<PAGE>
FORM 10-K. ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1995.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______
Commission file number 0-14620
------------------------------
COMMUNITY BANKSHARES, INC.
--------------------------
(Exact name of registrant as specified in its charter)
New Hampshire 02-0394439
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
43 North Main Street, Concord, New Hampshire 03301
-------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (603) 224-1100
--------------
Securities registered pursuant to Section 12(b) of the Act:
None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
-----------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if 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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of August 31, 1995: $26,610,285 (excludes shares held by all
directors and officers and by certain relatives of all such individuals).
Number of shares of Common Stock outstanding as of August 31, 1995: 1,735,295
Documents incorporated by reference: None
1
<PAGE>
PART III
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Highlights
The market area in which Community operates has experienced slow economic
growth during the fiscal year ended June 30, 1995 compared to the rapid growth
experienced prior to the recessionary period of the late 1980s and early 1990s.
General economic trends in Community's market area during the past few years
have been positive. The Merrimack County area has experienced growth in
population and jobs and declining unemployment since the end of an opposite,
recessionary trend in the early 1990s. In September 1995, unemployment in
Merrimack County, Community's principal market, was 3.1%, which represented a
slight increase from 3.0% unemployment in September 1994. However, both the size
of the workforce and total employment increased by approximately 3% from
September 1994 to September 1995. The September 1995 unemployment level compares
with New Hampshire unemployment of 3.9% and United States unemployment of 5.4%
for the same month.
The Company earned net income of $3,287,000, or $1.84 per share, for the
fiscal year ended June 30, 1995. Earnings for the years ended June 30, 1994, and
1993 were $3,090,000, or $1.73 per share, and $2,221,000, or $1.28 per share,
respectively.
Pretax earnings improved by 22.5% during fiscal 1995 over fiscal 1994
primarily from an increase in net interest income of $1,515,000. Pretax earnings
increased by 77.8% during fiscal 1994 over fiscal 1993 primarily due to
reductions in loan loss provision and expenses related to non-performing assets.
The Company achieved a 23.0% growth in total assets during fiscal 1995 with
total assets amounting to $425,714,000 at June 30, 1995 as compared to
$346,136,000 at June 30, 1994. Loans, primarily in indirect auto lending through
dealers, provided the majority of the asset growth for fiscal 1995.
At June 30, 1995, the Company's equity to asset ratio was 6.91%, its tier 1
leverage ratio was 7.07% and its total risk-based capital ratio was 11 .31%, all
of which exceeded published regulatory minimums. The capital ratios for June 30,
1994 were 7.69%, 7.94% and 13.39%, respectively. For further information on the
Company's and the Bank's capital ratios, see "Liquidity and Capital Resources"
in "Management's Discussion and Analysis."
On August 30, 1995, the Company announced the signing of a definitive
merger agreement to acquire Centerpoint Bank. For further information, see Note
17 of Notes to Consolidated Financial Statements.
Rate Volume Analysis
The following table presents changes in interest and dividend income,
interest expense and net interest and dividend income which are attributable to
changes in the average amounts of interest-earning assets and interest-bearing
liabilities outstanding and/or to changes in rates earned or paid thereon. The
net changes attributable to both volume and rate have been allocated
proportionately:
<TABLE>
<CAPTION>
Years Ended June 30 (In Thousands) 1995 vs. 1994 1994 vs. 1993
- -------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Due To Due To
Volume Rate Total Volume Rate Total
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest and dividend income:
Mortgage loans $ (27) $1,051 $1,024 $ 153 $ (500) $ (347)
Other loans 2,373 (135) 2,238 232 (1,231) (999)
Investments 1,212 549 1,761 740 (812) (72)
------ ------ ------ ------ ------- -------
Total interest and dividend income 3,558 1,465 5,023 1,125 (2,543) (1,418)
------ ------ ------ ------ ------- -------
Interest expense:
Deposits 376 817 1,193 271 (1,499) (1,228)
Borrowed funds 2,216 99 2,315 58 (68) (10)
------ ------ ------ ------ ------- -------
Total interest expense 2,592 916 3,508 329 (1,567) (1,238)
------ ------ ------ ------ ------- -------
Net interest and dividend income $ 966 $ 549 $1,515 $ 796 $ (976) $ (180)
====== ====== ====== ====== ======= =======
</TABLE>
2
<PAGE>
Average Balance Sheets and Net Interest and Dividend Income
The following table sets forth certain information relating to the Company's
average balance sheets, including interest-earning assets, interest-bearing
liabilities and net interest income on a fully tax-equivalent basis for the
periods indicated:
<TABLE>
<CAPTION>
Years Ended June 30,
(Dollars in Thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Mortgage loans $136,100 $11,666 8.57% $136,442 $10,642 7.80% $134,552 $10,989 8.17%
Other loans 118,231 9,933 8.40 90,011 7,695 8.55 87,620 8,694 9.92
-------- ------- ---- -------- ------- ---- -------- -------
Total loans(1) 254,331 21,599 8.49 226,453 18,337 8.10 222,172 19,683 8.86
Investment and
mortgage-backed securities(2) 104,732 6,603 6.30 79,406 4,768 6.00 71,933 4,895 6.80
Interest-bearing deposits in other banks 1,395 66 4.73 5,246 134 2.55 2,212 58 2.62
-------- ------- -------- ------- -------- -------
Total interest-earning assets 360,458 28,268 7.84 311,105 23,239 7.47 296,317 24,636 8.31
------- ------- -------
Non interest-earning assets 20,211 21,444 20,448
Allowance for possible loan losses (3,148) (3,642) (4,034)
-------- -------- --------
Total assets $377,521 $328,907 $312,731
======== ======== ========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposits:
Savings $124,606 $3,441 2.76% $130,432 $3,588 2.75% $119,843 $ 3,822 3.19%
Time certificates 162,066 8,047 4.97 146,364 6,707 4.58 150,461 7,701 5.12
-------- ------- -------- ------- -------- -------
Total deposits 286,672 11,488 4.01 276,796 10,295 3.72 270,304 11,523 4.26
Borrowed funds 47,009 2,756 5.86 8,955 441 4.92 7,865 451 5.73
-------- ------- -------- ------- -------- -------
Total interest-bearing liabilities 333,681 14,244 4.27 285,751 10,736 3.76 278,169 11,974 4.30
------- ------- -------
Non interest-bearing demand deposits 13,581 10,112 6,705
Other liabilities 2,648 6,594 5,027
-------- -------- --------
Total liabilities 349,910 302,457 289,901
Stockholders' equity 27,611 26,450 22,830
Total liabilities and
stockholders' equity $377,521 $328,907 $312,731
======== ======== ========
Net interest income/interest rate spread(3) $14,024 3.57% $12,503 3.71% $12,662 4.01%
======= ======= =======
Net interest margin(4) 3.89% 4.02% 4.27%
</TABLE>
(1) Includes nonaccrual loans.
(2) Investment and mortgage-backed securities are shown at average amortized
cost.
(3) Interest rate spread is the average yield earned on total earning assets
less the average cost paid for interest-bearing liabilities.
(4) The net interest margin during the period equals net interest income divided
by average interest-earning assets for the period.
3
<PAGE>
Net Interest and Dividend Income
Net interest and dividend income, which is the difference between income from
earning assets and what is paid for interest-bearing liabilities, is the primary
source of income for the Company. Net interest income increased to $13,997,000
in fiscal 1995 from $12,482,000 in fiscal 1994 mostly due to the Company's
growth in earning assets during fiscal 1995. Net interest income for fiscal 1993
was $12,662,000. The decline in net interest income from fiscal 1993 to 1994 was
primarily due to reduced market interest rates on earning assets. The Company's
net interest margin for fiscal 1995, 1994 and 1993 was 3.89%, 4.02% and 4.27%,
respectively, on a fully tax-equivalent basis.
Yields Earned and Rates Paid
Interest rate spread represents the difference between the weighted average
yield earned on loans and investments and the weighted average rate paid on
interest-bearing deposits and borrowed funds.
The fully tax-equivalent yield on earning assets was 7.84% in fiscal 1995
compared to 7.47% in fiscal 1994 and 8.31% in fiscal 1993. The cost of average
interest-bearing liabilities in fiscal 1995, 1994 and 1993 was 4.27%, 3.76% and
4.30%, respectively. The changes in these yields and costs reflect the trends in
market interest rates over the past three years as well as the shift in the
composition of deposits from higher rate time certificates to lower costing
savings accounts which occurred during fiscal years 1993 and 1994. This shift
subsequently reversed during fiscal year 1995.
Average Balances
During fiscal 1995, the Company increased its average earning assets by
$49,353,000, or 15.9%, over fiscal 1994. Earning asset growth was mostly in
indirect auto loans through dealers. In order to fund this growth in average
earning assets the Company utilized an increase in average borrowed funds of
$38,054,000 and growth in average interest-bearing deposits of $9,876,000 over
fiscal 1994. The Company also experienced growth of $3,469,000, or 34.3%, in
average non-interest bearing demand deposits for fiscal 1995 over 1994.
During fiscal 1994, average earnings assets increased by $14,788,000 over
fiscal 1993 primarily in investment securities which were funded by increases of
$9,899,000 and $1,090,000, respectively, in average deposits and borrowed funds.
Provision for Possible Loan Losses
The provision for possible loan losses is based on management's assessment of
the adequacy of the allowance for possible loan losses after considering known
and inherent risks in the loan portfolio, existing and expected economic
conditions, the level of non-performing loans, charge-offs, past loan loss
experience and loan growth.
During fiscal 1995, $475,000 was provided for possible loan losses versus
$625,000 in 1994 and $2,150,000 in 1993. During the fourth quarter of fiscal
1995, $150,000 was provided into the allowance for possible loan losses as
compared to $100,000, $100,000 and $125,000, respectively, during the first
three quarters of the fiscal year. The allowance for possible loan losses as a
percent of non-performing loans was 171.7% at June 30, 1995 as compared to
370.7% at June 30, 1994 and 116.6% at June 30, 1993. At June 30, 1995, the
allowance for possible loan losses stood at $2,970,000, or 1.1% of total loans.
At June 30, 1994 and 1993 the allowance for possible loan losses stood at
$3,351,000 and $3,822,000, respectively, and equaled 1.5% and 1.8% of total
loans. Improved asset quality and lower net charge-offs have enabled the Company
to reduce its loan loss provisions. Net charge-offs for fiscal years 1995, 1994
and 1993 were $856,000, $1,096,000 and $2,286,000, respectively.
A summary of net charge-offs (recoveries) in fiscal years 1995, 1994 and
1993 is as follows:
<TABLE>
<CAPTION>
(In Thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loan Type:
Construction $ (11) $ (153) $ 179
Commercial real estate (108) 44 1,304
Commercial (27) (57) 32
Residential mortgage 262 530 103
Home equity 106 77 54
Mobile home 528 516 473
Indirect and other consumer 106 139 141
----- ------ ------
$ 856 $1,096 $2,286
===== ====== ======
</TABLE>
4
<PAGE>
While management believes that additions to, and the year-end balance of, the
allowance for possible loan losses are adequate, further provisions to the
allowance for possible loan losses may be necessary if the market in which the
Company operates deteriorates.
Asset Quality
The Company's non-performing assets (which consist of non-performing loans and
assets acquired to satisfy debt, including loan collateral substantively
repossessed) amounted to $3,232,000 at the end of fiscal 1995 versus $1,982,000
at June 30, 1994 and $6,105,000 at June 30, 1993.
At June 30, 1995, non-performing loans totaled $1,730,000. Non-performing
loans amounted to $904,000 and $3,279,000, respectively, at June 30, 1994 and
1993.
Non-Performing Asset Analysis
Non-performing assets consist of nonaccrual loans, real estate acquired through
foreclosure or substantively repossessed and other assets acquired to satisfy
debt.
The Company's non-performing assets increased in fiscal 1995 by $1,250,000
from the end of fiscal 1994. At June 30, 1995, non-performing assets totaled
$3,232,000, or 0.8% of total assets, compared to $1,982,000, or 0.6% of total
assets, at June 30, 1994 and $6,105,000 or 1.9% of total assets, at June 30,
1993.
The increase in non-performing assets from June 30, 1994 to June 30, 1995
was the result of $5,290,000 in additions which were partially offset by
$2,742,000 in deletions from amortization, payoffs or sales of non-performing
assets and $1,298,000 in charge-offs.
Of the net increase of $1,250,000 in non-performing assets, $1,231,000 was
related to two commercial loans, which were originated prior to 1990 and which
were previously performing, being placed onto non-accruing status by the Bank
during the third quarter of fiscal 1995.
Non-Performing Loan Summary
<TABLE>
<CAPTION>
(Dollars in Thousands) At June 30, 1995
- -------------------------------------------------------------------------------------------------------------------------------
Share of Share of Percent of
Total Loans Total Loans Non-performing Non-performing Non-performing/
Loan Type Outstanding Outstanding Loans Loans Total Loans in Type
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Residential mortgage loans $67,501 24.8% $263 15.2% 0.4%
Commercial loans:
Construction 473 0.2 -- -- --
Real estate 53,504 19.7 1,268 73.3 2.4
Other 12,414 4.6 40 2.3 0.3
Home equity 17,070 6.3 23 1.3 0.1
Mobile home loans 11,976 4.4 37 2.1 0.3
Indirect consumer loans 101,744 37.5 89 5.2 0.1
Other consumer loans 6,779 2.5 10 0.6 0.1
-------- ------ ------ ------
Total $271,461 100.0% $1,730 100.0% 0.6
======== ====== ====== ======
</TABLE>
Management is not aware of any potential problem loans, which have not
already been identified and disclosed above, which would have a material effect
on the Company. For further information on non-performing loans, see Note 3 of
Notes to Consolidated Financial Statements.
Assets Acquired to Satisfy Debt and Loans Substantively Repossessed
Assets acquired to satisfy debt and loans substantively repossessed totaled
$1,502,000 at June 30, 1995 compared to $1,078,000 at June 30, 1994. Of the
total at June 30, 1995, $261,000 was in commercial real estate, $873,000 in
primary residential properties, $277,000 in mobile homes and $91,000 in
repossessed vehicles. For further information, see Note 6 of Notes to
Consolidated Financial Statements.
5
<PAGE>
Risk Characteristics of the Loan Portfolio
The majority of the asset growth was in the loan portfolio. Total loans
increased by $49,352,000, or 22.2%, from $222,109,000 at June 30, 1994 to
$271,461,000 at June 30, 1995. With the consolidation that has been taking place
over the past few years in the New Hampshire banking industry, the Company has
taken advantage of market opportunities to expand and develop new lending
relationships.
The Bank, through its subsidiary Bancredit, has serviced a large number of
auto and recreational vehicle dealers throughout New Hampshire for more than ten
years and understands the challenges and risks associated with this business.
With the addition of experienced, high level personnel the Bank has
substantially increased its number of active dealer relationships during fiscal
1995 resulting in significant loan growth in indirect loans. At June 30,1995,
the balance of indirect automobile and recreational vehicle loans through
dealers was $101,744,000, or 37.5% of total loans as compared to $66,699,000, or
30.0% of total loans at June 30, 1994.
In order to continue serving the market for indirect automobile loans in
New Hampshire, generate fee income from servicing these types of loans and
manage the Company's balance sheet, the Bank has developed the ability to sell
automobile loans while retaining the right to service these loans. During fiscal
1995, the Bank sold three separate pools of automobile loans, to two different
buyers, totaling $11,591,000. As part of the sales agreement relating to the
sale of $9,777,000 of these loans, the Bank is obligated to assume a certain
portion of credit losses should they occur and has accrued $51,000 to absorb
such possible losses. The remainder of these loans were sold without credit
enhancement. In addition, an agreement was reached to sell up to an additional
$48,000,000 of new loan production with credit enhancement on a best efforts
basis.
The Company also used similar market opportunities in the commercial
lending area to grow commercial loans by $18,333,000 during fiscal 1995. Of the
Bank's commercial loan portfolio, which represents 24.5% of total loans,
$8,178,000, or 12.3% of commercial loans, are loans enrolled with Small Business
Administration (SBA) programs. For further information on loans, see Note 7 of
Notes to Consolidated Financial Statements.
Commercial and consumer (indirect auto and recreational vehicle) lending
may entail additional risks compared to residential mortgage lending. Commercial
loans may involve large loan balances to single or groups of related borrowers.
In addition, the payment experience on loans secured by income producing
properties is typically dependent on the successful operation of the properties
and thus may be subject to a greater extent to adverse conditions in the local
real estate market or in the economy in general. Money lent for consumer loans
may be expensive and time consuming to recover in the event of default.
The Bank continues to use the same loan underwriting criteria and loan
review process that has reduced non-performing assets to the lower levels that
have been maintained over the past few years. This, in addition to an
experienced collections department, has kept loan delinquencies and loan charge-
offs at low levels, particularly in the consumer loan portfolio. Based on
management's analysis, the Bank's indirect auto lending delinquency levels have
been consistently below industry standards over the past few years.
Investment Securities
At June 30, 1995, the Company's securities classified as available for sale
amounted to $58,754,000, or 52.4% of total investment securities with the
remaining securities of $53,408,000, or 47.6%, classified as held to maturity.
At June 30, 1994, securities available for sale and held to maturity amounted to
$64,795,000 and $33,860,000, respectively, which represented 65.7% and 34.3%,
respectively, of total investment securities. The Bank, as a member, owned
Federal Home Loan Bank stock of $3,803,000 at June 30, 1995 compared to
$1,860,000 at June 30, 1994.
Unrealized net gains on securities available for sale, net of applicable
taxes, amounted to $328,000 at June 30, 1995 compared to unrealized net losses
of $262,000 at June 30, 1994.
Also, during the last quarter of fiscal 1995, the Bank securitized
$5,551,000 of residential mortgage loans with Fannie Mae and transferred them
from loans to securities available for sale on the balance sheet.
6
<PAGE>
Deposits
Deposits provided funding for 76.6% of total earning assets at June 30, 1995
compared to 89.4% at June 30, 1994 and 94.5% at June 30, 1993. Average deposits
amounted to $300,253,000, $286,908,000 and $277,009,000 for the years ended June
30, 1995, 1994 and 1993, respectively.
The average cost of interest-bearing deposits increased to 4.01% during
fiscal 1995 as compared to 3.72% in 1994 and 4.26% in 1993. The decline during
fiscal 1993 and 1994 and subsequent increase in 1995 in the cost of deposits was
primarily the result of trends in open market interest rates. By choice, the
Company currently accepts no brokered deposits. For further information, see
Note 7 of Notes to Consolidated Financial Statements.
Borrowed Funds
The Company, in order to fund its earning asset growth, increased borrowed funds
by $59,261,000 during fiscal 1995 and by $18,697,000 during fiscal 1994. For
further information, see Notes 8 and 9 of Notes to Consolidated Financial
Statements.
Non-Interest Income
Total non-interest income amounted to $2,036,000 for fiscal 1995 compared to
$2,558,000 in fiscal 1994 and $2,879,000 in fiscal 1993.
Exclusive of loan and security gains, non-interest income has steadily
increased from $985,000 in fiscal 1993 to $1,058,000 in fiscal 1994 to
$1,387,000 in fiscal 1995. This represents a 40.8% increase in 1995 versus the
level earned in fiscal 1993. The increases have resulted primarily from steady
growth in deposit fee and loan servicing income. Growth in service chargeable
deposit accounts and increases in selected service fees, implemented during
fiscal 1994, are the reasons for the increases in deposit fee income. Continued
growth in mortgage loans serviced for others over the past three years has
resulted in a corresponding increase in fee income.
The Company's recent purchase, during the last quarter of fiscal 1995, of
approximately $180,000,000 of residential mortgage servicing rights is expected
to provide further momentum to continued improvement in the Company's loan
servicing income. Revenues from these rights will be earned commencing in August
of 1995, the first quarter of fiscal 1996. It is expected that the Company will
be able to service these additional loans utilizing existing capacity without
significantly adding to staffing or equipment.
Loan sale gains decreased to $501,000 in fiscal 1995 compared to the higher
levels of $1,089,000 and $927,000 earned during fiscal 1994 and 1993,
respectively, due to reduced residential mortgage origination volume caused by
the decline in demand for refinancings as market rates have risen. Offsetting a
portion of this decline experienced in fiscal 1995 was the adoption of SFAS No.
122 "Accounting for Mortgage Servicing Rights, an Amendment of FASB Statement
No. 65." This was effective July 1, 1994 and resulted in an increase of $170,000
in gains on the sale of loans for fiscal 1995.
Also, the Company's opportunities to realize security gains has diminished
over the past two years as market rates rose. Gains on the sale of securities
has declined from $967,000 in fiscal 1993 to $411,000 in fiscal 1994 to
$148,000 in fiscal 1995.
Non-Interest Expense
Total non-interest expense increased by 2.4% to $10,720,000 in fiscal 1995 from
$10,467,000 experienced during fiscal 1994 primarily due to major investments
made by the Company to expand its business lines and product distribution
system. Total non-interest expense for fiscal 1994 represented a decrease of
6.3% from $11,170,000 in fiscal 1993. This reduction was primarily the result of
lower expenses related to non-performing assets.
During the fiscal year ended June 30, 1995, the Company experienced
increases in salaries and benefits and occupancy and equipment expenses
primarily due to expanding major business lines and product distribution system.
During fiscal 1995, the Bank opened a new full-service branch office at the
Steeplegate Mall located in Concord, New Hampshire, opened a remote automated
teller machine in Tilton, New Hampshire, expanded its indirect auto dealer
financing programs and established a municipal services department. Also
impacting salaries and benefits during fiscal 1995 were additional benefits
expense related to pension and the establishment and funding of a 401K benefit
plan.
Offsetting a portion of the increased non-interest expense was a reduction
in other non-interest expense during fiscal 1995 which was primarily due to
reduced legal and other expenses related to the resolution of problem loans.
7
<PAGE>
Income Taxes
There was no income tax expense in 1993 as a result of the decrease in the
deferred income tax asset valuation reserve established on July 1, 1992. In
1994, and to a lesser extent in 1995, income tax expense was partially offset by
further decreases in the valuation reserve. At June 30, 1995, the Company had a
net deferred tax asset of approximately $172,000, which includes a valuation
reserve of approximately $136,000 which primarily relates to certain state tax
temporary differences. The realization of the net deferred tax asset may be
based on utilization of carrybacks to prior taxable periods, anticipation of
future taxable income, and the utilization of tax planning strategies.
Management has determined that it is more likely than not that the net deferred
tax asset can be realized by carrybacks to federal taxable income in the three-
year carryback period and by expected future taxable income. For further
information on income taxes, see Note 11 of Notes to Consolidated Financial
Statements.
Liquidity and Capital Resources
Liquidity is a measure of the Company's ability to meet its cash needs at a
reasonable cost. Cash needs arise primarily as a result of funding lending
opportunities, the maturity of liabilities such as borrowings and the withdrawal
of deposits. Asset liquidity is achieved through the management of earning asset
maturities, loan amortization, deposit growth and access to borrowed funds.
Management believes that funding sources are adequate to meet commitments and
ongoing obligations.
The Holding Company's funding requirements are limited and are adequately
satisfied by dividends from the Bank and by its interest-bearing cash deposit
with the Bank. Dividends paid from the Bank to the Holding Company are limited
to the extent necessary for the Bank to comply with regulatory capital
guidelines.
The Bank is a member of the Federal Home Loan Bank of Boston which makes
substantial borrowings available to its members. Borrowed funds at June 30,
1995 totaled $82,768,000 compared to $23,507,000 at the end of fiscal 1994. At
June 30, 1995, the Bank had approximately $63,000,000 available in unused
borrowing capacity remaining at the Federal Home Loan Bank of Boston to meet
future large deposit fluctuations or increased loan demands should either occur.
Total cash and cash equivalents at June 30, 1995 were $19,097,000 versus
$8,012,000 at the end of fiscal 1994. This increase was in the interest-bearing
deposits in other banks which resulted primarily from the sale of approximately
$10,000,000 in automobile loans on June 30, 1995.
The investment portfolio at June 30, 1995 totaled $115,965,000 of which
$58,754,000 was designated as "available for sale" to enhance the liquidity
position, and $53,408,000 was designated as "held to maturity." The Company has
not historically had, and does not anticipate having, a need to use the
remainder of the investment portfolio for liquidity purposes given its unused
borrowing capacity and other liquidity resources.
At June 30, 1995, the Company had equity capital of $29,398,000, resulting
in an equity-to-assets ratio of 6.91%.
The Company is regulated by the Federal Reserve Board which requires the
Company to maintain a minimum risk-based capital ratio. At June 30, 1995 the
minimum risk-based capital ratio required was 8.00%. The Company's risk-based
capital ratio at June 30, 1995 was 11.31% compared to 13.39% at June 30, 1994.
To complement the risk-based guidelines, the Federal Reserve Board requires
a leverage ratio of 3% to 4% which represents the minimum capital to total asset
standard for bank holding companies. Federal banking agencies, including the
FDIC, require similar leverage ratios for banks. These leverage ratios are
expected to be used in tandem with the risk-based capital ratio. The Company's
leverage ratio was 7.07% at June 30, 1995.
The following table summarizes the Company's required and actual regulatory
capital ratios and amounts at June 30, 1995:
<TABLE>
<CAPTION>
Required Actual
Regulatory Regulatory
(Dollars in Thousands) Capital Capital
- ----------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio
--------------- --------- ------- -----
<S> <C> <C> <C> <C>
Leverage $12,268-$16,358 3.00-4.00% $28,827 7.07%
Risk-based:
Tier 1 11,244 4.00 28,827 10.25
Total risk-based 22,489 8.00 31,797 11.31
</TABLE>
8
<PAGE>
The following table summarizes the Bank's required and actual regulatory capital
ratios and amounts at June 30, 1995:
<TABLE>
<CAPTION>
Required Actual
Regulatory Regulatory
(Dollars in Thousands) Capital Capital
- --------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio
------ --------- ------- -----
<S> <C> <C> <C> <C>
Leverage $12,268-$16,358 3.00-4.00% $27,149 6.64%
Risk-based:
Tier 1 11,240 4.00 27,149 9.66
Total risk-based 22,480 8.00 30,119 10.72
</TABLE>
Management believes that the proposed acquisition of Centerpoint Bank will
not have a material impact on the Company's liquidity or capital resources.
Recent Accounting Developments
On July 1, 1995, the Company adopted SFAS No. 114 "Accounting by Creditors
for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosure." These statements
generally require all creditors to account for impaired loans, except those
loans accounted for at fair value or at the lower of cost or fair value, at the
present value of the expected future cash flows discounted at the loan's
effective interest rate or, alternatively, at the fair value of the loan's
collateral. In addition, criteria for classification of a loan as in-substance
foreclosure has been modified so that such classification need be made only when
the lender is in possession of the collateral. These statements also require
impairment of troubled debt restructuring to be measured using the pre-
modification rate of interest. Adoption of these statements had no material
impact on the Company's financial position or results of operations.
9
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of October 30, 1995
regarding (i) each person known by the Company to own beneficially more than
5% of the Company's Common Stock; (ii) each director and each nominee for
director individually; and (iii) all directors and executive officers of the
Company as a group. Except as otherwise noted in the footnotes to the table,
the beneficial owners have sole voting and investment power as to all shares
beneficially owned by them. All of the individuals named below (except Ingalls
& Snyder) are directors of the Company. Messrs. Holden and Resnicoff and Ms.
Kittredge and Ms. Tsouros are nominees.
<TABLE>
<CAPTION>
Amount and
Nature of Percentage
Name Beneficial Ownership(1) of Class
---- ----------------------- ----------
<S> <C> <C>
Ingalls & Snyder
61 Broadway
New York, NY 10006........................ 155,200(2) 8.9%
John N. Buxton.............................. 680(3) *
Douglas Crichfield.......................... 66,163(4) 3.8
Robert A. Hill.............................. 752(5) *
Eleanor H. Stark............................ 847(6) *
Russell A. Holden........................... 2,270(3) *
Lucia Kittredge............................. 4,752(6) *
Seth A. Resnicoff........................... 11,482(3) *
Katherine P. Tsouros........................ 2,594(6) *
William S. Fenollosa........................ 1,769(6) *
Oliver R. Fifield........................... 3,354(6) *
Thomas M. Hardiman.......................... 11,500 *
James R. Stewart............................ 4,286(3) *
Directors and executive officers as a group
(15 persons).............................. 145,075(7) 8.4
</TABLE>
- ----------------
*Less than one percent
(1) Includes shares owned beneficially by spouses, minor children and relatives
living in the named person's homes and trusts for their benefit; the named
persons disclaim any beneficial interest in shares so included.
(2) Ingalls & Snyder reports that it has sole voting power with respect to
40,000 shares and sole dispositive power as to 155,200 shares.
(3) Includes 270 shares obtainable upon exercise of stock options.
(4) Includes 38,819 shares obtainable upon exercise of stock options and 2,617
shares held in the Bank's Employee Stock Ownership Plan.
(5) Includes 73 shares obtainable upon exercise of stock options.
(6) Includes 145 shares obtainable upon exercise of stock options.
(7) Includes 47,577 shares obtainable upon exercise of stock options and 6,982
shares allocable to executive officers under the Bank's Employee Stock
Ownership Plan.
Item 13. Certain Relationships and Related Transactions
In the ordinary course of business, the Bank makes loans to its and the
Company's directors and officers and parties related to them. Such transactions
are on substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with other persons, and
do not involve more than normal risk of collectibility or present other
unfavorable features. For further information on loans to directors and
officers, see Note 3 of Notes to Consolidated Financial Statements.
10
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Amendment to Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized.
COMMUNITY BANKSHARES, INC.
By /s/ Gerald R. Emery
-------------------------------------
Gerald R. Emery
Dated: December 8, 1995 Treasurer and Chief Financial Officer
11
