All prices and dividends are adjusted for a 100% stock dividend paid on
August 31, 1995.
DIVIDENDS
The Company's management presently intends to continue the its policy of paying
out 8% to 15% of the previous year's earnings as dividends.
-19-
<PAGE>
TRANSFER/DIVIDEND DISBURSING AGENT
The Community Bank
Post Office Box 2166
Petersburg, Virginia 23804
INDEPENDENT AUDITORS FOR 1996
Mitchell, Wiggins & Company LLP
100 Flank Road
Petersburg, Virginia 23805
DESCRIPTION OF BUSINESS
Community Bankshares Incorporated is a registered bank holding company
headquartered in Petersburg, Virginia, with assets of $172,014,090. Organized in
1984, Community Bankshares Incorporated acquired its subsidiary affiliate, The
Community Bank, Petersburg, Virginia, and commenced operations as a bank holding
company on January 1, 1985. Community Bankshares Incorporated, through its
subsidiary bank, engages in a general commercial banking business and provides
full service banking to its customers, except that it does not provide trust
services. The principal market served is comprised of the cities of Petersburg
and Colonial Heights and the adjacent areas of the counties of Prince George,
Dinwiddie and Chesterfield, Virginia. A total of four offices are operated in
this area by The Community Bank. At December 31, 1996, the total number of
persons employed by the Company and its affiliate was 68.
-20-
<PAGE>
[Letterhead]
INDEPENDENT AUDITORS' REPORT
Board of Directors
Community Bankshares Incorporated
Petersburg, Virginia
We have audited the accompanying consolidated balance sheets of Community
Bankshares Incorporated, and its subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
Commerce Bank of Virginia, a wholly-owned subsidiary. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Commerce Bank of
Virginia, is based solely on the report of the other auditors.
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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Community Bankshares Incorporated
and its subsidiaries at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ Mitchell, Wiggins & Company LLP
Petersburg, Virginia
January 17, 1997
-21-
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
<TABLE>
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
<CAPTION>
ASSETS 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 9,337,968 $ 7,608,418
Federal funds sold 5,392,000 6,044,000
------------- -------------
Total cash and cash equivalents 14,729,968 13,652,418
Securities available for sale 19,337,299 10,975,301
Securities held to maturity (approximate market value,
$16,793,202 in 1996 and $23,430,785 in 1995) 16,885,814 23,282,101
Loans, net 115,135,240 107,405,161
Bank premises and equipment, net 2,652,610 2,847,981
Other real estate owned 766,579 784,443
Accrued interest receivable 1,081,163 982,274
Other assets 1,425,417 1,147,439
------------- -------------
$ 172,014,090 $ 161,077,118
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits $ 28,498,042 $ 23,532,250
Interest-bearing demand deposits 39,864,913 40,568,447
Savings deposits 27,478,841 24,387,463
Time deposits, $100,000 and over 10,751,753 10,979,834
Other time deposits 45,412,749 44,103,097
------------- -------------
152,006,298 143,571,091
Accrued interest payable 478,090 489,824
Other liabilities 541,583 793,782
Guaranteed debt of Employee Stock Ownership Trust 240,000 330,000
------------- -------------
153,265,971 145,184,697
------------- -------------
Commitments and Contingencies
(Note 16)
Stockholders' Equity
Capital stock, par value $3; authorized 4,000,000 shares;
issued 1996 1,901,080 shares; 1995 1,853,975 shares 5,703,240 5,561,925
Surplus 1,712,201 1,688,322
Retained earnings 11,716,193 8,885,976
Net unrealized gain (loss) on available for sale securities
net of tax (144,982) 86,198
------------- -------------
18,986,652 16,222,421
Unearned ESOP shares (238,533) (330,000)
------------- -------------
18,748,119 15,892,421
------------- -------------
$ 172,014,090 $ 161,077,118
------------- -------------
</TABLE>
See Notes to Consolidated Financial Statements.
-22-
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1996, 1995 and 1994
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
Interest income:
<S> <C> <C> <C>
Interest and fees on loans $ 11,348,077 $ 10,563,448 $ 8,614,800
Interest on investment securities:
U. S. Government agencies and corporations 2,129,199 1,561,989 1,235,943
Other securities 90,200 132,603 157,465
States and political subdivisions 59,384 47,513 64,655
Interest on federal funds sold and securities
purchased under agreements to resell 265,570 376,581 147,321
------------------------------------------
Total interest income 13,892,430 12,682,134 10,220,184
------------------------------------------
Interest expense:
Interest on deposits 5,350,688 5,080,578 3,722,487
Interest on federal funds purchased and securities
sold under agreements to repurchase 4,732 16,624 8,961
------------------------------------------
Total interest expense 5,355,420 5,097,202 3,731,448
------------------------------------------
Net interest income 8,537,010 7,584,932 6,488,736
Provision for loan losses 401,500 442,000 265,838
------------------------------------------
Net interest income after provision for
loan losses 8,135,510 7,142,932 6,222,898
------------------------------------------
Other income:
Service charges, commissions and fees 1,024,546 977,388 1,027,763
Security gains 6,047 29,763 47,800
Gain (loss) on sale of other real estate 54,975 -- (33,980)
Other operating income 128,910 127,446 189,486
------------------------------------------
Total other income 1,214,478 1,134,597 1,231,069
------------------------------------------
Other expenses:
Salaries, wages and employee benefits 2,800,070 2,599,266 2,441,656
Net occupancy 357,811 337,260 350,682
Furniture and equipment 387,227 336,420 447,716
Other operating 428,460 440,133 448,468
Insurance, general 36,206 55,839 104,641
Professional fees 202,481 202,272 102,828
Directors' fees 153,827 131,932 122,602
FDIC assessments 4,000 134,857 268,033
Postage 116,171 117,922 130,279
Stationery and supplies 139,060 135,486 143,150
Taxes 246,264 207,588 209,452
------------------------------------------
Total other expenses $ 4,871,577 $ 4,698,975 $ 4,769,507
------------------------------------------
</TABLE>
(Continued)
-23-
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME (Continued)
Years Ended December 31, 1996, 1995 and 1994
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income taxes $ 4,478,411 $ 3,578,554 $ 2,684,460
Income taxes 1,422,297 1,223,892 885,619
------------------------------------------
Net income $ 3,056,114 $ 2,354,662 $ 1,798,841
------------------------------------------
Earnings per common and common equivalent share $ 1.55 $ 1.2 $ 1.00
------------------------------------------
Earnings per common share, assuming full dilution $ 1.55 $ 1.2 $ 1.00
------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
-24-
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Capital Retained
Stock Surplus Earnings
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1, 1994 $ 3,517,56 $ 1,919,285 $ 5,793,097
Issuance of common stock pursuant to
exercise of stock options 9,270 2,450 --
Net income for the year ended
December 31, 1994 -- -- 1,798,841
Cash dividends declared -- -- (171,000)
Unrealized loss on available for
sale securities, net -- -- --
------------------------------------------
Balance, December 31, 1994 3,526,830 1,921,735 7,420,938
Issuance of common stock pursuant to
exercise of stock options 15,000 47,500 --
Stock split effected in the form of a 100%
stock dividend 1,725,000 (1,036,432) (688,568)
Proceeds from sale of stock 295,095 755,519 194
Net income for the year ended
December 31, 1995 -- -- 2,354,662
Cash dividends declared -- -- (201,250)
Unrealized gain on available for sale
securities, net -- -- --
Leveraged ESOP stock purchase -- -- --
Release of ESOP shares -- -- --
------------------------------------------
Balance, December 31, 1995 5,561,925 1,688,322 8,885,976
Issuance of common stock pursuant to
exercise of stock options 130,420 78,880 --
Cash settlement of options -- (123,750) --
Proceeds from sale of stock to ESOP 10,895 29,188 --
Purchase of fractional shares -- (1,918) --
Net income for the year ended
December 31, 1996 -- -- 3,056,114
Cash dividends declared -- -- (232,000)
Unrealized loss on available for sale
securities, net -- -- --
Release of ESOP shares -- 41,479 6,103
------------------------------------------
Balance, December 31, 1996 $ 5,703,240 $ 1,712,201 $ 11,716,193
==========================================
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Securities Unearned
Gain ESOP
(Loss) Shares
-------------------------------
<S> <C> <C>
Balance, January 1, 1994 $ -- $ --
Issuance of common stock pursuant to
exercise of stock options -- --
Net income for the year ended
December 31, 1994 -- --
Cash dividends declared -- --
Unrealized loss on available for
sale securities, net (14,990) --
-------------------------------
Balance, December 31, 1994 (14,990) --
Issuance of common stock pursuant to
exercise of stock options -- --
Stock split effected in the form of a 100%
stock dividend -- --
Proceeds from sale of stock -- --
Net income for the year ended
December 31, 1995 -- --
Cash dividends declared -- --
Unrealized gain on available for sale
securities, net 101,188 --
Leveraged ESOP stock purchase -- (365,500)
Release of ESOP shares -- 35,500
-------------------------------
Balance, December 31, 1995 86,198 (330,000)
Issuance of common stock pursuant to
exercise of stock options -- --
Cash settlement of options --
Proceeds from sale of stock to ESOP -- --
Purchase of fractional shares -- --
Net income for the year ended
December 31, 1996 -- --
Cash dividends declared -- --
Unrealized loss on available for sale
securities, net (231,180) --
Release of ESOP shares -- 91,467
-------------------------------
Balance, December 31, 1996 $(144,982) $(238,533)
===============================
</TABLE>
See Notes to Consolidated Financial Statements.
-25-
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
Operating Activities
<S> <C> <C> <C>
Net income $ 3,056,114 $ 2,354,662 $ 1,798,841
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 347,958 295,455 405,065
Deferred income taxes (56,072) (43,984) (35,647)
Provision for loan losses 401,500 442,000 265,838
Amortization and accretion of investment securities 116,509 8,120 28,498
Gain on sale of securities (6,047) (29,763) (47,800)
(Gain) loss on sale of other real estate (54,975) -- 33,980
Gain on sale of bank premises and equipment -- (26,975) (14,181)
Release of ESOP shares 49,049 -- --
Changes in operating assets and liabilities:
Increase in mortgage loans held for sale -- -- 2,125,261
Increase in accrued interest receivable (98,889) (115,129) (215,444)
Increase (decrease) in accrued expenses (126,737) 125,486 118,336
Net change in other operating assets and liabilities (338,622) (5,693) (17,572)
--------------------------------------------
Net cash provided by operating activities 3,289,788 3,004,179 4,445,175
--------------------------------------------
Investing Activities
Proceeds from maturity of investment securities 12,417,633 9,720,196 8,070,530
Proceeds from sale of investment securities 191,946 78,700 87,800
Purchase of investment securities (14,927,496) (20,148,829) (8,077,085)
Net increase in loans (8,391,282) (7,739,338) (12,484,587)
Proceeds from the sale of bank premises and equipment -- 98,561 19,750
Proceeds from the sale of other real estate 565,556 -- 19,603
Capital expenditures (151,940) (530,167) (325,430)
(Increase) decrease in other assets (9,917) (8,530) 26,319
Purchase of other real estate (233,660) (328,900) --
--------------------------------------------
Net cash used in investing activities (10,539,160) (18,858,307) (12,663,100)
--------------------------------------------
Financing Activities
Net increase in deposits 8,435,207 19,678,772 1,679,554
Cash settlement of options (123,750) -- --
Payment for fractional shares (1,918) -- --
Proceeds from sale of stock to ESOP 40,083 -- --
Net increase (decrease) in federal funds purchased -- (793,000) 793,000
Dividends paid (232,000) (201,250) (171,000)
Net proceeds from issuance of common stock 209,300 1,113,308 11,720
--------------------------------------------
Net cash provided by financing activities $ 8,326,922 $ 19,797,830 $ 2,313,274
--------------------------------------------
(Continued)
</TABLE>
-26-
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, 1996, 1995 and 1994
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in cash and cash
equivalents $ 1,077,550 $ 3,943,702 $ (5,904,651)
Cash and cash equivalents, beginning 13,652,418 9,708,716 15,613,367
--------------------------------------------
Cash and cash equivalents, ending $ 14,729,968 $ 13,652,418 $ 9,708,716
--------------------------------------------
Supplemental Disclosure Of Cash Flow Information
Interest paid $ 5,366,926 $ 4,980,649 $ 3,712,327
--------------------------------------------
Income taxes paid $ 1,811,649 $ 1,191,836 $ 803,000
--------------------------------------------
Supplemental Disclosure Of Noncash Investing
Activities
Acquisition of other real estate:
Purchase price $ 1,082,521 $ 545,882 $ 25,000
Reduction of loans (848,861) (216,982) (25,000)
--------------------------------------------
Cash paid to acquire other real estate $ 233,660 $ 328,900 $ --
--------------------------------------------
Sale of other real estate:
Sales price, net of closing cost $ 1,119,714 $ 35,000 $ 150,838
Increase in loans (554,158) (35,000) (131,235)
--------------------------------------------
Cash proceeds from sale of other real estate $ 565,556 $ -- $ 19,603
--------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
-27-
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Nature of operations: Community Bankshares Incorporated is a bank holding
company headquartered in Petersburg, Virginia. The Corporation's subsidiaries,
The Community Bank and Commerce Bank of Virginia, provide a variety of financial
services to individuals and corporate customers from its branches located
throughout the Richmond Metropolitan Area and Southside Virginia.
Consolidation and basis of financial statement presentation: The accompanying
consolidated financial statements include the accounts of Community Bankshares
Incorporated, and its subsidiaries, The Community Bank and Commerce Bank of
Virginia. All significant intercompany transactions and balances have been
eliminated in consolidation.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management uses estimates and assumptions. Those estimates
and assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues and
expenses.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. A substantial portion of the Corporation's loans are
secured by real estate in local markets. In addition, foreclosed real estate is
located in this same market. Accordingly, the ultimate collectibility of a
substantial portion of the Corporation's loan portfolio and the recovery of a
substantial portion of the carrying amount of foreclosed real estate are
susceptible to changes in local market conditions.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review the
Corporation's allowances for losses on loans and foreclosed real estate. Such
agencies may require the Corporation to recognize additions to the allowances
based on their judgments about information available to them at the time of
their examination.
Cash and cash equivalents: For purposes of reporting the consolidated statements
of cash flows, the Corporation includes cash on hand, amounts due from banks,
federal funds sold and all highly liquid debt instruments purchased with a
maturity of three months or less as cash and cash equivalents on the
accompanying consolidated balance sheets. Cash flows from deposits and loans are
reported net.
The Corporation maintains amounts due from banks which, at times, may exceed
federally insured limits. The Corporation has not experienced any losses in such
accounts.
Investment securities: Securities are classified as held to maturity when
management has the positive intent and the Corporation has the ability at the
time of purchase to hold them until maturity. These securities are carried at
cost adjusted for amortization of premium and accretion of discount, computed by
the straight-line method over their contractual lives. If the interest method of
accounting for amortization of premiums and accretion of discounts was used, it
would not have a material effect on the consolidated financial statements. Gains
and losses on the sale of such securities are determined by the specific
identification method.
-28-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies (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 and
accounted for at market value on an aggregate basis. These include securities
used as part of the Corporation's asset/liability management strategy and may be
sold in response to changes in interest rates, prepayment risk, the need or
desire to increase capital, to satisfy regulatory requirements and other similar
factors. Unrealized gains or losses are reported as increases or decreases in
stockholders' equity, net of the related deferred tax effect. Realized gains and
losses of securities available for sale are included in net securities gains
(losses) based on the specific identification method.
Trading securities, which are generally held for the short term in anticipation
of market gains, are carried at fair value. Realized and unrealized gains and
losses on trading account assets are included in interest income on trading
account securities. The Corporation held no trading securities during the years
ended December 31, 1996, 1995, and 1994.
Loans and allowance for loan losses: Loans are stated at the amount of unpaid
principal, reduced by unearned discount and fees and an allowance for possible
loan losses.
Unearned interest on discounted loans is amortized to income over the life of
the loans, using the interest method. For all other loans, interest is accrued
daily on the outstanding balances.
The allowance for loan losses is maintained at a level considered adequate to
provide for losses that can be reasonably anticipated. The allowance is
increased by provisions charged to operating expense and reduced by net
charge-offs. The Corporation makes periodic credit reviews of the loan portfolio
and considers current economic conditions, historical loss experience, review of
specific problem loans and other factors in determining the adequacy of the
allowance balance.
Loan origination and commitment fees and certain direct loan origination costs
are being deferred and the net amount amortized as an adjustment of the related
loan's yield. The Corporation is generally amortizing these amounts over the
average contractual life of the related loans.
Effective January 1, 1995, the Corporation adopted the SFAS No. 114, "Accounting
by Creditors for Impairment of a Loan". This Statement, as amended by SFAS No.
118, generally requires impaired loans to be measured on the present value of
expected future cash flows discounted at the loan's effective interest rate or
as an expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. A loan is impaired when it is
probable the creditor will be unable to collect all contractual principal and
interest payments due in accordance with the terms of the loan agreement.
Individually identified impaired loans are measured based on the present value
of payments expected to be received, using the historical effective loan rate as
the discount rate. Alternatively, measurement also may be based on observable
market prices or, for loans that are solely dependent on the collateral for
repayment, measurement may be based on the fair value of the collateral. The
Corporation does not aggregate loans for risk classification. Loans that are to
be foreclosed are measured based on the fair value of the collateral. If the
recorded investment in the impaired loan exceeds the measure of fair value, a
valuation allowance is established as a component of the allowance for credit
losses. 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, therefore, there
is no impact on the comparability of credit risk information.
-29-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies (Continued)
The basic policy of the Corporation is to charge off loans when the loss can be
readily determined. Changes in the allowance for loan losses relating to
impaired loans are charged or credited to the provision for loan losses.
Loans, including impaired loans, are generally classified as nonaccrual if they
are past due as to maturity or payment of principal or interest for a period of
more than 90 days, unless such loans are well secured and in the process of
collection. Loans that are on a current payment status or past due less than 90
days may also be classified as nonaccrual if repayment in full of principal
and/or interest is in doubt. Loans may be returned to accrual status when all
principal and interest amounts contractually due are reasonably assured of
repayment.
When a loan is classified as nonaccrual, all interest receivable on that
particular loan is charged back to income at that time. When the future
collectibility of the recorded loan balance is expected, interest income may be
recognized on a cash basis. On charged-off loans, cash receipts in excess of the
amount charged to the allowance for loan losses are recognized as income on the
cash basis.
Bank premises and equipment: Bank premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets. Expenditures for
betterments and major renewals are capitalized and ordinary maintenance and
repairs are charged to operations as incurred.
Foreclosed properties: Foreclosed properties represents real estate held for
resale acquired through foreclosure or other proceedings. Foreclosed properties
are held for sale and are recorded at the lower of the recorded amount of the
loan or fair value of the properties less estimated costs of disposal. Any
write-down to fair value at the time of foreclosure is charged to the allowance
for loan losses. Property is evaluated regularly to ensure the recorded amount
is supported by its current fair value and valuation allowances to reduce the
carrying amount to fair value less estimated costs to dispose are recorded as
necessary and are charged to expense.
Income taxes: The provision for income taxes relates to items of revenue and
expenses recognized for financial accounting purposes during each of the years.
The actual current tax liability may be more or less than the charge against
earnings due to the effect of deferred income taxes.
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
Earnings per share: All per share calculations are based on the weighted average
number of shares outstanding of common and common equivalent shares during each
year. Calculations are based on 1,964,894 shares outstanding in 1996, 1,853,627
shares outstanding in 1995, and 1,798,073 shares outstanding in 1994.
-30-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies (Continued)
Current accounting developments: In June 1996, the Financial Accounting
Standards Board issued its Statement of Financial Accounting Standards No. 125
(SFAS 125), "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". This Statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. After a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. In addition, a transfer of
financial assets in which the transferor surrenders control over those assets is
accounted for as a sale to the extent that consideration other than beneficial
interests in the transferred assets is received in exchange. SFAS 125 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. Management does not expect the application of this pronouncement
to have a material effect on the consolidated financial statements of the
Corporation.
Reclassifications: Various items in the consolidated statements of income and
cash flows for the years ended December 31, 1995 and 1994 have been reclassified
to conform to the classifications used at December 31, 1996. These
reclassifications have no effect on net income.
Note 2. Securities
A summary of the amortized cost and estimated market values of investment
securities is as follows:
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale
U. S. Treasury and agency securities $12,134,231 $ 8,412 $ (187,418) $11,955,225
Mortgage-backed securities 5,932,769 5,053 (50,215) 5,887,607
State and County Municipal Bonds 1,179,144 6,758 (2,260) 1,183,642
Other 310,825 -- -- 310,825
------------------------------------------------------
$19,556,969 $ 20,223 $ (239,893) $19,337,299
======================================================
Held to Maturity
U. S. Treasury and agency securities $ 2,449,331 $ 6,213 $ (21,339) $ 2,434,205
Mortgage-backed securities 13,028,030 46,342 (145,836) 12,928,536
Corporate securities 399,936 3,048 -- 402,984
State and County Municipal Bonds 1,008,517 24,502 (5,542) 1,027,477
------------------------------------------------------
$16,885,814 $ 80,105 $ (172,717) $16,793,202
======================================================
</TABLE>
-31-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Securities (Continued)
The amortized cost and estimated market values at December 31, 1996, by
contractual maturity, are as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
<S> <C> <C>
Available for Sale
Due in one year or less $ 425,942 $ 425,980
Due after one year but less than five years 5,879,998 5,825,959
Due after five years but less than ten years 7,893,993 7,768,958
Due after ten years 5,357,036 5,316,402
-------------------------
$19,556,969 $19,337,299
-------------------------
Held to Maturity
Due in one year or less $ 1,877,061 $ 1,886,542
Due after one year but less than five years 1,172,878 1,162,523
Due after five years but less than ten years 2,053,948 2,040,960
Due after ten years 11,781,927 11,703,177
-------------------------
$16,885,814 $16,793,202
-------------------------
</TABLE>
The amortized cost and fair market value of mortgage-backed securities are
presented in the available-for-sale and held-to-maturity categories by
contractual maturity in the preceding table. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
repay obligations without call or prepayment penalties.
A summary of the amortized cost and estimated market values of investment
securities is as follows:
<TABLE>
<CAPTION>
December 31, 1995
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale
U. S. Treasury and agency securities $ 5,253,137 $ 51,368 $ (3,970) $ 5,300,535
Mortgage-backed securities 5,318,010 89,212 (6,006) 5,401,216
Other 273,550 -- -- 273,550
------------------------------------------------------
$10,844,697 $ 140,580 $ (9,976) $10,975,301
------------------------------------------------------
Held to Maturity
U. S. Treasury and agency securities $ 7,990,490 $ 48,438 $ (9,883) $ 8,029,045
Mortgage-backed securities 12,899,676 139,000 (81,696) 12,956,980
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
------------------------------------------------------
$23,282,101 $ 242,670 $ (93,986) $23,430,785
------------------------------------------------------
</TABLE>
-32-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Securities (Continued)
Proceeds from sales of securities available for sale were $191,946, $78,700 and
$87,800 during 1996, 1995 and 1994, respectively, resulting in gross gains of
$6,047, $29,763 and $47,800 and no losses.
Securities with an amortized cost of $4,878,208 and $7,697,795 and a market
value of $4,792,546 and $7,697,647 as of December 31, 1996 and 1995,
respectively, were pledged as collateral to secure public funds as required by
law.
Note 3. Loans
Major classifications of loans are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1996 1995
-------------------------------------
<S> <C> <C>
Commercial $ 12,496,652 $ 11,971,254
Installment 8,354,731 10,348,203
Real estate 93,129,107 84,941,282
Other 3,332,970 2,529,000
-------------------------------------
117,313,460 109,789,739
Less unearned discount (932,151) (1,148,964)
-------------------------------------
116,381,309 108,640,775
Allowance for loan losses (1,246,069) (1,235,614)
-------------------------------------
Loans, net $ 115,135,240 $ 107,405,161
-------------------------------------
</TABLE>
An analysis of the transactions in the allowance for loan losses is given below:
<TABLE>
<CAPTION>
Years Ended
December 31,
----------------------------------------------------
1996 1995 1994
----------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 1,235,614 $ 1,099,233 $ 938,383
Loans charged off (568,967) (357,934) (251,774)
Recoveries credited to reserve 177,922 52,315 146,786
Provision charged to operations 401,500 442,000 265,838
----------------------------------------------------
Balance, end of year $ 1,246,069 $ 1,235,614 $ 1,099,233
----------------------------------------------------
</TABLE>
-33-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Loans (Continued)
At December 31, 1996 and 1995, the Corporation had loans totaling approximately
$736,000 and $426,000, respectively, for which impairment had been recognized.
Of the total loans impaired, $51,000 and $64,000, respectively, were valued on
the present value of future cash flows and $685,000 and $362,000, respectively,
were valued according to the underlying collateral. The average balance of the
impaired loans amounted to approximately $888,000 and $460,500 for the years
ended December 31, 1996 and 1995, respectively. The allowance for loan losses
related to these loans totaled approximately $184,000 and $174,000 at December
31, 1996 and 1995, respectively. The following is a summary of cash receipts on
these loans and how they were applied for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995
---------------------------
<S> <C> <C>
Cash receipts applied to reduce principal balance $ 52,008 $ 14,683
Cash receipts recognized as interest income 66,584 10,241
---------------------------
Total cash receipts $ 118,592 $ 24,924
---------------------------
</TABLE>
At December 31, 1996 and 1995, the Corporation had nonaccrual loans of
approximately $240,000 and $220,000, respectively. If interest on these loans
had been recognized at the original interest rates, interest income would have
increased approximately $6,000 and $12,000 in 1996 and 1995, respectively.
Note 4. Bank Premises and Equipment
Major classifications of bank premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1995
-------------------------------
<S> <C> <C>
Land $ 423,647 $ 423,647
Bank premises 2,628,585 2,587,190
Furniture and equipment 2,678,089 2,567,542
-------------------------------
5,730,321 5,578,379
Less accumulated depreciation 3,077,711 2,730,398
-------------------------------
$ 2,652,610 $ 2,847,981
-------------------------------
</TABLE>
Note 5. Maturities of Certificates of Deposits
The scheduled maturities of certificates of deposits at December 31, 1996 are as
follows:
Year Ended December 31,
- -----------------------
1997 $ 39,571,495
1998 6,940,304
1999 2,838,452
2000 5,059,951
2001 1,754,300
----------------
$ 56,164,502
----------------
-34-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Income Taxes
The components of the income tax provision for the years ended December 31,
1996, 1995 and 1994 are as follows:
1996 1995 1994
------------------------------------------------
Currently payable $ 1,404,535 $ 1,302,586 $ 921,286
Deferred 17,762 (78,694) (35,667)
-------------------------------------------------
$ 1,422,297 $ 1,223,892 $ 885,619
-------------------------------------------------
A reconciliation of the expected income tax expense computed at 34 percent to
the income tax expense included in the consolidated statements of income is as
follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
---------------------------------------
1996 1995 1994
---------------------------------------
<S> <C> <C> <C>
Tax provision computed by applying current Federal
income tax rates to income before income taxes $ 1,522,660 $ 1,216,708 $ 912,716
Cash settlement of nonstatutory stock options (42,075) -- --
Exercise of nonstatutory stock options (72,400) -- --
Municipal bond interest (13,900) (9,562) (22,000)
Other 28,012 16,746 (5,097)
---------------------------------------
$ 1,422,297 $ 1,223,892 $ 885,619
---------------------------------------
</TABLE>
-35-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Income Taxes (Continued)
The deferred income taxes result from timing differences in the recognition of
certain income and expense items for tax and financial reporting purposes. The
sources of these timing differences and their related tax effect are as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
--------------------------------
1996 1995 1994
--------------------------------
<S> <C> <C> <C>
Difference between the depreciation methods
used for financial statements and for income
tax purposes $ (3,905) $ 26,951 $(21,200)
Difference between loan loss provision charged
to operating expense and the bad debt deduction
taken for income tax purposes 5,599 (46,140) (54,642)
Accretion of discount recognized on financial
statements but not recognized for income tax
purposes until realized 631 708 749
Difference between accrual method used for
financial statement and cash method used
for income tax purposes 907 (20,448) 54,032
Deferred compensation 14,530 (39,765) (14,606)
--------------------------------
$ 17,762 $(78,694) $(35,667)
--------------------------------
</TABLE>
Net deferred tax assets consist of the following components as of December 31:
<TABLE>
<CAPTION>
1996 1995
--------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $311,225 $316,824
Deferred compensation 79,758 94,288
Unrealized loss on available for sale securities 74,688 --
--------------------
$465,671 $411,112
--------------------
Deferred tax liabilities:
Accrual to cash basis adjustment $130,887 $130,031
Investment securities 10,300 9,669
Property and equipment 35,102 39,007
Unrealized gain on available for sale securities -- 44,406
--------------------
$176,289 $223,113
--------------------
Deferred tax assets, net $289,382 $187,999
--------------------
</TABLE>
-36-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Deferred Compensation Agreements
The Community Bank had deferred compensation agreements for certain officers
providing for payments upon retirement, death or disability. During the year
ended December 31, 1996, the Board of Directors of The Community Bank voted to
cancel all individual contracts that were not vested as of December 31, 1995. In
addition, the Board voted to accelerate the liquidation of the vested contracts
by making full and complete payment during January 1996. These agreements
consisted of individual contracts with specific terms determined on an
individual-by-individual basis. The estimated actuarial values of the benefits
were being charged to operations over the period from the effective dates of
each agreement to the normal retirement dates of the officers. Contributions
amounted to $44,201 and $20,412 for the years ended December 31, 1995 and 1994,
respectively.
Commerce Bank of Virginia has a Deferred Compensation Plan (the Plan) for the
benefit of its directors. Contributions amounted to approximately $23,700,
$38,900 and $24,000 for the years ended December 31, 1996, 1995 and 1994,
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, Commerce Bank of Virginia adopted a Deferred Compensation Plan
(Officers' Plan) for the benefit of certain officers. Contributions of
approximately $29,200 and $28,000 were made to the Plan during the years ended
December 31, 1996 and 1995, respectively. The Officers' Plan provides each
covered officer an annual benefit payment upon retirement. In addition, benefit
payments are available upon death or early termination as defined by the Plan
document.
Note 8. Employee Benefit Plans
Effective January 1, 1993, the Corporation through its subsidiary, The Community
Bank, established an Employee Stock Ownership Plan with 401(K) provisions by
restating, amending and consolidating the Employee Stock Ownership Plan
originally effective January 1, 1987, and the Profit-Sharing and Thrift Plan
originally effective December 31, 1981. All participants of the pension plans
are eligible to participate. Thereafter, each employee will become eligible to
participate in the plan on the first anniversary date, December 31, following
their initial date of service. The employee must be at least 18 years old and be
employed in a full-time position requiring at least 1,000 hours of service for
the plan year ending on that anniversary date. The Corporation matches 75% of
employee contributions up to 5% of the participant's compensation. Annual
contributions to the ESOP are made at the discretion of the Board of Directors.
During the year ended December 31, 1995, the ESOP purchased additional shares
through the proceeds of a $365,500 direct bank loan. The shares purchased were
pledged as collateral for its debt. As the debt is repaid, shares are released
and allocated to participants. The Company accounts for its ESOP in accordance
with Statement of Position 93-6. Accordingly, the shares pledged are reported as
unearned ESOP shares in the balance sheet. As shares are released, the Company
reports compensation expense equal to the current market price of the shares,
and the shares then become outstanding for earnings per share (EPS) computation.
Dividends on allocated ESOP shares are recorded as a reduction of retained
earnings. Dividends on unallocated ESOP shares are recorded as a reduction of
debt and interest.
-37-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Employee Benefit Plans (Continued)
Compensation expense for the 401(k) match and the ESOP was $143,600, $105,000
and $90,000 for the three years ended December 31, 1996, 1995 and 1994,
respectively. The ESOP shares as of December 31 were as follows:
1996 1995
----------------------------
Allocated shares 154,551 138,344
Unreleased shares 21,755 30,515
----------------------------
176,306 168,859
----------------------------
Fair value of unreleased shares $ 386,151 $ 404,327
----------------------------
In addition, the Corporation through its subsidiary, Commerce Bank of Virginia,
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 $50,000, $40,000 and
$30,000 for the years ended December 31, 1996, 1995 and 1994, respectively. At
December 31, 1996, there were 21,500 shares allocated to participants which are
considered outstanding for purposes of computation of earnings per share.
Effective June 1, 1992, the Commerce Bank of Virginia 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 $23,500, $16,800 and $12,100 for the years
ended December 31, 1996, 1995 and 1994, respectively.
Note 9. Business Combination
On July 1, 1996, the Corporation acquired Commerce Bank of Virginia in a
business combination accounted for as a pooling of interests. Commerce Bank of
Virginia, a state-chartered member bank, became a wholly-owned subsidiary of the
Corporation through the exchange of 741,080 shares of the Corporation's common
stock for all of the outstanding stock of Commerce Bank of Virginia. The
accompanying consolidated financial statements for 1996 are based on the
assumption that the companies were combined for the full year, and the
consolidated financial statements for prior years have been restated to give
effect to the combination.
-38-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Business Combination (Continued)
Summarized results of operations of the separate companies for the period from
January 1, 1996 through July 1, 1996, the date of acquisition, are as follows:
Community Commerce
Bankshares Bank of
Incorporated Virginia
---------------------------------
Net interest income $ 2,384,082 $ 1,728,000
---------------------------------
Net income $ 862,955 $ 537,750
---------------------------------
Following is a reconciliation of the amounts of net interest income and net
income previously reported for 1995 and 1994 with restated amounts:
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------------------------
1995 1994
---------------------------------
<S> <C> <C>
Net interest income:
As previously reported $ 4,472,171 $ 3,783,609
Acquired company 3,112,761 2,705,127
---------------------------------
As restated $ 7,584,932 $ 6,488,736
---------------------------------
Net income:
As previously reported $ 1,622,996 $ 1,312,012
Acquired company 731,666 486,829
---------------------------------
As restated $ 2,354,662 $ 1,798,841
---------------------------------
</TABLE>
Note 10. Agreement and Plan of Reorganization
On January 14, 1997, the Board of Directors entered into an Agreement and Plan
of Reorganization (the Plan) with County Bank of Chesterfield to combine their
businesses. County Bank of Chesterfield is a Virginia state chartered bank with
its principal office located in Chesterfield, Virginia. The combination of the
two companies will be consummated through a Share Exchange under Virginia law.
Under the terms of the Plan, County Bank of Chesterfield would become a
wholly-owned subsidiary of Community Bankshares Incorporated. For each share
owned, the shareholders of County Bank of Chesterfield would receive 1.1054
shares of stock of Community Bankshares Incorporated. It is anticipated that the
transaction will qualify for and be accounted for as a pooling of interests. The
stockholders of Community Bankshares Incorporated and County Bank of
Chesterfield will be asked to consider and vote on the proposed Plan at their
Annual Meetings. If adopted by the shareholders, it is anticipated that the
transaction will become effective late in the second quarter of 1997. The
proposed transaction is subject to approval by regulatory authorities.
-39-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Agreement and Plan of Reorganization (Continued)
If the transaction had been consummated prior to December 31, 1996, the
accompanying consolidated financial statements would have included the financial
position and results of operations of County Bank of Chesterfield. Interest
income, net income, and net income per share for the three years ended December
31, 1996 would have been as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C>
Interest income $ 20,060 $ 18,176 $ 14,922
Net income $ 3,887 $ 2,980 $ 2,313
Earnings per common and common equivalent share $ 1.37 $ 1.18 $ 0.97
Earnings per common share, assuming full dilution $ 1.36 $ 1.18 $ 0.97
</TABLE>
Note 11. Employment Agreements
The Corporation has entered into employment agreements with certain officers
which expire at dates through June 30, 1998. These agreements, which contain
continual self-renewing terms of one year subject to cancellation by the
Corporation, 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, 1996, would have
been approximately $900,000.
Note 12. Incentive Compensation Plans
The Community Bank maintains a Cash Incentive Plan for certain employees and
directors of the Bank. The Plan sets forth predetermined award pools for each
group of participants. The level of the award pool is dependent upon the Bank
attaining certain returns on average assets for the year. The amounts awarded
under the Plan for the years ended December 31, 1996, 1995 and 1994 were
$146,294, $146,294 and $151,860, respectively.
Note 13. Incentive Stock Option and Nonstatutory Stock Option Plan
The Corporation has a Stock Plan that provides for the grant of Incentive Stock
Options and the grant of Nonstatutory Stock Options and Stock Appreciation
Rights. This Plan was adopted to encourage key officers and directors to acquire
or to increase their acquisition of the Corporation's common stock, thus
increasing their personal and proprietary interest in the Corporation's
continued success. The options were granted at the market value on the date of
each grant. Options may be exercised from date of grant through periods ending
July 20, 2003 through October 18, 2004.
The Corporation did not grant any options during the years ended December 31,
1996 and 1995. Therefore, the transition provisions of FASB Statement 123 would
not be applicable.
-40-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Incentive Stock Option and Nonstatutory Stock Option Plan (Continued)
The following table presents a summary of options under the Plan at December 31:
<TABLE>
<CAPTION>
Shares Under Options
--------------------------------------------
Option Price 1996 1995 1994
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year $6.25 - $ 9.75 203,705 213,705 206,795
Options granted 9.75 -- -- 10,000
Options exercised 6.25 - 12.12 (43,705) (10,000) (3,090)
Cash settlement of options 6.25 (10,000) -- --
------------------------------------------------------------------------
Outstanding, end of year $6.25 - $ 9.75 150,000 203,705 213,705
------------------------------------------------------------------------
</TABLE>
Note 14. Life Insurance
The Community Bank is owner and designated beneficiary on life insurance in the
face amount of $3,109,000 maintained on certain of its officers and directors.
At December 31, 1996, the cash surrender value of these policies was $491,764
which is included in other assets.
During the third quarter of 1994, the Bank was notified that the life insurance
carrier for the above policies, Confederation Life Insurance Company, had been
placed under regulatory control. Regulators have said that the insurance company
will continue to pay claims made; however, it will restrict access to cash value
until further notice. Rehabilitators and management are of the opinion that no
losses will occur as a result of the insurance company's rehabilitation and
accordingly, a provision for possible losses due to asset impairment is not
reflected in the accompanying consolidated financial statements.
Note 15. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
corporations to disclose the fair value of its financial instruments, whether or
not recognized in the balance sheet, where it is practical to estimate that
value.
Fair value estimates made as of December 31, 1996 are based on relevant market
information about the financial instruments. These estimates do not reflect any
premium or discount that could result from offering for sale at one time the
Corporation's entire holding of a particular financial instrument. In cases
where quoted market prices are not available, fair value estimates are based on
judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates. In
addition, the tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on fair value estimates and have
not been considered in the estimates.
The following methods and assumptions were used by the Corporation in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the consolidated
balance sheets for cash and short-term instruments approximate those assets'
fair values.
-41-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. Fair Value of Financial Instruments (Continued)
Securities available for sale and investment securities: Fair values were based
on quoted market prices, where available. If quoted market prices were not
available, fair values were based on quoted market prices of comparable
instruments.
Loans: The carrying values, reduced by estimated inherent credit losses, of
variable-rate loans and other loans with short-term characteristics were
considered fair values. For other loans, the fair market values were calculated
by discounting scheduled future cash flows using current interest rates offered
on loans with similar terms adjusted to reflect the estimated credit losses
inherent in the portfolio.
Accrued interest receivable and accrued interest payable: The carrying amounts
reported in the consolidated balance sheets for accrued interest receivable and
accrued interest payable approximate their fair values.
Deposit liabilities: The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, NOW, savings, and money market deposits,
was, by definition, equal to the amount payable on demand as of December 31,
1996. The fair value of certificates of deposit was based on the discounted
value of contractual cash flows, calculated using the discount rates that
equaled the interest rates offered at the valuation date for deposits of similar
remaining maturities.
The following is a summary of the carrying amounts and estimated fair values of
the Corporation's financial assets and liabilities to include off-balance sheet
financial instruments as December 31:
<TABLE>
<CAPTION>
1996 1995
------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks, noninterest bearing $ 9,337,968 $ 9,337,968 $ 7,608,418 $ 7,608,418
Federal funds sold and other short-term investments 5,392,000 5,392,000 6,044,000 6,044,000
Securities available for sale 19,337,299 19,337,299 10,975,301 10,975,301
Investment securities 16,885,814 16,793,202 23,282,101 23,430,785
Loans, net of reserve for credit losses 115,135,240 115,729,000 107,405,161 107,223,000
Accrued interest receivable 1,081,163 1,081,163 982,274 982,274
Financial liabilities:
Deposits $152,006,298 $153,331,000 $143,571,091 $144,156,000
Accrued interest payable 478,090 478,090 489,824 489,824
</TABLE>
At December 31, 1996, the Corporation had outstanding standby letters of credit
and fixed and variable rate commitments to extend credit. For fair value, the
fixed rate loan commitments were considered based on committed rates versus
market rates for similar transactions. Due to market constraints, rates have
remained relatively unchanged on these products, therefore, management has
determined fair value to be the same as the committed value. Standby letters of
credit and variable rate commitments are generally exercisable at the market
rate prevailing at the date the underlying transaction will be completed, and
therefore, they were deemed to have no current fair market value.
-42-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16. Commitments and Contingencies
Financial instruments with off-balance-sheet risk:
The Corporation is 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. These instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the consolidated balance
sheets.
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Corporation uses the same credit policies in making commitments
and conditional obligations as they do for on-balance-sheet instruments. A
summary of the Corporation's commitments at December 31, 1996 and 1995 is as
follows:
1996 1995
----------------------------------
Commitments to extend credit $ 19,663,000 $ 15,871,000
Standby letters of credit 2,248,000 2,251,000
----------------------------------
$ 21,911,000 $ 18,122,000
----------------------------------
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. The
Corporation evaluates each customer's credit-worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Corporation upon
extension of credit, is based on management's credit evaluation of the party.
Collateral held varies, but may include accounts receivable, inventory, property
and equipment, and residential and commercial real estate.
Standby letters of credit are conditional commitments issued by the Corporation
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements. Since
many of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements.
The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
as specified above and is required in instances which the Corporation deems
necessary.
Fixed-rate commitments were $4,851,000 and $4,438,000 as of December 31, 1996
and 1995, respectively. The average rates charged on the fixed-rate commitments
were 8.5% - 10.5% for the years then ended.
All of the Corporation's loans, commitments to extend credit, and standby
letters of credit have been granted to customers within the state and, more
specifically, its local geographic area of Virginia. The concentrations of
credit by type of loan are set forth in Note 3.
-43-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16. Commitments and Contingencies (Continued)
Lease commitments:
The Corporation leases land, tenant space and certain equipment under operating
leases expiring at various dates to 2006. Total rental expense amounted to
approximately $101,300, $85,700 and $101,900 for the years ended December 31,
1996, 1995 and 1994, respectively. At December 31, 1996, minimum annual lease
payments in the aggregate were as follows:
Year Ended December 31,
- -----------------------
1997 $ 94,400
1998 62,800
1999 15,000
2000 15,000
2001 15,000
Thereafter 61,000
---------------
$ 263,200
---------------
Note 17. Related Party Transactions
At December 31, 1996, loans to officers and directors and corporations in which
officers and directors own a significant interest totaled $6,208,247. All such
loans were made in the normal course of business on substantially the same
terms, including interest and collateral, as those prevailing at the time for
comparable transactions.
An analysis of these related party transactions is as follows:
<TABLE>
<CAPTION>
Balance Balance
December 31, December 31,
1995 Additions Repayments 1996
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Directors $ 2,979,084 $ 5,124,234 $ 2,361,911 $ 5,741,407
Officers and Employees 495,548 446,327 475,035 466,840
------------------------------------------------------------------
$ 3,474,632 $ 5,570,561 $ 2,836,946 $ 6,208,247
------------------------------------------------------------------
</TABLE>
Note 18. Capital Stock and Common Stock Split
On May 16, 1995, the Corporation changed its authorized capital from 1,000,000
shares of $3 par value common stock to 4,000,000 shares of $3 par value common
stock. On July 18, 1995, the Corporation's Board of Directors declared a two for
one split of the common stock effected in the form of a 100% stock dividend on
the outstanding stock to be distributed on August 31, 1995 to the stockholders
of record on July 31, 1995. The par value of the additional shares of common
stock was credited to common stock with reductions from surplus and retained
earnings.
All references in the accompanying consolidated financial statements to the
number of common shares and per share amounts have been restated to reflect the
stock split.
-44-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19. Regulatory Matters
The Corporation is subject to various regulatory capital requirements
administered by its primary federal regulator, the Federal Reserve Bank. 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 Corporation's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation must met specific capital guidelines that
involve quantitative measures of the Corporation's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Corporation'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 Corporation to maintain minimum amounts and ratios as set forth in
the table below of total and Tier I capital as defined in the regulations to
risk-weighted assets as defined, and of Tier I capital as defined to average
assets as defined. Management believes, as of December 31, 1996, that the
Corporation meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Federal Reserve
Bank categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Corporation
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 institution's category.
The Bank's actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
-----------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) $ 20,139 17.03% $ 9,460 8.00% $ 11,826 10.00%
Tier I Capital
(to Risk Weighted Assets) 18,893 15.98% 4,729 4.00% 7,094 6.00%
Tier I Capital
(to Average Assets) 18,893 11.51% 6,566 4.00% 8,207 5.00%
As of December 31, 1995:
Total Capital
(to Risk Weighted Assets) 17,041 15.09% 9,034 8.00% 11,293 10.00%
Tier I Capital
(to Risk Weighted Assets) 15,806 14.00% 4,516 4.00% 6,774 6.00%
Tier I Capital
(to Average Assets) 15,806 10.29% 6,144 4.00% 7,680 5.00%
</TABLE>
Banking laws and regulations limit the amount of dividends that may be paid
without prior approval of the Corporation's regulatory agency. Under that
limitation, the Corporation's subsidiaries could have declared additional
dividends of approximately $6,135,860 in 1996 without regulatory approval.
-45-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20. Parent Corporation
Financial statements for Community Bankshares Incorporated (not consolidated)
are presented below.
COMMUNITY BANKSHARES INCORPORATED
(Parent Corporation Only)
Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Cash $ 535,614 $ 82,075
Investment in subsidiaries 18,403,205 16,171,348
Other assets 116,536 5,000
----------------------------
Total assets $ 19,055,355 $ 16,258,423
----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Guaranteed debt of Employee Stock Ownership Trust $ 240,000 $ 330,000
Other liabilities 67,236 36,002
----------------------------
307,236 366,002
----------------------------
Stockholders' equity:
Common stock, par value $3 per share, authorized
4,000,000 shares; issued 1996 1,901,080 shares;
1995 1,853,975 shares 5,703,240 5,561,925
Surplus 1,712,201 1,688,322
Retained earnings 11,716,193 8,885,976
Net unrealized gain (loss) on securities available
for sale held by subsidiaries, net of taxes (144,982) 86,198
----------------------------
18,986,652 16,222,421
Unearned ESOP shares (238,533) (330,000)
----------------------------
Total stockholders' equity 18,748,119 15,892,421
----------------------------
Total liabilities and stockholders' equity $ 19,055,355 $ 16,258,423
----------------------------
</TABLE>
-46-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20. Parent Corporation (Continued)
COMMUNITY BANKSHARES INCORPORATED
(Parent Corporation Only)
Statements of Income
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Dividends from subsidiaries $ 880,520 $ 140,000 $ 171,000
Gain on sale of securities -- 29,763 47,800
--------------------------------------
880,520 169,763 218,800
--------------------------------------
Expenses:
Professional fees 87,508 58,353 12,847
Stationary and supplies 17,451 3,782 2,008
Taxes, miscellaneous 850 850 850
Other 7,738 1,949 324
--------------------------------------
Total expenses 113,547 64,934 16,029
--------------------------------------
Income taxes (credits) (12,987) 3,002 10,802
--------------------------------------
Income before equity in
undistributed income
of subsidiaries 779,960 101,827 191,969
Equity in undistributed income of subsidiaries 2,276,154 2,252,835 1,606,872
--------------------------------------
Net income $ 3,056,114 $2,354,662 $1,798,841
--------------------------------------
</TABLE>
-47-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20. Parent Corporation (Continued)
COMMUNITY BANKSHARES INCORPORATED
(Parent Corporation Only)
Statements of Changes in Stockholders' Equity
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Unrealized
Securities Unearned
Capital Retained Gain ESOP
Stock Surplus Earnings (Loss) Shares
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $3,517,560 $ 1,919,285 $ 5,793,097 $ -- $ --
Issuance of common stock pursuant to
exercise of stock options 9,270 2,450 -- -- --
Net income for the year ended
December 31, 1994 -- -- 1,798,841 -- --
Cash dividends declared -- -- (171,000) -- --
Unrealized loss on available for
sale securities, net -- -- -- (14,990) --
-------------------------------------------------------------------
Balance, December 31, 1994 3,526,830 1,921,735 7,420,938 (14,990) --
Issuance of common stock pursuant to
exercise of stock options 15,000 47,500 -- -- --
Stock split effected in the form of a 100%
stock dividend 1,725,000 (1,036,432) (688,568) --
Proceeds from sale of stock 295,095 755,519 194 -- --
Net income for the year ended
December 31, 1995 -- -- 2,354,662 -- --
Cash dividends declared -- -- (201,250) --
Unrealized gain on available for sale
securities, net -- -- -- 101,188 --
Leveraged ESOP stock purchase -- -- -- -- (365,500)
Release of ESOP shares -- -- -- -- 35,500
-------------------------------------------------------------------
Balance, December 31, 1995 5,561,925 1,688,322 8,885,976 86,198 (330,000)
Issuance of common stock pursuant to
exercise of stock options 130,420 78,880 -- -- --
Cash settlement of options -- (123,750) -- -- --
Proceeds from sale of stock to ESOP 10,895 29,188 -- -- --
Purchase of fractional shares -- (1,918) -- -- --
Net income for the year ended
December 31, 1996 -- -- 3,056,114 -- --
Cash dividends declared -- -- (232,000) -- --
Unrealized loss on available for sale
securities, net -- -- -- (231,180) --
Release of ESOP shares -- 41,479 6,103 -- 91,467
-------------------------------------------------------------------
Balance, December 31, 1996 $5,703,240 $ 1,712,201 $ 11,716,193 $(144,982) $(238,533)
-------------------------------------------------------------------
</TABLE>
-48-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20. Parent Corporation (Continued)
COMMUNITY BANKSHARES INCORPORATED
(Parent Corporation Only)
Statements of Cash Flows
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 3,056,114 $ 2,354,662 $ 1,798,841
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of securities -- (29,763) (47,800)
Release of ESOP shares 49,049 -- --
Undistributed earnings of subsidiary (2,276,154) (2,252,835) (1,606,872)
Changes in operating assets and liabilities:
(Increase) decrease in other assets (111,536) -- 10,077
Increase in other liabilities 31,234 24,700 11,303
-----------------------------------------
Net cash provided by operating activities 748,707 96,764 165,549
-----------------------------------------
Investing Activities
Proceeds from sale of investment securities -- 78,700 87,800
Purchase of investment securities -- -- (48,938)
-----------------------------------------
Net cash provided by investing activities -- 78,700 38,862
-----------------------------------------
Financing Activities
Cash settlement of options (123,750) -- --
Payment of fractional shares (1,918) -- --
Dividends paid (232,000) (201,250) (171,000)
Net proceeds from issuance of common stock 62,500 62,500 --
-----------------------------------------
Net cash used in financing activities (295,168) (138,750) (171,000)
-----------------------------------------
Increase in cash 453,539 36,714 33,411
Cash, beginning 82,075 45,361 11,950
-----------------------------------------
Cash, ending $ 535,614 $ 82,075 $ 45,361
-----------------------------------------
</TABLE>
-49-
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion provides information about the major
components of the results of operations and financial condition, liquidity and
capital resources of Community Bankshares Incorporated. This discussion and
analysis should be read in conjunction with the Consolidated Financial
Statements and the Notes to Consolidated Financial Statements.
Overview
Net income for the year ended December 31, 1996 of $3.056 million was
an increase of 29.8% over the year ended December 31, 1995. The increase in net
income during 1996 reflects primarily an increase in the lending volume and an
improvement in the rates earned on interest-earning assets. Earnings per share
for the year ended December 31, 1996 were $1.55, up from $1.27 for the year
ended December 31, 1995. CBI has shown an increase of 162% in net income over
the five years ended December 31, 1996, from $1.166 million in 1992 to $3.056
million during 1996. The increase in income over the past five years is
attributable to the 49% growth in the loan portfolio. As total assets grew from
$110.440 million in 1992 to $172.014 million as of December 31, 1996, net loans
grew from $77.144 million to $115.135 million.
CBI increased net income 31.0% to $2.355 million during 1995 over 1994.
This increase was attributable to an increase in the net interest yield and a
decrease in the provision for loan losses. Net income during 1994 of $1.798
million was a 31.8% increase over 1993. On a per share basis, net income was
$1.00 in 1994.
CBI's return on average equity and average assets has increased over
the past five years. The return on average equity was 17.24% for the year ended
December 31, 1996. The return on average equity was 16.38% in 1995, compared to
14.85% for 1994. The return on average assets amounted to 1.86%, 1.53% and 1.31%
for the three years ended December 31, 1996, 1995, and 1994, respectively.
Net Interest Income
Net interest income represents the principal source of earnings for
CBI. Net interest income equals the amount by which interest income exceeds
interest expense. Changes in the volume and mix of interest-earning assets and
interest-bearing liabilities, as well as their respective yields and rates, have
a significant impact on the level of net interest income.
Net interest income increased 12.6% to $8.537 million in 1996. This
increase was attributable to a 7.9% growth in average earning assets. The
increase in interest-earning assets was due primarily to increases in the
securities and lending volume. During the three years ended December 31, 1996,
CBI has had a consistent increase in loan demand. It is management's belief that
the increase in the lending volume is a result of competitive pricing and, most
importantly, responsiveness to loan demands. The ability to make a timely loan
decision is an operating characteristic that often allows CBI the opportunity to
meet the needs of borrowers before its competitors. Rates earned on average
interest earning assets were 9.14% during 1996 as compared to 8.96% one year
earlier. This return was a result of increased rates earned on loans. CBI is
competitive with rates and origination fees charged on loans. However, since
76.3% of CBI's loan portfolio may be repriced in one year or less, CBI may
respond quickly to market changes in rates.
Interest expense for the year ended December 31, 1996 increased
slightly, by 5.1%, to $5.355 million from $5.097 million for the year ended
December 31, 1995. This increase was due to an increase of 6.07% in average
interest bearing liabilities from $114.247 million during 1995 to $121.181
million in 1996. The interest rate paid on interest-bearing liabilities remained
fairly constant for the year, at 4.42% for 1996 compared to 4.46% in 1995.
-50-
<PAGE>
Net interest income was $7.585 million for the year ended December 31,
1995, an increase of 16.9% over the $6.489 million reported in 1994. This
increase was partially due to the 13.1% increase in interest-earning assets.
Again, the increase in the lending volume was the most significant portion of
the increase in average interest earning assets with a 10.26% increase. Also
contributing to the rise in net interest income was the 9.54% increase in the
yield on interest-earning assets, which increased from 8.18% to 8.96%. During
1995 interest expense increased by $1.37 million to $5.097 million. This
increase was a result of an increase in rates and deposit volume. As the rates
declined during 1994, many depositors elected not to invest in time deposits and
opted for short-term interest-bearing demand deposits which paid a lower rate.
This trend reversed itself in 1995 as average certificates of deposit and large
denomination deposits increased 33.77% or $12.034 million, at the same time
demand interest-bearing liabilities increased 5.9% or $2.124 million. This
change in the mix of deposits caused CBI to increase its cost of funds for 1995
to 4.46% from 3.62% for 1994.
Interest income increased 14.83% or $1.324 million from $8.926 million
in 1993 to $10.220 million during 1994. This increase was primarily due to an
increase in average loans of 14.03% or $11.983 million to $97.419 million during
1994. This increase in loan volume took place at a time when average rates on
loans increased only slightly to 8.84% for 1994 from 8.72% during 1993. Interest
expense increased 5.93%, from $3.523 million in 1993 to $3.71 million in 1994.
The net interest yield for 1994 was 5.18%, up slightly from 4.80% during 1993.
The following table sets forth CBI's average interest-earning assets
(on a tax equivalent basis) and average interest-bearing liabilities, the
average yields earned on such assets and rates, paid on such liabilities, and
the net interest margin, for the periods indicated:
-51-
<PAGE>
Average Balance Sheets, Interest Income and Expense, Yields and Rates
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------------------
1996 1995 1994
--------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance(6) Interest Rate (1) Balance(6) Interest Rate Balance(6) Interest Rate (1)
---------- -------- -------- ---------- -------- ----- ---------- -------- --------
(1)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Securities $ 34,277 $ 2,367 6.92% $ 28,645 $ 1,767 6.17% $ 24,572 $ 1,487 6.05%
Federal funds sold 4,810 266 5.53% 5,746 376 6.54% 3,369 148 4.39%
Loans (5) 113,963 11,349 9.96% 107,413 10,564 9.83% 97,419 8,615 8.84%
-------- ------- ----- -------- ------- ----- ------- ------ -----
Total interest-earning
assets $ 153,000 $ 13,982 9.14% $ 141,804 $ 12,707 8.96% $ 125,360 $ 10,250 8.18%
Noninterest-earning
assets:
Cash and due from banks 6,874 8,039 7,969
Premises and equipment 2,756 2,691 2,668
Other assets 2,787 2,280 2,211
Less allowance for loan
losses (1,251) (1,216) (1,033)
Total 164,166 153,598 137,175
======== ======== =======
Liabilities and
Stockholders'
Equity
Interest-bearing
liabilities:
Money market and NOW
accounts $ 40,039 $ 1,245 3.11% $ 38,007 $ 1,322 3.48% $ 35,883 $ 1,117 3.11%
Savings deposits 25,765 956 3.71% 28,049 918 3.27% 30,997 872 2.81%
Time deposits 45,409 2,580 5.68% 37,189 2,266 6.09% 28,511 1,449 5.08%
Large denomination
deposits 9,351 548 5.86% 10,481 575 5.49% 7,125 285 4.00%
Federal funds purchased 617 26 4.21% 521 16 3.07% 592 9 1.52%
---- --- ----- ---- --- ----- ---- -- -----
$ 121,181 $ 5,355 4.42% $ 114,247 $ 5,097 4.46% $ 103,108 $ 3,732 3.62%
-------- -------- --------
Noninterest-bearing
liabilities:
Demand deposits 24,307 23,845 21,154
Other liabilities 956 1,130 803
---- ------ ----
$ 146,444 $ 139,222 $ 125,065
Stockholders' Equity 17,722 14,376 12,110
------- ------- -------
Total $ 164,166 $ 153,598 $ 137,175
========= ========= =========
Net interest earnings $ 8,627 $ 7,610 $ 6,518
Less tax equivalent
adjustment 90 25 29
-- -- --
Net Interest income/
yield (2) (3) $ 8,537 5.58% $ 7,585 5.35% $ 6,489 5.18%
======== ===== ======== ===== ======== =====
Interest Spread (4) 4.72% 4.50% 4.56%
</TABLE>
- ---------------
(1) Computed on an annualized fully taxable equivalent basis.
(2) Net interest income is the difference between income from earning
assets and interest expense.
(3) Net interest yield is net interest income divided by total average
earning assets.
(4) Interest spread is the difference between the average interest rate
received on earning assets and the average interest rate paid for
interest-bearing liabilities.
(5) Average loan balances include non-accrual loans.
(6) Average balances are computed on monthly balances and management
believes such balances are representative of the operations of the
Bank.
-52-
<PAGE>
Interest income and interest expense are affected by changes in both
average interest rates and average volumes of interest-earning assets and
interest-bearing liabilities. The following table analyzes changes in net
interest income attributable to changes in the volume of interest-bearing assets
and liabilities compared to changes in interest rates. Nonaccruing loans are
included in average loans outstanding. The change in interest due to both rate
and volume has been allocated to change due to volume and change due to rate in
proportion to the relationship of the absolute dollar amounts of the change in
each.
Volume and Rate Analysis
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994 1994 vs. 1993
------------- ------------- -------------
Increase (decrease) Increase (decrease) Increase (decrease)
Due to changes in: Due to changes in: Due to changes in:
------------------ ------------------ ------------------
Volume Rate Total(1) Volume Rate Total(1) Volume Rate Total(1)
------ ---- -------- ------ ---- -------- ------ ---- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in:
Interest income:
Investment securities,
taxable $ 369 $ 231 $ 600 $ 250 $ 30 $ 280 $ 355 $ (88) $ 267
Federal funds sold (56) (54) (110) 135 93 228 (188) 81 (107)
Loans 644 141 785 933 1,016 1,949 1,060 104 1,164
--- --- --- --- ----- ----- ----- --- -----
$ 957 $ 318 $ 1,275 $ 1,318 $ 1,139 $ 2,457 $ 1,227 $ 97 $ 1,324
-------- -------- ------- ------- ------- -------- -------- -------- --------
Interest expense:
Savings and time
deposits $ 305 $ (57) $ 248 $ 433 $ 925 $ 1,358 $ 355 $ (154) $ 201
Federal funds
purchased 3 7 10 (1) 8 7 8 - 8
- - -- --- - - - - -
$ 308 $ (50) $ 258 $ 432 $ 933 $ 1,365 $ 355 $ (154) $ 209
-------- -------- -------- -------- -------- -------- ------ -------- --------
Net interest earnings $ 649 $ 368 $ 1,017 $ 886 $ 206 $ 1,092 $ 864 $ 251 $ 1,115
======== ======== ======= ======== ======== ======== ======== ======== ========
</TABLE>
- --------------------------
(1) Computed on an annualized fully taxable equivalent basis.
Interest Sensitivity
An important element of both earnings performance and the maintenance
of sufficient liquidity is management of the interest sensitivity gap. The
interest sensitivity gap is the difference between interest-sensitive assets and
interest-sensitive liabilities in a specific time interval. The gap can be
managed by repricing assets or liabilities, by replacing an asset or liability
at maturity or by adjusting the interest rate during the life of an asset or
liability. Matching the amounts of assets and liabilities repricing in the same
interval helps to hedge the risk and minimize the impact on net interest income
in periods of rising or falling interest rates.
The objective of interest sensitivity management is to provide
flexibility in controlling the response of both rate-sensitive assets and
liabilities to wide and frequent fluctuations in market rates of interest so
that the effect of such swings on net interest income is minimized. The most
important part of this objective is to maximize earnings while keeping risks
within defined limits. To reduce the impact of changing interest rates as much
as possible, CBI attempts to keep a large portion of its interest-sensitive
assets and liabilities in generally shorter maturities, usually one year or
less. This allows CBI the opportunity to adjust interest rates as needed to
react to the loan and deposit market conditions.
Management evaluates interest sensitivity through the use of a static
gap model on a monthly basis and then formulates strategies regarding asset
generation and pricing, funding sources and pricing, and off-balance sheet
commitments in order to decrease sensitivity risk. These strategies are based on
management's outlook regarding interest rate movements, the state of the
regional and national economies and other financial and business risk factors.
In addition, CBI establishes prices for deposits and loans based on local market
conditions and manages its securities portfolio with policies set by itself.
-53-
<PAGE>
The following tables present CBI's Interest Rate Sensitivity Analysis
as of December 31, 1996 and 1995.
<TABLE>
<CAPTION>
Interest Rate Sensitivity Analysis
December 31, 1996
----------------------------------------------------------
Within 4-12 1-5 Over
3 Months Months Years 5 Years Total
-------- ------ ----- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Federal funds sold $ 5,392 $ -- $ -- $ -- $ 5,392
Investment securities 529 1,851 6,260 27,600 36,240
Loans 48,591 36,641 30,311 841 116,384
-------- -------- -------- ------- --------
Total interest earning-assets $ 54,512 $ 38,492 $ 36,571 $28,441 $158,016
- ----------------------------- -------- -------- -------- ------- --------
Interest-Bearing Liabilities:
Deposits:
Demand $ 54,693 $ -- $ -- $ -- $ 54,693
Savings 27,478 -- -- -- 27,478
Time deposits, $100,000 and over 8,501 14,178 11,332 -- 34,011
Other time deposits 8,583 9,179 5,056 -- 22,818
-------- -------- -------- ------- --------
Total interest-bearing liabilities $ 99,255 $ 23,357 $ 16,388 $ -- $139,000
- ---------------------------------- -------- -------- -------- ------- --------
Period gap $(44,743) $ 15,135 $ 20,183 $28,441 $ 19,016
========= ======== ======== ======= ========
Cumulative gap $(44,743) $(29,608) $ (9,425) $19,016
========= ========= ========= =======
Ratio cumulative gap to total
interest-earning assets -28.32% -18.74% -5.96% 12.03%
======== ======== ======= ======
</TABLE>
The December 31, 1996 results of the rate sensitivity analysis show CBI
had $44.743 million more in liabilities than assets subject to repricing within
three months or less and was, therefore, in a liability-sensitive position. The
cumulative gap at the end of one year was a negative $29.608 million, and,
therefore in a liability-sensitive position. The one year negative gap position
reflects a loan portfolio that is weighted predominantly in shorter maturities.
Approximately $88.9 million, or 76.3% of the total loan portfolio, matures or
reprices within one year or less. An asset-sensitive institution's net interest
margin and net interest income generally will be impacted favorably by rising
interest rates, while that of a liability-sensitive institution generally will
be impacted favorably by declining rates.
-54-
<PAGE>
<TABLE>
<CAPTION>
Interest Rate Sensitivity Analysis
December 31, 1995
------------------------------------------------------------
Within 4-12 1-5 Over
3 Months Months Years 5 Years Total
-------- ------ ----- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Federal funds sold $ 6,044 $ -- $ -- $ -- $ 6,044
Investment securities 1,201 5,706 5,525 21,723 34,155
Loans 45,203 30,681 31,441 1,316 108,641
--------- -------- ------- ------- --------
Total interest-earning assets $ 52,448 $ 36,387 $36,966 $23,039 $148,840
--------- -------- ------- ------- --------
Interest-Bearing Liabilities:
Deposits:
Demand $ 40,569 $ -- $ -- $ -- $ 40,569
Savings 24,387 -- -- -- 24,387
Time deposits, $ 100,000 and over 2,327 4,233 4,420 -- 10,980
Other time deposits 9,996 16,888 17,131 88 44,103
--------- -------- ------- ------- --------
Total interest-bearing liabilities $ 77,279 $ 21,121 $21,551 $ 88 $120,039
--------- -------- ------- ------- --------
Period gap $ (24,831) $ 15,266 $15,415 $22,951 $ 28,801
========= ======== ======= ======= ========
Cumulative gap $ (24,831) $ (9,565) $ 5,850 $28,801
========= ======== ======= =======
Ratio cumulative gap to total
interest-earning assets -16.68% -6.43% 3.93% 19.35%
======= ====== ===== ======
</TABLE>
Noninterest Income
For the year ended December 31, 1996 noninterest income increased by
$79,000, or 6.96% to $1.214 million. This increase resulted primarily from a
gain on the sale of other real estate in the amount of approximately $55,000.
Noninterest income for the year ended December 31, 1995 was $1.135
million, a decrease of $96,000 or 7.8% from 1994. This decline is partially
attributable to a 5.0% or $50,375 decrease in service charges. CBI marketed
"Free Checking" in order to increase deposits, to increase name recognition in
the community, and at the same time, reduce the cost of funds.
Noninterest income for 1994 increased 9.67% or $108,458 from 1993.
Service charges, commissions and fees, the largest single item of noninterest
income, increased by $32,778 for 1994, up 3.3% from 1993.
Noninterest Expense
Noninterest expense of $4.872 million for the year ended December 31,
1996 was an increase of 7.7%. Salaries and employee benefits, the largest single
component of noninterest expense, had an increase of 8.2% for the year. Due to
regulatory rate reductions, FDIC assessments declined by 97% or $130,857, from
the previous year. In addition, general insurance decreased by $19,633 due to a
1995 change to a new carrier on the general liability policy that offered more
competitive rates. Other taxes increased 18.63% or $38,676.
-55-
<PAGE>
For 1995, noninterest expense decreased by $70,532 or 1.48% over 1994.
Salaries and employee benefits increased by $157,610 or 6.45% due to normal wage
increases and increased costs associated with various benefit plans sponsored by
CBI. Furniture and equipment expense decreased by $111,296 or 24.86% partially
due to the closing of one branch office. General insurance expenses declined by
$48,802 or 46.64% due to a new carrier on the general liability policy that
offered more competitive rates and an increase in the cash surrender value in
excess of premiums paid on the lives of executives. Professional fees increased
$99,444 or 96.7% largely associated with merger costs. Due to regulatory rate
reductions, FDIC assessments declined by $133,176 or 46.69%.
During the year ended December 1994, noninterest expenses increased by
11.56% or $494,203 from $4.275 million during 1993 to $4.770 million in 1994.
The majority of the increase was due to an increase in salaries and employee
benefits of 14.37% or $316,279 from $2.200 million to $2.517 million. This
increase was largely associated with the continuation of various incentive and
bonus plans adopted by CBI during prior years. Furniture and equipment expenses
increased by 16.84% or $62,706. Almost 100% of this increase was attributable to
increased depreciation due to the acquisition of operations equipment.
Income Taxes
The provision for income taxes for the year ended December 31, 1996 was
$1,422,297 a 16.2% increase from the previous year. The increase in the
provision was due to the increase in taxable income.
The income tax provision for the year ended December 31, 1995 was
$1,223,892, up from $885,619 for the year ended December 31, 1994.
Loan Portfolio
CBI's loan portfolio is comprised of commercial loans, real estate
loans, home equity loans, consumer loans, participation loans with other
financial institutions, and other miscellaneous types of credit. The primary
markets in which CBI makes loans are generally in areas contiguous to its branch
locations. The philosophy is consistent with CBI's focus on providing
community-based financial services.
-56-
<PAGE>
Loan Portfolio
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
% to Total % to Total % to Total
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 15,830 13.49% $ 14,500 13.21% $ 12,022 11.71%
Real estate construction 5,584 4.76% 3,745 3.41% 4,280 4.17%
Real estate mortgage:
Residential (1-4 family) 43,366 36.97% 43,439 39.57% 40,082 39.04%
Multifamily 3,667 3.13% 1,563 1.41% 224 0.22%
Nonfarm,
nonresidential 40,511 34.53% 36,194 32.97% 33,606 32.73%
------- ------ ------- ------ ------- ------
Real estate mortgage,
subtotal 87,543 74.63% 81,196 73.95% 73,912 71.99%
------- ------ ------- ------ ------- ------
Real estate, total 93,126 79.39% 84,941 77.36% 78,192 76.16%
------- ------ ------- ------ ------- ------
Consumer installment 8,355 7.12% 10,348 9.43% 12,455 12.13%
------ ----- ------- ----- ------- ------
Total loans 117,311 100.00% 109,789 100.00% 102,669 100.00%
======= ======= =======
Less unearned income 932 1,149 1,280
--- ------ -----
$ 116,381 $ 108,640 $ 101,389
========== ========== =========
</TABLE>
The following table shows the maturity of loans outstanding as of
December 31, 1996. Also provided are the amounts due after one year classified
according to the sensitivity to changes in interest rates. Loans are classified
based upon the period in which the payments are due.
Loan Maturity Schedule
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------------------------
Maturing
----------------------------------------------------
After One
Within But Within After
One Year Five Years Five Years Total
-------- ---------- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial $ 11,337 $ 4,475 $ 18 $ 15,830
Installment 2,653 5,170 202 8,025
Real estate 52,763 31,098 8,665 92,526
------- ------- ------ -------
Total $ 66,753 $ 40,743 $ 8,885 $ 116,381
========== ========= ========= ===========
Loans maturing after one year with:
Fixed interest rates $ 27,438 $ 74
Variable interest rates 13,305 8,811
------- ------
Total $ 40,743 $ 8,885
========= =========
</TABLE>
As of December 31, 1996, the loan portfolio was $116.381 million, net
of unearned income, an increase from the prior year of 7.1% or $7.741 million.
Real estate lending continues to be the growth of the portfolio with loans
secured by real estate comprising 79.39% of total loans.
Loans, net of unearned income, were $108.640 million at December 31,
1995, up $7.3 million or 7.1% from $101.389 million at December 31, 1994. The
growth in real estate loans, which increased $6.75 million or 8.63%, accounted
for 92% of the growth.
Loans secured by real estate comprise 77.36% of total loans at
December 31, 1995 and 76.16% at December 31, 1994.
-57-
<PAGE>
CBI's unfunded loan commitments amounted to $21.911 million as of
December 31, 1996, up from $18.122 million at December 31, 1995. This increase
is attributable to customer loan demands at a specific point in time. Fixed rate
commitments were $4.851 million and $4.438 million as of December 31, 1996 and
1995, respectively. The average rates charged on the fixed rate commitments were
8.5% - 10.5% for the years then ended.
Analysis of the Allowance for Loan Losses
The allowance for loan losses is an estimate of an amount adequate to
provide for potential losses in the loan portfolio. The level of loan losses is
affected by general economic trends, as well as conditions affecting individual
borrowers. The allowance is also subject to regulatory examinations and
determinations as to adequacy, which may take into account such factors as the
methodology used to calculate the allowance and the size of the allowance in
comparison to peer companies identified by regulatory agencies.
The provision for loan losses for the year ended December 31, 1996 was
$401,500, a decrease of $40,500 over the previous year. Management charged
income for the provision deemed necessary based on its analysis of the loan
portfolio. After reviewing the nonperforming loans and specifically nonaccrual
loans, management believes the current year provision increases the allowance
for loan losses to the desired level to cover potential losses. CBI had
charge-offs, net of recoveries, of $391,000 during 1996, an increase of $85,000
over the previous year. This increase was the result of normal changes in the
loan portfolio and local economic conditions. Management does not anticipate any
abnormal changes in the delinquency rates or charge-offs and recoveries in
connection with its normal loan operations procedures. It is management's
opinion that the allowance for loan losses is adequate to absorb any future
losses that may occur.
The provision for loan losses totaled $442,000 for the year ended
December 31, 1995, an increase of $176,162 from the previous year. CBI had
charge-offs, net of recoveries, of $306,000 during 1995, an increase of $201,000
over the previous year. This increase was primarily the result of a complete
charge off of one real estate loan in the amount of $103,000 and partial
charge-offs on three additional real estate loans in the amount of $85,000.
After consideration of these factors, management recorded a provision for loan
losses that would provide coverage for potential losses.
The provision in 1994 increased to $266,000 as compared to $195,000 in
1993. This increase of $71,000 reflected management's review of the loan
portfolio and the amount needed to maintain the reserve at acceptable levels to
cover potential losses.
As of December 31, 1996, the allowance for loan losses was $1.246
million up slightly from $1.235 million at December 31, 1995. The allowance as
of December 31, 1995 was up $136,000 over the $1.099 million at December 31,
1994. The ratio of the allowance for loan loss to total loans, net of unearned
income, has remained relatively constant over the last three years; 1.07% at
December 31, 1996, 1.14% at December 31, 1995, and 1.08% at December 31, 1994.
The multiple of the allowance for loan losses to nonperforming assets
was .60x at December 31, 1996, .65x at December 31, 1995 and 1.24x at December
31, 1994. Management continually evaluates nonperforming loans relative to their
collateral value and makes appropriate reductions in the carrying value of those
loans based on that review.
Effective January 1, 1995, CBI adopted Statement of Financial
Accounting Standards (SFAS) No. 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 Disclosure). The effect of adopting this new
accounting standard was immaterial to the operating results of CBI for the year
ended December 31, 1995. Prior financial statements have not been restated to
apply the provision of the new standard.
-58-
<PAGE>
Under the new accounting standard, a loan is considered to be impaired
when it is probable that CBI will be unable to collect all principal and
interest amounts according to the contractual terms of the loan agreement. A
loan is not considered impaired if (a) there is an insignificant delay in or
shortfall in amounts of payments, or (b) CBI expects to collect all amounts due,
including interest accrued at the contractual interest rate for the period of
delay. CBI does not aggregate loans for risk classification.
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 effective interest
rate. As of December 31, 1996, CBI had six loans with a carrying amount of
$736,000 that were considered to be impaired. The amount of impairment based on
present value of future cash flows or collateral values, if applicable, was
approximately $51,000 and $685,000, respectively. The amount provided in the
allowance for loan losses for these impaired loans was $184,000. The following
table summarizes changes in the allowance for loan losses:
-59-
<PAGE>
Summary of Loan Loss Experience
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Allowance for loan losses at beginning
of year $ 1,235 $ 1,099 $ 938
--------- --------- ---------
Loans charged off:
Commercial $ 226 $ 113 $ 153
Installment 39 46 56
Real estate 304 199 43
--------- --------- ---------
Total $ 569 $ 358 $ 252
--------- --------- ---------
Recoveries of loans previously charged off:
Commercial $ 82 $ 18 $ 34
Installment 16 26 9
Real estate 80 8 104
--------- --------- ---------
Total $ 178 $ 52 $ 147
--------- --------- ---------
Net loans recovered (charged off) $ (391) $ (306) $ (105)
Provision for loan losses 402 442 266
--------- --------- ---------
Allowance for loan losses at end of year $ 1,246 $ 1,235 $ 1,099
========= ========= =========
Average total loans (net of unearned
income) $ 112,712 $ 106,197 $ 96,386
Total loans (net of unearned income) $ 116,381 $ 108,640 $ 101,389
Selected Loan Loss Ratios:
Net charge-offs to average loans 0.35% 0.29% 0.11%
Provision for loan losses to average
loans 0.36% 0.42% 0.28%
Provision for loan losses to net
charge-offs 102% 144% 253%
Allowance for loan losses to year-end
loans 1.07% 1.14% 1.08%
Loan loss coverage (1) 782% 1,314% 2,810%
</TABLE>
- --------------------
(1) Income before income taxes plus provision for loan losses, divided by
net chargeoffs.
-60-
<PAGE>
A breakdown of the allowance for loan losses is provided in the
following table; however, such a breakdown has not historically been maintained
by the Bank and management does not believe that the allowance can be fragmented
by category with any precision that would be useful to investors. The entire
amount of the allowance is available to absorb losses occurring in any category.
The allowance is allocated below based on the relative percentage in each
category to total loans.
Composition of Allowance for Loan Losses
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------
Balance at End of 1996 1995 1994
---- ---- ----
Period Applicable to:
---------------------
% of Loans % of Loans % of Loans
in each in each in each
category category category
to total to total to total
Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 168 13.49% $ 163 13.21% $ 129 11.71%
Installment 89 7.12% 116 9.43% 133 12.13%
Real estate 989 79.39% 956 77.36% 837 76.16%
--- ----- --- ----- --- -----
$ 1,246 100.00% $ 1,235 100.00% $ 1,099 100.00%
========= ====== ======== ====== ========== ======
</TABLE>
Management has allocated the allowance according to the amount deemed
to be reasonably necessary to provide for the possibility of losses being
incurred. The allocation of the allowance as shown in the table above should not
be interpreted as an indication that loan losses in future years will occur in
the same proportions or that the allocation indicates future loan loss trends.
Furthermore, the portion allocated to each loan category is not the total amount
available for future losses that might occur within such categories since the
total allowance is a general allowance applicable to the entire portfolio.
Nonperforming Assets
Total nonperforming assets, which consist of nonaccrual loans,
restructured loans, loans 90 days or more past due, and other real estate owned
were $2.070 million at December 31, 1996 an increase of $183,000 from one year
earlier. Total nonperforming assets were $1.887 million at December 31, 1995, an
increase of $998,000 over December 31, 1994. Nonperforming assets increased
$265,000 during 1994 over 1993.
-61-
<PAGE>
Nonperforming Assets
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Nonaccrual loans $ 240 $ 220 $ 54
Loans contractually past due 90 days or more
and still accruing 1,063 882 560
Troubled debt restructuring -- -- --
------ ------ ----
Total nonperforming loans $1,303 $1,102 $614
Other real estate owned 767 785 275
------ ------ ----
Total nonperforming assets $2,070 $1,887 $889
====== ====== ====
Nonperforming assets to period-end total
loans and other real estate 1.77% 1.72% 0.87%
===== ===== =====
Foregone interest income on nonaccrual
loans $ 6 $ 12 $ 2
===== ====== ====
Interest income recorded on nonaccrual
loans during the year $ 4 $ 8 $--
====== ====== ====
</TABLE>
The following table summarizes all nonperforming loans, by loan type as
of December 31, 1996:
Number
of Principal
(Dollars in thousands) Loans Balance
---------------------- ----- -------
Residential mortgage 13 $ 1,189
Installment loans 3 27
Commercial loans 4 87
-- ----
20 $ 1,303
== ========
Loans, including impaired loans, are generally placed in nonaccrual
status when loans are delinquent in principal and interest payments greater than
90 days and the loan is not well secured and in process of collection. Accruals
of interest are discontinued until it becomes certain that both principal and
interest can be repaid. As shown in the above table, CBI does have loans that
are contractually past due greater than 90 days that are not in nonaccrual
status; however, those loans are still accruing because they are well secured
and in the process of collection. A loan is well secured if collateralized by
liens on real or personal property, including securities, that have a realizable
value sufficient to discharge the debt in full or by the guarantee of a
financially responsible party. Approximately 65% of these loans are
collateralized by residential real estate.
-62-
<PAGE>
As of December 31, 1996, nonaccrual loans and loans contractually past
due greater than 90 days have increased $20,000 and $181,000 over the December
31, 1995 levels, respectively. While the increase is significant, there are only
five loans in nonaccrual status. The largest two loans, $119,000 and $69,000,
are mortgage real estate loans secured by residential real estate. Often, CBI
will not immediately proceed to foreclose on real estate loans that become more
than 90 days past due. Instead, CBI will permit the borrower to market and sell
the collateral in an orderly manner. If the borrower does not sell the
collateral within a reasonable time, CBI will foreclose and sell the collateral.
CBI's experience has been that losses on well-collateralized real estate are
minimized when it works with borrowers in this manner, although its practice of
working with borrowers at times results in relatively high balances of past due
loans. CBI also has found that its collection practices enable it to compete
with larger and less flexible institutions that are not based in the community.
If foreclosure of property is required, the property is generally sold
at a public auction in which CBI may participate as a bidder. If CBI is the
successful bidder, the acquired real estate property is then included in CBI's
real estate owned account until it is sold.
Investment Securities
The securities portfolio is maintained to manage excess funds in order
to provide diversification and liquidity in the overall asset management policy.
The maturity of securities purchased is based on the needs of CBI and current
yields and other market conditions.
Securities are classified as held-to-maturity when management has the
positive intent and CBI has the ability at the time of purchase to hold them
until maturity. These securities are carried at cost adjusted for amortization
of premium and accretion of discount.
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 and accounted for at fair market value on an aggregate basis.
Unrealized gains or losses are reported as increases or decreases in
stockholders' equity, net of the related deferred tax effect. CBI does not buy
with the intent of trading and, accordingly, does not maintain a trading
account. Gains and losses on the sale of securities are determined by the
specific identification method.
The book value of the investment portfolio as of December 31, 1996
was $36.443 million compared to $34.127 million at December 31, 1995.
The following tables show the amortized cost, fair market value,
maturity distribution, and yield of the investment portfolio as of December
31, 1996 and 1995:
-63-
<PAGE>
Securities Portfolio
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------
Held -to-Maturity Available-for-Sale
----------------- ------------------
Cost Market Cost Market
---- ------ ---- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and agency securities $ 2,449 $ 2,434 $12,134 $11,955
Mortgage-backed securities:
Guaranteed or issued by
GNMA, FNMA or FHLMC 13,028 12,929 5,933 5,887
Securities issued by states and
political subdivisions 1,009 1,027 1,179 1,184
Other securities 400 403 311 311
------- ------- ------- -------
$16,886 $16,793 $19,557 $19,337
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
-----------------------------------------
Held -to-Maturity Available-for-Sale
----------------- ------------------
Cost Market Cost Market
---- ------ ---- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and agency securities $ 7,990 $ 8,029 $ 5,253 $ 5,301
Mortgage-backed securities:
Guaranteed or issued by
GNMA, FNMA or FHLMC 12,900 12,957 5,318 5,401
Securities issued by states and
political subdivisions 1,136 1,175 -- --
Other securities 1,256 1,270 274 273
------- ------- ------- -------
$23,282 $23,431 $10,845 $10,975
======= ======= ======= =======
</TABLE>
The maturity distribution, book value, market value, and yield of the
total investment securities portfolio at December 31, 1996 and 1995 are
presented as follows:
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------------------------------------
Held -to-Maturity Available-for-Sale
----------------- ------------------
Book Market Book Market
Value Value Yield Value Value Yield
----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Within 12 months $ 1,877 $ 1,886 7.56% $ 426 $ 426 5.84%
Over 1 year through 5 years 1,173 1,163 6.50% 5,880 5,826 6.18%
Over 5 years through 10 years 2,054 2,041 7.26% 7,894 7,769 7.30%
Over 10 years 11,782 11,703 7.06% 5,357 5,316 6.83%
------- ------- ----- ------ ------ -----
$ 16,886 $ 16,793 7.07% $ 19,557 $ 19,337 6.80%
======== ======== ===== ========= ======== =====
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------------------------------------------------------
Held -to-Maturity Available-for-Sale
----------------- ------------------
Book Market Book Market
Value Value Yield Value Value Yield
----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Within 12 months $ 5,455 $ 5,457 5.39% $ 499 $ 500 6.68%
Over 1 year through 5 years 4,143 4,190 6.59% 2,451 2,472 5.93%
Over 5 years through 10 years 1,525 1,550 7.37% 2,847 2,873 7.15%
Over 10 years 12,159 12,234 7.04% 5,047 5,130 6.82%
------- ------- ----- ------ ------ -----
$ 23,282 $ 23,431 6.89% $ 10,844 $ 10,975 6.70%
======== ======== ===== ======== ======== =====
</TABLE>
-64-
<PAGE>
Deposits
Deposits at December 31, 1996 were $152.006 million, up $8.434 million
from 1995, an increase of 5.87%. The growth in deposits was led by the 21.1%
increase in noninterest-bearing demand deposits, which increased from $23.532
million at December 31, 1995 to $28.498 million at December 31, 1996.
Noninterest-bearing deposits were 18.75% of total deposits at December 31, 1996.
At December 31, 1996, savings deposits had grown by $3.092 million, an increase
of 12.68% over December 31, 1995 levels.
Deposits at December 31, 1995 were $143.571 million, a 15.88% increase
from 1994. Certificates of deposit increased by $13.412 from 1994 levels.
Similarly, certificates of deposit of $100,000 or more increased $4.277 million
from 1994 levels. Noninterest-bearing deposits were 16.39% of total deposits at
December 31, 1995 compared to 16.57% at December 31, 1994.
Deposits Analysis
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
------- --------- ------- --------- ------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand
deposits $ 28,498 $ 23,532 $ 20,526
--------- --------- ---------
Interest-bearing liabilities:
Money market and NOW 39,865 3.11% 40,568 3.48% 36,614 3.11%
accounts
Savings deposits 27,479 3.71% 24,387 3.27% 29,358 2.81%
Time deposits 45,413 5.68% 44,103 6.09% 30,691 5.08%
Large denomination deposits 10,751 5.86% 10,980 5.49% 6,703 4.00%
------- ----- ------- ----- ------ -----
Total interest-bearing accounts $ 123,508 4.42% $ 120,038 4.47% $ 103,366 3.63%
--------- ----- --------- ----- --------- -----
Total deposits $ 152,006 $143,571 $ 123,892
========= ========= =========
</TABLE>
Maturity of CDs of $100,000 and Over
<TABLE>
<CAPTION>
Within Three Six to Over Percent
Three to Six Twelve One of Total
Months Months Months Year Total Deposit
------ ------ ------ ---- ----- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996 $ 2,653 $ 2,412 $ 2,137 $ 3,549 $ 10,751 7.07%
</TABLE>
Capital Resources
The adequacy of CBI's capital is reviewed by management on an
ongoing basis with reference to the size, composition and quality of CBI's asset
and liability levels and consistency with regulatory requirements and industry
standards. Management seeks to maintain a capital structure that will assure an
adequate level of capital to support anticipated asset growth and absorb
potential losses.
-65-
<PAGE>
The primary source of capital for CBI is internally generated retained
earnings. Average stockholders' equity increased 23.27% in 1996 over 1995.
Similarly, average stockholders' equity increased 18.71% in 1995 over 1994. The
following table highlights certain ratios for the periods indicated:
Return on Equity and Assets
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------- ---------------------- ---------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income before securities gains and losses to:
Average total assets 1.86% 1.51% 1.28%
Average stockholders' equity 17.21% 16.17% 14.46%
Net income to:
Average total assets 1.86% 1.53% 1.31%
Average stockholders' equity 17.24% 16.38% 14.85%
Dividend payout ratio (dividends
declared per share divided by net
income per share) 7.74% 8.66% 10.00%
Average stockholders' equity to average
total assets ratio 10.80% 9.36% 8.83%
</TABLE>
The FDIC has adopted capital guidelines to supplement the existing
definitions of capital for regulatory purposes and to establish minimum capital
standards. Specifically, the guidelines categorize assets and off-balance sheet
items into four risk-weighted categories. The minimum ratio of qualifying total
capital to risk-weighted assets is 8.0% of which at least 4.0% must be Tier 1
capital, composed of common equity, retained earnings and a limited amount of
perpetual preferred stock, less certain goodwill items. CBI had a ratio of total
capital to risk-weighted assets of 17.03% at December 31, 1996 and a ratio of
Tier 1 capital to risk-weighted assets of 15.98%. Both of these exceed the
capital requirements adopted by the federal regulatory agencies.
-66-
<PAGE>
Analysis of Capital
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Tier 1 Capital:
Common stock $ 5,703 $ 5,562 $ 3,219
Surplus 1,712 1,688 2,230
Retained earnings 11,716 8,886 7,421
Unearned ESOP shares (238) (330) -
----- ----- ----
Total Tier 1 Capital $ 18,893 $ 15,806 $ 12,870
---------- ---------- ----------
Tier 2 Capital
Allowance for loan losses 1,246 1,235 1,099
------ ------ ------
Total Tier 2 Capital $ 1,246 $ 1,235 $ 1,099
--------- --------- ---------
Total risk-based capital $ 20,139 $ 17,041 $ 13,969
========== ========== ==========
Risk weighted assets $ 118,233 $ 112,918 $100,382
Capital Ratios:
Tier 1 risk-based capital 15.98% 14.00% 12.82%
Total risk based capital 17.03% 15.09% 13.92%
Tier 1 capital to average total assets 11.51% 10.29% 9.38%
</TABLE>
Liquidity
Liquidity represents an institution's ability to meet present and
future financial obligations through either the sale or maturity of existing
assets or the acquisition of additional funds through liability management.
Liquid assets include cash, interest-bearing deposits with banks, federal funds
sold, investment in Treasury securities, and loans maturing within one year. As
a result of CBI's management of liquid assets and the ability to generate
liquidity through liability funding, management believes that CBI maintains
overall liquidity sufficient to satisfy its depositors' requirements and meet
its customers' credit needs.
For the year ended December 31, 1996 CBI provided cash or liquidity
from operations in the amount of $3.290 million. This increase in funds in
addition to an $8.435 million increase in deposits has given CBI approximately
$11.617 million in funds available for investment during 1996. In determining
investment strategies management considers objectives for the composition of the
loan and investment portfolio, such as type, maturity distribution, and fixed or
variable interest rate characteristics of investment opportunities. Management's
use of funds has included the funding of an $8.391 million increase in net loans
and the purchase of $14.927 million of securities. With 57% of the loan
portfolio repricing or maturing in the next twelve months CBI has enough asset
liquidity to meet the needs of maturing deposits.
-67-
<PAGE>
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of the financial position and operating results of CBI
in terms of historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation.
Virtually all of the assets of CBI are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or with the same magnitude as prices
of goods and services.
Current Accounting Developments
In June 1996, the Financial Standards Board issued its Statement of
Financial Accounting Standards No. 125 ("SFAS" 125"), "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities". This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. After a
transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities when
extinguished. In addition, a transfer of financial assets in which the
transferor surrenders control over those assets is accounted for as a sale to
the extent that consideration other than beneficial interests in the transferred
assets is received in exchange. SFAS 125 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 31, 1996 and is to be applied prospectively. Management does not expect
the application of this pronouncement to have a material effect on the financial
statements of CBI.
RELATIONSHIP WITH INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Mitchell, Wiggins and Company LLP has been CBI's independent certified
public accountants since 1984. CBI's consolidated financial statements for the
year ended December 31, 1996 were examined by Mitchell, Wiggins and Company LLP.
Although it has not yet selected auditors for the current year, CBI
anticipates that Mitchell, Wiggins and Company LLP will be selected as CBI's
auditors for 1997. A representative of Mitchell, Wiggins and Company LLP is
expected to be present at the Annual Meeting.
-68-
Exhibit 21
Subsidiaries of the Registrant
------------------------------
The Community Bank, incorporated in the Commonwealth of Virginia.
Commerce Bank of Virginia, incorporated in the Commonwealth of
Virginia.
-69-
Exhibit 23
REPORT AND CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Community Bankshares Incorporated
Petersburg, Virginia
We hereby consent to the incorporation by reference in this annual report on
Form 10-K of Community Bankshares Incorporated for the year ended December 31,
1996, of our report dated January 17, 1997, which appears on page 4 of the
annual report to shareholders for the year ended December 31, 1996.
The audit referred to in the above mentioned report also included the related
financial schedules for the three years ended December 31, 1996, 1995, and 1994,
listed in the accompanying index. In our opinion, such financial schedules
present fairly the information required to set forth therein.
/s/ Mitchell, Wiggins & Company LLP
March 21, 1997
Petersburg, Virginia
-70-
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 9337968
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 5392000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 19337299
<INVESTMENTS-CARRYING> 16885814
<INVESTMENTS-MARKET> 16793202
<LOANS> 116381309
<ALLOWANCE> 1246069
<TOTAL-ASSETS> 172014090
<DEPOSITS> 152006298
<SHORT-TERM> 0
<LIABILITIES-OTHER> 541583
<LONG-TERM> 240000
0
0
<COMMON> 5703240
<OTHER-SE> 13044879
<TOTAL-LIABILITIES-AND-EQUITY> 172014090
<INTEREST-LOAN> 11348077
<INTEREST-INVEST> 2278783
<INTEREST-OTHER> 265570
<INTEREST-TOTAL> 13892430
<INTEREST-DEPOSIT> 5350688
<INTEREST-EXPENSE> 5355420
<INTEREST-INCOME-NET> 8537010
<LOAN-LOSSES> 401500
<SECURITIES-GAINS> 6047
<EXPENSE-OTHER> 4871577
<INCOME-PRETAX> 4478411
<INCOME-PRE-EXTRAORDINARY> 4478411
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3056114
<EPS-PRIMARY> 1.55
<EPS-DILUTED> 1.55
<YIELD-ACTUAL> 5.58
<LOANS-NON> 240000
<LOANS-PAST> 1063000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1235614
<CHARGE-OFFS> 568967
<RECOVERIES> 177922
<ALLOWANCE-CLOSE> 1246069
<ALLOWANCE-DOMESTIC> 1246069
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
