SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURUSANT
SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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
------------------- ------------------------------------
Common Stock, $3.00 par value NASDAQ
Securities registered pursuant to Section 12(G) of the Act: None
----
Indicate by a 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 incorporate 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:
$48,160,330 at March 27, 2000.
APPLICABLE TO CORPORATE ISSUERS: Indicate the number of shares outstanding of
each of the issuer's classes of common stock:
2,713,258 shares of Common Stock, $3.00 par value, as of December 31, 1999.
DOCUMENTS INCORPORATED BY REFERENCE. The following documents are incorporated by
reference in this Form 10-K in the Parts indicated:
1. Proxy Statement for 1999 Annual Meeting of Stockholders of the Company.
Total number of pages, including cover page - 56
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
Item 1. Business
GENERAL
Community Bankshares Incorporated (CBI), The Community Bank, Commerce
Bank of Virginia and County Bank of Chesterfield. Community Bankshares
Incorporated is a registered bank holding company headquartered in Petersburg,
Virginia, with assets of $358,836,000 at December 31, 1999. CBI's sole business
is to serve as a multi-bank holding company for its wholly owned subsidiaries.
The Community Bank, Commerce Bank of Virginia and County Bank of Chesterfield.
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. CBI acquired all of the outstanding stock of County Bank of Chesterfield
through a share exchange agreement effective July 1, 1999.
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.
The Community Bank operates branch offices in Colonial Heights,
Virginia and in the village of Chester in Chesterfield County, Virginia. Its
primary service area consists of the Cities of Petersburg and Colonial Heights
and Chesterfield County. The bank is insured by the FDIC and is supervised and
examined by the Federal Reserve and the Virginia State Corporation Commission.
It engages in 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 bank were $109.119 million at December 31, 1999.
Commerce Bank of Virginia was incorporated in 1984 under the laws of
the Commonwealth of Virginia. Since Commerce Bank of Virginia opened for
business on August 28, 1984, its main banking and administrative office has been
located at 11500 West Broad Street, Richmond, Virginia (Henrico County).
Commerce Bank of Virginia operates branch offices in the City of
Richmond and Hanover and Goochland Counties. The bank is insured by the FDIC and
is supervised and examined by the Federal Reserve and the Virginia State
Corporation Commission. It engages in 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 bank were $117.439 million at
December 31, 1999.
County Bank of Chesterfield was incorporated in 1985 under the laws of
the Commonwealth of Virginia. Since County Bank of Chesterfield opened for
business in September 1986, its main banking and administrative office has been
located at 10400 Hull Street Road, Richmond, Virginia (Chesterfield County).
County Bank of Chesterfield operates branch offices in Chesterfield
County. The bank is insured by the FDIC and is supervised and examined by the
Federal Reserve and the Virginia State Corporation Commission. It engages in
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 bank
were $132.034 million at December 31, 1999.
Banking Services. Through its network of banking facilities CBI
provides a wide range of commercial banking services to individuals and small
and medium-sized businesses. CBI conducts 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.
CBI also offers other related services, such as traveler's checks, safe deposit
boxes, lock box, depositor transfer, customer note payment, collection, notary
public, escrow, drive-in facilities and other customary banking services. Trust
CBI does not offer services.
The Federal Deposit Insurance Corporation, an instrumentality of the
United States Government, insures the accounts of CBI's depositors up to
$100,000 for each account holder. Insurance of accounts is subject to the
statutes and regulations governing insured banks, to examination by the FDIC,
and to certain limitations and restrictions imposed by that agency.
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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 of its primary service area.
The primary 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 o the local
economy. The risk associated with real estate construction loans vary 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 over
60 monthly payments. In addition, CBI, through its subsidiary Commerce Bank of
Virginia, offers both conventional and government fixed rate and adjustable rate
residential mortgage loans primarily for resale in the secondary market.
Commerce Bank of Virginia is an approved seller/servicer for the Federal Home
Loan Mortgage Corporation (FHLMC) and the Federal National Mortgage Association
(FNMA).
Residential Construction Lending. Because of 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, either due
to the borrower's inability to fulfill the terms of the commitment or due to the
permanent lender's inability to meet its funding commitments. In addition to its
usual 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 of 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 of 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 competent
personnel who are independent of CBI conduct both initial project review and
periodic inspections. 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 it business borrowers and the concentration of such
loans in the portfolio. Most of CBI 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 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 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 loans 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 has also found
that its loan collection practices enable it to compete with larger and less
flexible institutions that are not based in the community. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Nonperforming Assets".
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<PAGE>
Competition
CBI encounters strong competition for its banking services within its
primary market area. There are approximately 15 commercial banks actively
engaged in business in its market area, including major statewide and regional
banking organizations. Finance companies, credit unions, savings and loan
associations compete for loans and deposits. In addition, in some instances, CBI
must compete for deposits with money market funds that are marketed by brokerage
firms on a local and national level. CBI's competitors generally have
substantially greater resources than CBI.
Employees
As of December 31, 1999, CBI had 149 full time equivalent employees.
Management considers its relations with employees to be excellent. No employees
are represented by a union, or any similar group and CBI has never experienced
any strike or labor disputes.
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
subsidiary banks 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, Commerce Bank of
Virginia and County Bank of Chesterfield.
This discussion 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.
Bank Holding Companies
The Bank Holding Company Act (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 bank 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 are able to branch
across state lines by acquisition, merger or de novo, 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 a default of a commonly
controlled insured depository or for any assistance provided by the FDIC to a
commonly controlled 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
assets of any bank subsidiaries.
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 risk 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
4
<PAGE>
requirements of these regulatory agencies, The Community Bank, Commerce Bank of
Virginia and County Bank of Chesterfield 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, 1999 were 16.03% and 17.11%, exceeding the
minimum required. The Tier 1 and total capital to risk weighted asset ratios of
Commerce Bank of Virginia as of December 31, 1999 were 11.56% and 12.51%,
exceeding the minimum required. . The Tier 1 and total capital to risk weighted
asset ratios of County Bank of Chesterfield as of December 31, 1999 were 9.14%
and 10.08%, exceeding the minimum required. Based upon the applicable Federal
Reserve regulations, at December 31, 1999, all three banks would be considered
"well capitalized".
In addition, the federal regulatory agency is required to revise its
risk capital standards to ensure that those standards take adequate amount of
interest rate risk, concentration of credit risk and the risks of nontraditional
activities, as well as the actual performance and expected risk of multifamily
mortgages. The Federal Reserve and 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 institutions assets,
liabilities, and off-balance sheet positions would be weighted by risk factors
that approximate the instruments' price sensitivity to a 100 basis point change
in interest rates. Institutions with an interest rate risk exposure in excess of
a threshold level would be required to hold additional capital proportional to
that risk. In 1994 the, the federal bank regulatory agencies solicited comments
on a proposed revision to the risk based capital guidelines to take account of
concentration of credit 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 institutions 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 subsequently became effective
on January 17, 1995. CBI does not expect the final rule to have a material
impact on its 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, 1999.
Capital Ratios
Regulatory CBI
Minimum Current
------- -------
Risk-based capital
Tier 1 (2) 4.00% 12.87%
Total (2) 8.00% 13.85%
Leverage (1) (2) 4.00% 10.63%
Total shareholder's equity to total assets N/A 9.52%
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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
adjustments for net unrealized depreciation on securities available for sale
5
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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 normal course of business or its total assets would be less than its total
liabilities. There are similar restrictions with respect to stock repurchases
and redemption's.
The Community Bank, Commerce Bank of Virginia and County Bank of
Chesterfield are subject to legal limitations on capital distributions including
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
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 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 banks financial soundness.
Most of the revenues of CBI and CBI's ability to pay dividends to its
shareholders will depend on the dividends paid to it by its subsidiary banks,
The Community Bank, Commerce Bank of Virginia and County Bank of Chesterfield.
Based on the subsidiary banks' current financial condition, CBI expects that the
above-described provisions will have no impact on its ability to obtain
dividends from the subsidiary banks or on CBI's ability to pay dividends to its
shareholders. At December 31, 1999, the subsidiary banks had $10.654 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, Commerce Bank of Virginia and County Bank
of Chesterfield are subject to extensive regulation as well. The following
discussion addresses certain primary regulatory considerations affecting the
subsidiary banks.
The banks are regulated extensively under both federal and state laws.
The banks 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 banks are regulated
and supervised by the Federal Reserve Bank of Richmond. The Virginia SCC and the
Federal Reserve Bank of Richmond conduct regular examinations of the banks,
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 banks must
furnish the 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, Commerce Bank of Virginia and County Bank of Chesterfield are
insured up to $100,000 per insured depositor (as defined by law and regulation)
through the BIF, which 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 my terminate
the deposit insurance of any institution 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 may also 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 of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances that could result in
the termination of any of the bank's deposit insurance.
Other Safety and Soundness Regulations. The Federal banking agencies
have broad powers under 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 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 institutions 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 rule making, which requested comment on the implementation of
these standards. The proposed rule sets forth general operational and management
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standards in the areas of internal control, information systems and internal
audit systems, loan documentation, credit underwriting interest rate exposure,
asset growth and compensation, fees, and benefits. The proposal 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 depository
institution subsidiaries if it were enacted substantially as proposed.
Community Reinvestment. The requirements of the Community Reinvestment
Act (CRA) affect the subsidiary banks. 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. Each of the subsidiary banks maintains a satisfactory rating
in meeting its obligations under CRA.
Item 2. Properties
CBI's offices and The Community Bank's main office are located in two
3,500 square foot condominiums in a seven- story masonry building located at 200
North Sycamore Street, Petersburg, Virginia. The Community Bank's branch office
at 2618 South Crater Road in Petersburg was opened in 1979. The branch office at
2000 Snead Avenue, Colonial Heights, was opened in 1984. The branch office at
4203 West Hundred Road, Chester was opened in 1985. The Community Bank owns the
land and buildings in which the Sycamore Street, South Crater Road and West
Hundred Road branches operate and leases the Snead Avenue 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 at 11500 West
Broad Street in Henrico County, Virginia. The Hanover branch office at 10035
Sliding Hill Road, Ashland (Hanover County) opened in 1988. The Riverfront Tower
branch office at 901 East Byrd Street, Richmond, opened in 1992. The Goochland
Courthouse branch office at 3018 River Road West, Goochland County opened in
1993. The Centerville branch office at 27 Broad Street Road, Goochland County
opened in 1993.
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. The Hanover branch is owned by the Atlee Station Co., of
which Sam T. Beale, a Director of CBI, is the principal shareholder. The bank
also leases the space where the Riverfront Towers branch is located. Commerce
Bank of Virginia owns the property for its two Goochland County branches.
Commerce Bank of Virginia's facilities and equipment are considered
adequate for its immediate needs and for foreseeable expansion.
County Bank of Chesterfield's principal office is located at 10400 Hull
Street Road, Midlothian (Chesterfield County). In 1988 the bank opened its
branch office at 6435 Ironbridge Road in Chesterfield County. A third branch
office located at 13241 River's Bend Blvd, Chesterfield County, was opened in
1997. The bank owns all three locations. A fourth branch office, located at 906
Branchway Road, in Chesterfield County was opened in 1999; this facility is
leased from a non-related third party.
County Bank of Chesterfield's facilities and equipment are considered
adequate for its immediate needs and for foreseeable expansion.
Item 3. Legal Proceedings.
None
Item 4. Submission of Matters to Vote of Security Holders.
None
7
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Item 5. Market for Company's Common Stock and Related Stockholder
Matters.
As of December 31, 1999 CBI had 1330 shareholders of record of its
Common Stock.
The following table sets forth, for the quarters indicated, the high
and low sale prices for CBI Common Stock. The company's common stock trades on
The NASDAQ Stock Market under the symbol CBIV. The stock began trading on Nasdaq
on July 1, 1999. Prior to that date the stock was traded on the OTC Bulletin
Board.
CBI Market Price and Dividends
Sales Price (1) Dividends (1)
--------------- -------------
High Low
---- ---
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
1997
1st quarter 19.500 17.250
2nd quarter 19.000 16.250 .20
3rd quarter 22.250 17.750
4th quarter 28.000 21.750 .15
1998
1st quarter 30.000 25.000 .12
2nd quarter 31.000 27.250 .12
3rd quarter 28.750 24.500 .13
4th quarter 28.000 23.000 .15
1999
1st quarter 26.250 23.000 .15
2nd quarter 26.000 23.250 .15
3rd quarter 26.000 20.750 .16
4th quarter 22.000 20.000 .17
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(1) All prices and dividends are adjusted for a 100% stock dividend paid on
August 31, 1995.
The Community Bank acts as the Transfer/Dividend Disbursing Agent for
Community Bankshares Incorporated.
Dividends
The Company declared total dividends of $1,718,000, $1,444,000 and
$859,000 on its Common Stock during 1999, 1998 and 1997, respectively.
Limits on Dividends and Other Payments
As noted in Item 1., Business, The Community Bank, Commerce Bank of
Virginia and County Bank of Chesterfield are limited in the amount of dividends
it may pay to CBI in any given year. At December 31, 1999, the subsidiary banks
had $10.654 million of retained earnings legally available for the payment of
dividends to CBI.
Item 6. Selected Financial Data.
The following table presents a Comparative Summary of Earnings of the
Company for the five years ended December 31, 1999. These statements should be
read in conjunction with the Consolidated Financial Statements and Related Notes
appearing in Item 8 of this filing.
8
<PAGE>
<TABLE>
COMMUNITY BANKSHARES INCORPORATED
SELECTED HISTORICAL FINANCIAL INFORMATION
Years Ended December 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------------------
(In thousands, except ratios and per share data)
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Net interest income . . . . . . . . . . . $ 15,951 $ 14,165 $ 12,618 $ 11,712 $ 10,273
Provision for loan losses . . . . . . . . 559 453 52 532 492
----------------------------------------------------------------------
Net interest income after
provision for loan losses . . . . . . . . $ 15,392 $ 13,712 $ 12,566 $ 11,180 $ 9,781
Noninterest income . . . . . . . . . . . . . 2,303 2,273 1,666 1,683 1,603
Noninterest expense . . . . . . . . . . . . 9,877 8,840 7,992 7,264 6,990
----------------------------------------------------------------------
Income before income taxes . . . . . . $ 7,818 $ 7,145 $ 6,240 $ 5,599 $ 4,394
Income taxes . . . . . . . . . . . . . . . . . . 2,407 2,153 1,968 1,712 1,414
----------------------------------------------------------------------
Net income . . . . . . . . . . . . . . . . . . . $ 5,411 $ 4,992 $ 4,272 $ 3,887 $ 2,980
======================================================================
PER SHARE DATA (1):
Basic earnings per share $ 1.98 $ 1.80 $ 1.54 $ 1.42 $ 1.23
Diluted earnings per share . . . . . . . . $ 1.95 $ 1.76 $ 1.48 $ 1.36 $ 1.18
Cash dividends . . . . . . . . . . . . . . . . . $ 0.63 $ 0.52 $ 0.31 $ 0.10 $ 0.08
Book value at period end . . . . . . . . . $ 12.59 $ 12.35 $ 11.17 $ 9.84 $ 8.75
BALANCE SHEET DATA:
Total assets . . . . . . . . . . . . . . . . . . . 358,836 329,912 270,237 251,011 234,645
Loans, net . . . . . . . . . . . . . . . . . . . . 263,194 200,558 175,991 162,861 149,415
Securities . . . . . . . . . . . . . . . . . . . . . 66,150 71,885 57,660 55,615 56,711
Deposits . . . . . . . . . . . . . . . . . . . . . 318,427 294,002 237,529 221,909 208,641
Stockholder's equity (1) . . . . . . . . . . 34,164 34,120 31,041 27,339 23,895
Shares outstanding (1) . . . . . . . . . 2,713,258 2,761,926 2,779,426 2,777,856 2,730,751
PERFORMANCE RATIOS:
Return on average assets . . . . . . . . . 1.55% 1.69% 1.66% 1.63% 1.35%
Return on average equity . . . . . . . . . 15.07% 15.32% 14.62% 14.94% 14.92%
Net interest margin (2) . . . . . . . . . . 4.99% 5.13% 5.27% 5.25% 5.01%
Average loans to deposits . . . . . . . 77.96% 73.87% 76.68% 75.69% 73.95%
ASSET QUALITY RATIOS:
Allowance for loan losses to
period end loans . . . . . . . . . . . . . . 1.04% 1.16% 1.12% 1.21% 1.22%
Allowance for loan losses to
nonaccrual loans . . . . . . . . . . . . 1.37X 3.12X 2.70X 2.00X 3.80X
Nonperforming assets to period end
loans and other real estate owned . 1.42% 1.66% 2.30% 2.20% 1.90%
Net chargeoffs
to average loans . . . . . . . . . . . . . . 0.06% 0.05% 0.04% 0.24% 0.20%
- ------------------------------------------
</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 the net yield
on its earning assets.
9
<PAGE>
Item 7. 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, 1999 of $5.411 million was
an increase of 8.39%, or $0.419 million over the year ended December 31, 1998.
The increase in net income during 1999 primarily reflects an increase in the
lending volume, as total net loans increased by $62.636 million, or 31.23%.
Basic earnings per share for the year ended December 31, 1999 was $1.98 up from
$1.80 for the year ended December 31, 1998. CBI has shown an increase of 81.57%
in net income over the five years ended December 31, 1999, from $2.980 million
in 1995 to $5.411 million during 1999. The increase in income over the past five
years is attributable to the 76.15% growth in the loan portfolio. As total
assets grew from $234.645 million in 1995 to $358.836 million as of December 31,
1999, net loans grew from $149.415 million to $263.194 million.
The Company increased net income 16.85% or $0.720 million during 1998
over 1997. This increase was attributable to an increase in the net interest
income. Net income during 1997 of $4.272 million was a 9.90% increase over 1996.
On a per share basis, net income was $1.54 in 1997.
The Company's return on average equity has increased while the return
on average assets has remained fairly constant over the past three years. The
return on average equity was 15.07% for the year ended December 31, 1999. The
return on average equity was 15.32% in 1998, compared to 14.62% for 1997. The
return on average assets amounted to 1.55%, 1.69% and 1.66% for the three years
ended December 31, 1999, 1998, and 1997, respectively.
Net Interest Income. Net interest income represents the principal source of
earnings for Community Bankshares, Inc. 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 12.61% to $15.951 million in 1999. This
increase was attributable to a 15.83% growth in average interest-earning assets.
The increase in interest-earning assets was due primarily to increases in the
lending volume. During the five years ended December 31, 1999, the Company 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 their competitors. Rates earned on average
earning assets were 8.43% during 1999 as compared to 8.73% one year earlier. The
Company is competitive with rates and origination fees charged on loans.
However, since 50.29% of the Company's loan portfolio may be repriced in one
year or less, the Company may respond quickly to market changes in rates.
Interest expense for the year ended December 31, 1999 increased by
10.39%, to $10.660 million from $9.657 million for the year ended December 31,
1998. This increase was due to an increase of 16.07% in average interest bearing
liabilities from $215.125 million during 1998 to $249.706 million in 1999. The
interest rate paid on interest-bearing liabilities decreased for the year, to
4.27% for 1999 compared to 4.49% in 1998.
Net interest income was $14.165 million for the year ended December 31,
1998, an increase of 12.26% over the $12.618 million reported in 1997. This
increase was partially due to the 15.43% increase in average interest-earning
assets. Again, the increase in the lending volume was the most significant
portion of the increase in average interest earning assets with an 11.19%
increase. During 1998 interest expense increased by $1.007 million to $9.657
million. This increase was a result of a 17.89% increase in deposit volume.
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:
10
<PAGE>
<TABLE>
Average Balance Sheets, Interest Income and Expense, Yields and Rates
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance(6) Interest Rate (1) Balance(6) Interest Rate (1) Balance(6) Interest Rate (1)
----------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Securities $ 72,896 $ 4,664 6.40% $ 62,679 $ 4,116 6.57% $ 55,974 $3,772 6.74%
Federal funds sold 10,240 515 5.03% 20,282 1,055 5.20% 9,091 479 5.27%
Loans (5) 236,719 21,800 9.21% 192,778 18,921 9.81% 173,384 17,181 9.91%
Interest-bearing
deposits in
other banks 122 7 5.74% 493 27 5.48% 863 50 5.79%
----------------------------------------------------------------------------------------------
Total interest-earning
assets $ 319,977 $ 26,986 8.43% $276,232 $24,119 8.73% $239,312 $21,482 8.98%
------------ ----------- ----------
Noninterest-earning
assets:
Cash and due from banks 14,201 11,791 10,762
Premises and equipment 4,706 4,816 4,800
Other assets 5,169 4,576 4,334
Less allowance for loan
losses (2,489) (2,127) (2,087)
----------- ------------- ------------
Total $ 341,564 $295,288 $257,121
=========== ============= ============
Liabilities and Stockholders'
Equity
Interest-bearing liabilities:
Money market and NOW
accounts $ 74,884 $ 2,245 3.00% $ 61,348 $ 1,812 2.95% $ 46,565 $1,623 3.49%
Savings deposits 48,834 1,735 3.55% 42,846 1,608 3.75% 33,790 1,245 3.68%
Time deposits 101,633 5,327 5.24% 93,064 5,150 5.53% 86,610 4,818 5.56%
Large denomination
deposits 23,520 1,312 5.58% 17,867 1,087 6.08% 15,381 959 6.23%
Federal funds purchased 835 41 4.91% - - - 126 5 3.97%
----------------------------------------------------------------------------------------------
$ 249,706 $ 10,660 4.27% $215,125 $ 9,657 4.49% $182,472 $8,650 4.74%
------------ ----------- ----------
Noninterest-bearing liabilities:
Demand deposits 54,791 45,842 43,766
Other liabilities 1,837 1,738 1,664
----------- ------------- ------------
$ 306,334 $262,705 $227,902
Stockholders' Equity 35,230 32,583 29,219
----------- ------------- ------------
Total $ 341,564 $295,288 $257,121
=========== ============= ============
Net interest earnings $ 16,326 $14,462 $12,832
Less tax equivalent adjustment 375 297 214
------------ ----------- ----------
Net Interest income/
yield (2) (3) $ 15,951 4.99% $14,165 5.13% $12,618 5.27%
============ =========== ==========
Interest Spread (4) 4.16% 4.24% 4.24%
- ---------------
(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.
</TABLE>
11
<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.
<TABLE>
Volume and Rate Analysis
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997 1997 vs. 1996
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 $657 $(109) $548 $441 $(97) $344 $24 $17 $41
Federal funds sold (507) (33) (540) 582 (6) 576 122 (17) 105
Interest-bearing
deposits
in other banks (21) 1 (20) (20) (2) (22) - (3) (3)
Loans 4,094 (1,215) 2,879 1,914 (175) 1,739 1,323 (243) 1,080
---------------------------------------------------------------------------------------------
$4,223 $(1,356) $2,867 $2,917 $(280) $2,637 $1,469 $(246) $1,223
---------------------------------------------------------------------------------------------
Interest expense:
Savings and time
deposits $1,454 $(492) $962 $1,489 $(476) $1,013 $175 $127 $302
Federal funds 41 41 (3) (3) (6) (7) 7 -
purchased
---------------------------------------------------------------------------------------------
$1,495 $(492) $1,003 $1,486 $(479) $1,007 $168 $134 $302
---------------------------------------------------------------------------------------------
Net interest earnings $2,728 $(864) $1,864 $1,431 $199 $1,630 $1,301 $(380) $921
=============================================================================================
</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, the Company establishes prices for deposits and loans based on
local market conditions and manages its securities portfolio with policies set
by it.
12
<PAGE>
The following tables present CBI's Interest Rate Sensitivity Analysis
as of December 31, 1999:
<TABLE>
Interest Rate Sensitivity Analysis
<CAPTION>
December 31, 1999
------------------------------------------------------------------------------------------
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 $ 3,154 $ - $ - $ - $ 3,154
Investment securities 1,390 3,196 20,992 40,572 66,150
Loans 72,752 87,755 90,630 14,830 265,967
------------------------------------------------------------------------------------------
Total interest-earning assets $ 77,296 $ 90,951 $ 111,622 $ 55,402 $ 335,271
------------------------------------------------------------------------------------------
Interest-Bearing Liabilities:
Deposits:
Demand $ 78,094 $ - $ - $ - $ 78,094
Savings 50,921 - - - 50,921
Time deposits, $100,000 and over 7,420 19,653 9,519 - 36,592
Other time deposits 22,373 45,300 34,114 - 101,787
Federal funds purchased 3,597 - - - 3,597
------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 162,405 $ 64,953 $ 43,633 $ - $270,991
------------------------------------------------------------------------------------------
Period gap $ (85,109) $ 25,998 $ 67,989 $ 55,402 $ 64,280
==========================================================================================
Cumulative gap $ (85,109) $ (59,111) $ 8,878 $ 64,280
============================================================================
Ratio cumulative gap to total
interest-earning assets -25.39% -17.63% 2.65% 19.17%
============================================================================
</TABLE>
The December 31, 1999 results of the rate sensitivity analysis show CBI
had $85.109 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 $59.111 million, and,
therefore is a liability-sensitive position. The one-year negative gap position
reflects a deposit portfolio that is weighted predominantly in shorter
maturities. Approximately $227.358 million, or 83.89% of the total deposits,
matures or reprice 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.
Noninterest Income. For the year ended December 31, 1999 noninterest income
increased by $0.030 million, or 1.32% to $2.303 million. Although service charge
income increased by $266,000, the securities gains and other income categories
decreased by $211,000. Gains on the sale of other real estate declined by
$25,000.
Noninterest income for the year ended December 31, 1998 was $2.273
million, an increase of $607,000 from 1997. This increase is primarily
attributable to an increase on securities gains of $164,000, and an increase in
other income of $204,000. Service charge income increased $181,000.
Noninterest income for 1997 decreased 1.00% or $17,000 from 1996. This
decrease is primarily attributable to a loss on the sale of other real estate in
the amount of $32,000.
Noninterest Expense. Noninterest expense of $9.877 million for the year ended
December 31, 1999 was an increase of 11.73%. Salaries and employee benefits, the
largest single component of noninterest expense, had an increase of 11.71% for
the year. This was due to normal salary increases and an increase in total
staffing requirements to handle growth and the new branch opened this year.
13
<PAGE>
For 1998, noninterest expense increased by $0.848 million or 10.61%
over 1997. Salaries and employee benefits increased by $0.670 million or 15.23%.
During the year ended December 1997, noninterest expenses increased by
10.02% or $0.728 million from $7.264 million during 1996 to $7.992 million in
1997. The majority of the increase was due to an increase in salaries and
employee benefits of 11.30% or $0.447 million from $3.953 million to $4.400
million. This increase was largely associated with the continuation of various
incentive and bonus plans adopted by the Company during prior years.
Income Taxes. The provision for income taxes for the year ended December 31,
1999 was $2.407 million an 11.80% 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, 1998 was
$2.153 million, up from $1.968 million for the year ended December 31, 1997.
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 in the Cities of Petersburg and Colonial Heights, and Chesterfield
County. The philosophy is consistent with CBI's focus on providing
community-based financial services.
14
<PAGE>
<TABLE>
Loan Portfolio
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------------
1999 1998 1997 1996
--------------------------------------------------------------------------------------------------
% to Total % to Total % to Total % to Total
Amount Loans Amount Loans Amount Loans Amount Loans
--------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 77,337 29.06% $ 62,213 30.62% $ 49,487 27.71% $ 43,883 26.47%
Real estate construction 42,237 15.87% 17,100 8.41% 13,926 7.80% 11,097 6.69%
Real estate mortgage:
Residential (1-4 family) 49,396 18.56% 46,944 23.10% 47,530 26.61% 47,205 28.47%
Multifamily 4,737 1.78% 2,741 1.35% 2,834 1.59% 3,667 2.21%
Nonfarm, nonresidential 64,342 24.18% 46,792 23.02% 42,337 23.70% 40,517 24.44%
--------------------------------------------------------------------------------------------------
Real estate mortgage,
subtotal 118,475 44.52% 96,477 47.47% 92,701 51.90% 91,389 55.12%
--------------------------------------------------------------------------------------------------
Real estate, total 160,712 60.39% 113,577 55.89% 106,627 59.70% 102,486 61.82%
--------------------------------------------------------------------------------------------------
Credit card 1,437 0.54% 1,189 0.59% 1,006 0.56% 830 0.50%
Consumer installment 19,762 7.43% 20,047 9.86% 16,356 9.16% 14,906 9.00%
Other 6,871 2.58% 6,205 3.05% 5,127 2.87% 3,688 2.22%
--------------------------------------------------------------------------------------------------
Total loans 266,119 100.00% 203,231 100.00% 178,603 100.00% 165,793 100.00%
Less unearned income 152 328 621 932
------------- ------------ ------------- ------------
$ 265,967 $ 202,903 $ 177,982 $ 164,861
============= ============ ============= ============
</TABLE>
December 31,
-------------------------
1995
-------------------------
% to Total
Amount Loans
-------------------------
Commercial $ 39,666 26.03%
Real estate construction 9,503 6.24%
Real estate mortgage:
Residential (1-4 family) 47,420 31.11%
Multifamily 1,563 1.03%
Nonfarm, nonresidential 36,203 23.75%
-------------------------
Real estate mortgage,
subtotal 85,186 55.89%
-------------------------
Real estate, total 94,689 62.13%
-------------------------
Credit card 719 0.46%
Consumer installment 14,504 9.52%
Other 2,835 1.86%
-------------------------
Total loans 152,413 100.00%
Less unearned income 1,148
-------------
$ 151,265
=============
The following table shows the maturity of loans, net of unearned income,
outstanding as of December 31, 1999. Also provided are the amounts due after one
year classified according ot the sensitivity to changes in interest rates. Loans
are classified based upon the period in which the payments are due.
Loan Maturity Schedule
December 31, 1999
---------------------------------------------------
Maturing
---------------------------------------------------
After One
Within But Within After
One Year Five Years Five Years Total
---------------------------------------------------
(Dollars in thousands)
Commercial $ 41,206 $ 34,075 $ 2,056 $ 77,337
Installment 3,033 15,256 1,321 19,610
Real estate 82,327 48,192 30,193 160,712
Credit card 1,437 - - 1,437
Other 5,604 1,267 - 6,871
---------------------------------------------------
Total $ 133,607 $ 98,790 $ 33,570 $ 265,967
===================================================
Loans maturing after one year with:
Fixed interest rates $ 79,773 $ 11,003
Variable interest rates 19,017 22,567
--------------------------
Total $ 98,790 $ 33,570
==========================
15
<PAGE>
As of December 31, 1999, the loan portfolio was $265.967 million, net
of unearned income, an increase from the prior year of 31.08% or $63.064
million. Real estate lending continues to be the bulk of the portfolio with
loans secured by real estate comprising 60.39% of total loans. Commercial loans
comprise 29.06% of total loans.
Loans, net of unearned income, were $202.903 million at December 31,
1998, up $24.921 million or 14.00% from $177.982 million at December 31, 1997.
The growth in commercial loans of $12.726 million and in real estate loans,
which increased $6.950 million accounted for 78.95% of the growth.
Loans secured by real estate comprise 55.89% of total loans at December
31, 1998 and 59.70% at December 31, 1997.
The Company's unfunded loan commitments amounted to $44.061 million as
of December 31, 1999, up from $34.553 million at December 31, 1998. Fixed rate
commitments were $10.540 million and $11.192 million as of December 31, 1999 and
1998, respectively. The average rates charged on the fixed rate commitments were
8.0% - 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 of the Bank. 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, 1999 was
$559,000, an increase of $106,000 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 feels the current year provision increases the allowance for
loan losses to the desired level to cover potential losses. The Company had
charge-offs, net of recoveries, of $131,000 during 1999, an increase of $32,000
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 $453,000 for the year ended
December 31, 1998, an increase of $401,000 from the previous year. The Company
had charge-offs, net of recoveries, of $99,000 during 1998, an increase of
$38,000 over the previous year. After consideration of these factors, management
recorded a provision for loan losses that would provide coverage for potential
losses.
The provision in 1997 decreased to $52,000 as compared to $532,000 in
1996. This decrease of $480,000 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, 1999, the allowance for loan losses was $2.773
million up from $2.345 million at December 31, 1998. The allowance as of
December 31, 1998 was up $354,000 from the $1.991 million at December 31, 1997.
The ratio of the allowance for loan loss to total loans, net of unearned income,
has remained relatively constant over the last three years, 1.04% at December
31, 1999, 1.16% at December 31, 1998, and 1.12% at December 31, 1997.
The multiple of the allowance for loan losses to nonaccrual loans was
1.37X at December 31, 1999, 3.12X at December 31, 1998 and 2.70X at December 31,
1997. Management continually evaluates nonaccrual loans relative to their
collateral value and makes appropriate reductions in the carrying value of those
loans based on that review.
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. At December 31, 1999 and 1998, the Corporation had loans totaling
approximately $2.620 million and $1.104 million, respectively, for which
impairment had been recognized. Of the total loans impaired, $27,240 and
$37,215, respectively, were valued on the present value of future cash flows and
$2.595 million and $1.067 million, respectively, were valued according to the
underlying collateral. The average balance of the impaired loans amounted to
approximately $1.952 million and $1.274 million for the years ended December 31,
1999 and 1998, respectively. The allowance for loan losses related to these
loans totaled approximately $671,000 and $372,000 at December 31, 1999 and 1998,
respectively.
16
<PAGE>
The following table summarizes changes in the allowance for loan losses:
<TABLE>
Summary of Loan Loss Experience
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at beginning of year $ 2,345 $ 1,991 $ 2,000 $ 1,850 $ 1,680
----------------------------------------------------------------
Loans charged off:
Commercial $ 44 $ 25 $ 126 $ 290 $ 224
Credit card 14 3 31 24 8
Installment 78 24 79 72 77
Real estate 44 180 58 303 197
----------------------------------------------------------------
Total $ 180 $ 232 $ 294 $ 689 $ 506
----------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial $ 19 $ 66 $ 64 $ 200 $ 38
Credit card 1 4 1 5 -
Installment 15 11 14 23 140
Real estate 14 52 154 79 6
----------------------------------------------------------------
Total $ 49 $ 133 $ 233 $ 307 $ 184
----------------------------------------------------------------
Net loans charged off $ (131) $ (99) $ (61) $ (382) $ (322)
Provision for loan losses 559 453 52 532 492
----------------------------------------------------------------
Allowance for loan losses at end of year $ 2,773 $ 2,345 $ 1,991 $ 2,000 $ 1,850
================================================================
Average total loans (net of unearned income) $ 236,719 $ 192,778 $ 173,384 $160,030 $147,478
Total loans (net of unearned income) $ 265,967 $ 202,903 $ 177,982 $164,861 $151,265
Selected Loan Loss Ratios:
Net charge-offs to average loans 0.06% 0.05% 0.04% 0.24% 0.22%
Provision for loan losses to average loans 0.24% 0.23% 0.03% 0.33% 0.33%
Provision for loan losses to net charge-offs 427% 458% 85% 139% 153%
Allowance for loan losses to year-end loans 1.04% 1.16% 1.12% 1.21% 1.22%
</TABLE>
17
<PAGE>
A breakdown of the allowance for loan losses is provided in the
following table; however, the Bank has not historically maintained such a
breakdown 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.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------------
Balance at End of 1999 1998 1997 1996
--------------------------------------------------------------------------------------------------
Period Applicable to:
% of Loans % of Loans % of Loans % of Loans
in each in each in each in each
category to category to category to category to
Amount total loans Amount total loans Amount total loans Amount total loans
--------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 806 29.06% $ 718 30.62% $ 552 27.71% $ 529 26.47%
Credit card 15 0.54% 14 0.59% 11 0.56% 10 0.50%
Installment 206 7.43% 231 9.86% 182 9.16% 180 9.00%
Real estate 1,675 60.39% 1,311 55.88% 1,188 59.70% 1,236 61.81%
Other 71 2.58% 71 3.05% 58 2.87% 45 2.22%
--------------------------------------------------------------------------------------------------
$ 2,773 100.00% $ 2,345 100.00% $ 1,991 100.00% $ 2,000 100.00%
==================================================================================================
</TABLE>
December 31,
-------------------------
Balance at End of 1995
-------------------------
Period Applicable to:
% of Loans
in each
category to
Amount total loans
-------------------------
Commercial $ 514 27.71%
Credit card 10 0.56%
Installment 169 9.16%
Real estate 1,104 59.70%
Other 53 2.87%
-------------------------
$ 1,850 100.00%
=========================
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.
18
<PAGE>
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 $3.799 million at December 31, 1999 an increase of $0.407 million
from one year earlier. Total nonperforming assets were $3.392 million at
December 31, 1998, a decrease of $0.734 million over December 31, 1997.
<TABLE>
Nonperforming Assets
<CAPTION>
December 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 2,026 $ 752 $ 737 $ 996 $ 487
Loans contractually past due 90 days or more
and still accruing 801 1,649 2,176 1,324 882
Troubled debt restructuring - - - - -
--------------------------------------------------------------
Total nonperforming loans $ 2,827 $ 2,401 $ 2,913 $ 2,320 $ 1,369
Other real estate owned 972 991 1,213 1,330 1,540
--------------------------------------------------------------
Total nonperforming assets $ 3,799 $ 3,392 $ 4,126 $ 3,650 $ 2,909
==============================================================
Nonperforming assets to period-end total
loans, gross, and other real estate 1.42% 1.66% 2.30% 2.20% 1.90%
==============================================================
Foregone interest income on nonaccrual
loans $ 127 $ 95 $ 65 $ 50 $ 32
==============================================================
Interest income recorded on nonaccrual
loans during the year $ 29 $ 17 $ 16 $ 4 $ 8
==============================================================
</TABLE>
The following table summarizes all nonperforming loans, by loan type as of
December 31, 1999:
Number
of Principal
(Dollars in thousands) Loans Balance
- -----------------------------------------------------------------------------
Residential mortgage 17 $ 2,083
Installment loans 12 154
Commercial loans 15 588
Credit cards 2 2
-------------------------
46 $ 2,827
=========================
19
<PAGE>
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, the Company 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.
As of December 31, 1999, total nonperforming loans have increased by
$0.426 million, to $2.827 million from $2.401 million on December 31, 1998.
If foreclosure of property is required, the property is generally sold
at a public auction in which CBI may participate as a bidder. If the CBI is the
successful bidder, the acquired real estate property is then included in the CBI
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
the Company and current yields and other market conditions.
Securities are classified as held-to-maturity when management has the
positive intent and the 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, 1999 was
$69.414 million compared to $71.734 million at December 31, 1998.
The following tables show the amortized cost, fair market value,
maturity distribution, and yield of the investment portfolio as of December
31,1999 and 1998
20
<PAGE>
<TABLE>
Securities Portfolio
<CAPTION>
December 31, 1999
--------------------------------------------------
Held -to-Maturity Available-for-Sale
----------------- ------------------
Cost Market Cost Market
--------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and agency securities $ 500 $ 452 $13,330 $12,308
Mortgage-backed securities:
Guaranteed or issued by
GNMA, FNMA or FHLMC 5,422 5,353 25,941 24,885
Securities issued by states and
political subdivisions 513 507 14,625 14,192
Other securities - - 9,083 8,330
--------------------------------------------------
$ 6,435 $ 6,312 $ 62,979 $ 59,715
==================================================
<CAPTION>
December 31, 1998
--------------------------------------------------
Held -to-Maturity Available-for-Sale
----------------- ------------------
Cost Market Cost Market
--------------------------------------------------
(Dollars in thousands)
U.S. Treasury and agency securities $ 900 $ 841 $15,152 $15,113
Mortgage-backed securities:
Guaranteed or issued by
GNMA, FNMA or FHLMC 8,066 8,103 24,835 24,809
Securities issued by states and
political subdivisions 612 645 14,204 14,453
Other securities 100 101 7,865 7,832
--------------------------------------------------
$ 9,678 $ 9,690 $62,056 $62,207
==================================================
<CAPTION>
December 31, 1997
--------------------------------------------------
Held -to-Maturity Available-for-Sale
----------------- ------------------
Cost Market Cost Market
--------------------------------------------------
(Dollars in thousands)
U.S. Treasury and agency securities $ 1,949 $ 1,877 $16,091 $16,058
Mortgage-backed securities:
Guaranteed or issued by
GNMA, FNMA or FHLMC 10,874 10,924 16,608 16,564
Securities issued by states and
political subdivisions 702 732 8,491 8,654
Other securities 100 102 2,693 2,759
--------------------------------------------------
$ 13,625 $ 13,635 $43,883 $44,035
==================================================
The maturity distribution, book value, market value, and yield of the total
investment securities portfolio at December 31, 1999 and 1998 are
presented as follows:
<CAPTION>
December 31, 1999
---------------------------------------------------------------------------
Held -to-Maturity Available-for-Sale
----------------- ------------------
Book Market Book Market
Value Value Yield Value Value Yield
---------------------------------------------------------------------------
(Dollars in thousands)
Within 12 months $ 9 $ 9 9.31% $ 4,840 $ 4,577 5.52%
Over 1 year through 5 years 713 667 6.30% 20,979 20,279 5.91%
Over 5 years through 10 years 2,205 2,165 5.47% 26,892 25,498 6.43%
Over 10 years 3,508 3,471 7.07% 10,268 9,361 6.91%
---------------------------------------------------------------------------
$ 6,435 $ 6,312 6.44% $62,979 $59,715 6.27%
===========================================================================
</TABLE>
21
<PAGE>
Deposits. Deposits at December 31, 1999 were $318.427 million, up $24.425
million from 1998, an increase of 8.31%. The growth in deposits was led by the
11.58% increase in interest-bearing deposits, which increased from $239.645
million at December 31, 1998 to $267.394 million at December 31, 1999.
Noninterest-bearing deposits were 16.03% of total deposits at December 31, 1999.
Deposits at December 31,1998 were $294.002 million, a 23.77% increase
from 1997. Noninterest-bearing deposits were 18.49% of total deposits at
December 31, 1998 compared to 17.22% at December 31, 1997.
<TABLE>
Deposits Analysis
<CAPTION>
December 31,
------------------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------------------
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 $ 51,033 $ 54,357 $ 40,914
------------- ------------- -------------
Interest-bearing liabilities:
Money market and NOW accounts 78,094 3.00% 70,276 2.95% 55,778 3.49%
Savings deposits 50,921 3.55% 48,973 3.75% 34,638 3.68%
Time deposits 101,787 5.24% 95,416 5.53% 85,546 5.56%
Large denomination deposits 36,592 5.58% 24,980 6.08% 20,653 6.23%
------------------------------------------------------------------------
Total interest-bearing accounts $267,394 4.27% $ 239,645 4.49% $ 196,615 4.74%
------------------------------------------------------------------------
Total deposits $318,427 $ 294,002 $ 237,529
============= ============= =============
Maturity of CDs of $100,000 and Over
Within Three Six to Over Percent
Three to Six Twelve One of Total
Months Months Months Year Total Deposit
------ ------ ------ ---- ----- -------
(Dollars in thousands)
December 31, 1999 $7,420 $7,136 $ 12,517 $9,519 $ 36,592 11.49%
</TABLE>
22
<PAGE>
Capital Resources. The adequacy of the CBI's capital is reviewed by management
on an ongoing basis, with reference to the size, composition and quality of the
Company'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.
The primary source of capital for CBI is internally generated retained
earnings. Stockholders' equity increased 6.75% in 1999 over 1998 (before the
mark to market adjustment on securities available for sale of -$2.154 million,
net of tax). Similarly, stockholders' equity increased 9.96% in 1998 over 1997
(before the mark to market adjustment on securities available for sale of
+$99,000, net of tax). The following table highlights certain ratios for the
periods indicated:
Return on Equity and Assets
Years Ended December 31,
----------------------------------
1999 1998 1997
----------------------------------
Income before securities gains and losses to:
Average total assets 1.55% 1.64% 1.66%
Average stockholders' equity 15.07% 14.82% 14.62%
Net income to:
Average total assets 1.58% 1.69% 1.66%
Average stockholders' equity 15.36% 15.32% 14.62%
Dividend payout ratio (dividends declared
per share divided by net income per share) 32.31% 29.55% 20.95%
Average stockholders' equity to average
total assets ratio 10.31% 11.03% 11.36%
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 13.85% at December 31, 1999 and a ratio of
Tier 1 capital to risk-weighted assets of 12.87%. Both of these exceed the
capital requirements adopted by the federal regulatory agencies.
23
<PAGE>
<TABLE>
Analysis of Capital
<CAPTION>
December 31,
---------------------------------------
1999 1998 1997
---------------------------------------
(Dollars in thousands)
Tier 1 Capital:
<S> <C> <C> <C>
Common stock $ 8,140 $ 8,286 $ 8,338
Surplus 3,894 4,915 5,425
Retained earnings 24,513 20,820 17,268
Unearned ESOP shares (229) - (91)
---------------------------------------
Total Tier 1 Capital $ 36,318 $ 34,021 $ 30,940
---------------------------------------
Tier 2 Capital
Allowance for loan losses 2,773 2,345 1,991
---------------------------------------
Total Tier 2 Capital $ 2,773 $ 2,345 $ 1,991
---------------------------------------
Total risk-based capital $ 39,091 $ 36,366 $ 32,931
=======================================
Risk weighted assets $ 282,158 $ 240,036 $ 188,945
Capital Ratios:
Tier 1 risk-based capital 12.87% 14.17% 16.38%
Total risk based capital 13.85% 15.15% 17.43%
Tier 1 capital to average total assets 10.63% 11.52% 12.03%
</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 the Company's management of liquid assets and the ability to
generate liquidity through liability funding, management believes that the
Company maintains overall liquidity sufficient to satisfy its depositors'
requirements and meet its customers' credit needs.
For the year ended December 31, 1999 the Company provided cash or
liquidity from operations in the amount of $6.264 million. This increase in
funds in addition to a $24.425 million increase in deposits has given the
Company approximately $30.689 million in funds available for investment during
1999. 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 was primarily directed to the funding
of a $63.118 million increase in net loans
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 1998, FASB issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The Statement
establishes accounting and reporting standards requiring that derivative
instruments (including certain derivative instruments embedded in other
contracts) be recorded on the balance sheet as either assets or liabilities
measured at fair value. FASB No. 133 requires that changes in the derivative's
fair value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related changes in value of the hedged item in the
income statement and requires that a company document, designate, and assess the
effectiveness of transactions that qualify for hedge accounting. Pursuant to
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of Effective Date of Financial
Accounting Standards Board Statement No. 133", the Corporation is required to
adopt the standard on or before January 1, 2001. Upon adoption, all hedging
relationships must be designated and documented pursuant to the provisions of
the statement. CBI is in the process of evaluating the impact of this statement
on its risk management strategies and processes, information systems and
financial statements.
24
<PAGE>
Year 2000 Issues. The Year 2000 Issue (commonly referred to as "Y2K") is the
result of computer programs being written using two digits, rather than four
digits, to define the applicable year. The Y2K issue, which is common to most
corporations, including banks, concerns the inability of information systems,
primarily (but not exclusively) computer software programs, to properly
recognize and process date-sensitive information as the Year 2000 approaches and
beyond.
The Company is happy to report that all Year 2000 issues were resolved prior to
the end of 1999, and all systems performed as expected at the end of the year.
There were no system problems or service disruptions.
Company Consolidation. In March of this year the Company announced that the
Board of Directors had made the decision to consolidate the three banking
affiliates into one entity. This decision was made in order to achieve more
efficient use of the Company's management and technical resources and to give
our customers expanded banking services and facilities.
Toward this end, the Company has evaluated and selected new data processing
hardware and software and is in the process of establishing a new operations
center for consolidated processing of the combined bank's customer deposit and
loan applications. This project is currently expected to be completed in stages,
with final conversions scheduled for the August to October time frame. During
the year the Company will incur additional expenses associated with equipment
installation, training, new product development and data processing upgrades.
Management anticipates future operational and organizational efficiencies will
help the long-range growth and profitability of the Company.
FORWARD LOOKING STATEMENTS
The preceding "Business", "Legal Proceeding" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" sections of this Form
10-K contain various "forward looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which represents CBI's expectations and
beliefs concerning future events including, without limitation, the following:
the Company's efforts in retaining and expanding its customer base and
differentiating it from its competition; the FDIC insurance premium assessments
for 2000; the impact from liabilities arising from legal proceedings on its
financial condition; the impact of certain securities sales, and interest rates
in general, on the volatility of its net interest income; the impact of policy
guidelines and strategies on net interest income based on future interest rate
projections; the ability to provide funding sources for both the Bank and the
Parent Company; the benefits of 1999 merger activity on future years' overhead
expense; the impact of portfolio diversification and the outplacement of high
risk loans on future levels on loan losses; the reversal in the trend of
competition for real estate-commercial loans and the effect of loan growth
generally on the improvement in net interest income; the assessment of its
provision and reserve for loan loss levels based upon future changes in the
composition of its loan portfolio, loan losses, collateral value and economic
conditions
The Company cautions that these statements are further qualified by important
factors that could cause actual results to differ materially from those set
forth in the forward looking statements due to market, economic and other
business-related risks and uncertainties affecting the realization of such
statements. Certain of these risks and uncertainties included in such forward
looking statements include, without limitations, the following: dynamics of the
markets served in terms of competition from traditional and nontraditional
financial service providers can affect both the funding capabilities of the
Company in terms of deposit garnering as well as the ability to compete for
loans and generate the higher yielding assets necessary to improve net interest
income; future legislation and actions by the Federal Reserve Board may result
in the imposition of costs and constraints on the Company through higher FDIC
insurance premiums, significant fluctuations in market interest rates and
operational limitations; significant fluctuations in market interest rates may
affect the ability to reinvest proceeds from the maturities and prepayments on
certain categories of securities and affect the overall yield of the portfolio;
business expansion activities and other efforts to retain customers may increase
the need for staffing and the resulting personnel expense in future periods;
deviations from the assumptions used to evaluate the appropriate level of the
reserve for loan losses as well as future purchases and sales of loans may
affect the appropriate level of the reserve for loan losses and thereby affect
the future levels of provisioning
Accordingly, results actually achieved may differ materially from expected
results in these statements. CBI does not undertake, and specifically disclaims,
any obligation to update any forward-looking statements to reflect events or
circumstances occurring after the date of such statements.
25
<PAGE>
Item 8. Financial Statements and Supplementary Data.
INDEPENDENT AUDITORS' REPORT
Board of Directors
Community Bankshares Incorporated
Petersburg, Virginia
We have audited the accompanying consolidated balance sheets of Community
Bankshares Incorporated and subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 in the first paragraph present
fairly, in all material respects, the financial position of Community Bankshares
Incorporated and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
Mitchell, Wiggins & Company, LLP
Certified Public Accountants
Petersburg, Virginia
January 14, 2000
26
<PAGE>
<TABLE>
COMMUNITY BANKSHARES INCORPORATED
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(Dollars in thousands)
<CAPTION>
ASSETS 1999 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 14,410 $ 12,661
Federal funds sold 3,154 34,657
----------------------------------
Total cash and cash equivalents 17,564 47,318
Interest-bearing deposits in other depository institutions - 289
Securities available for sale 59,715 62,207
Securities held to maturity (approximate market value,
$6,312 in 1999 and $9,690 in 1998) 6,435 9,678
Loans, net 263,194 200,558
Bank premises and equipment, net 4,575 4,672
Other real estate owned 972 991
Accrued interest receivable 2,229 1,950
Other assets 4,152 2,249
----------------------------------
$ 358,836 $ 329,912
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits $ 51,033 $ 54,357
Interest-bearing demand deposits 78,094 70,276
Savings deposits 50,921 48,973
Time deposits, $100,000 and over 36,592 24,980
Other time deposits 101,787 95,416
----------------------------------
318,427 294,002
Accrued interest payable 836 755
Federal funds purchased 3,597 -
Other liabilities 1,583 1,035
Guaranteed debt of Employee Stock Ownership Trust 229 -
----------------------------------
324,672 295,792
----------------------------------
Commitments and Contingencies
(Note 14)
Stockholders' Equity
Capital stock, $3 par value 20,000,000 shares
authorized; 2,713,258 and 2,761,926 shares issued and
outstanding in 1999 and 1998, respectively 8,140 8,286
Surplus 3,894 4,915
Retained earnings 24,513 20,820
Accumulated other comprehensive income (loss),
net of tax (2,154) 99
----------------------------------
34,393 34,120
Unearned ESOP shares (229) -
----------------------------------
34,164 34,120
----------------------------------
$ 358,836 $ 329,912
==================================
See Notes to Consolidated Financial Statements.
</TABLE>
27
<PAGE>
<TABLE>
COMMUNITY BANKSHARES INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1999, 1998 and 1997
(Dollars in thousands, except per-share information)
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 21,800 $ 18,921 $ 17,168
Interest on investment securities:
U. S. Government agencies and corporations 3,413 3,118 3,095
Other securities 166 164 136
States and political subdivisions 717 564 390
Interest on federal funds sold and securities
purchased under agreements to resell 515 1,055 479
------------------------------------------------
Total interest income 26,611 23,822 21,268
------------------------------------------------
Interest expense:
Interest on deposits 10,619 9,657 8,645
Interest on federal funds purchased and securities
sold under agreements to repurchase 41 - 5
------------------------------------------------
Total interest expense 10,660 9,657 8,650
------------------------------------------------
Net interest income 15,951 14,165 12,618
Provision for loan losses 559 453 52
------------------------------------------------
Net interest income after provision for
loan losses 15,392 13,712 12,566
------------------------------------------------
Other income:
Service charges, commissions and fees 1,964 1,698 1,517
Security gains 101 164 -
Gain (loss) on sale of other real estate 1 26 (32)
Other operating income 237 385 181
------------------------------------------------
Total other income 2,303 2,273 1,666
------------------------------------------------
Other expenses:
Salaries, wages and employee benefits 5,664 5,070 4,400
Net occupancy 584 513 503
Furniture and equipment 662 597 617
Other operating 1,901 1,597 1,425
Professional fees 164 197 246
Stationery and supplies 234 279 268
Taxes 668 587 533
------------------------------------------------
Total other expenses 9,877 8,840 7,992
------------------------------------------------
Income before income taxes 7,818 7,145 6,240
Income taxes 2,407 2,153 1,968
------------------------------------------------
Net income $ 5,411 $ 4,992 $ 4,272
------------------------------------------------
Basic earnings per share $ 1.98 $ 1.80 $ 1.54
------------------------------------------------
Diluted earnings per share $ 1.95 $ 1.76 $ 1.48
------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
28
<PAGE>
<TABLE>
COMMUNITY BANKSHARES INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Accumulated
Years Ended December 31, 1999, 1998 and 1997 Unearned Other
(Dollars in thousands) Capital Retained ESOP Comprehensive
Stock Surplus Earnings Shares Income (Loss) Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $ 8,334 $ 5,657 $ 13,852 $ (239) $ (265) $27,339
-----------
Comprehensive income:
Net income for the year ended
December 31, 1997 - - 4,272 - - 4,272
Other comprehensive income, net of tax:
Unrealized holding gains on available-for-sale
securities arising during the period, net of
deferred income tax expense of $189 - - - - 366 366
-----------
Comprehensive income 4,638
-----------
Issuance of common stock pursuant to
exercise of stock options 31 44 - - - 75
Cash settlement of options - (271) - - - (271)
Common stock repurchased (27) (130) - - - (157)
Purchase of fractional shares - (2) - - - (2)
Cash dividends declared - - (859) - - (859)
Release of ESOP shares - 127 3 148 - 278
-----------------------------------------------------------------------------
Balance, December 31, 1997 8,338 5,425 17,268 (91) 101 31,041
-----------
Comprehensive income:
Net income for the year ended
December 31, 1998 - - 4,992 - - 4,992
Other comprehensive income, net of tax:
Unrealized holding gains on available-for-sale
securities arising during the period, net of
deferred income tax expense of $64 - - - - 106 106
Less reclassification adjustment for gains included
in net income, net of income tax expense of $56 - - - - (108) (108)
-----------
Comprehensive income 4,990
-----------
Issuance of common stock pursuant to
exercise of stock options 10 14 - - - 24
Cash settlement of options - (208) - - - (208)
Common stock repurchased (62) (441) - - - (503)
Cash dividends declared - - (1,444) - - (1,444)
Release of ESOP shares - 125 4 91 - 220
-----------------------------------------------------------------------------
Balance, December 31, 1998 8,286 4,915 20,820 - 99 34,120
-----------
Comprehensive income:
Net income for the year ended
December 31, 1999 - - 5,411 - - 5,411
Other comprehensive income, net of tax:
Unrealized holding losses on available-for-sale
securities arising during the period, net of
deferred income tax expense of $1,126 - - - - (2,186) (2,186)
Less reclassification adjustment for gains included
in net income, net of income tax expense of $34 - - - - (67) (67)
-----------
Comprehensive income 3,158
-----------
Issuance of common stock pursuant to
exercise of stock options 3 3 - - - 6
Common stock repurchased (149) (1,024) - - - (1,173)
Cash dividends declared - - (1,718) - - (1,718)
Leveraged ESOP stock purchase - - - (229) - (229)
-----------------------------------------------------------------------------
Balance, December 31, 1999 $ 8,140 $ 3,894 $ 24,513 $ (229) $ (2,154) $34,164
-----------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
</TABLE>
29
<PAGE>
<TABLE>
COMMUNITY BANKSHARES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
(Dollars in thousands)
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Activities
<S> <C> <C> <C>
Net income $ 5,411 $ 4,992 $ 4,272
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 505 504 502
Deferred income taxes (336) (223) (137)
Provision for loan losses 559 453 52
Provision for losses on other real estate owned 9 13 9
Amortization and accretion of investment securities (38) (7) 33
Gain on sale of securities (101) (164) -
(Gain) loss on sale of other real estate (1) (26) 32
Gain on sale of bank premises and equipment (9) (6) -
Release of ESOP shares - 129 130
Changes in operating assets and liabilities:
Increase in accrued interest receivable (279) (145) (159)
Increase (decrease) in accrued expenses 143 47 (20)
Net change in other operating assets and liabilities 400 (169) 39
----------------------------------------------
Net cash provided by operating activities 6,263 5,398 4,753
----------------------------------------------
Investing Activities
Proceeds from maturity and redemptions of securities held to
maturity 3,223 3,748 4,210
Proceeds from maturity of interest-bearing deposits 289 190 -
Proceeds from maturity, redemptions and sales of securities
available for sale 19,317 37,032 18,552
Proceeds from sales of interest-bearing deposits - 195 -
Purchase of interest-bearing deposits - - (5)
Purchase of investment securities available for sale (20,079) (54,835) (24,285)
Net increase in loans (63,118) (25,092) (13,508)
Proceeds from the sale of bank premises and equipment 13 20 -
Proceeds from the sale of other real estate 273 333 676
Capital expenditures (310) (356) (858)
(Increase) decrease in other assets (423) 39 (39)
Purchase of other real estate (339) (25) (274)
----------------------------------------------
Net cash used in investing activities (61,154) (38,751) (15,531)
----------------------------------------------
Financing Activities
Net increase in deposits 24,425 56,473 15,620
Cash settlement of options - (208) (271)
Payment for fractional shares - - (2)
Net increase in federal funds purchased 3,597 - -
Dividends paid (1,718) (1,444) (859)
Common stock repurchased (1,173) (503) (157)
Net proceeds from issuance of common stock 6 24 75
----------------------------------------------
Net cash provided by financing activities 25,137 54,342 14,406
----------------------------------------------
(Continued)
</TABLE>
30
<PAGE>
<TABLE>
COMMUNITY BANKSHARES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, 1999, 1998 and 1997
(Dollars in thousands)
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents (29,754) 20,989 3,628
Cash and cash equivalents, beginning 47,318 26,329 22,701
----------------------------------------------
Cash and cash equivalents, ending $ 17,564 $ 47,318 $ 26,329
----------------------------------------------
Supplemental Disclosure Of Cash Flow Information
Interest paid $ 10,579 $ 9,736 $ 8,591
----------------------------------------------
Income taxes paid $ 2,361 $ 2,405 $ 1,936
----------------------------------------------
Supplemental Disclosure Of Noncash Investing
Activities
Acquisition of other real estate:
Purchase price $ 389 $ 623 $ 884
Reduction of loans (50) (598) (610)
----------------------------------------------
Cash paid to acquire other real estate $ 339 $ 25 $ 274
----------------------------------------------
Sale of other real estate:
Sales price, net of closing cost $ 381 $ 859 $ 960
Increase in loans (108) (526) (284)
----------------------------------------------
Cash proceeds from sale of other real estate $ 273 $ 333 $ 676
----------------------------------------------
See Notes to Consolidated Financial Statements.
</TABLE>
31
<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, Commerce Bank of Virginia, and County Bank of Chesterfield,
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, Commerce Bank of
Virginia, and County Bank of Chesterfield. 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 is
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.
The Corporation is required to maintain reserve funds in cash or on deposit with
the Federal Reserve Bank. The required reserve at December 31, 1999 was
$2,481,000.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies (Continued)
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 interest method over their contractual lives. Gains and losses on the sale
of such securities are determined by the specific identification method.
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, 1999, 1998, and 1997.
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.
Impaired loans are 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.
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.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies (Continued)
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 represent 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: In February 1997, the Financial Accounting Standards Board
issued its Statement of Financial Accounting Standards No. 128 (SFAS 128)
"Earnings per Share". This Statement specifies the computation, presentation and
disclosure requirements for earnings per share for entities with publicly held
common stock or potential common stock. The Statement's objective is to simplify
the computation of earnings per share and to make the U. S. standard for
computing earnings per share more compatible with the EPS Standards of other
countries and with that of the International Accounting Standards Committee.
SFAS 128 is effective for financial statements for both interim and annual
periods ending after December 15, 1997. After the effective date, all prior
period EPS data presented has been restated to conform with the provisions of
this Statement.
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies (Continued)
The following data show the amounts used in computing earnings per share and the
effect on income and the weighted average number of shares of dilutive potential
common stock.
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------------
(Dollars in thousands, except number of shares)
<S> <C> <C> <C>
Income available to common stockholders
used in basic EPS $ 5,411 $ 4,992 $ 4,272
------------------------------------------------------
Weighted average number of common
shares used in basic EPS 2,733,893 2,774,563 2,766,630
Effect of dilutive securities:
Stock options 46,237 62,027 113,869
------------------------------------------------------
Weighted number of common shares and
dilutive potential stock used in diluted
EPS 2,780,130 2,836,590 2,880,499
------------------------------------------------------
</TABLE>
Comprehensive income: In June 1997, the Financial Accounting Standards Board
issued its Statement of Financial Accounting Standards No. 130 (SFAS 130),
"Reporting Comprehensive Income". This Statement defines comprehensive income as
the change in an institution's equity during a period from transactions and
other events, except those resulting from investments by investors and
distributions to those investors. Comprehensive income includes net income and
other changes in assets and liabilities that are not reported in net income, but
instead reported as a separate component of stockholders' equity. SFAS 130 is
effective for financial statements for both interim and annual periods beginning
after December 15, 1997.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Securities
A summary of the amortized cost and estimated market values of investment
securities is as follows:
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------------------------------------------------
(Dollars in thousands)
Available for Sale
<S> <C> <C> <C> <C>
U. S. Treasury and agency securities $ 13,330 $ - $ (1,022) $ 12,308
Mortgage-backed securities 25,941 - (1,056) 24,885
State and County Municipal Bonds 14,625 35 (468) 14,192
Other 9,083 - (753) 8,330
---------------------------------------------------------
$ 62,979 $35 $ (3,299) $ 59,715
=========================================================
Held to Maturity
U. S. Treasury and agency securities $ 500 $ - $ (48) $ 452
Mortgage-backed securities 5,422 4 (73) 5,353
State and County Municipal Bonds 513 9 (15) 507
---------------------------------------------------------
$ 6,435 $13 $(136) $6,312
=========================================================
</TABLE>
The amortized cost and estimated market values at December 31, 1999, by
contractual maturity, are as follows:
Estimated
Amortized Market
Cost Value
-------------------------
(Dollars in thousands)
Available for Sale
Due in one year or less $ 4,840 $ 4,577
Due after one year but less than five years 20,979 20,279
Due after five years but less than ten years 26,892 25,498
Due after ten years 10,268 9,361
-------------------------
$62,979 $59,715
=========================
Held to Maturity
Due in one year or less $ 9 $ 9
Due after one year but less than five years 713 667
Due after five years but less than ten years 2,205 2,165
Due after ten years 3,508 3,471
-------------------------
$ 6,435 $ 6,312
=========================
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Securities (Continued)
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, 1998
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------------------------------------------------
(Dollars in thousands)
Available for Sale
<S> <C> <C> <C> <C>
U. S. Treasury and agency securities $ 15,152 $ 49 $ (88) $ 15,113
Mortgage-backed securities 24,835 67 (93) 24,809
State and County Municipal Bonds 14,204 300 (51) 14,453
Other 7,865 99 (132) 7,832
---------------------------------------------------------
$ 62,056 $515 $(364) $ 62,207
=========================================================
Held to Maturity
U. S. Treasury and agency securities $ 900 $ 1 $ (60) $ 841
Mortgage-backed securities 8,066 63 (26) 8,103
Corporate securities 100 1 - 101
State and County Municipal Bonds 612 33 - 645
---------------------------------------------------------
$ 9,678 $ 98 $ (86) $ 9,690
=========================================================
</TABLE>
Proceeds from sales of securities available for sale were $11,825,395,
$21,130,319 and $8,070,865 during 1999, 1998 and 1997, respectively, resulting
in gross gains of $30,292, $169,365 and $6,251 and gross losses of $26,909,
$5,268 and $6,105 in 1999, 1998 and 1997, respectively.
Securities with an amortized cost of $14,739,850 and $10,429,255 and a market
value of $14,144,524 and $10,440,782 as of December 31, 1999 and 1998,
respectively, were pledged as collateral to secure public funds as required by
law.
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Loans
Major classifications of loans are summarized as follows:
December 31,
---------------------------
1999 1998
---------------------------
(Dollars in thousands)
Commercial $ 77,337 $ 62,213
Consumer 21,199 21,236
Real estate:
Construction 42,237 17,100
Mortgage 118,475 96,477
Other 6,871 6,205
---------------------------
266,119 203,231
Less unearned discount (152) (328)
---------------------------
265,967 202,903
Allowance for loan losses (2,773) (2,345)
---------------------------
Loans, net $ 263,194 $ 200,558
===========================
An analysis of the transactions in the allowance for loan losses is given below:
December 31,
----------------------------------------
1999 1998 1997
----------------------------------------
(Dollars in thousands)
Balance, beginning of year $ 2,345 $ 1,991 $ 2,000
Loans charged off (180) (232) (294)
Recoveries credited to reserve 49 133 233
Provision charged to operations 559 453 52
----------------------------------------
Balance, end of year $ 2,773 $ 2,345 $ 1,991
========================================
At December 31, 1999 and 1998, the Corporation had loans totaling approximately
$2,622,570 and $1,104,061, respectively, for which impairment had been
recognized. Of the total loans impaired, $27,240 and $37,215, respectively, were
valued on the present value of future cash flows and $2,595,330 and $1,066,846,
respectively, were valued according to the underlying collateral. The average
balance of the impaired loans amounted to approximately $1,952,000 and
$1,274,000 for the years ended December 31, 1999 and 1998, respectively. The
allowance for loan losses related to these loans totaled approximately $671,000
and $372,000 at December 31, 1999 and 1998, respectively. The following is a
summary of cash receipts on these loans and how they were applied for the years
ended December 31:
1999 1998
--------------------------
(Dollars in thousands)
Cash receipts applied to reduce principal balance $ 448 $ 473
Cash receipts recognized as interest income 70 20
--------------------------
Total cash receipts $ 518 $ 493
--------------------------
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Loans (Continued)
At December 31, 1999 and 1998, the Corporation had nonaccrual loans of
$2,026,285 and $752,495, respectively. If interest on these loans had been
recognized at the original interest rates, interest income would have increased
approximately $127,000 and $95,000 in 1999 and 1998, respectively.
Note 4. Bank Premises and Equipment
Major classifications of bank premises and equipment are summarized as follows:
December 31,
--------------------------
1999 1998
--------------------------
(Dollars in thousands)
Land $ 1,085 $ 1,085
Bank premises 4,308 4,305
Furniture and equipment 4,800 4,480
--------------------------
10,193 9,870
Less accumulated depreciation 5,618 5,198
--------------------------
$ 4,575 $ 4,672
==========================
Note 5. Maturities of Certificates of Deposits
The scheduled maturities of certificates of deposits at December 31, 1999 are as
follows:
Year Ended December 31,
- -----------------------
(Dollars in thousands)
2000 $ 94,675
2001 22,199
2002 8,980
2003 7,954
2004 4,571
--------------
$ 138,379
==============
Note 6. Income Taxes
The components of the income tax provision for the years ended December 31,
1999, 1998 and 1997 are as follows:
1999 1998 1997
-------------------------------------
(Dollars in thousands)
Currently payable $ 2,743 $ 2,376 $ 2,092
Deferred (336) (223) (124)
-------------------------------------
$ 2,407 $ 2,153 $ 1,968
=====================================
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Income Taxes (Continued)
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,
--------------------------------------
1999 1998 1997
--------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Tax provision computed by applying current Federal
income tax rates to income before income taxes $ 2,696 $ 2,432 $ 2,122
Cash settlement of nonstatutory stock options - (70) (92)
Exercise of nonstatutory stock options - (17) -
Municipal bond interest (247) (197) (141)
Other (42) 5 79
--------------------------------------
$ 2,407 $ 2,153 $ 1,968
======================================
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:
<CAPTION>
Years Ended
December 31,
-------------------------------------
1999 1998 1997
-------------------------------------
(Dollars in thousands)
Difference between the depreciation methods
used for financial statements and for income
tax purposes $ (18) $ (17) $ (66)
Difference between loan loss provision charged
to operating expense and the bad debt deduction
taken for income tax purposes (163) (109) (90)
Accretion of discount recognized on financial
statements but not recognized for income tax
purposes until realized - 1 (3)
Difference between accrual method used for
financial statement and cash method used
for income tax purposes (46) (46) (47)
Deferred compensation (60) (42) (15)
Interest related to non-accrual loans (29) (13) 95
Other (20) 3 2
-------------------------------------
$ (336) $ (223) $ (124)
=====================================
</TABLE>
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Income Taxes (Continued)
Net deferred tax assets consist of the following components as of December 31:
<TABLE>
<CAPTION>
1999 1998
--------------------------
(Dollars in thousands)
Deferred tax assets:
<S> <C> <C>
Allowance for loan losses $ 712 $ 549
Deferred compensation 191 132
Property and equipment 30 1
Interest on non-accrual loans 104 71
Debt cancellation reserve 9 11
Unrealized loss on available-for-sale securities 1,110 -
Other 22 2
--------------------------
$ 2,178 $ 766
--------------------------
Deferred tax liabilities:
Accrual to cash basis adjustment $ - $ 46
Unrealized gain on available-for-sale securities - 50
Investment securities 8 7
Property and equipment 10 -
--------------------------
$ 18 $ 103
--------------------------
Deferred tax assets, net $ 2,160 $ 663
===========================
</TABLE>
Note 7. Deferred Compensation Agreements
The Corporation has a Deferred Compensation Plan for the benefit of certain
directors. Contributions amounted to approximately $13,400 for the years ended
December 31, 1999, 1998 and 1997. 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.
The Corporation has Deferred Compensation Plans for the benefit of certain
officers. Benefits will be funded by the Corporation. The cost of these benefits
is being charged to expense and accrued using a present value method over the
expected term of employment. The Plan provides each covered officer an annual
benefit payment upon retirement. Contributions were approximately $107,700,
$55,700 and $45,600 for the years ended December 31, 1999, 1998 and 1997,
respectively.
The lives of the officers and directors for which deferred compensation
agreements have been adopted have been insured for amounts sufficient to
discharge the obligations thereunder.
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Employee Benefit Plans
On April 21, 1999, the Corporation merged the three employee stock ownership
plans (ESOP) of its subsidiaries into one plan. Employees who complete 1,000
hours of service in a plan year and who have been employed a year or longer are
eligible for participation. Contributions to the plan are at the discretion of
the Board of Directors and are limited to the lesser of $30,000 or 25% of the
participant's total compensation for the limitation year. Employees will be
allocated shares based upon the ratio which the covered compensation of each
participant bears to the aggregate covered compensation of all participants.
Employee accounts are 20% vested after three years with vesting increasing 20%
each year thereafter until 100% vested.
During the year ended December 31, 1999, the ESOP purchased additional shares
through the proceeds of $229,241 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 Corporation accounts for its ESOP in
accordance with Statement of Position 93-6. Accordingly, the shares are reported
as unearned ESOP shares in the consolidated balance sheets. As shares are
released, the Corporation reports compensation expense equal to the current
market price of the shares and the shares then become outstanding for each 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.
For financial statement presentation purposes, compensation expense to the plan
is measured by recording the fair market value of shares allocated to the
employee accounts each year. For the year ended December 31, 1999, contributions
in the amount of $114,824 were accrued to the new plan and, accordingly,
contribution expense was recorded for the year. Compensation expense for the old
plans was $249,792 and $321,236 for the two years ended December 31, 1998 and
1997, respectively.
The ESOP shares as of December 31 were as follows:
1999 1998
----------------------------
Allocated shares 208,425 193,355
Unreleased shares 10,874 -
----------------------------
Total ESOP shares 219,299 193,355
----------------------------
Fair value of unreleased shares $ 239,228 $ -
============================
In addition, the Corporation, through its subsidiaries, sponsors 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 $169,000, $163,000 and $107,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Employment Agreements
The Corporation has entered into employment agreements with certain officers
which expire at dates through June 30, 2000. 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, 1999, would have
been approximately $1,658,000.
Note 10. Incentive Compensation Plans
The Corporation, through its subsidiaries, maintains various cash incentive and
bonus plans for certain employees and directors of the individual subsidiaries.
Awards through the various plans are determined based on management discretion
or through predetermined award criteria for each group of participants. The
level of the bonus or award is based on management discretion or the subsidiary
attaining certain returns on average assets, or attaining targeted income levels
for the year. The amounts awarded under the plans for the years ended December
31, 1999, 1998 and 1997 were $268,103, $318,498 and $213,616, respectively.
Note 11. 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 following table presents a summary of options under the Plan at December 31:
<TABLE>
<CAPTION>
Shares Under Options
---------------------------------------
Option Price 1999 1998 1997
----------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year $6.25 - $8.37 208,326 221,317 249,486
Options granted 12.21 - - -
Options exercised 6.25 - 12.12 (1,000) (3,064) (10,469)
Cash settlement of options 6.25 - (9,927) (17,700)
----------------------------------------------------------
Outstanding, end of year $6.25 - $ 8.46 207,326 208,326 221,317
==========================================================
</TABLE>
The Corporation applies APB Opinion 25 and related interpretations in accounting
for its plan. Accordingly, no compensation cost has been recognized. There were
no options granted during the years ended December 31, 1999, December 31, 1998
or December 31, 1997.
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Life Insurance
The Corporation is owner and designated beneficiary on life insurance in the
face amount of $4,228,000 maintained on certain of its officers and directors.
At December 31, 1999 and 1998, the cash surrender value of these policies was
$720,000 and $637,000, respectively, which is included in other assets.
Note 13. 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, 1999 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.
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,
1999. 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.
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Fair Value of Financial Instruments (Continued)
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>
1999 1998
-----------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-----------------------------------------------------
(Dollars in thousands)
Financial assets:
<S> <C> <C> <C> <C>
Cash and due from banks, noninterest bearing $ 14,410 $ 14,410 $ 12,661 $ 12,661
Federal funds sold and other short-term investments 3,154 3,154 34,657 34,657
Interest-bearing deposits in other depository
institutions - - 289 289
Securities available for sale 59,715 59,715 62,207 62,207
Investment securities 6,435 6,312 9,678 9,690
Loans, net of reserve for credit losses 263,194 260,929 200,558 200,542
Accrued interest receivable 2,229 2,229 1,950 1,950
Financial liabilities:
Deposits 318,427 318,767 294,002 295,467
Accrued interest payable 836 836 755 755
Federal funds purchased 3,597 3,597 - -
</TABLE>
At December 31, 1999, 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.
Note 14. 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.
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14. Commitments and Contingencies (Continued)
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, 1999 and 1998 is as
follows:
1999 1998
---------------------------
(Dollars in thousands)
Commitments to extend credit $ 36,783 $ 30,409
Standby letters of credit 7,278 4,144
---------------------------
$ 44,061 $ 34,553
===========================
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 $10,540,000 and $11,192,000 as of December 31, 1999
and 1998, respectively. The average rates charged on the fixed-rate commitments
were 8.0% - 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.
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14. Commitments and Contingencies (Continued)
Lease commitments:
The Corporation leases land, tenant space and certain equipment under operating
leases expiring at various dates to 2008. Total rental expense amounted to
approximately $165,000, $103,000 and $108,000 for the years ended December 31,
1999, 1998 and 1997, respectively. At December 31, 1999, minimum annual lease
payments in the aggregate were as follows:
Year Ended December 31,
- -----------------------
(Dollars in thousands)
2000 $ 153
2001 134
2002 123
2003 103
2004 105
Thereafter 313
-----------
$ 931
===========
The Hanover branch facility is owned by a company whose principal shareholder is
the Corporation's Chairman. The base annual rent as of December 31, 1998 is
$40,800 per year through 2005 and increases three percent annually.
The Corporation at December 31, 1999 had entered into an agreement to purchase a
new data processing system for approximately $1,400,000. It is expected that the
purchase of the new data processing system will be funded from normal
operations.
Note 15. Related Party Transactions
At December 31, 1999, loans to officers and directors and corporations in which
officers and directors own a significant interest totaled $11,154,211. 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,
1998 Additions Repayments 1999
---------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Directors $ 10,304 $ 8,737 $ 9,523 $ 9,518
Officers and Employees 1,798 668 830 1,636
---------------------------------------------------------------
$ 12,102 $ 9,405 $ 10,353 $ 11,154
===============================================================
</TABLE>
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16. Capital Stock
On June 11, 1998, the Corporation changed its authorized capital from 4,000,000
shares of $3 par value stock to 20,000,000 shares of $3 par value common stock.
Note 17. 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 meet 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, 1999, that the
Corporation meets all capital adequacy requirements to which it is subject.
As of December 31, 1999, 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)
As of December 31, 1999:
<S> <C> <C> <C> <C> <C> <C>
Total Capital $ 39,091 13.85% $ 22,573 8.00% $ 28,216 10.00%
(to Risk Weighted Assets)
Tier I Capital 36,318 12.87% 11,286 4.00% 16,929 6.00%
(to Risk Weighted Assets)
Tier I Capital 36,318 10.63% 13,663 4.00% 17,078 5.00%
(to Average Assets)
As of December 31, 1998:
Total Capital $ 36,366 15.15% $ 19,203 8.00% $ 24,004 10.00%
(to Risk Weighted Assets)
Tier I Capital 34,021 14.17% 9,601 4.00% 14,402 6.00%
(to Risk Weighted Assets)
Tier I Capital 34,021 11.52% 11,812 4.00% 14,764 5.00%
(to Average Assets)
</TABLE>
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17. Regulatory Matters (Continued)
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 $10,654,000 in 1999 without regulatory approval.
Note 18. Quarterly Financial Data (Unaudited)
The following is a summary of selected quarterly operating results for each of
the four quarters in fiscal years 1999 and 1998:
<TABLE>
<CAPTION>
(In thousands, except per share data) March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------------------
1999
<S> <C> <C> <C> <C>
Total interest income $ 6,211 $ 6,475 $ 6,806 $ 7,119
Total interest expense 2,564 2,589 2,700 2,807
Net interest income 3,647 3,886 4,106 4,312
Provision for loan losses 80 40 81 358
Noninterest income 517 563 595 628
Noninterest expense 2,413 2,504 2,477 2,483
Earnings before income tax expense 1,671 1,905 2,143 2,099
Income tax expense 527 608 703 569
Net earnings $ 1,144 $ 1,297 $ 1,440 $ 1,530
Basic earnings per share $ 0.41 $ 0.47 $ 0.53 $ 0.57
Diluted earnings per share $ 0.39 $ 0.44 $ 0.51 $ 0.61
1998
Total interest income $ 5,576 $ 5,864 $ 6,123 $ 6,259
Total interest expense 2,268 2,362 2,468 2,559
Net interest income 3,308 3,502 3,655 3,700
Provision for loan losses 52 58 198 145
Noninterest income 515 511 815 432
Noninterest expense 2,119 2,160 2,267 2,294
Earnings before income tax expense 1,652 1,795 2,005 1,693
Income tax expense 515 592 630 416
Net earnings $ 1,137 $ 1,203 $ 1,375 $ 1,277
Basic earnings per share $ 0.41 $ 0.43 $ 0.50 $ 0.46
Diluted earnings per share $ 0.40 $ 0.42 $ 0.49 $ 0.45
</TABLE>
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19. Parent Corporation
Financial statements for Community Bankshares Incorporated (not consolidated)
are presented below.
COMMUNITY BANKSHARES INCORPORATED (Parent Corporation Only) Balance Sheets
December 31, 1999 and 1998 (Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS 1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash $ 2,012 $ 1,749
Investment in subsidiaries 31,695 32,069
Securities available for sale 148 75
Other assets 539 227
--------------------------
Total assets $ 34,394 $ 34,120
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Guaranteed debt of Employee Stock Ownership Trust $ 229 $ -
Other liabilities 1 -
--------------------------
230 -
--------------------------
Stockholders' equity:
Capital stock, $3 par value; 20,000,000 shares
authorized; 2,713,258 and 2,761,926 shares
issued and outstanding in 1999 and 1998,
respectively 8,140 8,286
Surplus 3,894 4,915
Retained earnings 24,513 20,820
Accumulated other comprehensive income (loss)
of subsidiaries, net of taxes (2,128) 122
Accumulated other comprehensive loss of
parent corporation, net of tax (26) (23)
--------------------------
34,393 34,120
Unearned ESOP shares (229) -
--------------------------
Total stockholders' equity 34,164 34,120
--------------------------
Total liabilities and stockholders' equity $ 34,394 $ 34,120
==========================
</TABLE>
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19. Parent Corporation (Continued)
COMMUNITY BANKSHARES INCORPORATED
(Parent Corporation Only)
Statements of Income
Years Ended December 31, 1999, 1998 and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------
Income:
<S> <C> <C> <C>
Dividends from subsidiaries $ 3,600 $ 2,372 $ 2,168
Gain on sale of securities 2 85 -
Other 1 2 -
---------------------------------------
3,603 2,459 2,168
---------------------------------------
Expenses:
Professional fees 78 34 108
Stationary and supplies 23 19 14
Taxes, miscellaneous 12 1 1
Other 15 1 3
---------------------------------------
Total expenses 128 55 126
---------------------------------------
Income taxes (credits) (42) 8 (20)
---------------------------------------
Income before equity in
undistributed income
of subsidiaries 3,517 2,396 2,062
Equity in undistributed income of subsidiaries 1,894 2,596 2,210
---------------------------------------
Net income $ 5,411 $ 4,992 $ 4,272
=======================================
</TABLE>
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19. Parent Corporation (Continued)
COMMUNITY BANKSHARES INCORPORATED
(Parent Corporation Only)
Statements of Changes in Stockholders' Equity
Years Ended December 31, 1999, 1998 and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Other
Unearned Comprehensive
Capital Retained ESOP Income
Stock Surplus Earnings Shares (Loss) Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $8,334 $ 5,657 $ 13,852 $ (239) $ (265) $ 27,339
-------------
Comprehensive income:
Net income for the year ended
December 31, 1997 - - 4,272 - - 4,272
Other comprehensive income, net of tax:
Unrealized holding gains on available-for-sale
securities arising during the period, net of
deferred income tax expense of $189 - - - - 366 366
-------------
Comprehensive income 4,638
-------------
Issuance of common stock pursuant to exercise
of stock options 31 44 - - - 75
Cash settlement of options - (271) - - - (271)
Common stock repurchased (27) (130) - - - (157)
Purchase of fractional shares - (2) - - - (2)
Cash dividends declared - - (859) - - (859)
Release of ESOP shares - 127 3 148 - 278
----------------------------------------------------------------------
Balance, December 31, 1997 8,338 5,425 17,268 (91) 101 31,041
-------------
Comprehensive income:
Net income for the year ended
December 31, 1998 - - 4,992 - - 4,992
Other comprehensive income, net of tax:
Unrealized holding gains on available-for-sale
securities arising during the period, net of
deferred income tax expense of $64 - - - - 106 106
Less reclassification adjustment for gains included
in net income, net of income tax expense of $56 - - - - (108) (108)
-------------
-------------
Comprehensive income 4,990
-------------
Issuance of common stock pursuant to exercise
of stock options 10 14 - - - 24
Cash settlement of options - (208) - - - (208)
Common stock repurchased (62) (441) - - - (503)
Cash dividends declared - - (1,444) - - (1,444)
Release of ESOP shares - 125 4 91 - 220
----------------------------------------------------------------------
Balance, December 31, 1998 8,286 4,915 20,820 - 99 34,120
-------------
Comprehensive income:
Net income for the year ended
December 31, 1999 - - 5,411 - - 5,411
Other comprehensive income, net of tax:
Unrealized holding losses on available-for-sale
securities arising during the period, net of
deferred income tax expense of $1,126 - - - - (2,186) (2,186)
Less reclassification adjustment for gains included
in net income, net of income tax expense of $34 - - - - (67) (67)
-------------
Comprehensive income 3,158
-------------
Issuance of common stock pursuant to exercise
of stock options 3 3 - - - 6
Common stock repurchased (149) (1,024) - - - (1,173)
Cash dividends declared - - (1,718) - - (1,718)
Leveraged ESOP stock purchase - - - (229) - (229)
----------------------------------------------------------------------
Balance, December 31, 1999 $8,140 $ 3,894 $ 24,513 $ (229) $ (2,154) $ 34,164
======================================================================
</TABLE>
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19. Parent Corporation (Continued)
COMMUNITY BANKSHARES INCORPORATED
(Parent Corporation Only)
Statements of Cash Flows
Years Ended December 31, 1999, 1998 and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
Operating Activities
<S> <C> <C> <C>
Net income $ 5,411 $ 4,992 $ 4,272
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of securities (2) (85) -
Release of ESOP shares - 129 129
Undistributed earnings of subsidiary (1,894) (2,596) (2,210)
Changes in operating assets and liabilities:
(Increase) decrease in other assets (295) 65 (46)
Increase (decrease) in other liabilities 1 - (67)
----------------------------------------
Net cash provided by operating activities 3,221 2,505 2,078
----------------------------------------
Investing Activities
Proceeds from sale of investment securities 5 154 -
Purchase of investment securities (78) (110) (69)
----------------------------------------
Net cash provided by (used in) investing activities (73) 44 (69)
----------------------------------------
Financing Activities
Cash settlement of options - (208) (271)
Payment of fractional shares - - (2)
Dividends paid (1,718) (1,444) (859)
Net proceeds from issuance of common stock 6 24 75
Common stock repurchased (1,173) (503) (157)
----------------------------------------
Net cash used in financing activities (2,885) (2,131) (1,214)
----------------------------------------
Increase in cash 263 418 795
Cash, beginning 1,749 1,331 536
----------------------------------------
Cash, ending $ 2,012 $ 1,749 $ 1,331
========================================
</TABLE>
53
<PAGE>
Item 9. Disagreements on Accounting and Financial Disclosure.
None
Item 10. 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 2000 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 2000 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 2000 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 2000 Annual Meeting and is incorporated herein
by reference.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1) None
(a) (2) None
(a) (3) Exhibits included herein:
21 - Subsidiaries of the Registrant
(b) Reports on Form 8-K: None
54
<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 Senior Vice President and
Chief Financial Officer
Date: March 30, 2000 Date: March 30, 2000
- ------------------------ ------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
COMMUNITY BANKSHARES INCORPORATED and in the capacities and on the date
indicated:
/s/ Sam T. Beale Date: March 30, 2000
- -------------------------------------- ------------------------
Sam T. Beale, Director
/s/ David E. Hudgins Date: March 30, 2000
- -------------------------------------- ------------------------
David E. Hudgins, Director
/s/ Richard C. Huffman Date: March 30, 2000
- -------------------------------------- ------------------------
Richard C. Huffman, Director
/s/ Nathan S. Jones, 3rd Date: March 30, 2000
- -------------------------------------- ------------------------
Nathan S. Jones, 3rd, Director
/s/ Vernon E. LaPrade, Jr. Date: March 30, 2000
- -------------------------------------- ------------------------
Vernon E. LaPrade, Jr., Director
/s/ Elinor B. Marshall Date: March 30, 2000
- -------------------------------------- ------------------------
Elinor B. Marshall, Director
/s/ Jack W. Miller Date: March 30, 2000
- -------------------------------------- ------------------------
Jack W. Miller, Jr., Director
/s/ H. E. Richeson Date: March 30, 2000
- -------------------------------------- ------------------------
H. E. Richeson, Director
/s/ Alvin L. Sheffield Date: March 30, 2000
- -------------------------------------- ------------------------
Alvin L. Sheffield, Director
/s/ Harold L. Vaughan Date: March 30, 2000
- -------------------------------------- ------------------------
Harold L. Vaughan, Director
Exhibit 21
Subsidiaries of the Registrant
The Community Bank
200 North Sycamore Street
P .O. Box 2166
Petersburg, Virginia 23804
Commerce Bank of Virginia
11500 West Broad Street
P. O. Box 29569
Richmond, Virginia 23242
County Bank of Chesterfield
10400 Hull Street Road
Midlothian, Virginia 23112
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
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0
0
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</TABLE>
