<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
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR
or
[X] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM JULY 1,1995 TO DECEMBER
31,1995.
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
incorporation or organization) Identification No.)
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. YES [X] NO [ ]
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 20, 1996: $38,452,188 (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 March 20, 1996: 2,405,502
Documents incorporated by reference: None
1
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
(a) General development of business
Community Bankshares, Inc. (Community) is a bank holding company organized in
1985 under New Hampshire statutes to acquire Concord Savings Bank ("Concord")
upon Concord's conversion from a mutual savings bank to a guaranty stock savings
bank (the "Conversion"). The Conversion was effected on May 8, 1986. Community
is regulated by the Federal Reserve Board, and Concord by the New Hampshire
Commissioner of Banks and by the FDIC. Concord is also a member of the Federal
Home Loan Bank of Boston ("FHLB").
Effective March 20, 1996, subsequent to the periods covered in this report,
Community acquired Centerpoint Bank (Centerpoint) in a merger accounted for as a
pooling of interests and pursuant to which Community exchanged 1.073 shares of
its common shares (657,587 in total) for Centerpoint's 612,849 outstanding
common shares. For further information see Note 17 of Notes to the Consolidated
Financial Statements.
(b) Financial information about industry segments.
Community operates in only one industry segment and only within the United
States. During 1995, Community's sole operations were those of Concord and its
subsidiaries.
(c) Description of business.
The following description of the business of Community relates to the
consolidated operations of Concord and its subsidiaries unless the context
otherwise requires.
General
During September 1995, Community's Board of Directors voted to change
Community's fiscal year end from June 30 to December 31 effective December 31,
1995. As a result of this change in fiscal year, this report on Form 10-K covers
the transition period ended December 31, 1995. As a result of the closing of
the Centerpoint transaction, Community has expanded its marketshare into
Hillsborough County in Southern New Hampshire.
The principal business of Community consists of originating residential
mortgage loans on property located primarily in New Hampshire, commercial loans
and consumer loans, and attracting deposits to fund these assets. Community also
maintains a portion of its assets in investment securities, which are primarily
comprised of U.S. Government, federal agency, mortgage-backed securities and
other bonds and obligations. As of December 31, 1995, Community had total assets
of $409,498,000 with a loan portfolio of $266,695,000, representing 65.1% of
total assets.
Community's operations are conducted through four offices in Concord, New
Hampshire and offices located in Weare and Tilton, New Hampshire. Community's
principal market area encompasses Merrimack County in central New Hampshire.
Residential mortgage loans are originated in much of the state and indirect
automobile and recreational vehicle loans are originated through dealers located
throughout the state.
Funds for Community's lending and investment activities are provided
primarily from deposits, amortization and repayment of outstanding loans and
mortgage-backed securities, sales of mortgage loans into the secondary market
and from borrowings, principally from the FHLB.
Community is primarily a provider of deposit and loan products to
individuals, households and small businesses located within its market area.
At December 31, 1995, approximately 74% of Community's loans were to
individuals and 26% to businesses.
2
<PAGE>
Loan Portfolio
At December 31, 1995, Community's net loan portfolio amounted to $266,695,000
(before allowance for possible loan losses), representing 65.1% of consolidated
assets. The following table shows the composition of Community's portfolio by
type of loan.
<TABLE>
<CAPTION>
At June 30,
At December 31, ----------------------------------------------------------------------------------------
1995 1995 1994 1993 1992 1991
--------------- --------------- --------------- --------------- --------------- ----------------
Amount % Amount % Amount % Amount % Amount % Amount %
-------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential:
Conventional ....... $ 71,236 26.8 $ 67,048 24.8 $ 65,566 29.5 $ 73,773 33.7 $ 61,772 29.7 $ 83,987 37.3
FHA and VA.......... 535 0.2 595 0.2 814 0.4 857 0.4 837 0.4 1,080
Home equity......... 14,878 5.6 17,053 6.3 18,969 8.5 21,426 9.7 22,187 10.6 18,989 8.4
Construction......... 2,821 1.1 489 0.2 - - 1,312 0.6 1,227 0.6 5,553 2.5
Commercial........... 54,308 20.4 53,716 19.8 40,078 18.0 35,288 16.1 35,651 17.1 33,247 14.7
-------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total mortgage loans.. 143,778 54.1 138,901 51.3 125,427 56.4 132,656 60.5 121,674 58.4 142,856 63.4
-------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Other loans:
Installment:
Indirect
automobile and
recreational
vehicle........... 90,449 34.0 100,666 37.2 66,528 30.0 60,707 27.7 62,320 29.9 56,815 25.2
Mobile home........ 11,235 4.2 11,976 4.4 13,702 6.2 15,036 6.9 15,884 7.6 16,878 7.5
Other.............. 3,631 1.4 3,168 1.2 2,574 1.2 1,968 0.9 1,766 0.9 2,179 1.0
Other consumer...... 3,594 1.4 3,611 1.3 5,778 2.6 5,739 2.6 3,415 1.6 2,370 1.0
Commercial.......... 13,126 4.9 12,409 4.6 8,060 3.6 2,989 1.4 3,406 1.6 4,208 1.9
-------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total other loans.... 122,035 45.9 131,830 48.7 96,642 43.6 86,439 39.5 86,791 41.6 82,450 36.6
-------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- -----
265,813 100.0 270,731 100.0 222,069 100.0 219,095 100.0 208,465 100.0 225,306 100.0
===== ===== ===== ===== ===== =====
Deferred loan
origination
(fees) costs........ 882 730 40 (135) (143) (379)
-------- -------- -------- -------- -------- --------
$266,695 $271,461 $222,109 $218,960 $208,322 $224,927
======== ======== ======== ======== ======== ========
</TABLE>
For additional information on loans, see Note 3 of Notes to the Consolidated
Financial Statements.
Mortgage Loans. Community's principal lending activities have historically
consisted of the origination of long-term loans collateralized by first or
second mortgage liens on residential and commercial real estate. Community's
mortgage loans are generally collateralized by real estate located in New
Hampshire, although it is authorized to make loans on real estate located
outside of the state.
At December 31, 1995, approximately 60% of Community's long-term mortgage
loans were collateralized by one-to-four family residential properties. The
remaining 40% were collateralized by commercial and industrial properties and
multi-family dwellings. At December 31, 1995, long-term fixed-rate mortgage
loans totaled $8,613,000, or 2% of total assets. Shorter-term fixed, balloon and
variable-rate mortgage loans at December 31, 1995 totaled $135,165,000, or 33%
of total assets.
Community originates fixed-rate residential mortgages primarily for sale to
investors in the secondary mortgage market. Variable-rate mortgages may be sold
to investors or retained in Community's loan portfolio. Community continues to
service a large portion of the loans that it sells into the secondary market in
order to maintain customer relationships and generate non-interest income
through mortgage servicing fees. At December 31, 1995, residential mortgage
loans serviced for others amounted to $345,328,000.
Concord is a certified Small Business Administration ("SBA") lender. At
December 31, 1995, SBA loans outstanding totaled $7,280,000, of which the
majority were secured by commercial real estate.
Occasionally, Community participates with other lenders in commercial loans
collateralized by real estate. At December 31, 1995, Community held $12,490,000
in such loan participations.
3
<PAGE>
Other Loans. Community has been an active originator of consumer loans for
many years. The majority of Community's consumer loans are fixed-rate loans
collateralized by automobiles and are written as installment sales contracts for
terms ranging from three to five years. Although it is not actively originating
mobile home loans at this time, Community has in the past written variable-rate
mobile home loans. At December 31, 1995, the balance outstanding in variable-
rate mobile home loans was $11,235,000. Other consumer loans are collateralized
by recreational vehicles, boats, passbooks or bank certificates of deposit or
are unsecured.
Community originates indirect automobile and recreational vehicle loans
through dealers throughout the state of New Hampshire. Indirect loans at
December 31, 1995 amounted to $90,449,000. 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 Community's balance sheet, Community
periodically sells automobile loans while retaining the right to service these
loans. At December 31, 1995, Community serviced $25,942,000 of indirect
automobile loans for others. At December 31, 1995, Community had an agreement to
sell up to an additional $24,000,000 of newly originated automobile loans on a
best efforts basis.
Community offers home equity lines of credit, a revolving credit line secured
by a first or second mortgage lien on residential real estate generally located
within New Hampshire. At December 31, 1995, home equity lines of credit totaled
$28,885,000, with an outstanding balance of $14,878,000.
Commercial loans, other than those secured by real estate, amounted to
$13,126,000 at December 31, 1995. These non-real estate commercial loans
primarily consist of loan products designed for small businesses. Such products
included SBA loans, Business Manager (an accounts receivable financing vehicle)
and Business Express CreditLine.
Contractual Loan Maturities. The following table sets forth the December 31,
1995 contractual loan maturities for Community and amounts due after one year,
classified according to the sensitivity to changes in interest rates.
<TABLE>
<CAPTION>
Within From 1 to After
------- --------- --------
1 Year 5 Years 5 Years Total
------- --------- -------- --------
<S> <C> <C> <C> <C>
(in Thousands)
Mortgage loans:
Residential....................... $ 1,240 $ 10,660 $ 74,588 $ 86,488
Construction...................... 2,813 - - 2,813
Commercial........................ 3,871 9,812 40,429 54,112
------- -------- -------- --------
Total mortgage loans............ 7,924 20,472 115,017 143,413
Other loans:
Installment and consumer.......... 11,066 85,443 13,630 110,139
Commercial........................ 5,713 4,026 3,404 13,143
------- -------- -------- --------
Total other loans............... 16,779 89,469 17,034 123,282
------- -------- -------- --------
Total loans, gross.............. $24,703 $109,941 $132,051 $266,695
======= ======== ======== ========
Loans maturing after one year with:
Fixed interest rates:
Commercial........................ $ 4,654 $ 1,481 $ 6,135
All other......................... 85,503 8,572 94,075
-------- -------- --------
Total........................... 90,157 10,053 100,210
Variable interest rates:
Commercial........................ 9,184 42,352 51,536
All other......................... 10,600 79,646 90,246
-------- -------- --------
Total........................... 19,784 121,998 141,782
-------- -------- --------
Total............................ $109,941 $132,051 $241,992
======== ======== ========
</TABLE>
4
<PAGE>
Delinquent Loans and Real Estate Acquired by Foreclosure. Loans are considered
delinquent when any payment of principal and/or interest is 30 days or more past
due. Nonaccrual loans include impaired loans and are those loans on which the
accrual of interest is discontinued when collectibility of principal or interest
is uncertain or payments of principal or interest have become contractually past
due 90 days. Upon such discontinuance, all unpaid accrued interest is reversed
against the current period's earnings. A non-impaired loan which has principal
or interest payments contractually past due 90 days may remain on accrual
status, however, if value of the collateral securing the loan is sufficient to
cover principal and accrued interest, and the loan is in the process of
collection. Community uses a formal procedure for notifying borrowers of
payments contractually past due and for the assessment of late charges.
Community works with delinquent borrowers to seek a satisfactory repayment
schedule, but will undertake foreclosure or repossession proceedings as
appropriate to recover the amount owed. At December 31, 1995, real estate
acquired by foreclosure totaled $566,000. Such properties are carried at the
lower of cost or fair value minus costs to sell. For further information, see
Note 1 of Notes to Consolidated Financial Statements.
The table below shows loans on non-accrual status, restructured loans, real
estate acquired by foreclosure or substantively repossessed and other
repossessed assets.
<TABLE>
<CAPTION>
June 30,
December 31 --------------------------------------------------
1995 1995 1994 1993 1992 1991
------------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Nonaccrual loans ................... $1,331 $1,730 $ 730 $3,117 $ 3,681 $ 7,395
Restructured loans.................. - - 174 162 2,084 577
------------ ------- ------ ------ ------- -------
Total non-performing loans........ 1,331 1,730 904 3,279 5,765 7,972
------------ ------ ------ ------ ------- -------
Real estate acquired by foreclosure. 566 1,134 836 2,568 6,725 6,613
Other assets acquired............... 333 368 242 258 420 1,132
------------ ------ ------ ------ ------- -------
Total assets acquired toward
satisfaction of debt............. 899 1,502 1,078 2,826 7,145 7,745
------------ ------ ------ ------ ------- -------
Total non-performing assets......... 2,230 3,232 1,982 6,105 12,910 15,717
Loans delinquent 90 days or more and
still accruing..................... 54 - - 16 1 10
------------ ------ ------ ------ ------- -------
Total non-performing assets and
loans delinquent 90 days or more
and still accruing............... $2,284 $3,232 $1,982 $6,121 $12,911 $15,727
============ ====== ====== ====== ======= =======
Total non-performing assets as a
percent of total loans and
assets acquired toward
satisfaction of debt.............. 0.83% 1.18% 0.89% 2.75% 5.99% 6.76%
============ ====== ====== ====== ======= =======
</TABLE>
At December 31, 1995, impaired loans, which are included in nonaccrual loans
in the table above, amounted to $526,000.
Since June 30, 1991, Community has made progress toward resolving its non-
performing assets. Community made substantial reductions in non-performing
assets during fiscal 1994 resulting in a decline from $6,105,000 at June 30,
1993 to $1,982,000 at June 30, 1994, a decrease of 67.5%. At June 30, 1995, non-
performing assets had increased to $3,232,000. Of this increase, $1,231,000 was
related to two commercial loans, which were originated prior to 1990 and which
were previously performing, being placed on non-accruing status by Community
during the third quarter of fiscal 1995. One of these two commercial loans
repaid during the quarter ended December 31, 1995 and accounted for the majority
of the decline in non-performing assets to $2,230,000. The decrease in
restructured loans during fiscal 1993 was primarily due to one commercial credit
that returned to a performing status after complying with its restructured terms
for more than a year.
5
<PAGE>
At December 31, 1995, Community had one residential mortgage loan that was
delinquent 90 days or more and still accruing. Management has reviewed the
circumstances of this loan and concluded that non-accrual status is unwarranted
because the loans collateral is sufficient to cover principal and accrued
interest and the loan is in process of collection.
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 Community. In addition, there are no known loan concentrations in
excess of 10.00% of total loans.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS--Asset Quality," "--Risk
Characteristics of the Loan Portfolio" and Notes 1, 3 and 6 of Notes to the
Consolidated Financial Statements.
Summary of Loan Loss Experience. Community maintains an allowance for
possible losses on loans. 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,
past loan loss experience and loan growth.
The following table analyzes movements in the allowance during the periods
indicated:
<TABLE>
<CAPTION>
Six Months
Ended Years Ended June 30,
December 31, ------------------------------------------------
1995 1995 1994 1993 1992 1991
------------ -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance of allowance at beginning of period..... $2,970 $ 3,351 $ 3,822 $ 3,958 $ 3,982 $ 6,264
Provision for possible loan losses.............. 375 475 625 2,150 2,950 2,500
------ ------- ------- ------- ------- -------
Recoveries of loans previously charged-off:
Mortgage loans............................... 211 273 417 261 152 212
Indirect consumer loans...................... 51 75 61 59 43 52
Mobile home loans............................ 35 73 42 9 7 20
Commercial loans............................. 5 27 69 21 136 11
Other loans.................................. 10 18 23 28 21 43
------ ------- ------- ------- ------- -------
312 466 612 378 359 338
------ ------- ------- ------- ------- -------
3,657 4,292 5,059 6,486 7,291 9,102
------ ------- ------- ------- ------- -------
Charge-offs:
Mortgage loans............................... (181) (522) (915) (1,900) (1,724) (3,970)
Indirect consumer loans...................... (151) (175) (185) (172) (356) (353)
Mobile home loans............................ (265) (601) (558) (482) (924) (476)
Commercial loans............................. (6) -- (12) (53) (206) (243)
Other loans.................................. (47) (24) (38) (57) (123) (78)
------ ------- ------- ------- ------- -------
(650) (1,322) (1,708) (2,664) (3,333) (5,120)
------ ------- ------- ------- ------- -------
Balance of allowance at end of period........... $3,007 $ 2,970 $ 3,351 $ 3,822 $ 3,958 $ 3,982
====== ======= ======= ======= ======= =======
Allowance for possible loan losses
expressed as a percent of total loans at
end of period.................................. 1.13% 1.09% 1.51% 1.75% 1.90% 1.77%
Loan charge-offs, net of recoveries, during
each period expressed as an annualized
percentage of average total loans during
the period..................................... 0.25% 0.34% 0.48% 1.03% 1.38% 2.13%
</TABLE>
Lower levels of net charge-offs and improved asset quality over the past five
years has allowed Community to bring its allowance for possible loans losses as
a percent of total loans down to 1.13% at December 31, 1995 as compared to 1.77%
at June 30, 1991.
6
<PAGE>
The following table sets forth the breakdown of the allowance for possible
loan losses by loan category and the percentage of loans in each category to
total loans at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
At June 30,
At December 31, -----------------------------------------------------------------------------------
1995 1995 1994 1993 1992 1991
---------------- --------------- --------------- --------------- --------------- ---------------
Amount % Amount % Amount % Amount % Amount % Amount %
-------- ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance of allowance at end
of period applicable to:
Mortgage loans............. $1,262 54.1 $1,124 51.3 $1,074 56.4 $1,602 60.5 $1,697 58.4 $1,914 63.4
Indirect consumer loans.... 688 34.0 763 37.2 667 30.0 607 27.7 779 29.9 852 25.2
Mobile home loans.......... 605 4.2 638 4.4 632 6.2 486 6.9 471 7.6 337 7.5
Commercial loans........... 146 4.9 150 4.6 103 3.6 33 1.4 105 1.6 197 1.9
Other loans................ 54 2.8 51 2.5 125 3.8 116 3.5 78 2.5 125 2.0
Unallocated................ 252 n/a 244 n/a 750 n/a 978 n/a 828 n/a 557 n/a
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
$3,007 100.0 $2,970 100.0 $3,351 100.0 $3,822 100.0 $3,958 100.0 $3,982 100.0
====== ===== ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
At December 31, 1995, the portion of the allowance for possible loan losses
allocated to mortgage loans, in the table above, includes an allocation of
$84,000 for two commercial impaired loans which totaled $526,000.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS--Asset Quality" and "--Risk
Characteristics of the Loan Portfolio."
Investment Activities
Community maintains a portion of its assets in short-term interest-bearing
deposits in other banks and in investment securities, which consist primarily of
U.S. Government and Agency obligations and mortgage-backed securities of which
the majority are guaranteed by the Federal Home Loan Mortgage Corporation
("FHLMC") or the Federal National Mortgage Association ("FNMA"). Other
investments include corporate bonds and obligations, municipal investments,
marketable equity securities and stock in the FHLB.
At December 31, 1995, investment securities classified as "available for
sale" amounted to $54,141,000 and investment securities classified as "held to
maturity" amounted to $43,529,000. Community did not have any securities
classified as "trading securities". At December 31, 1995, the tax affected
unrealized net gains on securities "available for sale" was $711,000 and is
carried as a component of stockholders' equity.
At December 31, 1995, Community owned mortgage-backed securities having a
carrying value of $36,850,000 and an unrealized net gain of $360,000.
Substantially all of Community's mortgage-backed securities are guaranteed by
FHLMC, FNMA or GNMA. Of the total mortgage-backed securities at December 31,
1995, $18,991,000 bear a fixed interest rate and $17,859,000 bear either an
adjustable or variable interest rate. The market values of mortgage-backed
securities change with market and economic conditions. The most significant
factors affecting market value are prepayments of the underlying loans and
interest rates. As interest rates increase, prepayments generally decline,
causing an extension of the expected maturity and a decline in market value. The
converse is generally true when interest rates decrease. The market value of
fixed-rate mortgage-backed securities is generally more sensitive to market
interest rate changes than adjustable or variable interest rate mortgage-backed
securities. Mortgage-backed securities are expected to have shorter average
lives than their contractual maturities because borrowers may repay obligations
without prepayment penalties.
7
<PAGE>
A breakdown of yields (based on amortized cost) and contractual maturities
for investment securities (excluding marketable equity securities) at December
31, 1995 is presented below.
<TABLE>
<CAPTION>
After One But After Five But After Ten
Within One Year Within Five Years Within Ten Years Years Total
------------------- ------------------- ------------------- ------------------- -------------------
Carrying Weighted Carrying Weighted Carrying Weighted Carrying Weighted Carrying Weighted
Value Avg Yld Value Avg Yld Value Avg Yld Value Avg Yld Value Avg Yld
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Available for Sale:
U.S. Government and
Agency obligations.... $ 4,009 5.17% $24,617 6.68% $ -- --% $ -- % $28,626 6.46%
Municipal investments.. 784 4.91 187 6.32 971 5.18
Mortgage-backed
securities............ -- -- 2,449 5.93 2,970 5.11 18,859 6.81 24,278 6.51
------- ------- ------ ------- -------
$ 4,793 5.13 $27,253 6.61 $2,970 5.11 $18,859 6.81 $53,875 6.46
======= ======= ====== ======= =======
Held to Maturity:
U.S. Government and
Agency obligations.... $16,983 6.56 $13,974 6.01 $ -- -- $ -- -- $30,957 6.31
Mortgage-backed
securities............ -- -- 11,670 6.02 -- -- 902 6.79 12,572
------- ------- ------ ------- -------
$16,983 6.56 $25,644 6.01 $ -- -- $ 902 6.79 $43,529
======= ======= ====== ======= =======
</TABLE>
Community's investment portfolio is managed by Community's officers in
accordance with the investment policy established by the Finance Committee of
Community's Board of Directors and with the advice of professional investment
advisors. The objectives of Community's investment policy are to provide
liquidity, diversification of assets and earnings. At December 31, 1995,
Community did not hold any security which exceeded 10% of Community's
stockholders' equity other than FHLB common stock.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS--Investment Securities" and Notes 1
and 2 of Notes to the Community Consolidated Financial Statements.
Sources of Funds
Deposits. The majority of Community's deposits are derived from customers
who reside or work in Merrimack County, New Hampshire. Community receives a
smaller volume of deposits from customers residing in a number of communities
across New Hampshire and from outside of the state. By choice, Community
currently accepts no brokered deposits.
Because convenience is an important factor in attracting deposits, Community
operates four offices located in the City of Concord, each with ample parking
and three with "drive-up" bays. Community also operates offices located to the
west of Concord in Weare, New Hampshire and to the north of Concord in Tilton,
New Hampshire. Community operates automatic teller machines at all of its
locations and at four off-site locations in Concord, Contoocook, Epsom, and
Tilton, New Hampshire. Concord is a member of an electronic funds transfer
network that allows customers to access cash from their accounts through ATMs
located throughout the state of New Hampshire and throughout the United States.
Community's deposits consist of savings accounts, NOW accounts, demand
deposit accounts, money market deposit accounts, club accounts, variable-rate
term certificates of deposit and fixed-rate term certificates of deposit
offering maturities of up to five years. The flow of deposits is influenced
significantly by general economic conditions, changes in money markets and
prevailing interest rates. Community has maintained a competitive deposit
pricing structure within its market to achieve controlled growth and increase
its market share.
8
<PAGE>
The following table presents the distribution of Community's average deposits
outstanding and the annualized average interest rates paid on such deposits
during the periods indicated.
<TABLE>
<CAPTION>
Six Months Ended Years Ended June 30,
December 31, -----------------------------------------------------
1995 1995 1994 1993
----------------- ---------------- --------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing deposits........... $ 17,869 --% $ 13,581 --% $ 10,112 --% $ 6,705 --%
-------- -------- -------- --------
Savings deposits:
Savings, club and escrow accounts..... 79,945 2.95 91,423 2.97 97,262 2.92 87,082 3.33
Interest bearing NOW accounts......... 22,841 1.44 21,668 1.91 19,429 1.98 15,921 2.39
Money market accounts................. 9,365 2.93 11,515 2.70 13,741 2.64 16,840 3.22
-------- -------- -------- --------
Total savings deposits.............. 112,151 2.64 124,606 2.76 130,432 2.75 119,843 3.19
Time certificates of deposit............ 184,277 5.74 162,066 4.97 146,364 4.58 150,461 5.12
-------- -------- -------- --------
Total deposits...................... $314,297 4.30 $300,253 3.83 $286,908 3.59 $277,009 4.16
======== ======== ======== ========
</TABLE>
Outstanding time certificates of deposit in amounts of $100,000 or more mature
as follows:
<TABLE>
<CAPTION>
At December 31,1995
--------------------
(In Thousands)
<S> <C>
Within 3 months........... $ 8,899
Over 3 through 6 months... 6,034
Over 6 through 12 months.. 5,950
Over 12 months............ 5,234
-------
Total................... $26,117
=======
</TABLE>
See "MANAGEMENT'S DISCUSSION AND ANALYSIS--Deposits" and Note 7 of Notes to
the Community Consolidated Financial Statements.
Borrowings. Concord may obtain advances from the FHLB upon pledging as
collateral the common stock of the FHLB that it owns and certain of its
investment securities and residential mortgage loans, provided certain standards
related to creditworthiness are met. Such advances are made under several
different credit programs, each of which has its own interest rate and range of
maturities. FHLB borrowings have been utilized for loan portfolio growth,
asset/liability management, liquidity and/or operational needs. At December 31,
1995, Concord had outstanding advances and available borrowing capacity with the
FHLB of $54,549,000 and approximately $90,000,000, respectively.
Community also uses repurchase agreements as a source of funds. Repurchase
agreements outstanding at December 31, 1995 amounted to $4,675,000 and carried
maturities of three months or less. U.S. Government and Agency securities with a
book value of $4,770,000 and a fair value of $4,794,000 were pledged as
collateral and held by custodians to secure the agreements at December 31, 1995.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS--Borrowed Funds" and Notes 8 and
9 of Notes to the Community Consolidated Financial Statements.
9
<PAGE>
Asset/Liability Management
It is Community's policy to manage its assets and liabilities in a manner
that minimizes interest rate risk exposure while meeting the needs of
Community's customers. The following provides insight into the sensitivity of
Community's earnings to changes in interest rates as of December 31, 1995.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
0-1 1-3 3-5 Over 5
Year Years Years Years Total
--------- --------- -------- -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Assets Subject to Interest Rate Adjustment:
Interest-bearing deposits in other banks......... $ 11,322 $ -- $ -- $ -- $ 11,322
Investment securities available for sale......... 5,059 24,804 -- -- 29,863
Investment securities held to maturity........... 16,983 13,974 -- -- 30,957
Mortgage-backed securities available for sale.... 9,577 14,701 -- -- 24,278
Mortgage-backed securities held to maturity...... 2,862 5,287 4,423 -- 12,572
Federal Home Loan Bank stock..................... 3,803 -- -- -- 3,803
Mortgage loans held for sale..................... 2,940 -- -- -- 2,940
Mortgage loans:
Home equity.................................... 14,569 189 -- -- 14,758
Residential.................................... 32,337 22,358 9,396 7,252 71,343
Commercial and construction.................... 40,732 13,156 534 1,906 56,328
Other loans:
Indirect automobile and recreational vehicle... 41,451 31,938 14,125 3,954 91,468
Mobile home.................................... 9,260 1,720 -- 164 11,144
Other consumer................................. 4,970 1,254 989 -- 7,213
Commercial..................................... 12,967 104 39 -- 13,110
-------- -------- ------- ------- --------
Total........................................ $208,832 $129,485 $29,506 $13,276 $381,099
======== ======== ======= ======= ========
Liabilities Subject to Interest Rate Adjustment:
Deposits:
Savings, escrow and club accounts.............. $ 26,007 $ 52,837 $ -- $ -- $ 78,844
Interest-bearing NOW accounts.................. 4,868 18,619 -- -- 23,487
Money market accounts.......................... 2,261 6,785 -- -- 9,046
Time certificates of deposit................... 124,003 54,839 6,753 -- 185,595
Borrowed funds................................... 52,687 6,299 548 -- 59,534
-------- -------- ------- ------- --------
Total........................................ $209,826 $139,379 $ 7,301 $ -- $356,506
======== ======== ======= ======= ========
Excess (deficiency) of rate sensitive assets
over rate sensitive liabilities................... $ (994) $ (9,894) $22,205 $13,276 $ 24,593
======== ======== ======= ======= ========
Cumulative excess (deficiency)..................... $ (994) $(10,888) $11,317 $24,593
======== ======== ======= =======
Cumulative rate sensitive assets as a
percent of cumulative rate sensitive liabilities.. 99.53% 96.88% 103.17% 106.90%
======== ======== ======= =======
Cumulative excess (deficiency) as a percent of
total rate sensitive assets....................... (0.26)% (2.86)% 2.97% 6.45%
======== ======== ======= =======
</TABLE>
The effect of interest rate changes on the assets and liabilities of a
financial institution such as Community may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
"gap" is defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds interest
rate sensitive assets. During a period of falling interest rates, a positive gap
would tend to adversely affect net interest income, while a negative gap would
tend to result in an increase in net interest income. During a period of rising
interest rates, a positive gap would tend to result in an increase in net
interest income while a negative gap would tend to affect net interest income
adversely.
Management uses its judgment in classifying assets and liabilities into the
various interest sensitivity time periods, taking into consideration certain
assumptions based on Community's historical experience and other relevant data.
Non-accruing loans amounting to $1,331,000 have been excluded from this
analysis. The analysis
10
<PAGE>
takes into consideration next repricing dates on variable-rate instruments.
Amortization on some of Community's loans and mortgage-backed securities has
been estimated, based on historical trends, and included in shorter time
periods even though the contractual maturity of such loans and securities may
be further out. While savings, NOW and MMDA accounts allow for immediate
withdrawal and interest rate adjustment, based on Community's historical
experience they are generally considered more stable and are classified
proportionately according to their established sensitivities in the "0-1
Year" and "1-3 Year" categories.
Community had a negative gap of under 1% of total rate sensitive assets at
December 31, 1995 in the "0-1 Year" category.
Competition
Community experiences substantial competition in attracting and retaining
deposit accounts and in making mortgage and other loans. Including Concord,
there are 45 banking offices of 14 federally-insured depository institutions
within Community's principal market area of Merrimack County, which does not
include the non-bank financial service providers which also operate in
Community's market area. Based on June 30, 1995 data compiled by the FDIC, the
branches of Concord located within Merrimack County had total deposits of
$295,181,000, which represented 18% of the total deposits in competing bank and
credit union offices located in Merrimack County. Concord ranked first in terms
of total deposits located in these institutions in Merrimack County, based on
the FDIC's June 30, 1995 data.
The primary factors in competing for deposit accounts are interest rates,
convenience of office locations, quality of service and banking hours. The
primary factors in competing for loans are interest rates, loan origination fees
and the quality and range of lending services offered. Competition for
origination of first mortgage loans comes primarily from other savings
institutions, mortgage banking firms, and commercial banks.
Regulation and Supervision
Community is subject to regulation by the Federal Reserve Board and to
periodic reporting and examination requirements of the Bank Commissioner of the
State of New Hampshire. Concord is subject to regulation, supervision and
examination by the Bank Commissioner and the Federal Deposit Insurance
Corporation (FDIC), whos Bank Insurance Fund ("BIF") insures Concords deposit
accounts up to the maximum allowed by law. Concord derives its lending and
investment powers from New Hampshire law, under which the Bank Commissioner has
specific statutory jurisdiction over certain banking activities such as mergers
and the creation of new powers. In addition, the establishment of branches is
subject to approval of the New Hampshire Board of Trust Company Incorporation
and the FDIC. Both New Hampshire and federal law contain restrictions on, and
require regulatory approvals of, acquisitions by Community or Concord, State and
federal regulations further require that Concord maintain various reserves and
that it meet certain capital and liquidity requirements. Concord is in
compliance with all such requirements.
Federal regulations prohibit banking companies from paying dividends on their
stock if the effect would cause stockholders equity to be reduced below
applicable regulatory capital requirements or if such declaration and payment
would otherwise violate regulatory requirements. For additional information, See
"MANAGEMENT'S DISCUSSION AND ANALYSIS--Liquidity and Capital Resources."
Personnel
As of December 31, 1995, Community and its subsidiaries had a total of 153
full-time and 41 part-time employees. None of Community's employees is subject
to a collective bargaining agreement.
11
<PAGE>
ITEM 2. PROPERTIES
Community's main office, which is owned by Community, is located at 43 North
Main Street, Concord, New Hampshire, in the center of the downtown business
district. At present, Community does not require all of the space available in
this building and has leased approximately one half of it to retail businesses.
Community owns two of its branch offices in Concord, each of which is located
in a modern, one-story building. The other Concord branch office is a leased
facility located on the Steeplegate Mall property. Community's branch offices
located in Weare and Tilton, New Hampshire are also leased. Community owns a
three-story building in downtown Concord of which two stories are currently
serving as its operations center and the other floor is leased to another local
business.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against Community or any of
its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE COMPANYS COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
COMMON STOCK INFORMATION
At January 31, 1996, there were 927 shareholders of record of common stock.
The common stock of Community Bankshares, Inc. is traded and quoted on the
National Association of Securities Dealers, Inc. (NASDAQ) National Market System
under the symbol "CBNH". The following table represents common stock information
as reported by NASDAQ.
<TABLE>
<CAPTION>
Dividends
per Share Share Volume Traded High Low
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Six Months Ended December 31, 1995
Second Quarter (12/31/95) $0.15 340,591 $19.25 $16.500
First Quarter (9/30/95) 0.14 177,504 17.25 15.750
Fiscal Year Ended June 30, 1995
Fourth Quarter $0.13 230,175 $17.25 $15.250
Third Quarter 0.13 227,201 16.25 12.875
Second Quarter 0.13 178,655 16.25 12.875
First Quarter 0.12 292,397 16.25 14.500
Fiscal Year Ended June 30, 1994
Fourth Quarter $0.11 120,150 $15.50 $13.250
Third Quarter 0.08 213,806 14.50 11.000
Second Quarter 0.05 172,855 14.50 11.000
First Quarter - 218,865 12.75 8.250
</TABLE>
The declaration of future dividends will depend, subject to the discretion of
the Board of Directors, on a number of factors including operating results,
financial condition, capital adequacy, regulatory and tax considerations and
other factors. For further information, See "MANAGEMENT'S DISCUSSION AND
ANALYSIS--Liquidity and Capital Resources."
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
At or for the Six Months
(Dollars in Thousands Except Per Share Data) Ended December 31, At or for the Years Ended June 30,
---------------------------- ----------------------------------------------------
1995 1994 1995 1994 1993 1992 1991
----------- ------------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Results of Operations:
Interest and dividend income............ $ 16,124 $ 13,004 $ 28,241 $ 23,218 $ 24,636 $ 26,671 $ 28,996
Interest expense........................ 8,902 6,180 14,244 10,736 11,974 15,936 19,996
-------- -------- -------- -------- -------- -------- --------
Net interest and dividend income.... 7,222 6,824 13,997 12,482 12,662 10,735 9,000
Provision for possible loan losses...... 375 200 475 625 2,150 2,950 2,500
-------- -------- -------- -------- -------- -------- --------
Net interest and dividend income
after provision for possible
loan losses........................ 6,847 6,624 13,522 11,857 10,512 7,785 6,500
Non-interest income..................... 1,497 939 2,036 2,558 2,879 2,528 1,806
Non-interest expense.................... 6,119 5,290 10,720 10,467 11,170 9,969 8,907
-------- -------- -------- -------- -------- -------- --------
Income before income taxes.......... 2,225 2,273 4,838 3,948 2,221 344 (601)
Income taxes............................ 854 728 1,551 858 -- 85 (1,088)
-------- -------- -------- -------- -------- -------- --------
Net income.......................... $ 1,371 $ 1,545 $ 3,287 $ 3,090 $ 2,221 $ 259 $ 487
======== ======== ======== ======== ======== ======== ========
Ending Balance Sheet Data:
Assets.................................. $409,498 $379,552 $425,714 $346,136 $320,567 $312,019 $293,674
Investment Securities................... 101,473 100,494 115,965 100,515 64,958 74,693 44,765
Loans................................... 266,695 256,323 271,461 222,109 218,960 208,322 224,927
Allowance for Possible Loan Losses...... 3,007 3,095 2,970 3,351 3,822 3,958 3,982
Real Estate Acquired by Foreclosure..... 566 1,258 1,134 836 2,568 6,725 6,613
Deposits................................ 315,538 302,542 308,556 292,925 285,609 272,068 238,369
Borrowed Funds.......................... 59,534 43,519 82,768 23,507 4,810 8,529 29,584
Stockholders Equity..................... 30,790 26,810 29,398 26,625 23,849 21,406 20,995
Per Share Data and Other Selected Ratios:
Earnings Per Common and Common
Equivalent Share....................... $ 0.77 $ 0.86 $ 1.84 $ 1.73 $ 1.28 $ .15 $ .29
Dividends Paid Per Share................ 0.29 0.25 0.51 0.24 -- -- --
Book Value Per Share.................... 17.70 15.43 16.94 15.27 13.93 12.70 12.48
Dividend Payout Ratio................... 37.66% 29.07% 27.72% 13.87% --% --% --%
Return on Average Assets (1)............ 0.65% 0.82% 0.87% 0.94% 0.71% 0.09% 0.17%
Return on Average Equity (1)............ 9.07 11.05 11.90 11.68 9.73 1.19 2.26
Net Interest Margin (1)................. 3.66 4.01 3.89 4.02 4.27 3.83 3.29
Stockholders Equity to Assets
at Period End.......................... 7.52 7.06 6.91 7.69 7.43 6.86 7.15
Average Stockholders Equity
to Average Assets...................... 7.21 7.59 7.31 8.04 7.30 7.29 7.38
</TABLE>
(1) Ratios for the six months ended December 31, 1995 and 1994 are annualized.
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
Managements Discussion and Analysis should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere in this
Form 10-K and the tables appearing throughout this section and the section
labeled "Item 1. Description of Business".
During September 1995, Community's Board of Directors voted to change
Community's fiscal year end from June 30 to December 31 effective December 31,
1995. As a result of this reporting transition, the financial condition section
of this Managements Discussion and Analysis covers December 31, 1995, as well as
June 30, 1995, and 1994 and the results of operations sections covers the six
months ended December 31, 1995 as compared to the twelve months ended June 30,
1995 and a comparison of the three years ended June 30, 1995.
Effective March 20, 1996, subsequent to the periods covered in this report,
Community completed its acquisition of Centerpoint Bank (Centerpoint) in a
merger accounted for as a pooling of interests and pursuant to which Community
exchanged 1.073 shares of its common shares (657,587 in total) for Centerpoint's
612,849 outstanding common shares. For further information see Note 17 of Notes
to the Consolidated Financial Statements.
The market area in which Community operates has experienced slow economic
growth during the last year and a half 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.
Financial Condition
Community's total assets amounted to $409,498,000 at December 31, 1995 which
represents a decrease of $16,216,000 from $425,714,000 at June 30, 1995. In an
effort to reduce its dependency on higher costing borrowed funds and to take
advantage of market conditions, Community repaid maturing borrowed funds with
proceeds from consumer loan sales and investment security maturities and sales.
Community achieved a 23.0% growth in total assets during the fiscal year
ended June 30, 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 the fiscal year ended June 30, 1995.
At December 31, 1995, Community's equity to assets ratio was 7.52%, its tier
1 leverage ratio was 7.02% and its total risk-based capital ratio was 12.08%, as
compared to 6.91%, 7.07% and 11.31%, respectively, at June 30, 1995. The capital
ratios at June 30, 1994 were 7.69%, 7.94% and 13.39%, respectively. All of these
capital ratios exceeded published regulatory minimums.
Investment Securities
At December 31, 1995, Community's investment securities classified as
available for sale amounted to $54,141,000, or 55% of total investment
securities with the remaining securities of $43,529,000, or 45%, classified as
held to maturity. At June 30, 1995, securities available for sale and held to
maturity amounted to $58,754,000 and $53,408,000, respectively, which
represented 52% and 48%, respectively, of total investment securities. At June
14
<PAGE>
30, 1994 securities available for sale and held to maturity amounted to
$64,795,000 and $33,860,000, respectively, which represented 66% and 34%,
respectively, of total investment securities.
In 1995, the Financial Accounting Standards Board allowed a one-time
reassessment of the appropriateness of the classification of all securities
held, and Community reclassified $3,953,000 of securities held to maturity to
available for sale during November 1995. At the time of reclassification, there
were $58,000 in unrealized gains and no unrealized losses relating to the
securities transferred. For further information, see Note 2 to Notes to
Consolidated Financial Statements.
Concord, as a member, owned Federal Home Loan Bank stock of $3,803,000 at
December 31, 1995 and June 30, 1995 compared to $1,860,000 at June 30, 1994.
Tax affected unrealized net gains on securities available for sale, amounted
to $711,000 at December 31, 1995 and $328,000 at June 30, 1995 compared to
unrealized net losses of $262,000 at June 30, 1994.
Also, during the last quarter of the fiscal year ended June 30, 1995, Concord
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.
Risk Characteristics of the Loan Portfolio
Total loans decreased by $4,766,000 from $271,461,000 at June 30, 1995 to
$266,695,000 at December 31, 1995. The decrease in loans was primarily due to
the sale of $17,366,000 of indirect automobile loans during the six months ended
December 31, 1995.
The majority of the asset growth during the fiscal year ended June 30, 1995
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, Community has taken advantage of market
opportunities to expand and develop new lending relationships.
Community has originated a large number of automobile and recreational
vehicle loans through 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 Community substantially increased
its number of active dealer relationships during the fiscal year ended June 30,
1995 resulting in significant growth in loan originations in indirect loans
since that time. At December 31, 1995, the balance of indirect automobile and
recreational vehicle loans through dealers was $91,679,000, or 34% of total
loans as compared to $101,744,000 and $66,699,000, respectively, or 38% and
30%, respectively, of total loans at June 30, 1995 and 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
Community's balance sheet, Community has developed the ability to sell
automobile loans, while retaining the right to service these loans. During the
six months ended December 31, 1995, Community sold $17,366,000 of automobile
loans. It also sold $11,591,000 during the fiscal year ended June 30, 1995. As
part of the sales agreement relating to the sale of the majority of these loans,
Community is obligated to assume a certain portion of credit losses should they
occur and has accrued $139,000 to absorb such possible losses. Community has an
agreement in place to sell up to an additional $24,000,000 of new loan
production with credit enhancement on a best efforts basis.
Total commercial loans, which includes commercial mortgage, construction and
non-real estate commercial loans, grew by $3,677,000 during the six months ended
December 31, 1995. During the fiscal year ended June 30, 1995, Community used
market opportunities in the commercial lending area to grow commercial loans by
$18,333,000. Of Community's commercial loan portfolio at December 31, 1995,
which represents 26% of total loans, $7,280,000, or 10%, of commercial loans
which were originated under various Small Business
15
<PAGE>
Administration (SBA) programs. For further information on loans, see Note 3 of
Notes to the Consolidated Financial Statements.
Commercial and consumer (indirect automobile 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.
Community 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. Community's indirect auto
lending delinquency levels have been consistently below industry averages over
the past few years.
Community's policies on loan-to-value ratios and loan origination and
underwriting criteria for each of its lending categories are set forth below. On
occasion, exceptions may be made to these policies on a case-by-case basis.
Residential mortgage loans are originated and underwritten according to
Federal and state regulations and generally in accordance with secondary market
guidelines. If possible, Community sells most of its fixed rate residential
mortgage loans on the secondary market. As a general rule, the maximum loan-to-
value ratio is 80% of the lesser of the appraised value or purchase price of the
property (up to 95% with private mortgage insurance as secondary market
requirements permit). The loan-to-value ratio maximum may vary with individual
program requirements, such as FHA and VA loans, which are financed up to 100%
with guaranties and sold servicing released to private investors.
The maximum loan-to-value ratio for commercial real estate and commercial
construction loans ranges from 70% to 85% of the lesser of the appraised value
or purchase price of the property, depending on the type of loan. The maximum
loan-to-value ratio for 1-4 family residential construction is 85%; for non-
residential construction and improved property, 70%; and for raw land and land
development, 60%.
Among the factors that Community considers in making commercial construction
loans are the experience, background, credibility and overall capacity of the
contractor/developer; the contractor's past performance, including the success
or failure of previous projects; the contractor's reputation for honesty and
integrity; and the contractor's financial condition. Community generally
requires that permanent financing be in place and committed prior to funding
construction.
The maximum loan-to-value ratio for residential construction loans is 75% of
the lower of appraised value, sales price or acquisition cost (up to 90% for
pre-sold primary residences with private mortgage insurance and up to 80% for
pre-sold second homes with private mortgage insurance). Residential construction
loans generally must qualify for sale to Community's secondary financing
markets.
The maximum loan-to-value ratio for new indirect automobile loans is 90% of
the greater of sales or invoice amount. The maximum loan-to-value ratio for used
automobile loans is 90% of the sales price or the average trade-in value plus
one-third of the difference between the average trade-in value and average
retail value, whichever amount is greater.
16
<PAGE>
Asset Quality
Non-Performing Asset Analysis. Non-performing assets consist of nonaccrual
loans (which may include impaired loans), real estate acquired through
foreclosure and other assets acquired to satisfy debt. Community's non-
performing assets amounted to $2,230,000 at December 31, 1995 versus $3,232,000
at June 30, 1995 and $1,982,000 at June 30, 1994. Included in these amounts were
non-performing loans of $1,331,000, $1,730,000 and $904,000, respectively, at
December 31, 1995, June 30, 1995 and June 30, 1994. Impaired loans, which were
included in non-performing loans, amounted to $526,000 at December 31, 1995.
Community's non-performing assets decreased to $2,230,000, or 0.5% of total
assets, at December 31, 1995 from $3,232,000, or 0.8% of total assets, at June
30, 1995. This brings December 31, 1995 non-performing assets back to a level
closer to the $1,982,000, or 0.6% of total assets, experienced at June 30, 1994.
The increase in non-performing assets from June 30, 1994 to June 30, 1995 was
primarily the result of two commercial loans totaling approximately $1,200,000
which were originated prior to 1990 and which were previously performing, being
placed onto non-accruing status by Community during the third quarter of fiscal
1995. The successful resolution of one of these commercial loans represented
the majority of the decrease in non-performing assets during the six months
ended December 31, 1995.
Non-Performing Loan Summary.
<TABLE>
<CAPTION>
At December 30, 1995
----------------------------------------------------------------------------
Share of Non- Share of Percent of
Total Loans Total Loans performing Non-performing Non-performing/
Outstanding Outstanding Loans Loans Total Loans in Type
----------- ------------ ---------- --------------- --------------------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Residential mortgage loans.. $ 71,599 26.8% $ 256 19.2% 0.4%
Commercial loans:
Construction.............. 2,813 1.1 -- -- --
Real estate............... 54,113 20.3 598 44.9 1.1
Other..................... 13,142 4.9 32 2.4 0.2
Home equity................. 14,889 5.6 131 9.9 0.9
Mobil home loans............ 11,235 4.2 91 6.8 0.8
Indirect consumer loans..... 91,679 34.4 211 15.9 0.2
Other consumer loans........ 7,225 2.7 12 0.9 0.2
-------- ----- ------ -----
Total................... $266,695 100.0 $1,331 100.0 0.5
======== ===== ====== =====
</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
Community. For further information on non-performing loans, see Notes 1 and 3
of Notes to the Consolidated Financial Statements.
Assets Acquired to Satisfy Debt. Assets acquired to satisfy debt totaled
$899,000 at December 31, 1995 compared to $1,502,000 at June 30, 1995 and
$1,078,000 at June 30, 1994. Of the total at December 31, 1995, $261,000 was in
commercial real estate, $305,000 in primary residential properties, $225,000 in
mobile homes and $108,000 in repossessed vehicles. For further information, see
Notes 1 and 6 of Notes to the Community Consolidated Financial Statements.
Deposits
Total deposits amounted to $315,538,000 at December 31, 1995 which
represented an increase of $6,982,000 over the June 30, 1995 balance of
$308,556,000. Total deposits at June 30, 1994 amounted to $292,925,000.
17
<PAGE>
Deposits provided funding for 83% of total earning assets at December 31, 1995
compared to 77% at June 30, 1994 and 89% at June 30, 1994. For further
information, see Note 7 of Notes to the Community Consolidated Financial
Statements.
Borrowed Funds
During the six months ended December 31, 1995, Community reduced its
borrowed funds from $82,768,000 at June 30, 1995 to $59,534,000 at December 31,
1995. Investment security maturities and sales as well as consumer loan sale
proceeds were utilized to lessen Communitys dependency on higher costing
borrowed funds.
In order to fund its earning asset growth during the fiscal year ended June
30, 1995, Community substantially increased its borrowed funds by $59,261,000
from $23,507,000 at June 30, 1994 to $82,768,000 at June 30, 1995. For further
information, see Notes 8 and 9 of Notes to the Consolidated Financial
Statements.
Liquidity and Capital Resources
Liquidity is a measure of Community'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 Companys funding requirements are limited and are adequately
satisfied by dividends from Concord and by its interest-bearing cash deposit
with Concord. Dividends paid from Concord to Community are limited to the extent
necessary for Concord to comply with regulatory capital guidelines.
Concord is a member of the FHLB which makes substantial borrowings available
to its members. At December 31, 1995 Concords borrowed funds totaled $59,534,000
and Concord had approximately $90,000,000 available in unused borrowing capacity
remaining at the FHLB to meet future large deposit fluctuations or increased
loan demands should either occur.
Total cash and cash equivalents at December 31, 1995 totaled $22,092,000. Of
this amount, $11,322,000 was held in interest-bearing deposits in other banks.
These funds originated primarily from the sale of approximately $10,000,000 in
automobile loans on December 31, 1995.
The investment portfolio at June 30, 1995 totaled $97,670,000 of which
$54,141,000 was designated as "available for sale" and could be utilized to
manage liquidity needs, and $43,529,000 was designated as "held to maturity."
Community 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 December 31, 1995, Community had equity capital of $30,790,000, resulting
in an equity-to-assets ratio of 7.52%.
Community is regulated by the Federal Reserve Board which requires Community
to maintain a minimum risk-based capital ratio. At December 31, 1995 the minimum
risk-based capital ratio required was 8.00%. Community's risk-based capital
ratio at December 31, 1995 was 12.08%.
To complement the risk-based guidelines, the Federal Reserve Board requires a
leverage ratio of 4% to 5% 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. Community's
leverage ratio was 7.02% at December 31, 1995.
18
<PAGE>
The following table summarizes Community's required and actual regulatory
capital ratios and amounts at December 31, 1995:
<TABLE>
<CAPTION>
Required Actual
Regulatory Regulatory
Capital Capital
---------------------------- ---------------
Amount Ratio Amount Ratio
--------------- ----------- ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Leverage .............. $16,710-$20,887 4.00%-5.00% $29,628 7.02%
Risk-based:
Tier 1............... 10,807 4.00 29,628 10.97
Total risk-based..... 21,614 8.00 32,635 12.08
</TABLE>
The following table summarizes Concord's required and actual regulatory
capital ratios and amounts at December 31, 1995:
<TABLE>
<CAPTION>
Required Actual
Regulatory Regulatory
Capital Capital
---------------------------- ---------------
Amount Ratio Amount Ratio
--------------- ----------- ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Leverage................ $16,710-$20,887 4.00%-5.00% $28,081 6.73%
Risk-based:
Tier 1................ 10,799 4.00 28,081 10.40
Total risk-based...... 21,590 8.00 31,008 11.49
</TABLE>
Management believes that the acquisition of Centerpoint will not have a
material impact on Community's liquidity or capital resources.
Recent Accounting Developments
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
which was adopted by the Company on January 1, 1996. This statement establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to such assets being held and
used and for such assets and certain identifiable intangibles to be disposed of.
The implementation of this statement is not expected to have a material effect
on the Company's financial condition or results of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which became effective for the Company on January 1, 1996. This
statement establishes a fair-value-based method of accounting for stock-based
compensation plans under which compensation cost is measured at the grant date
based on the value of the award and is recognized over the service period.
However, the statement allows a company to continue to measure compensation cost
for such plans under Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees." Under APB Opinion No. 25, no
compensation cost is recorded if, at the grant date, the exercise price of
options granted is equal to the fair market value of the Company's stock. The
Company has elected to continue to follow the accounting method under APB
Opinion No. 25. SFAS No. 123 requires companies that elect to continue to follow
the accounting in APB Opinion No. 25 to disclose in the notes to their financial
statements pro forma net income and earnings per share as if the fair-value-
based method of accounting had been applied. Based on activity for the six
months ended December 31, 1995, net income and earnings per share would not have
been materially affected had the accounting method under SFAS No. 123 been
applied.
19
<PAGE>
Results of Operations
for the Six Months Ended December 31, 1995
and Year Ended June 30, 1995
For the purpose of comparing the December 31, 1995 six month income statement
dollar amounts with the June 30, 1995 twelve month dollar amounts, December 31,
1995 six month numbers, excluding non-recurring items, have been doubled to
estimate annualized comparative dollar amounts. Non-recurring acquisition
expenses and expenses related to the change in the fiscal year end, experienced
during the six months ended December 31, 1995, have been excluded before
annualizing the income statement amounts. The after-tax impact of these non-
recurring expenses amounted to $503,000. There were no such non-recurring
expenses recorded during the twelve months ended June 30, 1995.
Community earned net income of $1,371,000, or $0.77 per share, for the six
months ended December 31, 1995. Excluding non-recurring expenses incurred
during the period, earnings for the six months ended December 31, 1995, on an
annualized basis, equaled $3,748,000, or $2.10 per share. Earnings for the year
ended June 30, 1995 equaled $3,287,000, or $1.84 per share.
Increases, on an annualized basis, in net interest income and non-interest
income more than offset the increases in non-interest expenses and loan loss
provision for the current period versus the prior fiscal year.
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. The six months ending December 31, 1995 amounts have been
annualized in order to compare to the twelve months ending June 30, 1995,
Communitys previous fiscal year.
<TABLE>
<CAPTION>
Annualized Six Months Ended
December 31, 1995 vs.
Year Ended June 30, 1995
-----------------------------------------
Increase (Decrease)
-----------------------------------------
Due to
------
Volume Rate Total
------ ---- -----
(In Thousands)
<S> <C> <C> <C>
Interest and dividend income:
Mortgage loans.................... $ 630 $ 620 $1,250
Other loans....................... 1,260 429 1,689
Investments....................... 934 134 1,068
------ ------ ------
Total interest and dividend income.. 2,824 1,183 4,007
------ ------ ------
Interest expense:
Deposits.......................... 402 1,648 2,050
Borrowed funds.................... 1,437 73 1,510
------ ------ ------
Total interest expense.............. 1,839 1,721 3,560
------ ------ ------
Net interest and dividend income.... $ 985 $ (538) $ 447
====== ====== ======
</TABLE>
20
<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 Community. Net interest income for the six months ended
December 31, 1995 amounted to $7,222,000, or $14,444,000 on an annualized basis,
compared to $13,997,000 for the fiscal year ended June 30, 1995. This increase
was mostly due to growth in average earning assets during the six months ended
December 31, 1995 as compared to the year ended June 30, 1995. The increase in
average earning assets was partially offset by an increase in the cost of funds
primarily due to Community's reliance on higher costing borrowed funds which
were utilized to fund the asset growth. The net interest margin for the six
months ended December 31, 1995 equaled 3.66% compared to 3.89% for the year
ended June 30, 1995.
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 8.14% for the six months
ended December 31, 1995 compared to 7.84% for the year ended June 30, 1995. The
cost of average interest-bearing liabilities for the most recent six months
equaled 4.85% versus 4.27% for the prior fiscal year ended June 30, 1995. This
resulted in an interest rate spread of 3.29% and 3.57%, respectively, for the
six months ended December 31, 1995 and year ended June 30, 1995. The changes in
these yields and costs reflect the trends in market interest rates over the past
eighteen months as well as the greater reliance on higher costing borrowed funds
to fund the growth in average earning assets during the more recent period as
well as the continued shift from savings deposits to the higher costing time
deposits.
Average Balances
During the six months ended December 31, 1995, Community increased its average
earning assets by $36,370,000 over the year ended June 30, 1995. Earning asset
growth was mostly in indirect automobile loans through dealers. In order to fund
this growth in average earning assets Community utilized an increase in average
borrowed funds of $23,928,000 and growth in average interest-bearing deposits of
$9,756,000 over the prior fiscal year. Community also experienced growth of
$4,288,000 in average non-interest bearing demand deposits for the six months
ended December 31, 1995 over the year ended June 30, 1995.
21
<PAGE>
Average Balance Sheets and Net Interest and Dividend Income
The following table sets forth certain information relating to Community'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>
Six Months Ended
December 31, Year Ended June 30,
1995 1995
-------------------------------------------------------------------- --------------------------------
Average Yield/ Average Yield/
Balance Interest Rate (6) Balance Interest Rate
----------------------- --------------------- -------------------- ----------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Assets:
Interest-earning assets:
Mortgage loans............ $143,267 $ 6,458 9.02% $136,100 $11,666 8.57%
Other loans............... 132,772 5,811 8.75 118,231 9,933 8.40
-------- ------- -------- -------
Total loans(1).......... 276,039 12,269 8.89 254,331 21,599 8.49
Investment and
mortgage-backed
securities(2)(5)... 117,823 3,801 6.45 104,732 6,603 6.30
Interest-bearing deposits
in other banks........... 2,966 87 5.87 1,395 66 4.73
-------- -------- ------- -------
Total interest-earning
assets................. 396,828 16,157 8.14 360,458 28,268 7.84
-------- -------
Non interest-earning assets 24,929 20,211
Allowance for possible
loan losses............... (2,921) (3,148)
-------- --------
Total assets............ $418,836 $377,521
======== ========
Liabilities and
Stockholders' Equity:
Interest-bearing
liabilities:
Deposits:
Savings................... $112,151 $ 1,482 2.64% $124,606 $ 3,441 2.76%
Time certificates......... 184,277 5,287 5.74 162,066 8,047 4.97
-------- ------- -------- -------
Total deposits.......... 296,428 6,769 4.57 286,672 11,488 4.01
Borrowed funds............ 70,937 2,133 6.01 47,009 2,756 5.86
-------- ------- -------- -------
Total interest-bearing 367,365 8,902 4.85 333,681 14,244 4.27
liabilities............ ------- -------
Non interest-bearing 17,869 13,581
demand deposits...........
Other liabilities.......... 3,384 2,648
-------- --------
Total liabilities....... 388,618 349,910
Stockholders' equity....... 30,218 27,611
-------- --------
Total liabilities and
stockholders' $418,836 $377,521
equity................. ======== ========
Net interest
income/interest rate
spread(3)................. $ 7,255 3.29% $14,024 3.57%
======= =======
Net interest margin(4)..... 3.66 3.89
- --------------
</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.
(5) Included in investment and mortgage-backed securities are average balances
of non-taxable securities amounting to $3,856,000 and $2,078,000,
respectively, and tax equivalent income of $132,000 and $133,000,
respectively, for the six months ended December 31, 1995 and the year ended
June 30, 1995. Tax equivalent income was calculated using an effective tax
rate of 34%.
(6) Calculated on an annualized basis.
22
<PAGE>
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 the six months ended December 31, 1995, $375,000 was provided for
possible loan losses versus $475,000 for the year ended June 30, 1995. The
increase is primarily attributable to higher average loan volumes during the
current period versus the prior fiscal year ended June 30, 1995. The allowance
for possible loan losses as a percent of non-performing loans was 225.9% at
December 31, 1995 compared to 171.7% at June 30, 1995. At December 31, 1995, the
allowance for possible loan losses stood at $3,007,000, or 1.1% of total loans
compared to $2,970,000 and 1.1%, respectively, at June 30, 1995. Net charge-offs
for the six months ended December 31, 1995 totaled $338,000, or 0.25%
(annualized) of total average loans versus $856,000 and 0.34%, respectively, for
the fiscal year ended June 30, 1995.
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
Community operates deteriorates.
Non-Interest Income
Total non-interest income amounted to $1,497,000, or $2,994,000 on an
annualized basis, for the six months ended December 31, 1995 compared to
$2,036,000 for the fiscal year ended June 30, 1995. This annualized increase was
primarily due to higher investment and loan sale gains and loan servicing
income. The increase in investment and loan sale gains was due to improved
market conditions. The increase in loan servicing income resulted from
Community's purchase of the rights to service approximately $180,000,000 of
mortgage loans during August of 1995 and due to servicing income derived from
the indirect automobile loans which were sold with servicing retained during the
six months ended December 31, 1995.
Non-Interest Expense
Total non-interest expense amounted to $6,119,000 for the six months ended
December 31, 1995. Included in this total was $530,000 in expenses related to
Community's acquisition of Centerpoint Bank, completed during March 20, 1996,
and expenses related to the changing of Community's fiscal year from June 30 to
December 31, which was effective December 31, 1995.
The annualized total non-interest expense for the six months ended December
31, 1995, excluding the non-recurring items mentioned above, equaled $11,178,000
which compares to $10,720,000 for the fiscal year ended June 30, 1995. The
Company did not experience these types of non-recurring expenses during the
fiscal year ended June 30, 1995. The annualized increase in non-interest expense
was primarily due to continued investments made by Community to expand its
business lines and product distribution system, increased marketing, as well as
normal increases related to salaries and benefits and other operating expenses.
During the six months ended December 31, 1995, Community opened a new full
service office in Tilton, New Hampshire, its sixth full service office and
second opened during the last year and a half. Partially offsetting these
increases was a significant decrease in FDIC insurance premium expense. Concord
is currently subject to the minimum FDIC BIF insurance premium level.
23
<PAGE>
Income Taxes
Income tax expense for the six months ended December 31, 1995 amounted to
$854,000 which resulted in an effective tax rate of 38% for the period. This
compares to $1,551,000, or an effective rate of 32%, for the fiscal year ended
June 30, 1995. The higher effective tax rate for the most recent period
compared to the prior fiscal year was primarily due to the non-deductibility of
certain acquisition expenses related to Community's acquisition of Centerpoint
Bank and due to Community lowering its deferred tax asset valuation reserve more
significantly during the prior fiscal year. For further information on income
taxes, see Note 11 of Notes to the Consolidated Financial Statements.
Results of Operations
for the Three Years Ended June 30, 1995
Community 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.
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
-----------------------------------------------------
1995 vs. 1994 1994 vs. 1993
------------------------- --------------------------
Increase (Decrease) Increase (Decrease)
------------------------- --------------------------
Due to Due to
-------- --------
Volume Rate Total Volume Rate Total
------- ------ ------- ------ ------ --------
(In Thousands)
<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>
24
<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 Community. Net interest income increased to $13,997,000 in
fiscal 1995 from $12,482,000 in fiscal 1994. This increase was mostly due to
growth in earning assets during fiscal 1995 which was partially offset by an
increase in interest expense. The increase in cost of funds was primarily due to
the utilization of higher cost borrowed funds and time certificates of deposit
to fund the earning asset growth. Also, during fiscal 1995 Community experienced
a shift in the mix of deposits from the lower cost savings deposits to the
higher cost time certificates of deposit. The increase in interest expense was
the primary cause of the decline in net interest margin from 4.02% for fiscal
1994 to 3.89% for 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. Community's
net interest margin for fiscal 1993 was 4.27%.
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, Community increased its average earning assets by
$49,353,000, or 15.9%, over fiscal 1994. Earning asset growth was mostly in
indirect automobile loans through dealers. In order to fund this growth in
average earning assets Community 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. Community 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.
25
<PAGE>
Average Balance Sheets and Net Interest and Dividend Income
The following table sets forth certain information relating to Community'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,
-------------------------------------------------------------------------------------------
1995 1994 1993
----------------------------- ----------------------------- -----------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
(Dollars in Thousands)
<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)(5)................ 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.
(5) Included in investment and mortgage-backed securities are average balances
of non-taxable securities amounting to $2,078,000 and $3,020,000,
respectively, and tax equivalent income of $133,000 and $110,000,
respectively, for the years ended June 30, 1995 and 1994. There were no non-
taxable securities held during fiscal 1993. Tax equivalent income was
calculated using an effective tax rate of 34%.
26
<PAGE>
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 added to 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 Community 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>
1995 1994 1993
------ -------- -------
<S> <C> <C> <C>
(In Thousands)
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>
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
Community operates deteriorates.
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 steadily increased
from $985,000 in fiscal 1993 to $1,058,000 in fiscal 1994 to $1,387,000 in
fiscal 1995. This represented a 40.8% increase in 1995 versus the level earned
in fiscal 1993. The increases 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, were the
reasons for the increases in deposit fee income. Continued growth in mortgage
loans serviced for others since the beginning of fiscal 1993 resulted in a
corresponding increase in fee income.
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
27
<PAGE>
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, Community's opportunities to realize security gains diminished since
fiscal 1993 as market rates rose. Gains on the sale of securities 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 Community 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, Community 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, Community 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.
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, Community had a
net deferred tax asset of $172,000, which included a valuation reserve of
$136,000 which primarily related 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 the Consolidated Financial Statements.
28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Community Bankshares, Inc.:
We have audited the accompanying consolidated balance sheets of Community
Bankshares, Inc. and subsidiaries as of December 31, 1995 and June 30, 1995 and
1994, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the six months ended December 31, 1995
and for each of the years in the three-year period ended June 30, 1995. These
consolidated financial statements are the responsibility of Community'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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Community
Bankshares, Inc. and subsidiaries at December 31, 1995 and June 30, 1995 and
1994, and the results of their operations and their cash flows for the six
months ended December 31, 1995 and each of the years in the three-year period
ended June 30, 1995, in conformity with generally accepted accounting
principles.
As explained in Note 1 of Notes to Consolidated Financial Statements,
effective July 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 122 "Accounting for Mortgage Servicing Rights, an Amendment of
FASB Statement No. 65."
KPMG Peat Marwick LLP
Boston, Massachusetts
January 17, 1996
29
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Six Months
Ended Years Ended June 30,
December 31, ----------------------------------
1995 1995 1994 1993
------------ ---------- ---------- ----------
(Dollars in Thousands, Except Share Data)
<S> <C> <C> <C> <C>
Interest and dividend income:
Loans (Note 3)........................ $ 12,269 $ 21,599 $ 18,337 $ 19,683
Securities available for sale......... 2,021 3,823 4,171
Securities held for sale.............. -- -- -- 761
Securities held to maturity........... 1,618 2,565 422 3,963
Dividends on Federal Home Loan Bank
stock................................ 129 188 154 171
Deposits in other banks............... 87 66 134 58
---------- ---------- ---------- ----------
Total interest and dividend income.. 16,124 28,241 23,218 24,636
---------- ---------- ---------- ----------
Interest expense:
Deposits.............................. 6,769 11,488 10,295 11,523
Borrowed funds........................ 2,133 2,756 441 451
---------- ---------- ---------- ----------
Total interest expense.............. 8,902 14,244 10,736 11,974
---------- ---------- ---------- ----------
Net interest and dividend income........ 7,222 13,997 12,482 12,662
Provision for possible loan losses 375 475 625 2,150
(Note 4)............................... ---------- ---------- ---------- ----------
Net interest and dividend income
after provision for possible
loan losses........................ 6,847 13,522 11,857 10,512
---------- ---------- ---------- ----------
Non-interest income:
Deposit account fees.................. 290 506 366 318
Gains on sales of investment
securities, net 228 148 411 967
(Note 2).............................
Gains on sales of loans, net (Note 1). 456 501 1,089 927
Mortgage servicing income............. 334 522 476 341
Other................................. 189 359 216 326
---------- ---------- ---------- ----------
Total non-interest income........... 1,497 2,036 2,558 2,879
---------- ---------- ---------- ----------
Non-interest expense:
Salaries and employee benefits (Note 2,900 5,430 4,989 4,370
12)..................................
Occupancy and equipment............... 866 1,466 1,297 1,255
Foreclosed property (Note 6).......... 156 146 67 1,875
FDIC deposit insurance premiums....... 11 678 697 668
Marketing............................. 236 301 315 229
Acquisition costs (Note 17)........... 450 -- -- --
Other................................. 1,500 2,699 3,102 2,773
---------- ---------- ---------- ----------
Total non-interest expense.......... 6,119 10,720 10,467 11,170
---------- ---------- ---------- ----------
Income before income taxes.............. 2,225 4,838 3,948 2,221
Income tax expense (Note 11)............ 854 1,551 858
---------- ---------- ---------- ----------
Net income............................ $ 1,371 $ 3,287 $ 3,090 $ 2,221
========== ========== ========== ==========
Earnings per common and
common equivalent share............. $ 0.77 $ 1.84 $ 1.73 $ 1.28
Average number of common and common
equivalent shares outstanding....... 1,785,009 1,788,792 1,786,436 1,736,775
Dividends paid per share.............. $ 0.29 $ 0.51 $ 0.24 $ --
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
CONSOLIDATED BALANCE SHEETS
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
June 30,
December 31, --------------------------
1995 1995 1994
---------------- ------------ ------------
(Dollars in Thousands, Except Share Data)
<S> <C> <C> <C>
Assets
Cash and due from banks (Note 13)........ $ 10,770 $ 8,227 $ 7,503
Interest-bearing deposits in other
banks................................... 11,322 10,870 509
-------- -------- --------
Total cash and cash equivalents...... 22,092 19,097 8,012
-------- -------- --------
Securities available for sale--amortized
cost $52,982 at December 31, 1995,
$58,225 at June 30, 1995 and $65,252
at June 30, 1994 (Notes 2, 8
and 9).................................. 54,141 58,754 64,795
Securities held to maturity--fair value
$43,753 at December 31, 1995, $53,350
at June 30, 1995 and $32,997 at June 30,
1994 (Notes 2, 8 and 9)................ 43,529 53,408 33,860
Federal Home Loan Bank stock (Notes 2
and 9).................................. 3,803 3,803 1,860
Mortgage loans held for sale (Note 3).... 2,940 4,392 4,942
Loans (Notes 3 and 9).................... 266,695 271,461 222,109
Allowance for possible loan losses
(Note 4)................................ (3,007) (2,970) (3,351)
-------- -------- --------
Net loans............................ 263,688 268,491 218,758
-------- -------- --------
Premises and equipment (Note 5).......... 8,247 7,422 7,150
Real estate acquired by foreclosure
(Note 6)................................ 566 1,134 836
Due from broker from security sale....... 1,710
Accrued interest receivable.............. 3,201 3,100 2,526
Other assets (Notes 6 and 11)............ 5,581 6,113 3,397
-------- -------- --------
Total assets......................... $409,498 $425,714 $346,136
======== ======== ========
Liabilities and Stockholders' Equity
Liabilities:
Deposits (Note 7):
Non-interest bearing demand........... $ 18,566 $ 16,420 $ 15,067
Savings............................... 111,377 115,174 131,877
Time certificates..................... 185,595 176,962 145,981
-------- -------- --------
Total deposits....................... 315,538 308,556 292,925
Borrowed funds (Notes 8 and 9)......... 59,534 82,768 23,507
Liability relating to ESOP (Note 12)... 118 197 355
Accrued interest payable............... 1,421 1,177 693
Other liabilities...................... 2,097 3,618 2,031
-------- -------- --------
Total liabilities.................... 378,708 396,316 319,511
-------- -------- --------
Commitments and contingencies (Notes 5,
12 and 13) Stockholders' equity
(Notes 10, 11 and 12):
Preferred stock, $1.00 par value per
share; 1,000,000 shares authorized,
none issued........................... -- -- --
Common stock, $1.00 par value per
share; 3,000,000 shares authorized;
issued and outstanding 1,749,405 at
December 31, 1995, 1,747,032 at
June 30, 1995 and 1,743,532 at
June 30, 1994......................... 1,749 1,747 1,744
Additional paid-in capital............. 17,165 17,146 17,343
Retained earnings...................... 11,441 10,567 8,155
-------- -------- --------
30,355 29,460 27,242
Unrealized net gains (losses) on
securities available for sale, net
(Note 3).............................. 711 328 (262)
Unearned compensation expense-ESOP..... (118) (197) (355)
Treasury stock (at cost) 9,655 shares
at December 31, 1995 and 11,810
at June 30, 1995..................... (158) (193)
-------- -------- --------
Total stockholders' equity........... 30,790 29,398 26,625
-------- -------- --------
Total liabilities and stockholders' $409,498 $425,714 $346,136
equity.............................. ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Unrealized Net
Gains (Losses) Unearned
Additional on Securities Compensation
Common Paid-in Retained Available for Expense Treasury
Stock Capital Earnings Sale, Net ESOP Stock Total
------- ----------- --------- --------------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands, Except Share Data)
Balances at June 30, 1992............... $1,705 $17,293 $ 3,252 $ -- $(670) $(174) $21,406
Net income.............................. -- -- 2,221 -- -- -- 2,221
Amortization of unearned
compensation-ESOP...................... -- -- -- -- 157 -- 157
Issuance of common stock through
stock option plans (Note 12)........... 3 (124) -- -- -- 174 53
Issuance of common stock through
employee stock purchase plan
(Note 12).............................. 4 8 -- -- -- -- 12
------ ------- -------- ---------- -------- ------- -------
Balances at June 30, 1993............... 1,712 17,177 5,473 -- (513) 23,849
Net income.............................. -- -- 3,090 -- -- -- 3,090
Amortization of unearned
compensation-ESOP...................... -- -- -- -- 158 -- 158
Issuance of common stock through
stock option plans (Note 12)........... 28 141 -- -- -- -- 169
Issuance of common stock through
employee stock purchase plan
(Note 12).............................. 4 25 -- -- -- -- 29
Cash dividends ($0.24 per share)........ -- -- (408) -- -- -- (408)
Change in unrealized net gains
(losses) on securities available for
sale, net.............................. -- -- -- (262) -- -- (262)
------ ------- -------- ---------- -------- ------- -------
Balances at June 30, 1994............... 1,744 17,343 8,155 (262) (355) -- 26,625
Net income.............................. -- -- 3,287 -- -- -- 3,287
Amortization of unearned
compensation-ESOP...................... -- -- -- -- 158 -- 158
Issuance of common stock through
stock option plans (Note 12)........... 3 (193) -- -- -- 407 217
Issuance of common stock through
employee stock purchase plan
(Note 12).............................. -- (4) -- -- -- 27 23
Purchase of 42,500 shares of
treasury stock......................... -- -- -- -- -- (627) (627)
Cash dividends ($0.51 per share)........ -- -- (875) -- -- -- (875)
Change in unrealized net gains
(losses) on securities available for
sale, net.............................. -- -- -- 590 -- -- 590
------ ------- -------- ---------- -------- ------- -------
Balances at June 30, 1995............... 1,747 17,146 10,567 328 (197) (193) 29,398
Net income.............................. -- -- 1,371 -- -- -- 1,371
Amortization of unearned
compensation-ESOP...................... -- -- -- -- 79 -- 79
Issuance of common stock through
stock option plans (Note 12)........... 2 22 -- -- -- -- 24
Issuance of common stock through
employee stock purchase plan
(Note 12).............................. -- (3) -- -- -- 35 32
Cash dividends ($0.29 per share)........ -- -- (497) -- -- -- (497)
Change in unrealized net gains
(losses) on securities available for
sale, net.............................. -- -- -- 383 -- -- 383
------ ------- -------- ---------- -------- ------- -------
Balances at December 31, 1995........... $1,749 $17,165 $11,441 $ 711 $(118) $(158) $30,790
====== ======= ======== ========== ======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Six Months
Ended Years Ended June 30,
December 31, ---------------------------------------
1995 1995 1994 1993
--------------- --------------- ---------- ----------
<S> <C> <C> <C> <C>
(in Thousands)
Cash flows from operating activities:
Net income.............................. $ 1,371 $ 3,287 $ 3,090 $ 2,221
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Provision for possible loan losses..... 375 475 625 2,150
Depreciation and amortization.......... 730 1,191 1,038 1,037
Gains on sales of investment
securities, net....................... (228) (148) (411) (967)
(Gain) loss on sales of premises and
equipment............................. -- -- 26 (61)
Net (gains) losses on sales and loss
provisions on real estate acquired by
foreclosure........................... 51 (51) (130) 1,323
Mortgage loans originated for sale..... (25,593) (28,655) (112,813) (78,863)
Mortgage loans sold.................... 27,045 29,205 114,617 75,959
(Increase) decrease in other assets.... 232 (3,205) 1,869 (2,390)
Increase (decrease) in other
liabilities........................... (1,268) 2,152 (3,027) (3,560)
--------- -------- --------- --------
Net cash provided by (used in)
operating activities................. 2,715 4,251 4,884 (3,151)
--------- -------- --------- --------
Cash flows from investing activities:
Proceeds from sales of investment
securities............................. -- -- -- 1,958
Proceeds from sales of securities
available for sale and held for sale... 13,917 20,925 11,407 17,854
Proceeds from maturities and principal 9,935 5,538 1,922 5,999
payments of securities held to maturity
Proceeds from maturities and principal
payments of securities available for
sale and held for sale................. 10,029 12,657 35,939 1,165
Purchase of securities held to maturity. (4,000) (25,094) (24,807) (9,607)
Purchase of securities available for
sale................................... (14,600) (20,904) (41,041) --
Net (increase) decrease in FHLB stock... -- (1,943) 448 --
Net increase in loans................... (13,510) (68,603) (24,354) (21,732)
Proceeds from sales of automobile loans. 17,366 11,591 -- --
Capitalized expenses on real estate
acquired by foreclosure................ -- (232) (65) (101)
Proceeds from disposition of real
estate acquired by foreclosure......... 937 984 2,404 4,219
Proceeds from sales of premises and
equipment.............................. -- -- 28 249
Additions to premises and equipment..... (1,258) (1,023) (827) (1,792)
Cash paid for mortgage servicing rights. (1,755) (453) -- --
--------- -------- --------- ---------
Net cash provided by (used in)
investing activities................. 17,061 (66,557) (38,946) (1,788)
--------- -------- --------- --------
Cash flows from financing activities:
Net increase (decrease) in time
certificates of deposit................ 8,633 30,981 (3,588) (4,537)
Net increase (decrease) in demand, NOW,
savings and money market deposit
accounts............................... (1,651) (15,350) 10,904 18,078
Proceeds from borrowings................ 102,145 158,113 30,782 12,303
Repayments of borrowings................ (125,379) (98,852) (12,085) (16,022)
Repayments of liability relating to ESOP (79) (158) (158) (157)
Proceeds from issuance of common stock.. 53 175 171 65
Purchase of treasury stock.............. -- (627) -- --
Dividends paid on common stock.......... (503) (891) (416) --
--------- -------- --------- ---------
Net cash provided by (used in) (16,781) 73,391 25,610 9,730
financing activities................. --------- -------- --------- --------
Net increase (decrease) in cash and 2,995 11,085 (8,452) 4,791
cash equivalents.....................
Cash and cash equivalents at beginning 19,097 8,012 16,464 11,673
of period.............................. --------- -------- --------- --------
Cash and cash equivalents at end of $ 22,092 $ 19,097 $ 8,012 $ 16,464
period................................. ========= ======== ========= ========
Supplemental cash flow information:
Cash paid for:
Income taxes, net...................... $ 1,015 $ 1,235 $ 1,186 $ 135
Interest............................... 8,658 13,760 10,696 12,147
</TABLE>
33
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
(Continued)
<TABLE>
<CAPTION>
Six Months
Ended Years Ended June 30,
December 31, ------------------------------------
1995 1995 1994 1993
--------------- ------------- ------------ -------
(in Thousands)
<S> <C> <C> <C> <C>
Supplemental schedule of non-cash
activities:
Transfer of securities to available for
sale (Note 2) $3,953 $ -- $56,028 $ --
Transfer of securities from available
for sale to held to maturity........... -- -- 10,957 --
Mortgage loans securitized during the
period................................. -- 5,551 19,625 6,827
Additions to real estate acquired by
foreclosure............................ 420 999 477 1,994
Transfer of real estate acquired by
foreclosure to premises and equipment.. -- -- -- 609
Change in net unrealized gains (losses)
on securities available for sale, net.. 383 590 (262) --
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Community
Bankshares, Inc. and its wholly-owned subsidiaries ("the Company"), Concord
Savings Bank ("the Bank") and its wholly owned subsidiary, Bancredit
Corporation ("Bancredit"). All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain amounts in prior
years have been reclassified to conform with the current year's presentation.
The Company is a shareholder owned bank holding company organized in 1985
under New Hampshire statutes to acquire the Bank upon its conversion from a
mutual savings bank to a stock guaranty savings bank on May 8, 1986. The Bank
was originally chartered by the New Hampshire legislature in 1872. The Holding
Company is regulated by the Federal Reserve Board, and the Bank by the Bank
Commissioner of the State of New Hampshire and by the Federal Deposit Insurance
Corporation (FDIC). The Bank is also a member of the Federal Home Loan Bank of
Boston.
The principal business of the Bank consists of originating residential
mortgage loans on property located primarily in New Hampshire, commercial loans
and consumer loans, and attracting deposits to fund these assets. Through its
subsidiary, Bancredit Corporation, the Bank is active throughout the state in
originating consumer automobile, recreational vehicle and boat loans. The Bank
also provides banking and financial advisory services to municipalities and
public agencies throughout New Hampshire.
Effective December 31, 1995, Community changed its fiscal year from June 30 to
December 31. The financial statements and notes thereto have been presently
accordingly to transition this change in fiscal year.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and general practices
within the banking industry. In preparing the financial statements, management
is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the dates of the balance sheets and revenues and
expenses for the periods. Actual results could differ from these estimates.
Material estimates that are susceptible to change because of changing market
conditions relate to the determination of the allowance for possible loan
losses, valuation of real estate acquired by foreclosure and the carrying value
of mortgage servicing rights.
Investment and Mortgage-Backed Securities
Debt securities that management has the positive intent and ability to hold to
maturity are classified as "held to maturity" and carried at amortized cost.
Investments that are purchased and held principally for the purpose of selling
them in the near term are classified as "trading" and carried at fair value,
with unrealized gains and losses included in earnings. Investments not
classified as either "held to maturity" or "trading" are classified as
"available for sale" and carried at fair value, with unrealized gains and
losses excluded from earnings and reported as a separate component of
stockholders' equity. When a debt security is transferred into the "held to
maturity" category from the "available for sale" category, the unrealized
gain or loss at the transfer date continues to be reported as a separate
component of stockholders' equity and is amortized over the remaining life of
the related security as a yield adjustment. If a decline in fair value below the
amortized cost basis of an investment is judged by management to be other than
temporary, the cost basis of the investment is written down to fair value and
the amount of the writedown is included in earnings.
35
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Premiums and discounts on investment and mortgage-backed securities are
recognized in the statements of income using a method that approximates the
level-yield method over the lives of the securities. Gains and losses on
securities are recognized when realized with the cost basis of investments sold
determined on a specific identification basis.
Loans
Interest income on loans is recognized on the accrual method. Nonaccrual loans
include impaired loans and are those loans on which the accrual of interest is
discontinued when collectibility of principal or interest is uncertain or
payments of principal or interest have become contractually past due 90 days.
Upon such discontinuance, all unpaid accrued interest is reversed against the
current period's earnings. A non-impaired loan which has principal or interest
payments contractually past due 90 days may remain on accrual status, however,
if value of the collateral securing the loan is sufficient to cover principal
and accrued interest, and the loan is in the process of collection.
Interest received on nonaccrual loans is either applied against principal or
reported as income according to management's judgment as to the collectibility
of principal. Interest received on impaired loans is applied against principal.
Loan origination fees and certain direct origination costs are capitalized and
recognized in income as an adjustment of the yield on the related loan.
Loan Sale Activity
Loans held for sale are carried at the lower of aggregate cost or market
value, based upon commitments from investors to purchase such loans and upon
prevailing market conditions. Deferred origination fees collected for such
loans, net of sale commitment fees paid, are included in the lower of cost or
market determination. Such fees are recognized as part of gains on sales of
loans when the loans are sold.
Gains and losses on loans sold with servicing rights retained are adjusted to
recognize the difference between the present value of future service fee income
and a normal service fee. The resulting excess loan servicing rights are
amortized as a reduction of service fee income using the level yield method over
the remaining lives of the loans adjusted by expected prepayments. Actual loan
prepayment experience is reviewed periodically and the carrying value of excess
loan servicing rights is reduced when actual prepayment experience exceeds that
originally estimated.
Effective July 1, 1994, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 122, "Accounting for Mortgage Servicing Rights, an
Amendment of FASB Statement No. 65." As a result of adoption, gains on sales of
loans increased by approximately $170,000 for the year ended June 30, 1995. This
statement requires the Company to recognize as separate assets rights to service
mortgage loans for others, however those servicing rights are acquired. When the
Company acquires mortgage servicing rights either through the purchase or
origination of mortgage loans (originated mortgage loan servicing rights) and
sells or securitizes those loans with servicing rights retained it allocates the
total cost of the mortgage loans to the mortgage servicing rights and the loans
(without the mortgage servicing rights) based on their relative fair values.
When the Company purchases mortgage loan servicing rights (purchased mortgage
loan servicing rights) separately, the initial purchase cost is recognized as an
asset.
36
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Originated and purchased mortgage loan servicing rights are amortized as a
reduction of service fee income in proportion to, and over the period of,
estimated net servicing income by use of the level yield method.
On a quarterly basis, the Company assesses the carrying values of originated
and purchased mortgage servicing rights for impairment based on the fair value
of such rights. A valuation model that calculates the present value of future
cash flows is used to estimate such fair value. This valuation model
incorporates assumptions that market participants would use in estimating future
net servicing income including estimates of the cost of servicing loans,
discount rate, float value, ancillary income, prepayment speeds, and default
rates. Any impairment is recognized as a charge to earnings through a valuation
allowance.
Allowance for Possible Loan Losses
The allowance for possible loan losses is maintained at a level believed by
management to be adequate to meet reasonably foreseeable loan losses on the
basis of many factors including the risk characteristics of the portfolio,
underlying collateral, current and anticipated economic conditions that may
affect the borrower's ability to pay, specific problem loans, and trends in loan
delinquencies and charge-offs. Possible losses on loans are provided for under
the allowance method of accounting. The allowance is increased by provisions
charged to earnings and reduced by loan charge-offs, net of recoveries. Loans,
including impaired loans, are charged off in whole or in part when, in
management's opinion, collectibility is not probable.
While management uses available information to establish the allowance for
possible loan losses, future additions to the allowance may be necessary if
economic developments differ substantially from the assumptions used in making
the evaluation. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for possible
loan losses. Such agencies may require the Bank to recognize additions to the
allowance based on judgments different from those of management.
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
require changes in both the disclosure and impairment measurement of certain
loans. Adoption of these statements had no material impact on the Company's
financial position or results of operations. At December 31, 1995, the Company
had impaired loans, as defined under SFAS No. 114 and 118, amounting to
$526,000.
Impaired loans are commercial, commercial real estate, and individually
significant mortgage and consumer loans for which it is probable that the
Company will not be able to collect all amounts due according to the contractual
terms of the loan agreement. The definition of "impaired loans" is not the
same as the definition of "nonaccrual loans," although the two categories
overlap. Nonaccrual loans include impaired loans and are those on which the
accrual of interest is discontinued when collectibility of principal or interest
is uncertain or payments of principal or interest have become contractually past
due 90 days. The Company may choose to place a loan on nonaccrual status due to
payment delinquency or uncertain collectibility, while not classifying the loan
as impaired, if (i) it is probable that the Company will collect all amounts due
in accordance with the contractual terms of the loan or (ii) the loan is not a
commercial, commercial real estate or an individually significant mortgage or
consumer loan. Factors considered by management in determining impairment
include payment status and collateral value. The amount of impairment for these
types of impaired loans is determined by the difference between the present
value of the expected cash flows related to the loan, using the original
contractual interest rate, and its recorded value, or, as a practical expedient
in the case of collateralized loans, the difference between the fair value of
the collateral and the recorded amount of the loans. When foreclosure is
probable, impairment is measured based on the fair value of the collateral.
Mortgage and consumer loans which are not individually significant are
measured for impairment
37
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
collectively. Loans that experience insignificant payment delays and
insignificant shortfalls in payment amounts generally are not classified as
impaired. Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Restructured, accruing loans entered into prior to the adoption of these
statements are not required to be reported as impaired unless such loans are not
performing according to the restructured terms at adoption of SFAS No. 114. Loan
restructurings entered into after adoption of SFAS No. 114 are reported as
impaired loans, and impairment is measured as described above using the loan's
pre-modification rate of interest.
Premises and Equipment
Land is stated at cost. Bank buildings, improvements and equipment are carried
at cost less accumulated depreciation. Depreciation is computed over the
estimated useful lives of the respective assets on the straight-line method for
buildings and improvements and on the straight-line and double-declining balance
methods for equipment.
Real Estate Acquired by Foreclosure
Real estate acquired by foreclosure includes foreclosed properties where the
Bank is in possession of the collateral. Real estate acquired by foreclosure in
settlement of loans are recorded at the lower of the carrying value of the loan
or the fair value of the property received minus costs to sell.
Losses arising from the acquisition of such properties or from the writedowns
to fair values of loans substantively repossessed are charged against the
allowance for possible loan losses. Operating expenses and any subsequent
provisions to reduce the carrying value to net fair value are charged to current
period earnings. Gains upon disposition are reflected in earnings as realized.
Realized losses are charged to an allowance for losses on real estate acquired
by foreclosure.
SFAS No. 114 also changes the criteria for classification of a loan as an in-
substance foreclosure. Beginning July 1, 1995, loans are classified as in-
substance foreclosure when the Company is in possession of the collateral.
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and the respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Earnings Per Share
Earnings per share is based on the weighted average number of common and
common stock equivalents outstanding during the period.
38
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(2) Investment and Mortgage-Backed Securities
The amortized cost and estimated market values of investment and mortgage-
backed securities were as follows:
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
------------------------------------------- -------------------------------------------
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
--------- ---------- ---------- -------- --------- ---------- ---------- --------
Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- -------- --------- ---------- ---------- --------
(in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1995 :
Investment securities:
U.S. Government and
Agency obligations............. $27,892 $ 755 $ 21 $28,626 $30,957 $ 242 $ 38 $31,161
Municipal investments............ 971 -- 971 -- -- -- --
Marketable equity securities..... 181 115 30 266 -- -- -- --
------- ------ ---------- ------- ------- ---------- ---------- -------
29,044 870 51 29,863 30,957 242 38 31,161
------- ------ ---------- ------- ------- ---------- ---------- -------
Mortgage-backed securities:
FHLMC............................ 8,160 61 20 8,201 10,621 23 36 10,608
FNMA............................. 12,452 233 26 12,659 1,844 33 -- 1,877
Other............................ 3,326 92 -- 3,418 107 -- -- 107
------- ------ ---------- ------- ------- ---------- ---------- -------
23,938 386 46 24,278 12,572 56 36 12,592
------- ------ ---------- ------- ------- ---------- ---------- -------
Total investment securities.... $52,982 $1,256 $ 97 $54,141 $43,529 $ 298 $ 74 $43,753
======= ====== ========== ======= ======= ========= ========== =======
June 30, 1995:
Investment securities:
U.S. Government and
Agency obligations............. $31,814 $ 364 $ 77 $32,101 $32,930 $ 146 $174 $32,902
Other debt securities............ -- -- -- -- 3,944 54 -- 3,998
Municipal investments............ 987 -- -- 987 2,750 -- -- 2,750
Marketable equity securities..... 182 87 40 229 -- -- -- --
------- ------ ---------- ------- ------- ---------- ---------- -------
32,983 451 117 33,317 39,624 200 174 39,650
------- ------ ---------- ------- ------- ---------- ---------- -------
Mortgage-backed securities:
FHLMC............................ 4,815 -- 81 4,734 10,657 18 123 10,552
FNMA............................. 11,951 251 -- 12,202 2,006 20 -- 2,026
Other............................ 8,476 89 64 8,501 1,121 3 2 1,122
------- ------ ---------- ------- ------- ---------- ---------- -------
25,242 340 145 25,437 13,784 41 125 13,700
------- ------ ---------- ------- ------- ---------- ---------- -------
Total investment securities.... $58,225 $ 791 $ 262 $58,754 $53,408 $ 241 $299 $53,350
======= ====== ========== ======= ======= ========== ========== =======
Available for Sale Held to Maturity
------------------------------------------- -------------------------------------------
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
--------- ---------- ---------- -------- --------- ---------- ---------- --------
Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- -------- --------- ---------- ---------- --------
(in Thousands)
June 30, 1994:
Investment securities:
U.S. Government and Agency
obligations..................... $36,135 $ 148 $343 $35,940 $16,931 $ -- $346 $16,585
Other debt securities............ 1,000 -- -- 1,000 977 -- 9 968
Marketable equity securities..... 127 72 44 155 -- -- -- --
------- ------ ------- ------- --------- ------- ---------- --------
37,262 220 387 37,095 17,908 -- 355 17,553
------- ------ ------- ------- --------- ------- ---------- --------
Mortgage-backed securities:
FHLMC............................ 12,176 53 307 11,922 12,253 -- 417 11,836
FNMA............................. 14,116 135 148 14,103 2,448 5 88 2,365
Other............................ 1,698 -- 23 1,675 1,251 -- 8 1,243
------- ------ ------- ------- --------- ------- ---------- --------
27,990 188 478 27,700 15,952 5 513 15,444
------- ------ ------- ------- --------- ------- ---------- --------
Total investment securities.... $65,252 $ 408 $865 $64,795 $33,860 $ 5 $868 $32,997
======= ====== ======= ======= ======= ======= ========== =======
</TABLE>
39
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As a member of the Federal Home Loan Bank (FHLB) of Boston, the Bank is
required to invest in $100 par value stock of the FHLB of Boston in the amount
of 1% of its outstanding loans secured by residential housing, or 1% of 30% of
total assets, or 5% of its outstanding advances from the FHLB of Boston,
whichever is higher. When such stock is redeemed, the Bank would receive from
the FHLB of Boston an amount equal to the par value of the stock. As of December
31, 1995, the Bank was required to have an investment of at least $2,727,000.
An analysis of realized gains and losses on investment and mortgage-backed
securities and investments, available and held for sale, for the periods
indicated is as follows:
<TABLE>
<CAPTION>
Six Months Ended Years Ended June 30,
December 31, ----------------------------------------------------------
1995 1995 1994 1993
------------------ ------------------ ------------------ ------------------
Realized Realized Realized Realized Realized Realized Realized Realized
-------- -------- -------- -------- -------- -------- -------- --------
Gains Losses Gains Losses Gains Losses Gains Losses
----- ------ ----- ------ ----- ------ ----- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt securities......... $ -- $ -- $ -- $ -- $ -- $ -- $ 85 $ --
Marketable equity
securities............. -- -- -- -- -- -- -- --
Mortgage-backed
securities............. -- -- -- -- -- -- 45 --
Investments, available
and held for sale...... 228 -- 171 23 411 -- 837 --
----- ------- ----- ------ ----- ------ ----- -----
$ 228 $ -- $ 171 $ 23 $ 411 $ -- $ 967 $ --
===== ======== ===== ====== ====== ======= ===== ======
</TABLE>
The following table sets forth the maturity distribution of investment
securities (excluding marketable equity securities) at December 31, 1995.
<TABLE>
<CAPTION>
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years Total
------------------ ------------------ ----------------- ------------------ ------------------
Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair
--------- ------- --------- ------- --------- ------ --------- ------- --------- -------
Cost Value Cost Value Cost Value Cost Value Cost Value
------- ------- ------- ------- ------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(in Thousands)
Available for Sale:
U.S. Government and
Agency obligations............ $ 4,000 $ 4,009 $23,892 $24,617 $ -- $ -- $ -- $ -- $27,892 $28,626
Municipal investments.......... 784 784 187 187 -- -- -- -- 971 971
Mortgage-backed securities..... -- -- 2,450 2,449 2,995 2,970 18,493 18,859 23,938 24,278
------- ------- ------- ------- ------ ------ ------- ------- ------- -------
Total........................... $ 4,784 $ 4,793 $26,529 $27,253 $2,995 $2,970 $18,493 $18,859 $52,801 $53,875
======= ======= ======= ======= ====== ====== ======= ======= ======= =======
Held to Maturity:
U.S. Government and
Agency obligations............ $16,983 $17,052 $13,974 $14,109 $ -- $ -- $ -- $ -- $30,957 $31,161
Mortgage-backed securities..... -- -- 11,670 11,689 -- -- 902 903 12,572 12,592
------- ------- ------- ------- ------ ------ ------- ------- ------- -------
Total........................... $16,983 $17,052 $25,644 $25,798 $ -- $ -- $ 902 $ 903 $43,529 $43,753
======= ======= ======= ======= ====== ====== ======= ======= ======= =======
</TABLE>
40
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Mortgage-backed securities are expected to have shorter average lives than
their contractual maturities because borrowers may repay obligations without
prepayment penalties. In a declining interest rate environment, prepayments on
mortgage-backed securities are likely to accelerate. In a rising rate scenario,
prepayments on mortgage-backed securities are likely to slow.
In 1995, the Financial Accounting Standards Board allowed a one-time
reassessment of the appropriateness of the classification of all securities
held, and the Company reclassified $3,953,000 of securities held to maturity to
available for sale during November 1995. At the time of reclassification, there
were $58,000 in unrealized gains and no unrealized losses relating to the
securities transferred.
(3) Loans
The Bank's lending activities are concentrated primarily in central and
southern New Hampshire. The Bank grants single family residential loans,
commercial real estate loans, commercial loans, indirect automobile and
recreational vehicle loans through dealers and a variety of other consumer
loans. In addition, the Bank grants loans for the construction of residential
homes and commercial real estate properties, and for the development of land.
The ability and willingness of residential mortgage and consumer loan borrowers
to honor their repayment commitments is generally dependent on the level of
overall economic activity within the borrower's geographic areas and real estate
values. The ability and willingness of commercial real estate, construction loan
and commercial borrowers to honor their repayment commitments is generally
dependent on the health of the real estate economic sector in the borrower's
geographic areas and the general economy.
<TABLE>
<CAPTION>
At June 30,
At December 31, ----------------------
1995 1995 1994
---------------- ---------- ----------
<S> <C> <C> <C>
(in Thousands)
Mortgage loans:
Residential......................... $ 71,771 $ 67,643 $ 66,380
Home equity......................... 14,878 17,053 18,969
Construction........................ 2,821 489
Commercial.......................... 54,308 53,716 40,078
-------- -------- --------
143,778 138,901 125,427
Deferred loan origination fees, net. (364) (353) (142)
-------- -------- --------
Mortgage loans, net............... 143,414 138,548 125,285
-------- -------- --------
Other loans:
Indirect automobile and 90,449 100,666 66,528
recreational vehicle...............
Mobile home......................... 11,235 11,976 13,702
Other consumer...................... 7,225 6,779 8,352
Commercial.......................... 13,126 12,409 8,060
-------- -------- --------
122,035 131,830 96,642
-------- -------- --------
Deferred loan origination costs..... 1,246 1,083 182
-------- -------- --------
Other loan........................ 123,281 132,913 96,824
-------- -------- --------
Total loans....................... $266,695 $271,461 $222,109
======== ======== ========
</TABLE>
In the ordinary course of business, the Bank has granted loans to executive
officers and directors, and their related interests, on substantially the same
terms, including interest and collateral, as those prevailing at the time
41
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for comparable transactions with unrelated borrowers. The aggregate amount of
these loans at December 31, 1995 was $160,000. No new loans were added, and
payments of $62,000 were recorded during the six months ended December 31, 1995.
The aggregate amount of these loans at June 30, 1995 was $222,000. Activity in
these loans during the year ended June 30, 1995 included loan additions of
$45,000 and loan repayments of $13,000. The balance of these loans at June 30,
1994 was $190,000.
The Company from time to time originates automobile consumer finance contracts
through an automobile dealership owned and operated by one of its directors,
subject to the Bank's credit approval, on terms comparable to those accorded
other dealers. Contracts amounting to $319,000 during the six months ended
December 31, 1995 and $1,003,000 and $960,000, respectively, during the fiscal
years ended June 30, 1995 and 1994 were originated through this dealership.
Loans on nonaccrual at December 31, 1995, June 30, 1995 and 1994 totaled
$1,331,000, $1,730,000 and $730,000, respectively. At December 31, 1995, loans
delinquent 90 days and still accruing amounted to $54,000. At June 30, 1995 and
1994, there were no loans that were 90 days or more past due and still accruing.
At December 31, 1995 and June 30, 1995 there were no restructured loans
classified as non-performing as compared to $174,000 at June 30, 1994. The Bank
has no additional funding commitments to these borrowers.
Impaired loans, which are included in nonaccrual loans, amounted to $526,000
at December 31, 1995. At December 31, 1995, the portion of the allowance for
possible loan losses allocated to impaired loans, comprised of two commercial
loans, was $84,000. No income was earned, on an average balance of $175,000, on
impaired loans during the six months ended December 31, 1995.
The reduction in interest income for the periods indicated associated with
nonaccrual and restructured loans held at the end of such periods is as follows:
<TABLE>
<CAPTION>
Six Months Years Ended June 30,
Ended December 31, -----------------------
1995 1995 1994 1993
------------------- ------- ------ ------
<S> <C> <C> <C> <C>
(in Thousands)
Income in accordance with original terms $ 65 $ 148 $ 62 $ 258
Income recognized....................... (2) (70) (42) (199)
----- ----- ----- -----
Foregone income......................... $ 63 $ 78 $ 20 $ 59
===== ===== ===== =====
</TABLE>
At December 31, 1995, June 30, 1995 and 1994, the principal balance of
residential mortgage loans serviced by the Bank for others amounted to
$345,328,000, $351,512,000 and $160,994,000, respectively. At December 31, 1995
and June 30, 1995, the principal balance of indirect automobile loans serviced
by the Bank for others amounted to $25,942,000 and $11,536,000, respectively.
The Bank did not service any indirect automobile loans for others during fiscal
1994.
42
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Following is an analysis of activity concerning loan servicing rights from
June 30, 1994 to December 31, 1995:
<TABLE>
<CAPTION>
Originated Purchased
Excess Loan Mortgage Loan Mortgage Loan
Servicing Rights Servicing Rights Servicing Rights
---------------- ---------------- ----------------
(in Thousands)
<S> <C> <C> <C>
Balance at June 30, 1994............................... $ -- $ -- $ --
Originations and acquisitions during the period...... 138 187 2,257
Amortization charged to service fee income........... (1) (8) --
---- ---- ------
Balance at June 30, 1995............................... 137 179 2,257
Valuation allowance.................................. -- (9) --
---- ---- ------
Carrying value at June 30, 1995........................ 137 170 2,257
Originations and acquisitions during the period...... 247 101 --
Receipt of purchase price adjustments................ -- -- (117)
Amortization charged to service fee income........... (69) (17) (115)
Change in valuation allowance........................ -- (6) (75)
---- ---- ------
Carrying value at December 31, 1995.................... $315 $248 $1,950
==== ==== ======
</TABLE>
At December 31, 1995, the carrying values of originated mortgage servicing
rights and purchased mortgage servicing rights was net of a valuation reserve of
$14,000 and $75,000, respectively. Excess loan servicing rights, at December 31,
1995 did not require a valuation reserve.
The December 31, 1995 and June 30, 1995 carrying values of originated and
purchased mortgage loan servicing rights are reasonable approximations of their
fair value at that date.
The risk characteristics of the underlying loans used to measure impairment of
originated and purchased mortgage loan servicing rights include loan type,
interest rate, loan origination date, term to maturity, and geographic location.
(4) Allowance for Possible Loan Losses
<TABLE>
<CAPTION>
Six Months
Ended Year Ended June 30,
December 31, -------------------------
1995 1995 1994 1993
------------ ------- ------- -------
<S> <C> <C> <C> <C>
(in Thousands)
Balance at beginning of period................... $2,970 $3,351 $3,822 $3,958
Provision for possible loan losses............... 375 475 625 2,150
Recoveries on loans previously charged off....... 312 466 612 378
------ ------ ------ ------
3,657 4,292 5,059 6,486
Less loans charged off........................... 650 1,322 1,708 2,664
------ ------ ------ ------
Balance at end of period......................... $3,007 $2,970 $3,351 $3,822
====== ====== ====== ======
</TABLE>
43
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(5) Premises and Equipment
The major categories of Bank premises and equipment are as follows:
<TABLE>
<CAPTION>
Estimated
At June 30, Useful
At December 31, ---------------- Life in
1995 1995 1994 Years
--------------- ------- ------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Land.......................................... $ 1,014 $ 1,014 $ 1,014
Buildings..................................... 7,796 7,178 6,861 15 to 40
Construction in process....................... 398 303 196
Furniture and equipment....................... 4,170 3,626 3,395 3 to 20
Furniture and equipment under capital leases.. 552 552 513 3 to 5
------- ------- -------
13,930 12,673 11,979
Less accumulated depreciation................. 5,683 5,251 4,829
------- ------- -------
$ 8,247 $ 7,422 $ 7,150
======= ======= =======
</TABLE>
Depreciation and amortization of Bank premises and equipment included in
operating expenses for the six months ended December 31, 1995 amounted to
$433,000 and $751,000, $685,000 and $632,000, respectively, for the years ended
June 30, 1995, 1994 and 1993.
The Bank is obligated under various non-cancelable operating leases as well as
the capital leases included above, some of which provide for periodic
adjustments. At December 31, 1995, minimum lease payments for capital and
operating leases were as follows:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
--------- -------
<S> <C> <C>
(in Thousands)
Payable:
Within 1 year..................... $108 $129
From 1 to 2 years................. 111 129
From 2 to 3 years................. 105 69
From 3 to 4 years................. 101 17
From 4 to 5 years................. 56 --
After 5 years..................... 318 --
---- ----
Total minimum lease payments....... 799 344
Less amount representing interest.. -- 38
---- ----
$799 $306
==== ====
</TABLE>
Total operating lease expense for the six months ended December 31, 1995
amounted to $49,000 and for the years ended June 30, 1995, 1994 and 1993
amounted to $71,000, $18,000 and $11,000, respectively.
44
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(6) Real Estate Acquired by Foreclosure or Substantively Repossessed
<TABLE>
<CAPTION>
At June 30,
At December 31, -------------
1995 1995 1994
--------------- ------ -----
<S> <C> <C> <C>
(in Thousands)
Single family housing projects.. $ 14 $ 14 $ 85
Retail and office............... 247 247 234
Non-retail commercial........... -- -- 28
Residential..................... 305 873 489
----- ------ -----
$ 566 $1,134 $ 836
===== ====== =====
</TABLE>
The above summary excludes $225,000, $277,000 and $204,000, respectively, of
repossessed mobile homes and $108,000, $91,000 and $38,000, respectively, of
repossessed automobiles at December 31, 1995 and June 30, 1995 and 1994 which
are included in other assets in the accompanying balance sheets.
An analysis of real estate acquired by foreclosure for the periods indicated
is as follows:
<TABLE>
<CAPTION>
Six Months
Ended Year Ended June 30,
December 31, ---------------------
1995 1995 1994
------------- ---------- ---------
(in Thousands)
<S> <C> <C> <C>
Balance at beginning of period............................. $1,134 $ 836 $ 2,568
Foreclosures and properties substantively repossessed.... 420 1,231 542
Sales proceeds........................................... (937) (984) (2,404)
Gains on sales, net...................................... 49 27 130
Recoveries subsequent to foreclosure, net................ (100) 24 --
------ ------ -------
Balance at end of period................................... $ 566 $1,134 $ 836
====== ====== =======
</TABLE>
An analysis of foreclosed property expense for the periods indicated is as
follows:
<TABLE>
<CAPTION>
Six Months
Ended Year Ended June 30,
December 31, ------------------------------
1995 1995 1994 1993
------------ --------- -------- -------
(in Thousands)
<S> <C> <C> <C> <C>
Foreclosure and holding costs, net......................... $ 105 $ 197 $ 197 $ 552
Recoveries and loss provisions during the period, net...... 100 (24) -- 1,029
(Gains) losses on sales, net............................... (49) (27) (130) 294
----- ----- ------ -------
$ 156 $ 146 $ 67 $ 1,875
===== ===== ====== =======
</TABLE>
45
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(7) Deposits
<TABLE>
<CAPTION>
At June 30,
At December 31, ------------------
1995 1995 1994
---- ---- ----
<S> <C> <C> <C>
(in Thousands)
Non-interest bearing demand deposits.. $ 18,566 $ 16,420 $ 15,067
-------- -------- --------
Savings deposits:
Savings, club and escrow accounts... 78,844 81,656 97,794
Interest-bearing NOW accounts....... 23,487 24,124 20,675
Money market accounts............... 9,046 9,394 13,408
-------- -------- --------
Total savings deposits............ 111,377 115,174 131,877
-------- -------- --------
Time certificates of deposit........ 185,595 176,962 145,981
-------- -------- --------
Total deposits.................... $315,538 $308,556 $292,925
======== ======== ========
</TABLE>
At December 31, 1995 and June 30, 1995 and 1994, time certificate of deposit
accounts with balances of $100,000 or more amounted to $26,117,000, $19,010,000
and $13,741,000, respectively.
The average annual interest rates on time certificates of deposit outstanding
at December 31, 1995 by periods to maturity are summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Amount Rate
----------- ----------
<S> <C> <C>
(Dollars in Thousands)
Within 1 year......... $124,003 5.73%
From 1 to 2 years..... 44,961 5.92
From 2 to 3 years..... 9,878 6.13
From 3 to 5 years..... 6,753 6.37
--------
$185,595 5.82
========
</TABLE>
At December 31, 1995 and June 30, 1995 and 1994, time certificates of deposit
issued at rates which may be adjusted periodically during the term of the
certificate amounted to $32,638,000, $33,098,000 and $40,806,000, respectively.
(8) Securities Sold Under Agreements to Repurchase
<TABLE>
<CAPTION>
Maximum
Outstanding
Daily Average at any
End of Period During Period Month-end
-------------- -------------- -----------
Balance Rate Balance Rate
------- ----- ------- -----
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Six Months ended December 31, 1995.. $4,675 4.78% $5,346 5.54% $7,514
Year Ended June 30, 1995............ 6,348 5.82 1,161 5.94 6,348
</TABLE>
46
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Repurchase agreements outstanding at December 31, 1995 and June 30, 1995
carried maturity dates of three months or less. U.S. Government and Agency
securities with a book value of $4,770,000 and $6,949,000, respectively, and a
fair value of $4,794,000 and $6,916,000, respectively, were pledged as
collateral and held by custodians to secure the agreements at December 31, 1995
and June 30, 1995. The Company had no repurchase agreement activity during the
fiscal years ended June 30, 1994 and 1993.
(9) Other Borrowed Funds
<TABLE>
<CAPTION>
At June 30,
At December 31, ---------------------
1995 1995 1994
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Advances from the Federal Home Loan Bank of
Boston............................................... $54,548 $76,050 $23,072
Capitalized leases.................................... 306 361 419
Note payable due in monthly installments including
interest at 7%....................................... 5 9 16
------- ------- -------
$54,859 $76,420 $23,507
======= ======= =======
</TABLE>
At December 31, 1995, mortgage loans on residential property of approximately
$73,000,000, investment securities of $9,000,000 and all stock in the Federal
Home Loan Bank of Boston were pledged as collateral to secure the above advances
and a line of credit with the Federal Home Loan Bank of Boston of $8,000,000.
The average annual interest rates on advances from the Federal Home Loan Bank of
Boston outstanding at December 31, 1995 by periods to maturity are summarized as
follows:
<TABLE>
<CAPTION>
Weighted
Average
Amount Rate
---------- -----------
<S> <C> <C>
(Dollars in Thousands)
Within 1 year......... $34,000 5.80%
From 1 to 2 years..... 20,000 5.66
From 3 to 5 years..... 75 8.13
After 5 years......... 473 7.37
-------
$54,548 5.77
=======
</TABLE>
(10) Stockholders' Equity
Federal regulations prohibit banking companies from paying dividends on their
stock if the effect would cause stockholders' equity to be reduced below
applicable regulatory capital requirements or if such declaration and payment
would otherwise violate regulatory requirements. At December 31, 1995, the
Company and the Bank were in compliance with all regulatory capital
requirements.
47
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On October 17, 1989, the Board of Directors adopted a Shareholder Rights Plan
and declared a dividend distribution of one Right for each outstanding share of
common stock. The distribution was payable on November 15, 1989 to the
stockholders of record on October 31, 1989. Such Rights only become exercisable
upon the earliest to occur of (i) 10 days following a public announcement that a
person or group of affiliated or associated persons (an "Acquiring Person")
has acquired, or obtained the right to acquire, beneficial ownership of 15% or
more of the outstanding Common Shares, or (ii) 10 days following the
commencement of a tender offer or exchange offer the consummation of which would
result in the beneficial ownership by a person of 25% or more of such
outstanding Common Shares, or (iii) the declaration by the Board of Directors
that any person is an "Adverse Person" (the earliest of such dates being
called the "Distribution Date"). Each Right entitles the registered holder to
purchase from the Company one one-hundredth of one share (a "Unit") of Series
A Preferred Stock, $1.00 par value, at a price of $40 per Unit, subject to
adjustment. If the Company is acquired in a merger or other business combination
transaction or more than 50% of its assets or earning power are sold, the Rights
entitle holders to acquire common stock of the Acquiring Person having a value
twice the exercise price of the Rights. The Rights may be redeemed in whole, but
not in part, at a price of $.01 per Right at any time prior to the Distribution
Date. The Rights will expire on October 30, 1999.
(11) Income Taxes
At December 31, 1995, the Company had a Federal income tax receivable of
$34,000. At June 30, 1995 and 1994, the Company's accrued Federal income tax
payable was $140,000 and $81,000, respectively.
During fiscal 1993, the Company was subject to an annual franchise tax imposed
by the State of New Hampshire at the rate of 1% of the total amount of interest
paid on its deposits each year. The Company was also subject to an additional
franchise tax in an amount equal to 1% of its outstanding capital stock account.
This additional franchise tax could be utilized as a credit against the
franchise tax imposed on interest paid on deposits. The Company was also subject
to a state business profits tax equal to 8% of taxable income, net of
permissible deductions under New Hampshire law for interest earned on United
States Government securities and a tax credit for franchise taxes paid.
On July 1, 1993, the State of New Hampshire modified many of its corporate
income tax laws. These changes resulted in the Company being subject to a state
business profits tax equal to 7.5% for fiscal year 1994 and 7.0% for years
thereafter. In addition, the Company is no longer subject to an annual franchise
tax but instead is subject to a business enterprise tax. This tax is imposed at
the rate of 0.25% of the sum of the Company's interest expense, compensation
expense and dividends paid. This additional enterprise tax may be utilized as a
credit against the business profits tax. No provision for state income taxes is
reflected in the Company's consolidated statements of income for the six months
ended December 31, 1995 and for the years ended June 30, 1995, 1994 and 1993
because the amount of annual business enterprise tax or franchise tax exceeded
the Company's liability under the business profits tax law.
48
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The difference between the total expected income tax expense computed by
applying the federal income tax rate of 34% to income before income taxes and
the reported income tax expense is as follows:
<TABLE>
<CAPTION>
Six Months
Ended Years Ended June 30,
December 31, ------------------------
1995 1995 1994 1993
------------ ------- ------- ------
<S> <C> <C> <C> <C>
(in Thousands)
Computed "expected" federal income tax
expense at statutory rate......................... $ 757 $1,645 $1,342 $ 755
Increase (decrease) resulting from:
State taxes (net of federal benefit, before
change in valuation reserve).................... 24 75 54 (12)
Dividend received deduction...................... (2) (6) (21) (2)
Change in valuation reserve...................... (55) (150) (510) (742)
Non-deductible acquisition expenses.............. 141 -- -- --
Other............................................ (11) (13) (7) 1
----- ------ ------ -----
$ 854 $1,551 $ 858 $ --
===== ====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
Six Months
Ended Years Ended June 30,
December 31, ------------------------
1995 1995 1994 1993
------------ ------- ------- ------
<S> <C> <C> <C> <C>
(in Thousands)
Current tax expense:
Federal.......................................... $ 854 $1,424 $ 922 $ 441
----- ------ ------ -----
State............................................ -- -- -- --
----- ------ ------ -----
854 1,424 922 441
===== ====== ====== =====
Deferred tax expense (benefit):
Federal.......................................... 18 162 365 319
State............................................ 37 115 81 (18)
Change in valuation reserve...................... (55) (150) (510) (742)
----- ------ ------ -----
-- 127 (64) (441)
----- ------ ------ -----
$ 854 $1,551 $ 858 $ --
===== ====== ====== =====
</TABLE>
49
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences (the difference between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases) that give rise to significant portions of the deferred tax
asset and deferred tax liability are as follows:
<TABLE>
<CAPTION>
June 30,
December 31, ----------------
1995 1995 1994
------------ ------- -------
<S> <C> <C> <C>
(in Thousands)
Deferred tax asset:
Allowance for possible loan losses................... $ 999 $ 922 $ 919
Deferred loan fees................................... 158 156 67
Valuation allowance on repossessed assets............ -- 22 32
State net operating loss carryforward................ -- 20 73
Unrealized loss on securities available for sale..... -- -- 161
Purchased mortgage servicing rights.................. 52 -- --
Other................................................ 56 19 10
------ ------ ------
Gross deferred tax asset............................... 1,265 1,139 1,262
Valuation reserve...................................... (81) (136) (286)
------ ------ ------
1,184 1,003 976
====== ====== ======
Deferred tax liability:
Originated mortgage servicing rights................. 96 -- --
Valuation allowance on loans held for sale........... -- -- 38
Pension.............................................. 40 40 88
Depreciation......................................... 156 156 101
Deferred loan costs.................................. 485 425 78
Unrealized gain on securities available for sale..... 448 206 --
Other................................................ 29 4 5
------ ------ ------
1,254 831 310
------ ------ ------
Deferred income tax asset (liability), net............. $ (70) $ 172 $ 666
------ ------ ------
</TABLE>
Retained earnings at December 31, 1995 include approximately $3,445,000 of bad
debt reserves for Federal income tax purposes which may be subject to tax if not
used to absorb loan losses. Related deferred taxes on such reserves of
approximately $1,330,000 have not been provided because it is not expected that
such reserves will be utilized for other than loan losses.
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. The valuation reserve relates primarily to
certain state tax temporary differences.
50
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(12) Employee Benefits
Stock Option Plans
In 1985, 1988 and 1992 the stockholders of the Company approved stock option
plans for the benefit of certain officers and other employees. Outside
directors may elect to receive options under the 1992 plan in lieu of a portion
of director fees. The total number of shares covered by the plans is 240,000.
Employee options granted under the plans vest over four years at 25% per year.
Options are granted at not less than the fair market value of the shares at the
date of the grant, and expire ten years from the date of the grant. Activity in
the plans is summarized as follows:
<TABLE>
<CAPTION>
Six Months Ended Years Ended June 30,
December 31, ------------------------------------------------------------
1995 1995 1994 1993
------------------ ------------------ ------------------ ------------------
Weighted Weighted Weighted Weighted
Number Average Number Average Number Average Number Average
of Option of Option of Option of Option
Shares Price Shares Price Shares Price Shares Price
------ -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
period............ 97,577 $ 8.26 130,505 $ 7.33 157,880 $6.92 146,130 $6.57
Granted............ 1,079 16.75 2,233 15.42 1,000 9.00 35,000 5.40
Canceled........... (500) 10.00 (3,000) 11.38 (375) 2.83 (1,000) 2.25
Exercised.......... (2,373) 9.39 (32,161) 4.71 (28,000) 5.09 (22,250) 2.34
------ ------- ------- -------
Outstanding at
end of period..... 95,783 $ 8.32 97,577 $ 8.26 130,505 $7.33 157,880 $6.92
====== ======= ======= =======
</TABLE>
At December 31, 1995 and June 30, 1995, exercisable stock options amounted to
84,221 and 86,594, respectively.
Stock Purchase Plan
Under the Stock Purchase Plan approved by the Company's stockholders,
participating employees may annually purchase shares through accumulated payroll
deductions. During the six months ended December 31, 1995, 2,155 shares were
purchased at $13.25 per share. During the years ended June 30, 1995, 1994 and
1993, 2,029, 3,412 and 4,207 shares were purchased at $11.375, $8.125 and $2.75
per share, respectively. At December 31, 1995, 38,197 shares were available for
issuance under the Plan.
Employee Stock Ownership Plan
In May of 1986, the Company adopted an Employee Stock Ownership Plan ("ESOP").
The Plan is designed to provide retirement benefits for eligible employees of
the Bank. Because the Plan invests primarily in the stock of the Company, it
will also give eligible employees an opportunity to acquire an ownership
interest in the Company.
51
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Employees are eligible to participate in the Plan after reaching age twenty-one,
completing one year of service and working at least one thousand hours of
consecutive service during the previous year. Contributions are allocated to
eligible participants on the basis of compensation and years of credited
service.
During May 1986, the Company issued a total of 59,775 shares under the ESOP at
a total purchase price of $975,000. The purchase was made from the proceeds of a
$975,000 loan from an unrelated third party lender bearing interest at a rate of
75% of floating prime. Repayment of the loan is secured by contributions the
Bank is obliged to make under a contribution agreement with the ESOP. In 1988,
the ESOP purchased 24,696 additional shares at an average price of $11.80 per
share which was funded by additional borrowings of approximately $291,000 under
the same loan agreement. In 1991, the ESOP purchased 20,000 additional shares at
an average price of $4.81 per share funded by available cash in the ESOP. During
the six months ended December 31, 1995, the Bank made contributions to the ESOP
totaling $85,000 and $167,000, $179,000 and $187,000, respectively, for the
fiscal years ended June 30, 1995, 1994 and 1993 to enable the ESOP to make
principal and interest payments on the loan. The amount contributed was charged
to salary and employee benefit expenses. The balance of the loan will be repaid
within one year with funds from the Bank's future contributions to the ESOP and
the earnings on the ESOP's assets.
Shares used as collateral to secure the loan are released and available for
allocation to eligible employees as the principal balance of the loan is repaid.
Dividends on released shares are credited to the participants' ESOP accounts.
Dividends on unreleased shares may be allocated to participants or applied
towards payment of the loan.
At December 31, 1995, the shares held by the ESOP amounted to 85,330 of which
70,927 were released and allocated to participants of the ESOP. Shares held in
suspense at December 31, 1995, to be released annually as the loan is paid down,
amounted to 14,403. The market value of these shares at December 31, 1995 was
$18.875 per share. Dividends on ESOP shares are charged to retained earnings and
all ESOP shares are considered outstanding in determining earnings per share.
Pension Plan
The Bank provides a noncontributory pension plan for its employees. The funded
status of the plan as of December 31, 1995 and June 30, 1995 and 1994 is as
follows:
<TABLE>
<CAPTION>
June 30,
December 31, ------------------
1995 1995 1994
------------- -------- --------
<S> <C> <C> <C>
(in Thousands)
Vested benefits................................................ $1,498 $1,663 $1,397
Nonvested benefits............................................. 42 46 39
------ ------ ------
Accumulated benefit obligation............................... 1,540 1,709 1,436
Additional benefits related to future compensation levels...... 541 602 564
------ ------ ------
Projected benefit obligation................................. 2,081 2,311 2,000
Plan assets at fair value invested primarily in equity and
fixed-income securities...................................... 3,665 3,390 3,117
------ ------ ------
Plan assets in excess of projected benefit obligation.......... 1,584 1,079 1,117
Unrecognized transition asset.................................. (746) (781) (850)
Unrecognized experience (gain) loss............................ (623) (113) 29
------ ------ ------
Prepaid pension cost included in other assets................ $ 215 $ 185 $ 296
====== ====== ======
</TABLE>
52
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted average discount rate and rate of increase in future compensation
levels used in calculating the actuarial present value of the projected benefit
obligations shown above were 7.0% and 5.0%, respectively, for December 31, 1995
and 8.0% and 6.0%, respectively, for June 30, 1995 and 1994. For all periods
presented, the expected long-term rate of return on assets was 8.0%.
Net pension expense for the periods indicated include the following components:
<TABLE>
<CAPTION>
Six Months Years Ended
Ended June 30,
December 31, --------------
1995 1995 1994
------------- ------ ------
<S> <C> <C> <C>
(in Thousands)
Service cost--benefits earned.................... $ 64 $ 258 $ 211
Interest cost on projected benefit obligation.... 77 155 129
Actual return on plan assets..................... (322) (127) (25)
Net amortization and deferral.................... 151 (186) (305)
----- ----- -----
Net pension expense (income)................... $ (30) $ 100 $ 10
===== ===== =====
</TABLE>
401(k) Savings Plan
On July 1, 1994, the Bank established a 401(k) Savings Plan covering all
employees who have reached the age of twenty-one, completed one year of service
and worked at least one thousand hours during the previous year. Participants
may contribute from 1% to 10% of their pre-tax compensation. The Bank makes
quarterly matching contributions equal to 33% of the participants' contributions
up to 6% of their pre-tax compensation. Employer matching contributions vest at
25% per year. Expense under the Plan amounted to $27,000 for the six months
ended December 31, 1995 and $53,000 during the fiscal year ended June 30, 1995.
Employee Agreements
The Bank has a supplemental retirement agreement for its chief executive
officer. This plan provides retirement benefits designed to supplement benefits
available through the Bank's retirement plan for employees. Total expense for
these benefits amounted to $15,000 for the six months ended December 31, 1995
and $26,000, $17,000 and $13,000, respectively, for the years ended June 30,
1995, 1994 and 1993.
The Bank has entered into employment agreements with its senior officers (10
individuals) which provide for a lump sum payment under certain circumstances to
the officer amounting to that officer's annual compensation for a period of
three years in the case of the chief executive officer, two years in the case of
the executive vice president and senior vice president (2 individuals) and one
year in the case of each other officer, after the officer's termination, if such
termination follows a "change of control" as defined in the agreements.
53
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Incentive Compensation Plans
The Company has two incentive compensation plans designed to provide an annual
incentive to improve financial performance, under which annual incentive awards
are paid if the Company achieves specified objectives.
All personnel employed at the beginning of the fiscal year are eligible to
participate in the General Profit Sharing Plan. Certain members of senior
management are eligible to participate in the Management Incentive Plan. The
Board of Directors may provide these incentive awards in the form of cash or
stock, or in the case of the General Profit Sharing Plan, a contribution to the
Company's 401(k) Plan. Based on financial results achieved during the past three
fiscal years, the Company paid total cash incentive awards, as defined in the
two plans, of $55,000 for the six months ended December 31, 1995 and $96,000,
$111,000 and $29,000, respectively, for the fiscal years ended June 30, 1995,
1994 and 1993.
(13) Financial Instruments with Off-Balance Sheet Risk and Other Commitments and
Contingencies
The Bank 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 unused lines of credit, unadvanced portions of
construction loans, commitments to originate loans, and standby letters of
credit. The instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance sheet. The
amounts of those instruments reflect the extent of involvement the Bank has in
particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to its financial instruments (for unused lines of credit, loan commitments
and standby letters of credit) is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments. The Bank
evaluates each customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the borrower.
Financial instruments with off-balance sheet risk at the dates indicated are
as follows:
<TABLE>
<CAPTION>
At At June 30,
December 31, ------------------
1995 1995 1994
------------ -------- --------
<S> <C> <C> <C>
(in Thousands)
Unused home equity lines of credit..................... $13,978 $14,898 $18,008
Unused commercial lines of credit...................... 6,466 4,016 3,023
Unadvanced portions of construction loans.............. 591 325 --
Commitments to originate residential mortgage loans.... 4,314 4,094 5,192
Commitments to originate commercial, construction and
commercial real estate loans.......................... 3,474 8,340 7,373
Standby letters of credit.............................. 363 416 72
Unused consumer overdraft protection credit............ 687 652 620
Commitments to sell residential mortgage loans......... 6,322 7,589 5,494
Best efforts commitment to sell automobile loans....... 24,000 48,000 --
Loans sold with credit enhancement..................... 24,019 9,777 --
</TABLE>
54
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Commitments to originate loans, unused lines of credit and unadvanced portions
of construction loans are agreements to lend to a customer provided there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since some of the commitments may expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements.
Commitments to sell residential mortgage loans for a fixed price are generally
entered into between the date lending commitments are issued to borrowers and
the date the loans are sold into the secondary market. Risks arise from the
possible inability of counter-parties to meet the terms of commitments and
movement in interest rates and related prices.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
The Company has periodically sold automobile loans with credit enhancement
that obligates the Bank to assume a certain portion of credit losses should they
occur. At December 31, 1995, the outstanding balance of those loans totaled
$24,019,000. The Bank has provided $139,000 to absorb such possible losses. The
Bank has an agreement to sell up to an additional $24,000,000 of new loan
production to the same buyer on a best efforts basis.
The Bank is required to maintain a portion of its cash and due from banks as
a reserve balance under the Federal Reserve Act. Such reserve is calculated
based upon deposit levels and amounted to $1,057,000 at December 31, 1995.
The Company is involved in various legal proceedings in the normal course of
business, none of which is believed by management to be material to the
financial condition or results of operations of the Company.
(14) Fair Values of Financial Instruments
The estimates of fair value of financial instruments are based on information
available at December 31, 1995, June 30, 1995 and June 30, 1994, and are not
indicative of the fair market value of those instruments at the date this report
is published. These estimates do not reflect any premium or discount that could
result from offering for sale at one time the Company's entire holdings of a
particular class of financial instruments. Because no market exists for a
portion of the Company's financial instruments, 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.
55
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair value estimates are based on existing on- and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not
considered financial assets or liabilities include loans serviced for others,
premises and equipment and foreclosed real estate. 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 any of the estimates. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Company.
The following methods and assumptions were used by the Bank in estimating fair
values of its financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate those assets' fair values.
Securities available for sale, securities held to maturity, and mortgage
loans held for sale: Fair values for these instruments are based on market
prices, where available. If quoted market prices are not available, fair
values are based on market prices of comparable instruments.
FHLB stock: The carrying amount reported in the balance sheet for Federal
Home Loan Bank ("FHLB") stock approximates fair value. If redeemed, the Bank
will receive an amount equal to the par value of the stock.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values.
The fair value of other loans are estimated using discounted cash flow
analyses using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. The fair value of nonaccrual
loans was estimated using the estimated fair values of the underlying
collateral. The carrying amount of accrued interest approximates fair value.
Loan servicing rights: The carrying values of loan servicing rights are
reasonable approximations of their fair value at that date.
Deposits and other borrowed funds: The fair values of non-interest
bearing demand and savings deposits are, by definition, equal to the amount
payable on demand at the reporting date (i.e., their carrying amounts). Fair
values for time certificates of deposit and borrowed funds are estimated using
a discounted cash flow technique that applies interest rates currently being
offered to a schedule of aggregated expected monthly maturities on time
deposits and other borrowed funds.
Repurchase agreements: Due to the short term nature of repurchase
agreements, carrying value is a reasonable estimation of fair value.
Liability relating to ESOP: The carrying amount reported in the balance
sheet approximates the liability relating to the ESOP's fair value. The
liability reprices quarterly.
56
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Off-balance sheet instruments: The fair value of commitments to extend
credit was based on fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the
counterparties' credit standing. The estimated fair value of the commitments
to sell residential mortgage loans was based on the cost to terminate such
commitments.
<TABLE>
<CAPTION>
December 31, 1995 June 30, 1995 June 30, 1994
------------------- ------------------- -------------------
Estimated Estimated Estimated
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
(in Thousands)
Financial assets:
Cash and cash equivalents...... $ 22,092 $ 22,092 $ 19,097 $ 19,097 $ 8,012 $ 8,012
Securities available for sale.. 54,141 54,141 58,754 58,754 64,795 64,795
Securities held to maturity.... 43,529 43,753 53,408 53,350 33,860 32,997
Federal Home Loan Bank stock... 3,803 3,803 3,803 3,803 1,860 1,860
Mortgage loans held for sale... 2,940 3,027 4,392 4,508 4,942 4,963
Loans, net..................... 263,688 265,658 268,491 267,180 218,758 220,434
Accrued interest receivable.... 3,201 3,201 3,100 3,100 2,526 2,526
Loan servicing rights.......... 2,513 2,513 2,564 2,564 -- --
Financial liabilities:
Non-interest bearing demand
deposits..................... $ 18,566 $ 18,566 $ 16,420 $ 16,420 $ 15,067 $ 15,067
Savings deposits............... 111,377 111,377 115,174 115,174 131,877 131,877
Time certificates of deposit... 185,595 186,486 176,962 177,119 145,981 146,382
Repurchase agreements.......... 4,675 4,675 6,348 6,348 -- --
Other borrowed funds........... 54,859 54,829 76,420 76,449 23,507 23,385
Liability related to ESOP...... 118 118 197 197 355 355
Accrued interest payable....... 1,421 1,421 1,177 1,177 693 693
Credit enhancement liability... 139 139 51 51 -- --
Off-balance sheet instruments:
Commitments to extend credit... $ -- $ 123 $ -- $ 94 $ -- $ 168
Commitments to sell loans...... -- -- -- 1 -- 3
</TABLE>
57
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(15) Condensed Parent Company Financial Information
Condensed financial statements of Community Bankshares, Inc. (the "Parent
Company") as of December 31, 1995 and June 30, 1995 and 1994 and for six months
ended December 31, 1995 and for the years ended June 30, 1995, 1994 and 1993
follow:
COMMUNITY BANKSHARES, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
December 31, --------------------------
1995 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
(Dollars in Thousands Except Share Data)
Assets
Cash..................................................................... $ 1,263 $ 1,601 $ 2,048
Securities available for sale--amortized cost $80 at December 31
and June 30, 1995 and $25 at June 30, 1994.............................. 108 97 35
Investment in subsidiary, at equity...................................... 29,532 27,841 24,860
Other assets............................................................. 85 95 84
------- ------- -------
Total assets......................................................... $30,988 $29,634 $27,027
======= ======= =======
Liabilities and Stockholders' Equity
Liabilities:
Liability relating to ESOP............................................. $ 118 $ 197 $ 355
Other liabilities...................................................... 80 39 47
------- ------- -------
Total liabilities.................................................... 198 236 402
------- ------- -------
Stockholders' equity:
Preferred stock, $1.00 par value per share; 1,000,000 shares
authorized, none issued...............................................
Common stock, $1.00 par value per share; 3,000,000 shares
authorized; issued and outstanding, 1,749,405 at
December 31, 1995, 1,747,032 shares at June 30, 1995 and
1,743,532 at June 30, 1994............................................ 1,749 1,747 1,744
Additional paid-in capital............................................. 17,165 17,146 17,343
Retained earnings...................................................... 11,441 10,567 8,155
------- ------- -------
30,355 29,460 27,242
Unrealized net gains (losses) on securities available for sale, net.... 711 328 (262)
Unearned compensation--ESOP............................................ (118) (197) (355)
Treasury stock (at cost) - 9,655 shares at December 31, 1995
and 11,810 shares at June 30, 1995.................................... (158) (193) --
------- ------- -------
Total stockholders' equity........................................... 30,790 29,398 26,625
------- ------- -------
Total liabilities and stockholders' equity........................... $30,988 $29,634 $27,027
======= ======= =======
</TABLE>
58
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
COMMUNITY BANKSHARES, INC.
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Six Months Ended
December 31, Year Ended June 30,
Ended ---------------------------
1995 1995 1994 1993
---------------- ------- ------- -------
<S> <C> <C> <C> <C>
(in Thousands)
Revenues:
Interest and dividend income..................... $ 27 $ 61 $ 54 $ 64
Dividends from subsidiary........................ 503 891 330 --
Management fees from subsidiary.................. 98 131 145 110
Equity in undistributed income of subsidiary..... 1,318 2,396 2,760 2,221
Total revenues................................. 1,946 3,479 3,289 2,395
Operating expenses................................. 575 192 199 174
------- ------- ------- -------
Net income..................................... $ 1,371 $ 3,287 $ 3,090 $ 2,221
======= ======= ======= =======
</TABLE>
The Parent Company's statements of changes in stockholders' equity are
identical to the consolidated statements of changes in stockholders' equity and
therefore are not reprinted here.
COMMUNITY BANKSHARES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months
Ended Year Ended June 30,
December 31, ---------------------------
1995 1995 1994 1993
------------ ------- ------- -------
(in Thousands)
<S> <C> <C> <C> <C>
Cash flows from operations:
Net income.............................................. $ 1,371 $ 3,287 $ 3,090 $ 2,221
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in undistributed income of subsidiary.......... (1,318) (2,396) (2,760) (2,221)
(Increase) decrease in other assets................... 10 68 (33) (4)
Increase (decrease) in other liabilities.............. 49 (8) 34 (17)
------- ------- ------- -------
Net cash provided by (used in) operating
activities......................................... 112 951 331 (21)
------- ------- ------- -------
Cash flows from investing activities:
Purchases of investment securities...................... -- (55) -- (17)
------- ------- ------- -------
Net cash used in investing activities............... -- (55) -- (17)
------- ------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock.................. 53 175 171 65
Purchase of treasury stock.............................. -- (627) -- --
Dividends paid on common stock.......................... (503) (891) (416) --
------- ------- ------- -------
Net cash provided by (used in) financing
activities......................................... (450) (1,343) (245) 65
------- ------- ------- -------
Net increase (decrease) in cash........................... (338) (447) 86 27
Cash at beginning of period............................... 1,601 2,048 1,962 1,935
------- ------- ------- -------
Cash at end of period..................................... $ 1,263 $ 1,601 $ 2,048 $ 1,962
======= ======= ======= =======
</TABLE>
59
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(16) Unaudited Consolidated Condensed Income Statements
Quarterly Income Statements (Unaudited)
<TABLE>
<CAPTION>
Quarters Ended
----------------------------------------
September December March June
--------- -------- ------- -------
30 31 31 30
------- ------- ------- -------
(in Thousands Except Share Data)
<S> <C> <C> <C> <C>
Six Months Ended December 31, 1995
Interest and dividend income................................ $ 8,055 $ 8,069
Interest expense............................................ 4,478 4,424
------- -------
Net interest and dividend income.......................... 3,577 3,645
Provision for possible loan losses.......................... 175 200
------- -------
Net interest and dividend income after provision for
possible loan losses..................................... 3,402 3,445
Non-interest income......................................... 675 822
Non-interest expense........................................ (2,795) (3,324)
------- -------
Income before income taxes................................ 1,282 943
Income taxes................................................ 436 418
------- -------
Net income................................................ $ 846 $ 525
------- -------
Earnings per common and common equivalent share............. $ .47 $ .29
======= =======
Fiscal Year Ended June 30, 1995
Interest and dividend income................................ $ 6,304 $ 6,700 $ 7,357 $ 7,880
Interest expense............................................ 2,957 3,223 3,756 4,308
------- ------- ------- -------
Net interest and dividend income.......................... 3,347 3,477 3,601 3,572
Provision for possible loan losses.......................... 100 100 125 150
------- ------- ------- -------
Net interest and dividend income after provision for
possible loan losses..................................... 3,247 3,377 3,476 3,422
Non-interest income......................................... 512 427 484 613
Non-interest expense........................................ (2,583) (2,707) (2,689) (2,741)
------- ------- ------- -------
Income before income taxes................................ 1,176 1,097 1,271 1,294
Income taxes................................................ 379 349 407 416
------- ------- ------- -------
Net income................................................ $ 797 $ 748 $ 864 $ 878
------- ------- ------- -------
Earnings per common and common equivalent share............. $ .44 $ .42 $ .48 $ .49
======= ======= ======= =======
Fiscal Year Ended June 30, 1994
Interest and dividend income................................ $ 5,815 $ 5,765 $ 5,682 $ 5,956
Interest expense............................................ 2,748 2,672 2,612 2,704
------- ------- ------- -------
Net interest and dividend income.......................... 3,067 3,093 3,070 3,252
Provision for possible loan losses.......................... 400 75 75 75
------- ------- ------- -------
Net interest and dividend income after provision for
possible loan losses..................................... 2,667 3,018 2,995 3,177
Non-interest income......................................... 848 584 622 504
Non-interest expense........................................ (2,586) (2,594) (2,610) (2,677)
------- ------- ------- -------
Income before income taxes................................ 929 1,008 1,007 1,004
Income taxes................................................ 218 229 232 179
------- ------- ------- -------
Net income................................................ $ 711 $ 779 $ 775 $ 825
------- ------- ------- -------
Earnings per common and common equivalent share............. $ .40 $ .44 $ .43 $ .46
======= ======= ======= =======
</TABLE>
Aggregate quarterly earnings per share may not equal earnings per share for
the full year due to rounding.
60
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
As indicated in Note 1, the Company adopted SFAS No. 122 effective July 1,
1994 with the effect of increasing gains on sale of loans by approximately
$170,000 for fiscal 1995. In so doing, the Company has herein revised the
previously reported quarterly operating results for the first three quarters of
fiscal 1995. As a result of such revisions, gains on sale of loans, net income,
and earnings per common and common equivalent share were increased as follows:
<TABLE>
<CAPTION>
Gains on Net Earnings
Fiscal 1995 Quarter Ended -------------- ------ ---------
- --------------------------- Sale of Loans Income per Share
-------------- ------ ---------
<S> <C> <C> <C>
(in Thousands, Except Share Data)
September 30, 1994......... $58 $39 $0.02
December 31, 1994.......... 46 31 0.02
March 31, 1995............. 47 32 0.02
</TABLE>
Income Statement for the Six Months Ended Decemeber 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
December 31,
1994
--------------------------------
(in Thousands Except Share Data)
<S> <C>
Interest and dividend income.............. $13,004
Interest expense.......................... 6,180
-------
Net interest and dividend income........ 6,824
Provision for possible loan losses........ 200
-------
Net interest and dividend income after
provision for possible loan losses..... 6,624
Non-interest income....................... 939
Non-interest expense...................... (5,290)
-------
Income before income taxes.............. 2,273
Income taxes.............................. 728
-------
Net income.............................. $ 1,545
=======
Earnings per common and common
equivalent share......................... $ .86
=======
</TABLE>
61
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
(17) Unaudited Subsequent Event--Acquisition of Centerpoint Bank
Effective March 20, 1996, the Company acquired Centerpoint Bank (Centerpoint)
in a merger accounted for as a pooling of interests and pursuant to which the
Company exchanged 1.073 shares of its common shares for each outstanding common
share of Centerpoint (657,587 in total). At December 31, 1995, Centerpoint had
total assets of $88,505,000, including $60,319,000 in loans and $18,519,000 in
investments and earning deposits. Centerpoint's deposits and stockholders equity
at December 31, 1995, were $69,899,000 and $5,978,000, respectively. Condensed
unaudited operating results for Centerpoint were as follows:
<TABLE>
<CAPTION>
Six Months
Ended Years Ended June 30,
December 31, -----------------------------
1995 1995 1994 1993
------------ --------- -------- --------
<S> <C> <C> <C> <C>
(Dollars in Thousands, Except Share Data)
Net interest and dividend income...................... $ 2,526 $ 4,058 $ 2,954 $ 2,098
Provision for possible loan losses.................... 123 302 300 201
Non-interest income................................... 88 165 260 152
Non-interest expense.................................. (1,678) (2,722) (2,344) (1,810)
------- ------- ------- -------
Income before income taxes............................ 813 1,199 570 239
Income tax expense.................................... 310 311 39 --
------- ------- ------- -------
Net income.......................................... 503 888 531 239
Dividends on preferred stock.......................... -- -- 18 25
------- ------- ------- -------
Net income available to common stock................ $ 503 $ 888 $ 513 $ 214
======= ======= ======= =======
Earnings per common and common equivalent share..... $ 0.83 $ 1.51 $ 0.90 $ 0.40
</TABLE>
The following unaudited pro forma combined condensed financial statements (the
pro forma financial statements) have been prepared to reflect the acquisition of
Centerpoint on a pooling-of-interests basis, and reflect the exchange of
Centerpoint common stock for Company common stock at the exchange ratio
indicated above. The pro forma financial statements do not include any expected
cost savings. Merger costs have been charged to expense as incurred in the
separate historical financial statements of Community and Centerpoint. For
purposes of this presentation, a reclassification was made within stockholders'
equity to reflect the issuance of Company shares. No adjustment was made,
however, for cash to be paid for fractional shares. Pro forma earnings per
common and common equivalent share has been computed by dividing pro forma net
income by the pro forma average number of common and common equivalent shares
outstanding. These pro forma adjustments are preliminary; the actual adjustments
will be based on the balance sheet amounts of both the Company and Centerpoint
at the merger consummation date and may differ from those reflected here. The
pro forma financial statements are not necessarily indicative of the financial
position or results of future operations of the combined Company or the actual
financial position and results of operations for the periods presented.
62
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
Unaudited Pro Forma Combined Condensed Balance Sheet
(Dollars in Thousands Except Share Data)
<TABLE>
<CAPTION>
December 31, 1995
--------------------
<S> <C>
Investments and earning deposits.................... $131,314
Loans held for sale................................. 2,940
Loans, net.......................................... 323,347
Other assets........................................ 40,402
--------
Total Assets................................... $498,003
========
Deposits............................................ $385,437
Borrowed funds...................................... 70,936
Other liabilities................................... 4,862
--------
Total Liabilities.............................. 461,235
--------
Preferred Stock..................................... --
Common Stock........................................ 2,382
Additional paid-in Capital.......................... 21,785
Retained earnings................................... 12,299
Unrealized net gains on Securities
available for sale, net........................... 578
Unearned compensation-ESOP.......................... (118)
Treasury Stock...................................... (158)
--------
Total stockholders' equity...................... 36,768
--------
Total liabilities and stockholders' equity..... $498,003
========
</TABLE>
Unaudited Pro Forma Combined Condensed Statements of Income
<TABLE>
<CAPTION>
Six Months
Ended Years Ended June 30,
December 31, ------------------------------
1995 1995 1994 1993
------------ -------- -------- --------
(Dollars in Thousands Except Share Data)
<S> <C> <C> <C> <C>
Net interest and dividend income.......................... $ 9,748 $ 18,055 $ 15,436 $ 14,760
Provision for possible loan losses........................ 498 777 925 2,351
Non-interest income....................................... 1,585 2,201 2,818 3,031
Non-interest expense...................................... (7,797) (13,442) (12,811) (12,980)
------- -------- -------- --------
Income before income taxes................................ 3,038 6,037 4,518 2,460
Income tax expense........................................ 1,164 1,862 897 --
------- -------- -------- --------
Net income......................................... 1,874 4,175 3,621 2,460
Dividends on preferred stock.............................. -- -- 18 25
------- -------- -------- --------
Net income available to common stock............... $ 1,874 $ 4,175 $ 3,603 $ 2,435
======= ======== ======== ========
Earnings per common and common equivalent share.... $ 0.77 $ 1.70 $ 1.49 $ 1.09
</TABLE>
63
<PAGE>
Item 9. Changes in and Disagreements with Accountants
None
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Directors
<TABLE>
<CAPTION>
Name Age Director Since Expiration of Term Other Offices Held
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Thomas M. Hardiman 66 1985 1996(1) Chairman of the Board
John N. Buxton 48 1992 1997(1) --
Douglas Crichfield 52 1990 1997(1) President and
Chief Executive Officer of the
Company and Concord Savings Bank
William S. Fenollosa 55 1985 1996(1) --
Oliver R. Fifield 69 1985 1996(1) --
Robert A. Hill 47 1992 1997(1) --
Russell A. Holden 70 1986 1998(1) --
Lucia P. Kittredge 47 1986 1998(1) --
Seth A. Resnicoff 58 1986 1998(1) --
Eleanor H. Stark 62 1985 1997(1) --
James R. Stewart 56 1985 1996(1) --
Katherine F. Tsouros 57 1985 1998(1) --
Arthur R. Bethke 73 1996 1997(2) --
Walter W. Hemming 55 1996 1997(2) --
Philip M. Stone 65 1996 1997(2) President and Chief Executive
Officer of Centerpoint Bank
</TABLE>
(1) The directors were elected to serve for three year terms and until their
successors are elected and qualify. Although the directors' terms expire in the
years indicated, due to the change in the Company's fiscal year from June 30 to
December 31, the Company expects to wait until April 1997 to hold its next
annual meeting, rather than holding another meeting just a few months after the
annual meeting held on January 25, 1996. As a result, the directors are expected
to continue to serve for approximately six months beyond the expiration date of
their current terms.
(2) These directors were directors of Centerpoint Bank who became directors
of the Company on March 20, 1996, the effective date of the Centerpoint
acquisition. Their terms will expire at the next annual meeting of the Company
in April 1997.
64
<PAGE>
(b) Executive Officers
<TABLE>
<CAPTION>
Date of Election
Name Age Offices Held to Such Office
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Douglas Crichfield 52 President and Chief Executive Officer 1990
of the Company and the Bank
Paul M. Ferguson 42 Vice President-Credit Administration of the Company; 1995
Executive Vice President of the Bank
Gerald R. Emery 50 Treasurer and Chief Financial Officer of the Company; 1990
Senior Vice President-Finance and Operations of the
Bank
Richard E. Kamp 46 Vice President and Secretary of the Company; 1990
Vice President--Communications of the Bank 1995
</TABLE>
(c) Identification of certain significant employees: Not applicable
(d) Family relationships: None
(e) Business experience
Thomas M. Hardiman was a Consultant to Chubb Securities Corporation from 1987
through 1989, a Senior Vice President of Chubb Securities Corporation from 1982
to 1987, and Vice President of Chubb Life Insurance Company from 1980 to 1981.
He served as Vice President and Treasurer of United Life and Accident Insurance
Co., from 1965 to 1980. He is a Director of Concord Electric Co., a subsidiary
of UNITIL Corp.
John N. Buxton has been Vice Rector for Administration, St. Paul's School,
Concord, New Hampshire, from 1984 to the present, with responsibility for
operations and administrative functions. He is a member of trustee committees on
investments, risk management, pensions and benefits and buildings and grounds.
Douglas Crichfield has been a Director, President and Chief Executive Officer
of the Company and the Bank since 1990. Previously, he served as Executive Vice
President and Treasurer of the Bank and Treasurer and Chief Financial Officer of
the Company from 1988 to 1990. He was Vice President of Corporate Finance at the
Bank of New England Corporation from 1986 to 1988, and held various positions,
including Senior Vice President, Treasurer and Trust Officer of Hancock Bank and
Trust Co. from 1976 to 1986.
William S. Fenollosa has been President and owner of Granite State Volkswagen,
Inc., an automobile sales and service dealership in Concord, New Hampshire,
since 1967.
Oliver R. Fifield was President of Northeast Consolidated Services, Inc., a
corporation providing various administrative office support to The New Hampshire
and Vermont Blue Cross Blue Shield corporations from 1981 until his retirement
in 1985, and President of Northeast Equity Corp., a business equipment leasing
corporation owned by Blue Cross Blue Shield, from 1983 to 1985.
Robert A. Hill has been President and Chief Operating Officer of Capitol
Plumbing and Heating Supply Co., Inc., a distributor of plumbing and heating
products, from 1985 to the present, with experience in management, sales, and
credit and collections over a 15 year period.
Russell A. Holden served as President of Granite State Electric Co. from 1973
to 1990. He was Vice President of New England Power Company from 1967 to 1990,
Chairman and Director of New England Electric Transmission Corporation from 1981
to 1991, and Chairman and Director of New England Hydro Transmission Corporation
from 1981 to 1991 (all subsidiaries of the New England Electric System). He is a
Director of Concord General Mutual Insurance Co., Green Mountain Insurance Co.
and Vermont Accident Insurance Co.
65
<PAGE>
Lucia P. Kittredge has been a principal of Kapala Kittredge Associates, Inc.,
an environmental and land use planning firm, from 1989 to the present. She was
President of Matarazzo Design, Inc., a design firm of landscape architects,
architects and land planning from 1984 to 1988, and Vice President of the firm
from 1981 to 1984.
Dr. Seth A. Resnicoff has been engaged in the private practice of surgery in
Concord, New Hampshire, since 1975. He is Chairman of the Board of Strategic
Healthcare, Concord, New Hampshire, a company providing management and marketing
services to independent physicians and surgeons, and a Trustee of Derryfield
School, Manchester, New Hampshire.
Eleanor H. Stark served as elected representative to the New Hampshire House
of Representatives from 1981 to 1985.
James R. Stewart has been President, Treasurer and a principal owner of
Capital Offset, Inc., a printing firm, since 1975.
Katherine F. Tsouros serves as an officer and active member of the Boards of
various non-profit organizations in the Concord, New Hampshire area.
Arthur R. Bethke is the President of Concord Oil Company, a corporation
engaged in the distribution of gasoline and fuel oil in the Concord,
Massachusetts region. He is also the Chairman of R. Murphy Company, a
manufacturing concern.
Walter W. Hemming is a Principal of Hemming Associates, a management
consulting business.
Philip M. Stone is the Chairman of the Board of Directors, President and Chief
Executive Officer for Centerpoint Bank.
Gerald R. Emery joined the Bank in 1988 as Vice President, Finance. He was
elected Treasurer of the Company and the Bank and Senior Vice President Finance
and Operations of the Bank in 1990. From 1986 until joining the Company, he was
Vice President, Finance with United Savers Bancorp, Inc. in Manchester, New
Hampshire. From 1982 until 1986, he held the same position with The Savers Bank
in Littleton, New Hampshire, a subsidiary of United Savers Bancorp, Inc. Prior
to 1982, Mr. Emery had 18 years experience in community banking with commercial
banks in both New Hampshire and in Vermont.
Paul M. Ferguson joined the Bank in 1991 as Senior Vice President Credit
Administration, and was elected Executive Vice President in 1995. In 1995, Mr.
Ferguson was elected Vice President Credit Administration for the Company. From
1985 through 1991 he was a senior executive of First NH Bank, N.A., most
recently serving as its Senior Vice President, Corporate Services and previously
as Regional President, Southern Division and prior to that, as Vice President
Senior Regional Lending Officer. His prior experience included two years as Vice
President-Manager Commercial Services Division for Merchants Savings Bank, of
Manchester, New Hampshire, and four years in commercial and consumer lending for
Indian Head National Bank, of Concord, New Hampshire.
Richard E. Kamp was elected Vice President of Retail Services, Marketing and
Investor Relations in 1990 and Vice President--Communications in 1995. Mr. Kamp
joined the Bank in 1989 as Vice President, Marketing and Investor Relations.
Since 1984 he had served in that same capacity at First Federal Bank, which
through merger became New Hampshire Savings Bank South, in Nashua, New
Hampshire. From 1978 to 1984, Mr. Kamp served at First Agricultural Bank in
Pittsfield, Massachusetts.
(f) Involvement in certain legal proceedings: not applicable
(g) Promoters and control persons: not applicable
66
<PAGE>
Compliance with Section 16(a) of the Exchange Act.
Section 16(a) of the Securities Exchange Act of 1934, as amended (the Exchange
Act), requires the Company's officers and directors, and persons who own more
than 10% of a registered class of the Company's securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, Directors and greater-than-10% shareholders are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on review of the copies of Forms 3, 4 and 5 furnished to the
Company during and with respect to the six months ended December 31, 1995,
or written representations that no Forms 5 were required, the Company
believes that all Section 16(a) filing requirements applicable to its officers,
Directors and greater-than-10% beneficial owners were complied with during 1995.
Item 11. Executive Compensation
Summary Compensation Table
The following table provides information concerning the annual and long term
compensation of the three executive officers whose total annual salary and bonus
exceeded $100,000 for the calendar years ended December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
Long Term Compensation
--------------------------
Annual Compensation Awards(1) Payouts
-------------------------------------- --------------------------- ---------------------------
Name and Other Annual Restricted Number of LTIP All Other
Principal Position Year Salary Bonus Compensation (2) Stock Award Options/SARS Payouts Compensation (3)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Douglas Crichfield 1995 $154,522 $19,443 -- -- -- -- $31,000
President and Chief 1994 148,893 14,395 -- -- -- -- 24,859
Executive Officer 1993 133,846 1,215 -- -- -- -- 14,000
Paul M. Ferguson 1995 117,182 7,043 -- -- -- -- 2,495
Executive Vice- 1994 107,182 8,561 -- -- -- -- 1,271
President 1993 91,589 853 -- -- -- -- --
Gerald R. Emery 1995 95,728 4,698 -- -- -- -- 1,013
Senior Vice- 1994 90,867 6,807 -- -- -- -- 535
President 1993 80,688 762 -- -- -- -- --
</TABLE>
(1) The Company has not granted any restricted stock awards or SARS.
(2) Omitted since amounts are below threshold required to be disclosed.
(3) Consists of amounts accrued as an expense with respect to a supplemental
retirement agreement with the Chief Executive Officer ($28,000 in 1995) and
matching contributions made in fiscal 1995 under the Company's 401(k) plan.
67
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Options
Values
The following table shows options exercised during calendar 1995 and the value
of unexercised options (whether or not vested) at December 31, 1995. The Company
has not granted any SARs.
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options at In-the-Money Options at
December 31, 1995 December 31, 1995 (1)
------------------------------ ------------------------------
Shares Acquired Value
Name On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Douglas Crichfield 6,500 $88,688 21,319 -- $402,396 $ --
Paul M. Ferguson 1,500 18,563 8,000 -- 151,000 --
Gerald R. Emery 5,000 60,438 9,075 -- 171,291 --
</TABLE>
(1) Based on December 31, 1995 market price of $18.875.
Pension Plan Table
The following table shows the estimated annual benefits payable under the Bank's
defined benefit retirement plan.
<TABLE>
<CAPTION>
Years of Credited Service
-------------------------------------------------------------------
Average Annual Salary 5 10 15 20 25 30
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$100,000 $ 9,856 $19,712 $29,568 $39,424 $49,280 $59,136
125,000 12,356 24,712 37,068 49,424 61,780 74,136
150,000 14,856 29,712 44,568 59,424 74,280 89,136
</TABLE>
The annual pension benefit is computed on the basis of a straight-life
annuity. Benefits under the plan are based on the five highest years' base
salary (up to a maximum of $150,000) and will be offset by benefits provided
under the Employee Stock Ownership Plan described below but will not be offset
by Social Security benefits. Mr. Crichfield has seven years, Mr. Ferguson has
four years and Mr. Emery has seven years, of credited service under the plan.
For the year ended December 31, 1995, Mr. Crichfield's base salary, as disclosed
above in the Summary Compensation Table, exceeded the maximum covered
compensation by $4,522.
The Bank and Mr. Crichfield are parties to an Executive Supplemental
Retirement Agreement ("Supplemental Agreement"), under which, if he works for
the Bank until reaching age 65, Mr. Crichfield will be entitled to receive an
annual benefit payable for life equal to (a) 60% of the average of his three
highest annualized salaries paid during the 5 year period ending on termination
of employment, less (b) the benefit payable in life annuity form under the
Bank's retirement plan discussed above and under the Bank's Employee Stock
Ownership Plan discussed below. Mr. Crichfield accrues a retirement benefit
under the Supplemental Agreement at the rate of 3% per year commencing at age
46, vesting at the rate of 10% per year commencing at age 49. The Supplemental
Agreement provides for faster accrual of benefits than the retirement plan, and
for benefits based upon the full amount of salary earned, whereas under 1993
amendments to the Internal Revenue Code, salary in excess of $150,000 cannot be
taken into account in computing benefits under the retirement plan. In addition,
the Supplemental Agreement provides for a death benefit payable monthly for 15
years to his beneficiaries in an annual amount equal to 40% of his salary at
death.
Employee Stock Ownership Plan
The Bank has established an Employee Stock Ownership Plan (the "ESOP"), for
employees age 21 or older who have at least one year of credited service. The
ESOP is funded by the Bank's contributions made in cash (which generally will be
invested in Common Stock) or Common Stock.
The ESOP has purchased shares of Common Stock with funds borrowed from an
unrelated third party lender. The loan, which the Company guaranteed, is being
repaid with funds from the Bank's contributions to the ESOP, forfeitures and
earnings on plan assets. Shares purchased with such loan proceeds are held in a
suspense account for
68
<PAGE>
allocation among members as the loan is paid. The number of shares allocated to
Mr. Crichfield's account as of December 31, 1994, December 31, 1993, and
December 31, 1992 were 2,617 shares, 2,195 shares, and 1,819 shares,
respectively. The number of shares allocated to Mr. Ferguson's account as of
such dates were 903 shares, 602 shares, and 350 shares, respectively. The number
of shares allocated to Mr. Emery's account as of such dates were 2,161 shares,
1,902 shares and 1,677 shares, respectively.
Contributions to the ESOP and shares released from the suspense account are
allocated among members on the basis of compensation and years of service.
Benefits become 100% vested after five years of service. Forfeitures are
reallocated among remaining participating employees and may reduce any amount
the Bank might otherwise have contributed to the ESOP. Benefits may be payable
upon retirement, early retirement, disability or separation from service. The
Bank's contributions to the ESOP are not fixed, so benefits payable under the
ESOP cannot be estimated. ESOP benefits offset benefits under the retirement
plan discussed above.
Severance Benefits Agreements
In April, 1989 the Company and the Bank entered into a severance benefits
agreement with Douglas Crichfield, then Executive Vice President and Treasurer
of the Bank. Under the agreement, under certain circumstances, Mr. Crichfield
(1) will be paid an amount equal to three times his then annual base salary, (2)
will become fully vested in stock options previously granted to him and in any
supplemental retirement benefits, (3) will be entitled to receive retirement
benefits in an amount equal to any difference between the benefits that would be
payable to him under the Bank's tax qualified employee benefit plans if Mr.
Crichfield were fully vested thereunder and the benefits actually payable and
(4) will be reimbursed for executive outplacement fees up to $10,000, all
relocation expenses, all legal expenses incurred in enforcing the severance
benefits agreement, the cost of maintaining his group insurance coverage for two
years and taxes on such reimbursed amounts. Such payments will be made and such
rights will vest if Mr. Crichfield terminates his employment within two years
following a "Change of Control" (as defined below), either involuntarily (other
than for specified causes) or voluntarily with good reason, as defined. Mr.
Crichfield's annual base salary is presently $160,000. Similar agreements have
been entered into with the Executive Vice President, the Senior Vice President,
and 7 Vice Presidents of the Bank, providing for severance benefits equal to two
years', two years', and one year's base salary, respectively, and certain other
benefits. Centerpoint also has agreements with three of its officers pursuant to
which severance would be payable under certain circumstances.
A Change of Control is generally defined in the agreements to include the
acquisition by any person other than the Company of the beneficial ownership of
shares representing 25% or more of the total number of votes that may be cast
for election of Directors of the Company or the Bank, the merger or
consolidation of the Company or the Bank or the Company or the Bank selling a
majority of its assets or entering into any transaction in which another entity
(other than an insurer of the Bank's deposit liabilities) assumes a majority of
the deposit liabilities of the Bank.
69
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of January 1, 1996
(unless otherwise noted) regarding (i) each person known by Community to own
beneficially more than 5% of Community's Common Stock; (ii) each director
individually; and (iii) all directors and executive officers of Community 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 are directors of Community. There
are no persons known to Community who own beneficially more than 5% of
Community's common stock.
<TABLE>
<CAPTION>
Amount and Percentage
Nature of of
Name Beneficial Ownership(1) Class (8)
- ----------------------------------------------- ----------------------- ---------
<S> <C> <C>
John N. Buxton................................. 684(2) *
Douglas Crichfield............................. 68,663(3) 2.9
Robert A. Hill................................. 761 *
Eleanor H. Stark............................... 853 *
Russell A. Holden.............................. 2,270(2) *
Lucia Kittredge................................ 4,781(4) *
Seth A. Resnicoff.............................. 11,482(2) *
Katherine F. Tsouros........................... 2,613(4) *
William S. Fenollosa........................... 1,769(4) *
Oliver R. Fifield.............................. 3,368(4) *
Thomas M. Hardiman............................. 11,500 *
James R. Stewart............................... 4,286(2) *
Arthur R. Bethke (7)........................... 96,028 4.0
Walter W. Hemming (7).......................... 38,448 1.6
Philip M. Stone (7)............................ 55,313(5) 2.3
Directors and executive officers as a group
(18 persons).................................. 340,955(6) 14.2
</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) Includes 270 shares obtainable upon exercise of stock options.
(3) Includes 21,319 shares obtainable upon exercise of stock options and 2,617
shares held in Concord's Employee Stock Ownership Plan.
(4) Includes 145 shares obtainable upon exercise of stock options.
(5) Includes 42,920 shares obtainable upon exercise of stock options.
(6) Includes 97,049 shares obtainable upon exercise of stock options and 6,079
shares allocable to executive officers under Concord's Employee Stock
Ownership Plan.
(7) Mssers. Bethke, Hemming and Stone were appointed to Community's Board of
Directors on March 20, 1996 in accordance with the terms of the Merger
Agreement between Community and Centerpoint Bank which was consummated on
March 20, 1996.
(8) With the consummation of the Merger between Community and Centerpoint Bank
on March 20, 1996, Community's outstanding Common Stock increased from
1,747,915 to 2,405,502.
70
<PAGE>
Item 13. Transactions With Certain Related Persons
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. From time to time, Community has originated indirect
automobile loans through an automobile dealership owned and operated by William
S. Fenollosa, a director of the Company, subject to the Bank's credit approval,
on terms comparable to those accorded other dealers. Community originated loans
amounting to $319,000 through this dealership during the six months ended
December 31, 1995.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) The following Financial Statements are included in item 8:
Independent Auditors' Report
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) All schedules are omitted because they are not applicable, the data
is not significant, or the required information is shown in the
consolidated financial statements.
(b) A Form 8-K was filed on October 4, 1995 to report a change in the
Company's fiscal year end (Item 8).
(c) See Index to Exhibits included elsewhere herein.
71
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused by this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
COMMUNITY BANKSHARES, INC.
Dated: March 28, 1996 By: /s/ Douglas Crichfield
--------------------------------------
Douglas Crichfield, President
<TABLE>
<CAPTION>
Name Title Date
- --------------------------------------------------------------------------------
<S> <C> <C>
/s/ Douglas Crichfield
- --------------------------- President and Director March 28, 1996
Douglas Crichfield (Principal Executive Officer)
/s/ Gerald R. Emery
- --------------------------- Treasurer (Principal Financial March 28, 1996
Gerald R. Emery and Accounting Officer)
/s/ Thomas M. Hardiman
- --------------------------- Director March 28, 1996
Thomas M. Hardiman
/s/ William S. Fenollosa
- --------------------------- Director March 28, 1996
William S. Fenollosa
/s/ Oliver R. Fifield
- --------------------------- Director March 28, 1996
Oliver R. Fifield
/s/ Eleanor H. Stark
- --------------------------- Director March 28, 1996
Eleanor H. Stark
/s/ Katherine F. Tsouros
- --------------------------- Director March 28, 1996
Katherine F. Tsouros
/s/ James R. Stewart
- --------------------------- Director March 28, 1996
James R. Stewart
/s/ Lucia P. Kittredge
- --------------------------- Director March 28, 1996
Lucia P. Kittredge
/s/ Seth A. Resnicoff
- --------------------------- Director March 28, 1996
Seth A. Resnicoff, M.D.
/s/ Russell A. Holden
- --------------------------- Director March 28, 1996
Russell A. Holden
- --------------------------- Director March , 1996
John N. Buxton
/s/ Robert A. Hill
- --------------------------- Director March 28, 1996
Robert A. Hill
- --------------------------- Director March , 1996
Philip M. Stone
- --------------------------- Director March , 1996
Walter W. Hemming
- --------------------------- Director March , 1996
Arthur R. Bethke
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit Method of Filing
- -------- ----------------------------------- --------------------------------
<S> <C> <C>
3.1 Restated Articles of Incorporation Incorporated by reference to
of Community Bankshares, Inc. as Exhibit 3.1B to Amendment No. 1
currently in effect. to Registration Statement on
Form S-1 (File No. 33-00125) the
"Registration Statement")
3.1(a) Statement of Resolution establishing Incorporated by reference to
series of shares of Community Exhibit 3.1(a) to Annual
Bankshares, Inc. dated October 27, Report on Form 10-K for the
1989 year ended June 30, 1991
3.2 By-laws of Community Bankshares, Incorporated by reference to
Inc. as currently in effect Quarterly Report on Form 10-Q
for the quarter ended
September 30, 1995
4.1 Loan Agreement dated September 22, Incorporated by reference to
1986 between the Savers Bank and Exhibit 4 to Annual Report on
the Trustee of the Concord Savings Form 10-K for year ended
Bank Employees Stock Ownership Plan, June 30, 1986
with related Note and Pledge
Agreement
4.2 Amendment to Loan Agreement between Incorporated by reference to
the Savers Bank and the Trustee of Exhibit 4.2 to Quarterly report
the Concord Savings Bank Employee on Form 10-Q for quarter ended
Stock Ownership Plan, dated March 31, 1988
January 25, 1988
4.3 Rights Agreement between Community Incorporated by reference to
Bankshares, Inc. and the First Form 8-A filed June 30, 1989
National Bank of Boston
4.4 Community Bankshares, Inc. Dividend Incorporated by reference to
Reinvestment and Stock Dividend Form S-3 (File No. 33-87956)
Plan, dated December 28, 1994
10.2(a) Concord Savings Bank 1985 Stock Incorporated by reference to
Option Plan, as amended* Exhibit 10.2 to Amendment No. 3
to Registration Statement
10.2(b) Amendment to said Stock Option Incorporated by reference to
Plan adopted August 18, 1987* Exhibit 10.2(b) to Annual Report
on Form 10-K for year ended
June 30, 1987
10.3 Concord Savings Bank 1988 Stock Incorporated by reference to
Option Plan* Exhibit A to Proxy Statement for
Annual Meeting of Stockholders
held on October 20, 1988
10.4 Executive Supplemental Retirement Incorporated by reference to
Agreement with Douglas Crichfield* Exhibit 10.8 to the Quarterly
Report on Form 10-Q for quarter
ended September 30, 1988
10.5 Form of Severance Benefits Incorporated by reference to
Agreement with Douglas Crichfield Exhibit 10.9 to Annual Report on
dated August 1, 1988* Form 10-K for year ended
June 30, 1989
10.5 (a) Amendment of Form of Severance Incorporated by reference to
Benefits Agreement with Douglas Exhibit 10.9(a) to Annual Report
Crichfield dated April 19, 1989* on Form 10-K for year ended
June 30, 1989
10.6 Form of Severance Benefits Incorporated by reference to
Agreement with Donna L. Bean* Exhibit 10.10 to Annual Report
on Form 10-K for year ended
June 30, 1989
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit Method of Filing
- -------- ----------------------------------- --------------------------------
<S> <C> <C>
10.7 Form of Severance Benefits Incorporated by reference to
Agreement with Gerald R. Emery* Exhibit 10.11 to Annual Report
on Form 10-K for year ended
June 30, 1989
10.7(a) Amendment of Form of Severance Incorporated by reference to
Benefits Agreement with Gerald Exhibit 10.7(a) to Annual Report
R. Emery dated December 30, 1992* on Form 10-K for year ended
June 30, 1993
10.8 Form of Severance Benefits Incorporated by reference to
Agreement with David E. Fuller* Exhibit 10.12 to Annual Report
on Form 10-K for year ended
June 30, 1989
10.9 Form of Severance Benefits Incorporated by reference to
Agreement with Robert F. Howe* Exhibit 10.13 to Annual Report
on Form 10-K for year ended
June 30, 1989
10.10 Form of Severance Benefits Incorporated by reference to
Agreement with Richard E. Kamp* Exhibit 10.14 to Annual Report
on Form 10-K for year ended
June 30, 1989
10.11 Form of Severance Benefits Incorporated by reference to
Agreement with Paul M. Ferguson* Exhibit 10.11 to Annual Report
on Form 10-K for year ended
June 30, 1991
10.11(a) Amendment of Form of Severance Incorporated by reference to
Agreement with Paul M. Ferguson Exhibit 10.11(a) to Annual
dated December 30, 1992* Report on Form 10-K for year
ended June 30, 1993
10.12 Form of Severance Benefits Incorporated by reference to
Agreement with Charles E. Gorhan* Exhibit 10.12 to Annual Report
on Form 10-K for year ended
June 30, 1991
10.13 Form of Severance Benefits Incorporated by reference to
Agreement with Irving S. Exhibit 10.13 to Annual Report
Felladore* on Form 10-K for year ended
June 30, 1991
10.14 Form of Severance Benefits Incorporated by reference to
Agreement with Margaret A. Flint* Exhibit 10.14 to Annual Report
on Form 10-K for year ended
June 30, 1991
10.15 Community Bankshares, Inc. 1992 Incorporated by reference to
Stock Option Plan* Exhibit A to Proxy Statement for
Annual Meeting of Stockholders
held on October 15, 1992
10.16 Agreement and Plan of Merger by Incorporated by reference to
and between the Company and Annex A of the Proxy Statement-
Centerpoint Bank, dated as of Prospectus included in
August 28, 1995 Registration Statement on Form
S-4 (File No. 33-63443) (the
"S-4 Registration Statement")
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit Method of Filing
- -------- ----------------------------------- --------------------------------
<S> <C> <C>
10.17 Employment Agreement between Incorporated by reference to
Centerpoint Bank and Philip Stone, the S-4 Registration Statement
dated August 29, 1995.*
10.18 Employment Agreement between Incorporated by reference to
Centerpoint Bank and Lucy T. Gobin, the S-4 Registration Statement
dated August 29, 1995*
10.19 Employment Agreement between Incorporated by reference to
Centerpoint Bank and Joseph B. the S-4 Registration Statement
Reilly, dated August 29, 1995*
10.20 Centerpoint Bank 1989 Stock Filed herewith
Option Plan*
11 Statement re computation of Filed herewith
Income per share
21 Subsidiaries of Community Filed herewith
Bankshares, Inc.
23 Consent of KPMG Peat Marwick to Filed herewith
incorporation by reference of
opinion in Registration Statement
on Form S-8 (File Nos. 33-53678,
33-18853 and 33-44264) and Form
S-3 (File No. 33-87956)
27 Financial Data Schedule Filed herewith
</TABLE>
* Indicates management contract or compensatory plan
75
<PAGE>
CENTERPOINT BANK
1989 STOCK OPTION PLAN
The purposes of the Centerpoint Bank 1989 Stock Option Plan (the "Plan")
are to encourage eligible Directors and employees of Centerpoint Bank (the
"Bank") and any subsidiary in which the Bank owns, directly or indirectly,
at least fifty percent (50%) of the total combined voting power of all classes
of stock ("Subsidiary"), including officers who are employees, to increase
their efforts to make the Bank and each Subsidiary more successful, to provide
an additional inducement for such individuals to remain with the Bank or
a Subsidiary, to reward such individuals by providing the opportunity to
acquire the common stock, par value $1.00 per share, of the Bank (the "Common
Stock") on favorable terms and to provide a means through which the Bank
may attract able persons to enter the employ of the Bank or its Subsidiaries.
SECTION 1
Administration
The Plan shall be administered by a Committee (the "Committee") appointed
by the Board of Directors of the Bank (the "Board") and consisting of not
less than three members of the Board, none of whom shall be eligible to
participate in the Plan while a committee member and none of whom was at
any time within one year prior to the time such person exercises discretion
in the administration of the Plan eligible for selection as a person to
whom stock may be allocated or to whom stock options or stock appreciation
rights may be granted pursuant to the Plan or any other plan of the Bank
or any of its affiliates (as such term is defined in regulations promulgated
under the Securities Exchange Act of 1934 (the "Exchange Act") entitling
the participants therein to acquire stock, stock options or stock appreciation
rights of the Bank or any of its affiliates.
The Committee shall interpret the Plan and prescribe such rules,
regulations and procedures in connection with the Plan as it shall deem
necessary or advisable for the administration of the Plan consistent with
the purposes of the Plan.
The Committee shall keep records of actions taken at its meetings,
a majority of the Committee members shall constitute a quorum at any meeting
and the acts of a majority of the members present at any meeting at which
a quorum is present, or acts approved in writing by a majority of the
Committee, shall be the acts of the Committee.
1
<PAGE>
SECTION 2
Eligibility
The Directors of the Bank (other than those serving on the Committee)
or any Subsidiary and those employees ("Key Employees") of the Bank or any
Subsidiary who share the primary responsibility for the management, growth
or protection of the business of the Bank or any Subsidiary shall be eligible
to receive stock options and/or stock appreciation rights as described herein.
Only Key Employees shall be eligible to receive incentive stock options
as described herein.
Subject to the provisions of the Plan, the Committee shall have the
full and final authority to grant stock options and/or stock appreciation
rights as described herein and, in its discretion, to determine the individuals
to whom stock options and/or stock appreciation rights shall be granted
and the number of shares to be covered by each stock option and/or stock
appreciation rights. In determining the eligibility of any individual, as
well as in determining the number of shares covered by each stock option
and/or stock appreciation right, the Committee shall consider the position
and the responsibilities of the individual being considered, the nature
and value to the Bank or a Subsidiary of his or her services, his or her
present and/or potential contribution to the success of the Bank or a
Subsidiary and such other factors as the Committee may deem relevant.
SECTION 3
Shares Available for Stock Options
and Stock Appreciation Rights
The aggregate number of shares of the Common Stock which may be issued
or delivered under the Plan is 120,000 shares, as constituted at the time
of adoption of the Plan by the Board, subject to adjustment and substitution
as set forth in Section 6 herein. The shares may be either authorized but
unissued shares or treasury shares or partly each, as shall be determined
by the Board.
If any stock option or stock appreciation right granted under the Plan
is cancelled in full, the shares subject to such stock option or stock
appreciation right shall again be available for the purposes of the Plan
except that, to the extent that an alternative stock appreciation right granted
in conjunction with a stock option is exercised, the number of shares thereby
made available for purposes of the Plan shall be reduced by the number of
shares, if any, delivered in exchange for the surrender of the related
unexercised option.
2
<PAGE>
SECTION 4
Grant of Stock Options and Stock Appreciation Rights
The Committee shall have the authority, in its discretion, to grant
"incentive stock options" pursuant to Section 422A of the Internal Revenue
Code of 1986, as the same may from time to time be amended (the "Code"),
or to grant "nonstatutory stock options" (stock options which do not qualify
under Section 422A of the Code), or to grant both types of stock options
(but not in tandem). The Committee also shall have the authority, in its
discretion, to grant stock appreciation rights in addition to nonstatutory
stock options with the effect provided in Section 5(D) herein, to grant
alternative stock appreciation rights in conjunction with nonstatutory stock
options or incentive stock options with the effect provided in Section 5(E)
herein, or to grant stock appreciation rights without related stock options
with the effect provided in Section 5(F) herein.
The aggregate fair market value, determined as of the date of grant
and as set forth in Section 5(J) herein, of all shares issuable upon exercise
of all incentive stock options which become exercisable by a Key Employee
for the first time during any calendar year under all plans of the Bank
employing such Key Employee, any parent or a Subsidiary of the Bank and
any predecessor corporation of any such corporation, shall not exceed $100,000.
SECTION 5
Terms and Conditions of Stock Options
and/or Stock Appreciation Rights
Stock options and stock appreciation rights granted under the Plan
shall be subject to the following terms and conditions:
A. The purchase price at which each stock option may be exercised
(the "option price") shall be such price (either greater than, the same
as, or less than the fair market value per share of the Common Stock on
the date of grant) as the Committee, in its absolute discretion, shall
determine but (i) in the case of incentive stock options granted to a Key
Employee who together with the members of his immediate family owns, or
may be deemed to own, beneficially, more than 10% of the outstanding voting
securities of the Bank (as the terms "immediate family" and "beneficial
ownership" are defined under the Exchange Act), shall not be less than one
hundred and ten percent (110%) of the fair market value per share of the
shares of Common Stock covered by the stock options on the date of grant,
(ii) in the case of incentive stock options, shall not be less than one hundred
percent (100%) of the fair market value per share of the shares of Common
Stock covered by the stock option on the date of grant,
3
<PAGE>
and (iii) in the case of nonstatutory stock options, shall not be less than
one hundred percent (100%) of the fair market value per share of the shares
of Common Stock covered by the stock option on the date of grant. If stock
appreciation rights are granted without a related stock option, the Committee,
in its absolute discretion, shall determine the base price per share for
such stock appreciation rights (the "base price") which shall not be less
than one hundred percent (100%) of the fair market value per share of the
Common Stock on the date of grant. In exercising its discretion, the Committee
shall take into account the fair market value of the Common Stock, the book
value of the Common Stock, the nature and value to the Bank of the Director's
or Key Employee's service and such other factors as the Committee may deem
relevant. For purposes of this Section 5(A), fair market value shall be
determined as set forth in Section 5(J) herein.
B. The option price is to be paid in full in cash upon the exercise
of a stock option; provided, however, that in lieu of cash an individual
may, if authorized by the Committee at the time of grant, exercise a stock
option by tendering to the Bank shares of Common Stock owned by the individual
and having a fair market value on the date of exercise, determined as set
forth in Section 5(J) herein, equal to the option price. The provisions
of this Section 5(B) shall not preclude the payment of the option price
of a stock option by any other legally permissible method specifically approved
by the Committee. No shares shall be issued or delivered upon exercise of
a stock option until payment of the option price in full has been made.
When payment of the option price in full has been made, the optionee shall
be considered for all purposes to be the owner of the shares with respect
to which payment has been made.
C. No stock option or stock appreciation right shall be exercisable
during the first six months of its term (except that this limitation shall
not apply if the optionee dies or becomes a Disabled Optionee, as defined
in Section 5(H) herein, and is voluntarily terminated with the consent of
the Bank or a Subsidiary during such six-month period). No nonstatutory
stock option shall be exercisable after the expiration of ten years and
six months from the date of grant. No incentive stock option (or alternative
stock appreciation rights granted in conjunction with an incentive stock
option) shall be exercisable after the expiration of ten years from the
date of grant. No alternative stock appreciation rights granted in conjunction
with an incentive stock option shall be exercisable until the then fair
market value of the Common Stock, determined as set forth in Section 5(J)
herein, exceeds the option price. Except as provided in this Section 5(C)
and in Section 5(H) herein, stock options or stock appreciation rights may
be exercised at such times, in such amounts and subject to such restrictions
as shall be determined by the Committee.
4
<PAGE>
D. If stock appreciation rights are granted in addition to a
nonstatutory stock option, such stock appreciation rights shall entitle the
optionee upon exercise of the related stock option, or any portion thereof, to
receive from the Bank (in addition to the shares to be received upon exercise of
the related stock option) that number of shares of the Common Stock having an
aggregate fair market value on the date of exercise of the related stock option
equal to the excess of the fair market value of one share of the Common Stock on
such date of exercise over the option price per share of such related stock
option times the number of shares covered by the related stock option, or
portion thereof, which is exercised. No fractional shares shall be issued but
instead, except as provided below, cash shall be paid in lieu of any fractional
shares. The Committee shall have the authority, in its discretion, to determine
that the obligation of the Bank shall be paid in cash, or part in cash and part
in shares except that the Committee shall not pay to any Director or Key
Employee subject to the provisions of Section 16(b) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") any portion of the Bank's
obligation in cash (including cash in lieu of a fractional share) unless such
related stock option is exercised during the period beginning on the third and
ending on the twelfth business day following the date of release for publication
of the Bank's quarterly or annual summary statements of income. For purposes of
this Section 5(D), fair market value shall be determined as set forth in Section
5(J) herein.
E. If alternative stock appreciation rights are granted in conjunction
with a nonstatutory or incentive stock option, such stock appreciation rights
shall be exercisable only to the extent that the related stock option is
exercisable. Such alternative stock appreciation rights shall entitle the
optionee to surrender unexercised the related stock option, or any portion
thereof, and to receive from the Bank in exchange therefor that number of shares
of the Common Stock having an aggregate fair market value on the date of
exercise of the alternative stock appreciation rights equal to the excess of the
fair market value of one share of the Common Stock on such date of exercise over
the option price per share times the number of shares covered by the stock
option, or portion thereof, which is surrendered. No fractional shares shall be
issued but instead, except as provided below, cash shall be paid in lieu of any
fractional shares. The Committee shall have the authority, in its discretion, to
determine that the obligation of the Bank shall be paid in cash, or part in cash
and part in shares except that the Committee shall not pay to any Director or
Key Employee subject to the provisions of Section 16(b) of the Exchange Act any
portion of the Bank's obligation in cash (including cash in lieu of a fractional
share) unless such alternative stock appreciation rights are exercised during
the period beginning on the third and ending on the twelfth business day
following the date of release for publication of the Bank's quarterly or annual
summary
5
<PAGE>
statements of income. For the purposes of this Section 5(E), fair market
value shall be determined as set forth in Section 5(J) herein.
F. If stock appreciation rights are granted without a related
stock option, such stock appreciation rights shall entitle the Director
or Key Employee to receive from the Bank that number of shares of the Common
Stock having an aggregate fair market value on the date of exercise of the
stock appreciation rights equal to the excess of the fair market value of
one share of the Common Stock on such date of exercise over the base price
per share of such stock appreciation rights times the number of shares covered
by the stock appreciation rights. No fractional shares shall be issued but
instead, except as provided below, cash shall be paid in lieu of any fractional
shares. The Committee shall have the authority, in its discretion, to determine
that the obligation of the Bank shall be paid in cash, or part in cash and
part in shares except that the Committee shall not pay to any Director or
Key Employee subject to Section 16(b) of the Exchange Act any portion of
the Bank's obligation in cash (including cash in lieu of a fractional share)
unless such stock appreciation rights are exercised during the period beginning
on the third and ending on the twelfth business day following the date of
release for publication of the Bank's quarterly or annual summary statement
of income. For the purposes of this Section 5(F), fair market value shall
be determined as set forth in Section 5(J) herein.
G. No stock option or stock appreciation right shall be transferable
by a Director or Key Employee other than by will, or if a Director or Key
Employee dies intestate, by the laws of descent and distribution of the
state of domicile of the Director or Key Employee at the time of death, and
each stock option or stock appreciation right shall be exercisable during
the lifetime of a Director or Key Employee only by the Director or Key
Employee.
H. Except as otherwise provided in the following sentence, if the
employment of a Key Employee is voluntarily terminated with the consent
of the Bank or a Subsidiary or a Key Employee retires under any retirement
plan of the Bank or a Subsidiary, any then outstanding incentive stock option
held by such Key Employee shall be exercisable (to the extent exercisable
on the date of termination of employment) by such Key Employee at any time
prior to the stock option expiration date or within three months after the
date of termination of employment, whichever is the shorter period. If the
employment of a Key Employee who is disabled within the meaning of Section
422A(c)(7) of the Code ("Disabled Optionee") is voluntarily terminated with
the consent of the Bank or a Subsidiary, any outstanding incentive stock
option held by such Disabled Optionee shall be exercisable by such Disabled
Optionee (to the extent exercisable) on the date of termination of employment
at any time prior to the stock option expiration date or within one year
after the date of termination of employment, whichever is the shorter
6
<PAGE>
period. Whether termination of employment is a voluntary termination with
consent and whether a Key Employee is disabled within the meaning of Section
422A(c)(7) of the Code shall be determined in each case by the Committee
and any such determination by the Committee shall be final and binding.
If the employment of a Key Employee, or the service of a Director,
is voluntarily terminated with the consent of the Bank or a Subsidiary,
or such Key Employee retires under any retirement plan of the Bank or a
Subsidiary, any then outstanding nonstatutory stock option held by such
Key Employee or Director shall be exercisable (to the extent exercisable
on the date of termination of employment) by such Key Employee or Director
at any time prior to the stock option expiration date or within one year
after the date of termination of employment, whichever is the shorter period.
If the employment of a Key Employee, or the service of a Director,
holding stock appreciation rights granted without a related stock option
is voluntarily terminated with the consent of the Bank or a Subsidiary,
or such Key Employee retires under any retirement plan of the Bank or a
Subsidiary, any such then outstanding stock appreciation rights held by
such Key Employee or Director shall be exercisable (to the extent exercisable
on the date of termination of employment) by such Key Employee or Director
at any time prior to the expiration date of the stock appreciation rights
or within one year after the date of termination of employment, whichever
is the shorter period.
Following the death of a Director or Key Employee, any outstanding
stock option or stock appreciation rights granted without a related stock
option held by such Director or Key Employee at the time of death shall
be exercisable in full (whether or not so exercisable on the date of the
death of the Director or Key Employee, but subject to such other restrictions
on the exercise of incentive stock options as are set forth in Section 5(c)
herein) by the person or persons entitled to do so under the will of the
Director or Key Employee, or, if the Director or Key Employee shall fail
to make testamentary disposition of such stock option or stock appreciation
rights or shall die intestate, by the legal representative of the Director
or Key Employee, in either case at any time prior to the expiration date
of such stock option or stock appreciation rights or within one year after
the date of death, whichever is the shorter period.
If the employment of a Key Employee or the service of a Director
who is an optionee or holds stock appreciation rights granted without a
related stock option terminates for any reason other than as set forth in
this Section 5(H), the rights of such Director or Key Employee under any
then outstanding stock option or stock appreciation rights granted without
a related stock option shall terminate at the time of such termination of
employment.
7
<PAGE>
I. Each stock option shall be confirmed by a stock option agreement
which shall be executed by the Chairman of the Board or the President on
behalf of the Bank and by the person to whom such stock option is granted.
Stock appreciation rights which are granted without a related stock option
shall be confirmed by a stock appreciation rights agreement which shall
be executed by the Chairman of the Board or the President on behalf of the
Bank and by the person to whom such stock appreciation rights are granted.
J. So long as the Common Stock is not listed on a national or regional
securities exchange or quoted in the inter-dealer quotation system maintained
by the National Association of Securities Dealers, Inc., the Committee shall
in good faith determine the fair market value of the Common Stock on or as
of the date on which fair market value is to be determined. At such time
as the Common Stock shall be listed on a national or regional securities
exchange or quoted in the inter-dealer quotation system maintained by the
National Association of Securities Dealers, Inc., the Committee shall adopt
such rules for determining fair market value of the Common Stock, which
shall employ such generally accepted criteria of value and make reference
to such generally available and reliable publications as the Committee in
its discretion may determine to be appropriate.
Subject to the foregoing provisions of this Section 5 and the other
provisions of the Plan, any stock option or stock appreciation rights granted
under the Plan shall be subject to such other terms and conditions as the
Committee shall deem advisable on the date of grant.
SECTION 6
Adjustment and Substitution of Shares
If a dividend or other distribution shall be declared upon the
Common Stock payable in shares of the Common Stock, the number of shares
of the Common Stock then subject to any outstanding stock option or stock
appreciation rights granted without a related stock option and the number
of shares which may be issued or delivered under the Plan but are not then
subject to an outstanding stock option or stock appreciation rights granted
without a related stock option shall be adjusted by adding thereto the number
of shares which would have been distributable thereon if such shares had
been outstanding on the date fixed for determining the shareholders entitled
to receive such stock dividend or distribution.
If the outstanding shares of the Common Stock shall be changed
into or exchangeable for a different number or kind of shares of stock or
other securities of the Bank or another corporation, whether through
reorganization, reclassification, recapitalization, stock split-up, combination
of shares, merger
8
<PAGE>
or consolidation, then there shall be substituted for each share of the
Common Stock subject to any then outstanding stock option or stock appreciation
rights granted without a related stock option and for each share of the
Common Stock which may be issued or delivered under the Plan but are not
then subject to an outstanding stock option or stock appreciation rights
granted without a related stock option, the number and kind of shares of
stock or other securities into which each outstanding share of the Common
Stock shall be so changed or for which each such share shall be exchangeable.
In case of any adjustment or substitution as provided for in this
Section 6, (i) the aggregate option price for all shares subject to each
then outstanding stock option prior to such adjustment or substitution shall
be the aggregate option price for all shares of stock or other securities
(including any fraction) to which such shares shall have been adjusted or
which shall have been substituted for such shares and (ii) the aggregate
base price for all shares subject to outstanding stock appreciation rights
granted without a related stock option shall be the base price for all shares
of stock or other securities (including any fraction) to which such shares
shall have been adjusted or which shall have been substituted for such shares.
Any new option price or base price per share shall be carried to at least
3 decimal places with the last decimal place rounded upwards to the nearest
whole number.
No adjustment or substitution provided for in this Section 6 shall
require the Bank to issue or sell a fraction of a share or other security.
Accordingly, all fractional shares or other securities which result from
any such adjustment or substitution shall be eliminated and not carried
forward to any subsequent adjustment or substitution.
All references in this Plan to shares shall, where the context so
requires, be deemed to be references to such shares as adjusted pursuant
to this Section 6. If any such adjustment to the number of shares subject
to the grant of stock options requires the approval of stockholders in order
to enable the Bank to issue incentive stock options then no such adjustment
shall be made without the approval of the stockholders. Notwithstanding
the foregoing, in the case of incentive stock options, if the effect of
any adjustment or substitution is to cause the stock option to fail to continue
to qualify as an incentive stock option or to cause a modification, extension
or renewal of such stock option within the meaning of Section 425 of the
Code, the Board of Directors may elect not to make such adjustment or
substitution but rather shall use reasonable efforts to effect such other
adjustment of each then outstanding stock option as the Board of Directors
in its sole discretion shall deem equitable and which will not result in
any disqualification, modification, extension or renewal (within the meaning
of Section 425 of the Code) of such stock option.
9
<PAGE>
"EXHIBIT 11"
The following table sets forth in detail the computation of earnings per share
for the periods indicated.
<TABLE>
<CAPTION>
Six Months
Ended Years Ended June 30,
December 31, -------------------------------------------------------------
1995 1995 1994 1993 1992 1991
------------ ----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net income............................................ $1,371,000 $3,287,000 $3,090,000 $2,221,000 $ 259,000 $ 487,000
Primary average common and common equivalent shares... 1,785,009 1,788,792 1,786,436 1,736,775 1,707,541 1,693,128
Primary earnings per common and common equivalent
shares.............................................. $0.77 $1.84 $1.73 $1.28 $0.15 $0.29
Fully diluted average common and common equvalent
shares.............................................. 1,788,093 1,793,725 1,799,367 1,743,019 1,715,773 1,693,128
Fully diluted earnings per common and common
equvalent shares.................................... $0.77 $1.83 $1.72 $1.27 $0.16 $0.29
</TABLE>
<PAGE>
EXHIBIT 21
LISTING OF SUBSIDIARIES
<TABLE>
<CAPTION>
Name Jurisdiction of Incorporation
- --------------------------------------------------------------------------------
<S> <C>
Concord Savings Bank New Hampshire
Bancredit Corporation New Hampshire
CB Mortgage Corp. New Hampshire
Centerpoint Bank New Hampshire
</TABLE>
<PAGE>
EXHIBIT 23
The Board of Directors
Community Bankshares, Inc.:
We consent to the incorporation by reference in the Registration Statements
(Nos. 33-53678, 33-18853 and 33-44264) on Form S-8 and in the Registration
Statement (No. 33-87956) on Form S-3 of our report dated January 17, 1996,
relating to the consolidated balance sheets of Community Bankshares, Inc. and
subsidiaries (the Company) as of December 31, 1995 and June 30, 1995 and 1994,
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for the six months ended December 31, 1995 and for each
year in the three year period ended June 30, 1995, which appears in the December
31, 1995 annual report on Form 10-K of Community Bankshares, Inc. Our report
indicates that the Company adopted Statements of Financial Accounting Standards
No. 122, "Accounting for Mortgage Servicing Rights an Amendment of FASB
Statement No. 65," effective July 1, 1994.
KPMG Peat Marwick LLP
Boston, Massachusetts
March 28, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from 10-K and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JUL-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 10,770
<INT-BEARING-DEPOSITS> 11,322
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 57,944
<INVESTMENTS-MARKET> 43,529
<LOANS> 269,635
<ALLOWANCE> 3,007
<TOTAL-ASSETS> 409,498
<DEPOSITS> 315,538
<SHORT-TERM> 59,534
<LIABILITIES-OTHER> 3,636
<LONG-TERM> 0
0
0
<COMMON> 30,790
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 409,498
<INTEREST-LOAN> 12,269
<INTEREST-INVEST> 3,768
<INTEREST-OTHER> 87
<INTEREST-TOTAL> 16,124
<INTEREST-DEPOSIT> 6,769
<INTEREST-EXPENSE> 8,902
<INTEREST-INCOME-NET> 7,222
<LOAN-LOSSES> 375
<SECURITIES-GAINS> 228
<EXPENSE-OTHER> 6,119
<INCOME-PRETAX> 2,225
<INCOME-PRE-EXTRAORDINARY> 1,371
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,371
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.29
<YIELD-ACTUAL> 3.66
<LOANS-NON> 1,331
<LOANS-PAST> 54
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,970
<CHARGE-OFFS> 650
<RECOVERIES> 312
<ALLOWANCE-CLOSE> 3,007
<ALLOWANCE-DOMESTIC> 3,007
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
