SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities and Exchange Act of 1934
For the Fiscal year Ended December 31, 1995 Commission File No. 0-19045
COMSOUTH BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
South Carolina 57-0853342
(State of Incorporation) (I.R.S. Employer I.D. No.)
1136 Washington Street, Suite 200 29201
Columbia, South Carolina 29201 (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (803) 343-2144
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common stock (no par value) American Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None.
Indicate by check whether the registrant (1) has filed all reports required to
be filed by section 13 or 15(d) of the Securities and 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. [X]
The aggregate market value of the voting Common Stock (no par value), held by
affiliates of the Registrant on March 15, 1996 was approximately $1,952,000. As
of March 15, 1996, there were 1,385,701 shares of the Registrant's Common Stock
outstanding. For purposes of the foregoing calculation only, all directors and
executive officers of the Registrant have been deemed affiliates.
Documents Incorporated by Reference:
(1) Portions of the Registrant's definitive Proxy Statement for its April 30,
1996 Annual Meeting of stockholders incorporated by reference into Part III
hereof.
<PAGE>
PART I
Item 1 - Business
General
ComSouth Bankshares, Inc. (the "Corporation") is a registered bank holding
company incorporated on May 15, 1987 pursuant to the laws of the state of South
Carolina. It presently conducts its business through its two bank subsidiaries
(the "Banks"), Bank of Columbia, N.A. ("BOCL") and Bank of Charleston, N.A.
("BOC"). The Corporation employees 53 full time employees.
The Banks
BOCL is a national bank chartered on July 12, 1988. BOCL is based in Columbia,
South Carolina, and engages in the commercial banking business in the Columbia
area. BOCL emphasizes local management and commitment to the industrial and
business growth of Columbia and the central region of South Carolina. BOCL seeks
to attract as customers small and mid-sized companies based in the central
region of South Carolina as well as low to-moderate and high income individuals
residing in BOCL's extended market area.
BOC is a national bank chartered on April 12, 1990. BOC is based in Charleston,
South Carolina, and engages in the commercial banking business in the Charleston
area. BOC seeks to attract as its primary customer base small and mid-sized
companies based in the coastal region of South Carolina as well as
low-to-moderate and high income individuals residing in BOC's extended market
area.
Services. Both Banks offer a full range of deposit services, including checking
accounts, NOW accounts, and savings and other time deposits of various types,
ranging from daily money market accounts to longer-term certificates of deposit.
The transaction accounts and time certificates are tailored to the principal
market areas of the Banks at rates competitive with those offered in the areas.
The Banks also offer individual retirement accounts. All deposit accounts are
insured by the Federal Deposit Insurance Corporation (the "FDIC") up to the
maximum amount permitted by law. Although the Banks are competitive in their
efforts to attract deposit accounts, they do not aggressively seek jumbo
certificates of deposit (certificates in amounts greater than $100,000) and do
not accept brokered accounts.
The Banks each offer a full range of short-term and intermediate-term commercial
and personal loans. The Banks originate variable-rate, residential and other
mortgage loans and fixed-rate mortgage loans primarily for resale. The Banks
also make personal loans directly to individuals for various other purposes,
including purchases of automobiles, mobile homes, boats and other recreational
vehicles, home improvements, education and personal investments. Commercial
loans, secured and unsecured, are made primarily to individuals and small and
mid-sized businesses operating in the central and coastal regions of South
Carolina, principally Richland and Lexington Counties for BOCL, and Charleston,
Colleton, Dorchester and Berkeley Counties for BOC. These loans are available
for general operating purposes, acquisition of fixed assets, including real
estate, purchases of equipment and machinery, financing of inventory and
accounts receivable, and other business purposes. In order to stress high
quality loans, the Boards of Directors of the Banks have each established
lending authority for each loan officer, but each loan request exceeding a loan
officer's authority must be approved by one or more senior officers. A loan
committee of each of the Boards of Directors reviews larger loans for approval
when the loan request exceeds established limits for the senior officers.
The Banks participate in a regional network of automated teller machines that
may be used by bank customers in major cities throughout the Southeast. The
Banks offer both Visa and Master Card together with related lines of credit. The
lines of credit may be used for overdraft protection as well as a pre-authorized
credit for personal purchases and expenses.
The Banks also provide safe deposit boxes, travelers checks, debit card
services, direct deposit of payroll and social security checks, and automatic
drafts for various accounts, but do not provide international or trust banking
services.
<PAGE>
Data Processing. During 1994 and early 1995, the Corporation upgraded its data
processing equipment to an IBM AS 400, Model F20 mainframe and a 3892 IBM sorter
in preparation for anticipated growth. This equipment is owned jointly by BOC
and BOCL and is operated by personnel of the Corporation through a service
agreement between both Banks and the Corporation. The capacity of this equipment
is expected to be sufficient to service the current short-term needs of BOC and
BOCL.
Asset and Liability Management. The primary assets of each of the Banks consist
of a loan portfolio and investment account. Efforts are made generally to match
maturities and rates of loans in the investment portfolio with those of
deposits, although exact matching is not possible. The majority of the Banks'
securities investments are in marketable obligations of the United States
government, federal agencies and state and municipal governments, generally with
varied maturities.
Long-term loans are generally priced to be interest-rate sensitive with only a
small portion of the Banks' portfolios of long-term loans at fixed rates.
Presently, such fixed-rate loans do not have maturities longer than five years,
except in exceptional cases.
Deposit accounts represent the majority of the liabilities of the Banks. These
include transaction accounts, time deposits and certificates of deposit. The
maturities of the majority of interest-sensitive accounts are six months or
less.
Competition. South Carolina law permits state-wide branching by banks and
savings and loan associations, and many financial institutions have branch
networks. South Carolina law also permits regional interstate banking, and five
of the larger commercial banks in the Columbia Metropolitan Statistical Area
("CMSA") are affiliated with regional banking groups. Approximately thirty-five
financial institutions are represented in the CMSA, including banks, savings
institutions and credit unions. Five of the larger commercial banks in the
Charleston area are also affiliated with regional banking groups. Approximately
twenty-eight financial institutions are represented in the Charleston area,
including banks, savings institutions and credit unions.
Banks generally compete with other financial institutions through the banking
products and services offered, the pricing of services, the level of service
provided, the convenience and availability of services, and the degree of
expertise and personal concern with which services are offered. The Banks
encounter strong competition from most of the financial institutions in their
respective extended market areas. In the conduct of certain areas of their
banking business, the Banks also compete with credit unions, consumer finance
companies, insurance companies, money market mutual funds and other financial
institutions, some of which are not subject to the same degree of regulation and
restriction imposed upon the Banks. Many of these competitors have substantially
greater resources and lending limits than the Banks and offer certain services,
such as international banking services and trust services, that the Banks do not
provide. Moreover, most of these competitors have numerous branch offices
located throughout the extended market area, a competitive advantage that the
Banks do not have at present. The Banks each believe, however, that their
relatively small sizes permit them to offer more personalized service than many
of their competitors, which may provide a competitive advantage.
Anticipated Growth. BOCL's initial capitalization was $5.5 million. Although its
capital has been reduced somewhat by costs of opening and initial operations,
BOCL's capital is expected to be adequate to support assets of approximately $84
million, based on normal bank regulatory guidelines and asset mix. BOCL's growth
is expected to come primarily from within its market area through loan and
deposit business generated at BOCL's main office and drive-through facility,
both located in downtown Columbia. BOC's initial capitalization was $5.5
million. BOC's capital is expected to be adequate to support assets of
approximately $150 million, based on current bank regulatory guidelines and
asset mix. Initially, BOC's growth is expected to come primarily from within the
Charleston area through loan and deposit business generated at BOC's main office
and drive-through facility, both located in downtown Charleston.
2
<PAGE>
Future possibilities for loan and deposit growth include branching beyond the
Banks' respective immediate market areas, and beyond the larger market areas
through merger, purchase of existing banks or establishment of new branches.
Premises. The principal operating facility for BOCL is located in the Barringer
Building, a National Place of Historic Interest, at the corner of Washington and
Main Streets in downtown Columbia, South Carolina. BOCL has leased approximately
6,600 square feet of space consisting of the street floor and two other floors
in the building. The main banking lobby is situated on the street floor with
access from both Washington and Main Streets. The initial lease term commenced
on December 1, 1987. The term of the lease is five years with options to renew
for two consecutive five-year periods. BOCL exercised the first five year option
period during 1992. Additionally, BOCL leases approximately 1500 square feet at
2850 Devine Street, Columbia, South Carolina for its Mortgage Loan Office. This
lease is on a month-to-month basis with a 30-day written notification for
termination.
The principal operating facility for BOC is located at 276 East Bay Street in
downtown Charleston, South Carolina. BOC has leased approximately 9,310 square
feet of space consisting of the street floor in the building. The main banking
lobby is accessed from East Bay Street. The initial lease term commenced on
December 29, 1989. The term of the lease is ten years with options to renew for
two consecutive five-year periods.
The Corporation has leased a drive-up facility located at 1313 Lady Street,
three blocks from the Main Street premises. The Corporation and BOCL are
currently leasing this facility on a three year lease which commenced on October
1, 1994.
Employees. BOCL employs 19 full-time employees and BOC employs 20
full-time employees. To the extent possible, the Banks employ people experienced
in the banking profession. Efforts are also made to employ people who are
knowledgeable about the Columbia and Charleston areas.
Federal and State Laws and Regulations
Bank holding companies and banks are extensively regulated under
federal and state law. To the extent that the following information describes
statutory and regulatory provisions, it is qualified in its entirety by
reference to such statutes and regulations. Any change in applicable law or
regulation may have a material effect on the business of the Corporation and its
subsidiaries.
Bank Holding Corporation Regulation
The Corporation is registered as a "bank holding company" with the
Board of Governors of the Federal Reserve System ("Federal Reserve"), and is
subject to supervision by the Federal Reserve under the Bank Holding Corporation
Act ("BHC Act"). The Corporation is required to file with the Federal Reserve
periodic reports and such additional information as the Federal Reserve may
require pursuant to the BHC Act. The Federal Reserve examines the Corporation,
and may examine the subsidiary Banks.
The BHC Act requires prior Federal Reserve approval for, among other
things, the acquisition by a bank holding company of direct or indirect
ownership or control of more than 5% of the voting shares or substantially all
the assets of any bank, or for a merger or consolidation of a bank holding
company with another bank holding company. With certain exceptions, the BHC Act
prohibits a bank holding company from acquiring direct or indirect ownership or
control of voting shares of any company which is not a bank or bank holding
company and from engaging directly or indirectly in any activity other than
banking or managing or controlling banks or performing services for its
authorized subsidiaries. A bank holding company may, however, engage in or
acquire an interest in a company that engages in activities which the Federal
Reserve has determined by regulation or order to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
3
<PAGE>
The Corporation is also registered under the bank holding company laws
of South Carolina. Accordingly, the Corporation is subject to regulation and
supervision by the South Carolina State Board of Financial Institutions (the
"State Board").
A registered South Carolina bank holding company must provide the State
Board with information with respect to the financial condition, operations,
management and inter-company relationships of the holding company and its
subsidiaries. The State Board also may require such other information as is
necessary to keep itself informed about whether the provisions of South Carolina
law and the regulations and orders issued thereunder by the State Board have
been complied with, and the State Board may examine any bank holding company and
its subsidiaries.
Under the South Carolina Bank Holding Corporation Act (the "SCBHCA"),
it is unlawful without the prior approval of the State Board for any South
Carolina bank holding company (i) to acquire direct or indirect ownership or
control of more than 5% of the voting shares of any bank or any other bank
holding company, (ii) to acquire all or substantially all of the assets of a
bank or any other bank holding company, or (iii) to merge or consolidate with
any other bank holding company.
As stated above, the Corporation is a legal entity separate and
distinct from the subsidiary Banks and its other subsidiary. Various legal
limitations place restrictions on the ability of the subsidiary Banks to lend or
otherwise supply funds to the Corporation or its non-bank subsidiaries. The
Corporation, BOC and BOCL are subject to Section 23A of the Federal Reserve Act.
Section 23A defines "covered transactions", which include extensions of credit,
and limits a bank's covered transactions with any affiliate to 10% of such
bank's capital and surplus. All covered transactions with all affiliates cannot
in the aggregate exceed 20% of a bank's capital and surplus. All covered and
exempt transactions between a bank and its affiliates must be on terms and
conditions consistent with safe and sound banking practices, and banks and their
subsidiaries are prohibited from purchasing low-quality assets from the bank's
affiliates. Finally, Section 23A requires that all of a bank's extensions of
credit to an affiliate be appropriately secured by acceptable collateral,
generally United States government or agency securities. The Corporation, BOC
and BOCL also are subject to Section 23B of the Federal Reserve Act, which
generally limits covered and other transactions among affiliates to terms and
circumstances, including credit standards, that are substantially the same or at
least as favorable to a bank holding company, a bank or a subsidiary of either
as prevailing at the time for transactions with unaffiliated companies.
In July 1994, South Carolina enacted legislation which effectively
provides that, after June 30, 1996, out-of-state bank holding companies
(including bank holding companies in the Southern Region, as defined under the
statute) may acquire other banks or bank holding companies having offices in
South Carolina upon the approval of the State Board and compliance with certain
other conditions, including that the effect of the transaction not lessen
competition and that the laws of the state in which the out-of-state bank
holding company filing the applications has its principal place of business
permit South Carolina bank holding companies to acquire banks and bank holding
companies in that state. Although such legislation may increase takeover
activity in South Carolina, the Corporation does not believe that such
legislation will have a material impact on its competitive position. However, no
assurance of such fact may be given.
Congress recently enacted the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994, which will increase the ability of bank
holding companies and banks to operate across state lines. Under the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994, the existing
restrictions on interstate acquisitions of banks by bank holding companies will
be repealed one year following enactment, such that the Corporation and any
other bank holding company located in South Carolina would be able to acquire a
bank located in any other state, and a bank holding company located outside
South Carolina could acquire any South Carolina-based bank, in either case
subject to certain deposit percentage and other restrictions. The legislation
also provides that, unless an individual state elects beforehand either (i) to
accelerate the effective date or (ii) to prohibit out-of-state banks from
operating interstate branches within its territory, on or after June 1, 1997,
adequately capitalized and managed bank holding companies will be able to
consolidate their multistate bank operations into a single bank subsidiary and
to branch interstate through acquisitions. De novo branching by an out-of-state
bank would be permitted only if it is expressly
4
<PAGE>
permitted by the laws of the host state. The authority of a bank to establish
and operate branches within a state will continue to be subject to applicable
state branching laws. The Corporation believes that this legislation may result
in increased takeover activity of South Carolina financial institutions by
out-of-state financial institutions. However, the Corporation does not presently
anticipate that such legislation will have a material impact on its operations
or future plans.
Obligations of Holding Corporation to its Subsidiary Banks
Under the policy of the Federal Reserve, a bank holding company is
required to serve as a source of financial strength to its subsidiary depository
institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. Under the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("1991 Banking Law"), to
avoid receivership of its insured depository institution subsidiary, a bank
holding company is required to guarantee the compliance of any insured
depository institution subsidiary that may become "undercapitalized" with the
terms of any capital restoration plan filed by such subsidiary with its
appropriate federal banking agency up to the lesser of (i) an amount equal to 5%
of the institution's total assets at the time the institution became
undercapitalized, or (ii) the amount which is necessary (or would have been
necessary) to bring the institution into compliance with all applicable capital
standards as of the time the institution fails to comply with such capital
restoration plan. Under the BHCA, the Federal Reserve has the authority to
require a bank holding company to terminate any activity or to relinquish
control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon
the Federal Reserve's determination that such activity or control constitutes a
serious risk to the financial soundness and stability of any bank subsidiary of
the bank holding company.
In addition, the "cross-guarantee" provisions of the Federal Deposit
Insurance Act, as amended ("FDIA"), require insured depository institutions
under common control to reimburse the FDIC for any loss suffered or reasonably
anticipated by either the Savings Association Insurance Fund or the Bank
Insurance Fund of the FDIC as a result of the default of a commonly controlled
insured depository institution or for any assistance provided by the FDIC to a
commonly controlled insured depository institution in danger of default. The
FDIC may decline to enforce the cross-guarantee provisions if it determines that
a waiver is in the best interest of the SAIF or the BIF or both. The FDIC's
claim for damages is superior to claims of stockholders of the insured
depository institution or its holding company but is subordinate to claims of
depositors, secured creditors and holders of subordinated debt (other than
affiliates) of the commonly controlled insured depository institutions.
The FDIA also provides that amounts received from the liquidation or
other resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or stockholder. This
provision would give depositors a preference over general and subordinated
creditors and stockholders in the event a receiver is appointed to distribute
the assets of the Banks.
Any capital loans by a bank holding company to any of its subsidiary
banks are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
Under the National Bank Act, if the capital stock of a national bank is
impaired by losses or otherwise, the Office of the Comptroller of the Currency
("OCC") is authorized to require payment of the deficiency by assessment upon
the bank's shareholders', pro rata, and to the extent necessary, if any such
assessment is not paid by any shareholder after three months notice, to sell the
stock of such shareholder to make good the deficiency.
5
<PAGE>
Capital Adequacy
The various federal bank regulators, including the Federal Reserve and
the OCC, have adopted risk-based capital requirements for assessing bank holding
company and bank capital adequacy. These standards define what qualifies as
capital and establish minimum capital standards in relation to assets and
off-balance sheet exposures, as adjusted for credit risks. Capital is classified
into two tiers. For bank holding companies, Tier 1 or "core" capital consists
primarily of common shareholders' equity, perpetual preferred stock (subject to
certain limitations) and minority interests in the common equity accounts of
consolidated subsidiaries, and is reduced by goodwill and certain investments in
other corporations ("Tier 1 Capital"). Tier 2 capital consists of the allowance
for possible loan losses (subject to certain limitations), and certain
subordinated debt, "hybrid capital instruments", subordinated and perpetual debt
and intermediate term and other preferred stock ("Tier 2 Capital"). A minimum
ratio of total capital to risk- weighted assets of 8.00% is required and Tier 1
capital must be at least 50% of total capital. The Federal Reserve also has
adopted a minimum leverage ratio of Tier 1 Capital to total assets (not
risk-weighted) of 3%. The 3% Tier 1 Capital to total assets ratio constitutes
the leverage standard for bank holding companies and national banks, and will be
used in conjunction with the risk-based ratio in determining the overall capital
adequacy of banking organizations.
The Federal Reserve and the OCC have emphasized that the foregoing
standards are supervisory minimums and that an institution would be permitted to
maintain such levels of capital only if it had a composite rating of "1" under
the regulatory rating systems for bank holding companies and banks. All other
bank holding companies are required to maintain a leverage ratio of 3% plus at
least 1% to 2% of additional capital. These rules further provide that banking
organizations experiencing internal growth or making acquisitions will be
expected to maintain capital positions substantially above the minimum
supervisory levels and comparable to peer group averages, without significant
reliance on intangible assets. The Federal Reserve continues to consider a
"tangible Tier 1 leverage ratio" in evaluation proposals for expansion or new
activities. The tangible Tier 1 leverage ratio is the ratio of a banking
organization's Tier 1 Capital less all intangibles, to total assets, less all
intangibles. The Federal Reserve has not advised the Corporation of any specific
minimum leverage ratio applicable to it. As of December 31, 1995, the
Corporation, BOC and BOCL had leverage ratios of 9.2%; 10.8%; and 7.3%
respectively, and total risk adjusted capital ratios of 13.4%; 15.2%; 11.2%,
respectively.
Payment of Dividends
If a national bank's surplus fund equals the amount of its capital
stock, the directors may declare quarterly, semi-annual or annual dividends out
of the bank's net profits, after deduction of losses and bad debts. If the
surplus fund does not equal the amount of capital stock, a dividend may not be
paid until one-tenth of the bank's net profits of the preceding half year, in
the case of quarterly or semi-annual dividends, or the preceding two years, in
the case of an annual dividend, are transferred to the surplus fund.
The approval of the OCC is required if the total of all dividends
declared by a national bank in any calendar year will exceed the total of its
retained net profits of that year combined with its retained net profits of the
two preceding years, less any required transfers to surplus or a fund for the
retirement of any preferred stock. OCC regulations provide that provisions for
possible credit losses cannot be added back to net income and charge-offs cannot
be deducted from net income in calculating the level of net profits available
for the payment of dividends.
The payment of dividends by the Banks may also be affected or limited
by other factors, such as the requirements to maintain adequate capital above
regulatory guidelines. In addition, if, in the opinion of the OCC, a bank under
its jurisdiction is engaged in or is about to engage in an unsafe or unsound
practice (which, depending on the financial condition of the bank, could include
the payment of dividends), the OCC may require, after notice and hearing, that
such bank cease and desist from such practice. The OCC has indicated that paying
dividends that deplete a national bank's capital base to an inadequate level
would be an unsafe and unsound banking practice. The Federal Reserve, the OCC
and the FDIC have issued policy statements which provide that bank holding
companies and insured banks should generally only pay dividends out of current
operating earnings.
6
<PAGE>
Bank Regulation
BOC and BOCL are subject to supervision and examination by the OCC. The OCC
regulates and monitors all areas of the Banks' operations, including loans,
mortgages, issuance of securities, capital adequacy, payment of dividends, and
establishment of branches. Interest and certain other charges collected or
contracted for by the Banks are also subject to state usury laws and certain
federal laws concerning interest rates. BOC and BOCL are members of the Federal
Reserve System, and their deposits are insured by the FDIC up to the maximum
permitted by law.
Under present law, the Banks currently may establish and operate
branches throughout the State of South Carolina, subject to the maintenance of
adequate capital for each branch and the receipt of OCC approval.
Insurance of Deposits
As FDIC-insured institutions, the Banks are subject to insurance
assessments imposed by the FDIC. Under current law, the insurance assessment to
be paid by FDIC-insured institutions shall be as specified in a schedule
required to be issued by the FDIC that specifies, at semi-annual intervals,
target reserve ratios designed to increase the FDIC insurance fund's reserve
ratio to 1.25% of estimated insured deposits (or such higher ratio as the FDIC
may determine in accordance with the statute) in 15 years. Further, the FDIC is
authorized to impose one or more special assessments in any amount deemed
necessary to enable repayment of amounts borrowed by the FDIC from the United
States Department of the Treasury.
Effective January 1, 1996, the FDIC implemented a risk-based assessment
schedule, having assessments ranging from 0.00% to 0.27% of an institution's
average assessment base with a minimum annual assessment of $2,000 per
institution. The actual assessment to be paid by each FDIC-insured institution
is based on the institution's assessment risk classification, which is
determined based on whether the institution is considered "well capitalized,"
"adequately capitalized" or "undercapitalized", as such terms have been defined
in applicable federal regulations adopted to implement the prompt corrective
action provisions of FDICIA, and whether such institution is considered by its
supervisory agency to be financially sound or to have supervisory concerns.
Under uniform regulations defining such capital levels issued by each of the
federal banking agencies, a bank is considered "well capitalized" if it has (i)
a total risk-based capital ratio of 10% or greater, (ii) a Tier 1 risk-based
capital ratio of 6% or greater, (iii) a leverage ratio of 5% or greater, and
(iv) is not subject to any order or written directive to meet and maintain a
specific capital level for any capital measure. An "adequately capitalized" bank
is defined as one that has (i) a total risk-based capital ratio of 8% or
greater, (ii) a Tier 1 risk-based capital ratio of 4% or greater, and (iii) a
leverage ratio of 4% or greater (or 3% or greater in the case of a bank with a
composite CAMEL rating of 1). A bank is considered "undercapitalized" if it has
(i) a total risk-based capital ratio of less than 8%, (ii) a Tier 1 risk-based
capital ratio of less than 4%, or (iii) a leverage ratio of less than 4% (or 3%
in the case of a bank with a composite CAMEL rating of 1). As a result of the
current provisions of federal law, the assessment rates on deposits could
increase over present levels. Based on the current financial condition and
capital levels of the Banks, the Corporation does not expect that the current
FDIC risk-based assessment schedule will have a material adverse effect on the
Banks' earnings. The Banks' risk-based insurance assessments currently are each
set at the minimum $2,000 annual assessment.
Legislation
In 1989 and again in 1991, Congress enacted comprehensive legislation
affecting the commercial banking and thrift industries: the Financial
Institutions Reform, Recovery and Enforcement Act (FIRREA") and the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). FIRREA, among
other things, abolished the Federal Savings and Loan Insurance Corporation and
established two new insurance funds under the jurisdiction of the FDIC: the Bank
Insurance Fund ("BIF"), which insures most commercial banks, including BOC and
BOCL, and the Savings Association Insurance Fund ("SAIF"), which insures most
thrift institutions.
7
<PAGE>
FIRREA permitted bank holding companies to acquire savings associations
subject to appropriate regulatory approvals. The entities acquired may be
operated as separate savings associations, converted into banks or, if certain
conditions are satisfied, merged into existing bank affiliates.
FIRREA also imposed, with certain limited exceptions, a
"cross-guarantee" on the part of commonly controlled depository institutions, as
discussed above under "Obligations of Holding Corporation to its Subsidiary
Banks."
FDICIA supplements the federal banking agencies' broad powers to take
corrective action to resolve problems of insured depository institutions,
generally authorizing earlier intervention in the affairs of a particular
institution and imposing express requirements that are tied to the institution's
level of capital. If a depository institution fails to meet regulatory capital
requirements specified in FDICIA, regulatory agencies can require submission and
funding of a capital restoration plan by the institution, place limits on its
activities, require the raising of additional capital and, ultimately, require
the appointment of a conservator or receiver for the institution. Where a
capital restoration plan is required, the regulatory agency may require a bank
holding company to guarantee as a condition of approval of the plan the lower of
5% of an undercapitalized subsidiary's assets or the amount required to meet
regulatory capital requirements. If the controlling bank holding company fails
to fulfill its obligations with respect to such a plan and files (or has filed
against it) a petition under the federal Bankruptcy Code, the claim would be
entitled to a priority in such bankruptcy proceeding over third party creditors
of the bank holding company.
FDICIA required each federal banking agency, including the Federal
Reserve, to revise its risk-based capital standards to ensure that those
standards take adequate account of interest rate risk, concentration of credit
risk and the risks of non-traditional activities, as well as reflect the actual
performance and expected risk of loss on multi-family mortgages. The Federal
Reserve, the FDIC and the OCC have issued a joint rule amending the capital
standards to specify that the banking agencies will include in their evaluations
of a bank's capital adequacy an assessment of the exposure to declines in the
economic value of the bank's capital due to changes in interest rates. The
agencies have also issued for comment a proposed joint policy statement that
describes the process the banking agencies will use to measure and assess the
exposure of a bank's net economic value to changes in interest rates. The
banking agencies have also indicated that, through a subsequent rulemaking
process, they intend to issue a proposed rule that would establish an explicit
capital charge for interest rate risk based on the level of a bank's measured
interest rate risk exposure.
The Federal Reserve, the FDIC, the OCC and the Office of Thrift
Supervision have also issued a joint rule amending the risk-based capital
guidelines to take account of concentration of credit risk and the risk of
non-traditional activities. The rule amends each agency's risk-based capital
standards by explicitly identifying concentration of credit risk and the risk
arising from other sources, as well as an institution's ability to manage these
risks, as important factors to be taken into account by the agency in assessing
an institution's overall capital adequacy.
FDICIA also restricts the acceptance of brokered deposits by insured
depository institutions and contains a number of consumer banking provisions,
including disclosure requirements and substantive contractual limitations with
respect to deposit accounts.
FDICIA also required each of the federal banking agencies to develop
regulations addressing certain safety and soundness standards for insured
depository institutions and depository institution holding companies, including
operational and managerial standards, asset quality, earnings and stock
valuation standards, as well as compensation standards (but not dollar levels of
compensation). On September 23, 1994, the Riegle Community Development and
Regulatory Improvement Act of 1994 amended the 1991 Banking Law to authorize the
agencies to establish safety and soundness standards by regulation or by
guideline. Accordingly, the federal banking agencies have recently issued
Interagency Guidelines Establishing Standards for Safety and Soundness, which
set forth general operational and managerial standards in the areas of internal
controls, information systems and internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth and compensation, fees
and benefits. The
8
<PAGE>
Guidelines also prohibit payment of excessive compensation as an unsafe and
unsound practice. Compensation is defined as excessive if it is unreasonable or
disproportionate to the services actually performed. Bank holding companies are
not subject to the Guidelines. The Guidelines contemplate that each federal
agency will determine compliance with these standards through the examination
process, and if necessary to correct weaknesses, require an institution to file
a written safety and soundness compliance plan. The Corporation does not expect
the Guidelines to materially change current operations of the Banks.
Enforcement Policies and Actions
FIRREA significantly increased the enforcement powers of the OCC, the
Federal Reserve and the other federal depository institution regulators, and
authorizes the imposition of civil money penalties of from $5,000 per day up to
$1,000,000 per day for violations of federal banking laws and regulations.
Persons who are affiliated with depository institutions and are found to have
violated federal banking laws and regulations can be removed from any office
held in such institution and banned for life from participating in the affairs
of such an institution. The banking regulators have not hesitated to use the new
enforcement authorities provided them under FIRREA.
Community Reinvestment Act
The Banks are subject to the requirements of the Community Reinvestment
Act (the "CRA"). The CRA requires that financial institutions have an
affirmative and ongoing obligation to meet the credit needs of their local
communities, including low- and moderate-income neighborhoods, consistent with
the safe and sound operation of those institutions. Each financial institution's
efforts in meeting the community credit needs are evaluated as part of the
examination process pursuant to twelve assessment factors. These factors also
are considered in evaluating mergers, acquisitions and applications to open a
branch or facility. Both Banks received ratings of satisfactory in their most
recent evaluations.
The federal banking agencies, including the OCC, have recently issued a
joint rule that changes the method of evaluating an institution's CRA
performance. The new rule evaluates institutions based on their actual
performance (rather than efforts) in meeting community credit needs. Subject to
certain exceptions, the OCC assesses the CRA performance of a bank by applying
lending, investment and service tests. The lending test evaluates a bank's
record of helping to meet the credit needs of its assessment area through its
lending activities by considering a bank's home mortgage, small business, small
farm, community development, and consumer lending. The investment test evaluates
a bank's record of helping to meet the credit needs of its assessment area
through qualified investments that benefit its assessment area or a broader
statewide or regional area that includes the bank's assessment area. The service
test evaluates a bank's record of helping to meet the credit needs of its
assessment area by analyzing both the availability and effectiveness of a bank's
systems for delivering retail banking services and the extent and innovativeness
of its community development services. The OCC assigns a rating to a bank of
"outstanding," satisfactory," "needs to improve," or "substantial noncompliance"
based on the bank's performance under the lending, investment and service tests.
To evaluate compliance with the tests, subject to certain exceptions, banks will
be required to collect and report to the OCC extensive demographic and loan
data.
For banks with total assets of less than $250 million that are
affiliates of a holding company with banking and thrift assets of less than $1
billion, such as the Banks and Corporation, the OCC evaluates the bank's record
of helping to meet the credit needs of its assessment area pursuant to the
following criteria: (1) the bank's loan-to-deposit ratio, adjusted for seasonal
variation and, as appropriate, other lending-related activities, such as loan
originations for sale to the secondary markets, community development loans, or
qualified investments; (2) the percentage of loans and, as appropriate, other
lending-related activities located in the bank's assessment area; (3) the bank's
record of lending to and, as appropriate, engaging in other lending-related
activities for borrowers of different income levels and businesses and farms of
different sizes; (4) the geographic distribution of the bank's loans; and (5)
the bank's record of taking action, if warranted, in response to written
complaints about its performance in helping to meet credit needs in its
assessment area. Small banks may also elect to be assessed under the generally
applicable standards of the rule, but to do so a small bank must collect and
report extensive data.
9
<PAGE>
A bank may also submit a strategic plan to the OCC and be evaluated on
its performance under the plan.
Other Laws and Regulations
Interest and certain other charges collected or contracted for by the
Banks are subject to state usury laws and certain federal laws concerning
interest rates. The Banks' operations are also subject to certain federal laws
applicable to credit transactions, such as the federal Truth-In-Lending Act
governing disclosures of credit terms to consumer borrowers, CRA requiring
financial institutions to meet their obligations to provide for the total credit
needs of the communities they serve, including investing their assets in loans
to low- and moderate-income borrowers, the Home Mortgage Disclosure Act of 1975
requiring financial institutions to provide information to enable the public and
public officials to determine whether a financial institution is fulfilling its
obligation to help meet the housing needs of the community it serves, the Equal
Credit Opportunity Act prohibiting discrimination on the basis of race, creed or
other prohibited factors in extending credit, the Fair Credit Reporting Act of
1978 governing the use and provision of information to credit reporting
agencies, the Fair Debt Collection Act governing the manner in which consumer
debts may be collected by collection agencies, and the rules and regulations of
the various federal agencies charged with the responsibility of implementing
such federal laws. The deposit operations of the Banks also are subject to the
Right to Financial Privacy Act, which imposes a duty to maintain confidentiality
of consumer financial records and prescribes procedures for complying with
administrative subpoenas of financial records, and the Electronic Funds Transfer
Act and Regulation E issued by the Federal Reserve to implement that act, which
govern automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
From time to time, bills are pending before the United States Congress
which contain wide-ranging proposals for altering the structure, regulation and
competitive relationships of the nation's financial institutions. Among such
bills are proposals to prohibit banks and bank holding companies from conducting
certain types of activities, to subject banks to increased disclosure and
reporting requirements, to alter the statutory separation of commercial and
investment banking, and to further expand the powers of banks, bank holding
companies and competitors of banks. It cannot be predicted whether or in what
form any of these proposals will be adopted or to the extent to which the
business of the Corporation and its subsidiaries may be affected thereby.
Fiscal and Monetary Policy
Banking is a business which depends on interest rate differentials. In
general, the difference between the interest paid by a bank on its deposits and
its other borrowings, and the interest received by a bank on its loans and
securities holdings, constitutes the major portion of a bank's earnings. Thus,
the earnings and growth of the Corporation will be subject to the influence of
economic conditions generally, both domestic and foreign, and also to the
monetary and fiscal policies of the United States and its agencies, particularly
the Federal Reserve. The Federal Reserve regulates the supply of money through
various means, including open-market dealings in United States government
securities, the discount rate at which banks may borrow from the Federal
Reserve, and the reserve requirements on deposits. The nature and timing of any
changes in such policies and their impact on the Corporation cannot be
predicted.
Item 2 - Properties
The principal operating facility for the Corporation is currently located at
1136 Washington Street, Suite 200, Columbia, South Carolina. The Corporation has
leased approximately 5,700 square feet of space at that address on a five year
lease commencing on February 1, 1995 with one five year renewal option.
Information relating to the premises leased by the Banks is set forth under Item
1 - "Business - General - The Banks - "Premises." The Corporation considers all
properties leased by the Banks suitable and adequate for their intended purpose.
10
<PAGE>
Item 3 - Legal Proceedings
On January 24, 1994, a former director of the Corporation and Bank of Columbia
and a current stockholder of the Corporation brought suit in the Court of Common
Pleas of Richland County against the Corporation and eight of its directors and
former directors alleging that the defendant directors had breached their
fiduciary duties in not pursuing proposals by third parties to acquire the
Corporation in 1992. The Corporation is named as a defendant because the
plaintiff asserts that the suit is, in part, a derivative action, which is a
claim brought by a stockholder that belongs to the Corporation against officers
and directors of the Corporation. The Corporation has answered the Complaint.
Management believes that the suit is without merit and is vigorously defending
the suit.
Item 4 - Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of 1995 to a vote of security
holders.
Part II
Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters
There has been only a limited trading market for the Corporation's stock since
inception. Since the completion of the Corporation's two common stock offerings
in 1987 and 1988 and its Bank of Charleston Series Preferred Stock offering in
1990, management has knowledge of only limited stock transactions. The Preferred
Stock converted to Common Stock in 1992. During 1995, management was aware of
limited transactions in its stock with the majority of the transactions
occurring at approximately $8.50 per share. Because there is no established
market for the Corporation's stock, these transactions may not be representative
of all transactions, may not be arm's length transactions, and are not
necessarily indicative, therefore, of prices at which shares of the
Corporation's stock could be bought or sold. On March 21, 1996, the Corporation
listed its common stock on the American Stock Exchange under the ticker symbol
CSB.
As of March 12, 1996, there were approximately 600 record holders of the
Corporation's common stock.
The Board of Directors of the Corporation, BOCL and BOC intend to follow a
policy of retaining earnings to provide funds to operate and expand the business
of the Corporation. Consequently, the Corporation has not declared or
distributed any cash dividends to its shareholders.
The future dividend policy of the Corporation is subject to the discretion of
the Board of Directors and will depend upon a number of factors including future
earnings, financial condition, cash needs, and general business conditions. The
Corporation's initial ability to distribute cash dividends will depend entirely
on the Bank's ability to distribute dividends to the Corporation. The Banks must
comply with the requirements of the National Bank Act and may have to obtain the
approval of the OCC before paying any dividend. The Banks may not declare or pay
a dividend if the effect of the payment would cause the minimum capital of the
Banks to be reduced below the minimum capital requirements imposed by the OCC.
Item 6 - Selected Financial and Other Data
The following table sets forth certain information concerning the consolidated
financial position and results of operations of the Corporation and its
subsidiaries. This information should be read in conjunction with Management's
Discussion and Analysis of Financial Conditions and Results of Operations and is
qualified in its entirety by reference to the more detailed consolidated
financial statements and notes thereto contained elsewhere in this report.
11
<PAGE>
<TABLE>
TABLE 1 - FINANCIAL SUMMARY
<CAPTION>
SUMMARY OF OPERATIONS
(thousands, except per share data) 1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest income $ 9,234 $ 6,786 $ 6,537 $ 7,392 $ 6,999
Interest expense 4,125 2,570 2,690 3,562 4,109
-------- -------- -------- ----- -------
Net interest income 5,109 4,216 3,847 3,830 2,890
Provision for loan losses 195 75 135 1,548 178
-------- -------- -------- ----- -------
Net interest income after provision
for loan losses 4,914 4,141 3,712 2,282 2,712
Noninterest income 1,469 771 690 1,083 562
Noninterest expense 4,576 3,927 3,836 3,991 3,032
-------- -------- -------- ----- -------
Income before income taxes 1,807 985 566 (626) 242
Applicable income (taxes) benefit (426) 62 (43) (33) (16)
------- -------- -------- --- -------
Net income (loss) $ 1,381 $ 1,047 $ 523 $ (659) $ 226
======== ======== ======== ======= =======
Net income (loss) per Common share (1) $ 1.00 $ .76 $ .38 $ (.48) $ .16
Book value (year-end) per Common share $ 8.57 $ 7.38 $ 6.75 $ 6.37 $ 6.98
Selected year-end assets and liabilities
Total assets $133,423 $96,920 $95,008 $94,162 $88,751
Interest-earning assets 119,429 89,179 87,105 86,698 82,258
Investment securities 22,135 21,878 23,323 21,769 19,231
Loans (net) 91,024 67,301 59,883 61,614 60,657
Deposits 117,763 82,908 82,898 83,087 75,607
Noninterest-bearing deposits 24,246 13,392 11,430 10,823 6,514
Interest-bearing deposits 93,517 69,516 71,468 72,264 69,093
Interest-bearing liabilities 2,193 3,422 2,513 1,727 3,004
Stockholders' equity 11,879 10,104 9,238 8,715 9,353
Ratios (average)
Loans to deposits 80.62% 71.87% 73.58% 79.28% 79.78%
Return on assets 1.22% 1.13% 0.58% (0.69%) 0.29%
Return on interest-earning assets 1.30% 1.20% 0.62% (0.74%) 0.32%
Return on stockholders' equity 12.74% 11.12% 5.68% (7.03%) 2.44%
Net interest income to interest-earning assets 4.81% 4.84% 4.53% 4.27% 4.00%
Net charge-offs (recoveries) to loans 0.01% (0.11%) 0.66% 0.74% 0.06%
Stockholders' equity to assets 9.55% 10.13% 10.21% 9.84% 11.88%
Stockholders' equity to deposits 10.94% 11.69% 11.60% 11.36% 14.21%
Risk-based capital ratio 13.43% 16.23% 15.27% 14.20% 11.88%
Tier 1 leverage ratio 12.17% 14.96% 14.00% 13.00% 12.27%
</TABLE>
(1) See Note 1 to consolidated financial statements regarding per share
calculation.
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis should be read in conjunction with the
consolidated financial statements and accompanying notes thereto as well as the
supplementary financial, tabular, and historical information presented elsewhere
in this Annual Report.
12
<PAGE>
Results of Operations
The Corporation continued to improve its earnings performance during 1995 as net
income for the year ended December 31, 1995 totaled $1,381,000 or $1.00 per
share, compared to $1,047,000 or $.76 per share for 1994 and $523,000 or $.38
per share for 1993. Net interest income increased primarily as a result of the
strong loan growth in both banks. Significant improvement in non-interest income
was primarily due to increased fees for deposit services resulting from a 42%
growth in deposits from the prior year and fees derived from the origination and
sale of residential mortgage loans as a result of an expansion in mortgage
lending operations during the latter part of 1994.
The Corporation had total revenues of $10,703,000, $7,557,000 and $7,227,000 for
the three years ending 1995, 1994, and 1993, respectively. Total expenses for
the same periods were $9,322,000, $6,510,000 and $6,704,000.
The increase in revenue provided by interest on loans in 1995 over 1994 is
primarily the result of the strong loan growth realized by both banks during
1995, coupled with several prime rate increases in 1994, which impacted the
yields realized during 1995. A significant portion of the loan portfolio is
indexed to the prime lending rate for pricing purposes. The growth in revenue
related to temporary investments is due to the steady growth of deposits. Funds
provided by this deposit growth were generally invested in temporary investments
so that funding for loan growth would be readily available as needed.
The growth in noninterest income was partially due to the success achieved by
the management of both banks in the acquisition of transaction deposit accounts
during 1994 and 1995. The growth in deposit relationships was responsible for a
23% increase in revenue derived from deposit service categories during 1995.
Also, BOCL restructured its mortgage lending operations during the second
quarter of 1994, resulting in an additional $457,000 in fees generated from the
origination and sale of residential mortgages during 1995.
BOC introduced a new product "Business Manager" in the second quarter of 1994.
This product provides immediate cash flow to small businesses through the
purchase by the Banks of the related company's receivables. The Banks are paid a
fee for the billing and collection of these receivables and retain full
recourse against the seller of the purchased receivables in case of default.
BOCL also began to offer this service in the first quarter of 1995. Fees from
this product, coupled with the lending fees realized from the residential
activities mentioned above, accounted for the major portion of the $698,000
increase in non-interest income during 1995.
The change in interest paid on deposits is principally due to a 42% growth in
deposits from 1994 to 1995 as a result of management's emphasis on developing a
strong deposit customer base to support its asset growth and the impact on rates
paid on deposits in 1995 due to changes in market rates as a result of several
prime rate increases in 1994. The increase in salaries and employee benefits is
primarily due to commissions paid to loan originators as a result of the
restructuring of the mortgage lending operation of BOCL during the second
quarter of 1994 along with normal merit increases. Furniture and equipment
expenses are up over 1994 due to the relocation of the data processing facility
in February 1995 and the upgrade of most of the hardware and software used by
the data processing facility during 1995.
Although the total change in other expenses did not vary significantly from
1994 to 1995, certain classifications did have noticeable variances (see Note 12
to the consolidated financial statements). Legal, accounting, regulatory and
insurance expenses declined from the prior year by approximately $42,000
primarily as the result of a reduction by the FDIC in insurance rates during
1995. Postage and freight expenses increased by approximately $26,000 due to a
postage rate increase and a 42% growth in deposits which resulted in additional
postage for statement rendering. Dues and subscriptions were up approximately
$34,000 due to asset growth as certain dues are charged based on asset size,
coupled with the accrual of a fee by the Corporation during 1995 for application
for membership on the American Stock Exchange (AMEX). Directors' fees increased
by $12,000 due to the implementation of directors' fees for BOCL and the
Corporation during 1995. Temporary employment services increased by $25,000 as a
result of
13
<PAGE>
temporary support for the strong asset growth during the year as well as
temporary coverage for vacant positions due to employee turnover throughout
1995. The increase in losses other than bad debt of approximately $12,000 was
the result of an increase in routine losses on deposit accounts related to the
overall growth in deposits, coupled with a robbery at BOCL during 1995.
Income tax expenses increased over the prior year by approximately $488,000 as
the Corporation fully liquidated its net operating loss carry forward (NOL) for
federal income tax purposes during the first half of 1995. Management decided to
reduce its reserve on net deferred tax assets by $200,000 during 1995 in
addition to the $113,000 in 1994 due to its third consecutive year of profit,
the liquidation of the NOL and the belief that profits will continue in 1996 and
beyond. See Note 13 to the consolidated financial statements for further details
concerning income tax expenses for 1995, 1994 and 1993.
Summarized in Table 2 is an analysis of the composition of the Corporation's
revenues and expenses for 1995, 1994 and 1993.
<TABLE>
TABLE 2 - REVENUES AND EXPENSES
<CAPTION>
Year ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
Amount % Amount % Amount %
------ --- ------ --- ------ ---
Revenues
<S> <C> <C> <C> <C> <C> <C>
Interest on loans $ 7,723,855 72.2% $5,503,179 72.8% $5,064,730 70.1%
Interest on investment securities 1,361,008 12.7% 1,209,414 16.0% 1,381,471 19.1%
Interest on temporary investments 148,778 1.4% 73,463 1.0% 90,663 1.3%
Noninterest income 1,469,342 13.7% 770,700 10.2% 689,622 9.5%
----------- ----- ---------- ----- ---------- -----
Total revenues $10,702,983 100.0% $7,556,756 100.0% $7,226,486 100.0%
=========== ===== ========== ===== ========== =====
Expenses
Interest on deposits $4,008,427 43.0% $2,475,804 38.0% $2,630,196 39.2%
Interest on note payable and
securities sold under
agreements to repurchase 116,136 1.2% 93,979 1.4% 59,535 0.9%
Provision for loan losses 195,000 2.1% 75,000 1.2% 135,000 2.0%
Salaries and employee benefits 2,481,335 26.6% 2,053,878 31.6% 1,939,723 28.9%
Occupancy expenses 429,183 4.6% 384,133 5.9% 391,211 5.9%
Furniture and equipment expenses 341,966 3.7% 281,216 4.3% 241,955 3.6%
Advertising and marketing 78,643 0.8% 83,735 1.3% 51,067 0.8%
Other 1,244,695 13.4% 1,124,005 17.3% 1,211,657 18.1%
Taxes 426,127 4.6% (61,742) (1.0%) 43,525 0.6%
---------- ----- ---------- ----- ---------- -----
Total expenses $9,321,512 100.0% $6,510,008 100.0% $6,703,869 100.0%
========== ===== ========== ===== ========== =====
</TABLE>
Discussion of the Corporation's financial condition and expanded discussion of
its operating results are presented in the following narratives and tables.
Net Interest Income
Net interest income represents the differences between interest earned on assets
and the interest paid on liabilities. It traditionally constitutes the largest
source of a financial institution's earnings.
For the years 1995, 1994 and 1993, net interest income totaled $5,109,000,
$4,216,000 and $3,847,000, respectively. The increase in net interest income in
1995 from 1994 was principally due to a significant increase in loans
14
<PAGE>
outstanding as loans increased by thirty-five percent (35%), or $23,900,000. The
increase of net interest income in 1994 from 1993 was principally due to a
rising interest rate environment in 1994 and a twelve percent (12%) increase in
loans outstanding, which replaced lower yielding temporary investments and
investment securities.
The average yield on earning assets for 1995, 1994 and 1993 was 8.69%, 7.79% and
7.70%, the average rate paid was 4.84%, 3.65% and 3.78%, and the annualized net
yield on average earnings (net interest income divided by average earning
assets) was 4.81%, 4.84% and 4.53%, respectively.
The change in yields on earning assets and rates paid on interest bearing
deposits from 1994 to 1995 is primarily due to several prime rate changes, which
occurred periodically during 1994. Even though rates paid on deposits are not
tied to the prime lending rate, changes in the prime lending rate traditionally
impact the market rate paid on deposits. In an effort to minimize any earnings
impact as a result of rate changes, management concentrated on maintaining a
relatively stable net interest margin during 1995, as can be seen by the minimal
change in the margin between 1995 and 1994.
Table 3 shows the yields and costs on average balances for the periods
discussed.
15
<PAGE>
<TABLE>
TABLE 3 - COMPARATIVE AVERAGE BALANCE SHEETS - YIELD AND COSTS
(Average balances for years ended December 31, in thousands)
<CAPTION>
1995 1994 1993
------ ------ -----
Average Revenue/ Average Revenue/ Average Revenue/
Balance expense Yield/Rate Balance expense Yield/Rate Balance expense Yield/Rate
------- ------- ---------- ------- ------- ---------- ------- ------- ----------
Interest earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans (1) $ 79,881 $ 7,724 9.67% $62,568 $5,503 8.79% $58,349 $ 5,065 8.68%
Investment securities (taxable) 23,902 1,361 5.69% 22,648 1,209 5.34% 23,481 1,381 5.88%
Federal funds sold 2,532 149 5.88% 1,842 74 4.00% 3,041 91 2.98%
-------- ------- ---- ------- ------ ---- ------- ------- ----
Total interest-earning assets 106,315 9,234 8.69% 87,058 6,786 7.79% 84,871 6,537 7.70%
-------- ------- ---- ------- ------ ---- ------- ------- ----
Noninterest earning assets
Cash and due from banks 5,763 4,543 3,838
Premises and equipment 1,321 1,178 1,189
Other, less allowance for loan losses 64 197 153
-------- ------- -------
Total noninterest earning assets 7,148 5,918 5,180
-------- ------- -------
Total assets $113,463 $92,976 $90,051
======== ======= =======
Interest-bearing liabilities:
Interest-bearing deposits
NOW, money market and savings $ 41,363 $ 1,653 4.00% $33,699 $1,078 3.20% $32,192 1,024 3.18%
Time deposits 41,329 2,356 5.70% 34,314 1,398 4.07% 37,156 1,606 4.32%
-------- ------- ---- ------- ------ ---- ------- ------ ----
Total interest-bearing deposits 82,692 4,009 4.85% 68,013 2,476 3.64% 69,348 2,630 3.79%
Short-term borrowings 1,915 83 4.33% 1,856 65 3.50% 930 29 3.07%
Note payable and US Treasury tax and
loan accounts 641 33 5.15% 622 29 4.66% 833 31 3.72%
-------- ------- ---- ------- ------ ---- ------- ------ ----
Total interest-bearing liabilities 85,248 4,125 4.84% 70,491 2,570 3.65% 71,111 2,690 3.78%
Noninterest-bearing liabilities
Demand deposits 16,387 12,535 9,133
Other liabilities 985 536 612
-------- ------- -------
102,620 83,562 80,856
Stockholders' equity 10,843 9,414 9,195
-------- ------- -------
Total liabilities and
stockholders' equity $113,463 $92,976 $90,051
======== ======= =======
Net interest income $ 5,109 $4,216 $3,847
======= ====== ======
Margin analysis
Interest income/earning assets 8.69% 7.79% 7.70%
Interest expense/earning assets 3.88% 2.95% 3.17%
---- ---- ----
Net interest income/earning assets(2) 4.81% 4.84% 4.53%
==== ==== ====
</TABLE>
(1) Nonaccrual loan balances have been excluded.
(2) Net interest income divided by total interest earning assets.
16
<PAGE>
Table 4 analyses changes in net interest income resulting from changes in volume
and rates in the period discussed.
<TABLE>
TABLE 4 - VOLUME AND RATE VARIANCE ANALYSIS
(Tax equivalent basis)
<CAPTION>
1995 Compared to 1994 1994 Compared to 1993
--------------------- ---------------------
Change in Change in Change in Change in
Volume (1) Rate (1) Total Volume (1) Rate (1) Total
---------- -------- ----- ---------- -------- -----
Interest income:
<S> <C> <C> <C> <C> <C> <C>
Loans $1,671,059 $ 549,617 $2,220,676 $368,867 $ 69,582 $438,449
Investment securities (2) 71,825 79,769 151,594 (44,700) (127,357) (172,057)
Federal funds sold and securities
purchased under agreements to resell 40,640 34,675 75,315 (48,074) 30,874 (17,200)
---------- --------- ---------- -------- --------- --------
Total interest-earning assets 1,783,524 664,061 2,447,585 276,093 (26,901) 249,192
---------- --------- ---------- -------- -------- --------
Interest expense:
NOW, money market and savings 305,910 269,001 574,911 47,706 6,370 54,076
Time deposits 399,270 558,442 957,712 (115,616) (92,852) (208,468)
Federal funds purchased and securities
sold under agreements to repurchase 2,568 15,353 17,921 32,369 3,915 36,284
Note payable and US Treasury tax and
loan accounts 1,012 3,224 4,236 (9,807) 7,967 (1,840)
---------- --------- ---------- -------- --------- --------
Total interest-bearing liabilities 708,760 846,020 1,554,780 (45,348) (74,600) (119,948)
---------- --------- ---------- -------- --------- --------
Net interest income $1,074,764 ($181,959) $ 892,805 $321,441 $ 47,699 $369,140
========== ========= ========== ======== ========= ========
</TABLE>
(1) Volume - rate changes have been allocated to each category based on the
percentage of each to the total change.
(2) Interest income is presented on a fully taxable equivalent basis using the
federal income tax rate of 34% and state tax rate of 4.5%.
Rate Sensitivity
The management of the composition and maturities of rate sensitive assets and
liabilities is vital to the optimization of net interest income as interest
rates earned on assets and paid on liabilities fluctuate in periods where the
rate environment is unstable. Management constantly reviews interest rate risk
exposure and the expected rate environment so that timely adjustments can be
made as appropriate.
17
<PAGE>
Table 5 sets forth the Corporation's interest sensitivity position as of
December 31, 1995.
<TABLE>
TABLE 5 - INTEREST SENSITIVITY GAP ANALYSIS (December 31, 1995 balances in
thousands)
<CAPTION>
One
One year through Over five
or less five years years Total
------- ---------- ----- -----
<S> <C> <C> <C> <C>
Interest-earning assets
Investment securities $ 6,303 $ 14,988 $ 844 $ 22,135
Loans receivable (1) 64,851 24,353 3,538 92,742
--------- -------- ------- ------
71,154 39,341 4,382 114,877
--------- -------- ------- -------
Interest-bearing liabilities
Deposits
NOW, money market and savings 49,321 49,321
Time deposits (2) 38,885 5,311 44,196
Federal funds purchased and
securities sold under agreements to repurchase 1,755 1,755
Note payable 0 0
US Treasury tax and loan accounts 438 438
--------- --------
90,399 5,311 0 95,710
--------- -------- ------- --------
Interest-sensitive gap ($19,245) $ 34,030 $ 4,382 $ 19,167
========= ======== ======= ========
Cumulative interest-sensitivity gap ($19,245) $ 14,785 $19,167
========= ======== =======
Ratio of interest-earning assets to
interest-bearing liabilities 78.7% 740.7%
========= ========
Cumulative gap to total interest-earning assets (16.8%) 12.9% 16.7%
========= ======== ======
</TABLE>
(1) Excludes nonaccrual loans.
(2) Includes accounts with balances $100,000 or more totaling $18,785,241 and
maturing as follows: within 3 months - $8,655,623; over 3 months but within
6 months - $3,580,547; over 6 months but within 12 months - $5,286,675; and
over 12 months - $1,262,396.
At December 31, 1995, approximately 62% of the Corporation's interest-earning
assets will reprice within one year, compared to 94% of interest-bearing
liabilities. Based on the $19,245,000 or 17% negative interest-sensitivity gap
position at year end, if a 1% change in interest rates were to immediately
impact all interest-sensitive assets and liabilities of the Corporation
repricing within one year, management would expect a change in income of
approximately $192,000. This impact to income would typically be positive in a
declining rate environment and negative in a rising rate environment.
Investment Securities
Investment securities represent the second largest component of earning assets,
comprising 19% and 24% of total earning assets in 1995 and 1994, respectively.
Note 4 to the accompanying consolidated financial statements presents the book
value of investment securities by category as of December 31, 1995 and 1994. As
shown in Table 6, the Corporation primarily invests in U.S. Treasury securities
and securities of other U.S Government agencies with maturities of up to five
years.
18
<PAGE>
The Corporation adopted SFAS No. 115 "Accounting for Certain Investment in
Debt and Equity Securities," on January 1, 1994. Management reviewed the
investment securities portfolio and classified securities as either held-to-
maturity or available-for-sale. Securities which the Corporation has the
positive intent and ability to hold to maturity were classified as
held-to-maturity, and are carried at amortized cost while all other securities
were classified as available-for-sale and recorded at estimated fair value with
any unrealized gain or loss recorded in stockholders' equity net of taxes. See
Note 4 to the consolidated financial statements for further details.
<TABLE>
TABLE 6 - ANALYSIS OF INVESTMENT SECURITIES
<CAPTION>
Weighted
Average
Taxable
Par Amortized Fair Equivalent
Value Value Value Yield(1)
----- ----- ----- --------
Held to Maturity
<S> <C> <C> <C> <C>
US Treasuries
Within one year $ 1,500,000 $ 1,494,316 $ 1,492,740 4.85%
One to five years 2,500,000 2,544,654 2,532,580 4.97%
----------- ----------- ----------- ----
Total 4,000,000 4,038,970 4,025,320 4.93%
----------- ----------- ----------- ----
US Government Agencies
Within one year 3,300,000 3,299,809 3,290,160 4.69%
One to five years 1,756,767 1,756,530 1,778,542 6.36%
Five to ten years 92,561 90,489 95,801 8.63%
After ten years 135,797 134,041 143,776 8.58%
----------- ----------- ----------- ----
Total 5,285,125 5,280,869 5,308,279 5.42%
----------- ----------- ----------- ----
Total Held to Maturity $ 9,285,125 $ 9,319,839 $ 9,333,599 5.20%
=========== =========== =========== ====
Available for Sale
US Treasuries
Within one year 1,500,000 1,499,829 1,508,400 6.22%
One to five years 3,250,000 3,290,116 3,339,300 6.15%
----------- ----------- ----------- ----
Total 4,750,000 4,789,945 4,847,700 6.17%
----------- ----------- ----------- ----
US Government Agencies
One to five years 7,300,000 7,262,046 7,347,844 6.17%
----------- ----------- ----------- ----
Total 7,300,000 7,262,046 7,347,844 6.17%
----------- ----------- ----------- ----
Other Securities
After ten years (2) 619,850 619,850 619,850 6.69%
----------- ----------- ----------- ----
Total 619,850 619,850 619,850 6.69%
----------- ----------- ----------- ----
Total Available for Sale $12,669,850 $12,671,841 $12,815,394 6.20%
=========== =========== =========== ====
Average Maturity in Years of Total
Investment Securities 2.02
===========
</TABLE>
(1) Computed using a federal tax rate of 34%.
(2) Includes Federal Reserve Bank stock and Federal Home Loan Bank stock. These
stocks are excluded from the calculation of average maturity in years.
19
<PAGE>
Loans and Allowance for Loan Losses
Total loans outstanding at December 31, 1995 were $92.8 million, an
increase of 35% over the December 31, 1994 balance of $68.9 million. Both Banks
realized strong loan growth during 1995 as each experienced strong loan demand
due to improved economic conditions in their market area and the efforts of
management to service the needs of the Banks' respective communities as well as
increase market share. BOCL's outstanding loans increased $12.9 million or
42.2%, while BOC's outstanding loans increased $11.0 million or 28.6% in 1995.
Management continuously monitors business and geographic concentrations of its
loan portfolio and believes that the loan portfolio is adequately diversified.
There were no significant concentrations in any industry or with any individual
borrower at years ending December 31, 1995 and 1994.
The mortgage loan division of each bank originates loans primarily for sale to
others and does not generally service such loans; however, certain older
mortgage loans are held and serviced.
Management has policies and procedures in place to reduce any risk related to
environmental issues in its lending activity. As of December 31, 1995 and 1994,
management was not aware of any environmental risk or exposure in its loan
portfolio or any other assets of the Corporation.
Table 7 shows the maturity or repricing distribution of selected loan categories
at December 31, 1995.
TABLE 7 - SELECTED LOAN MATURITIES AND INTEREST RATE SENSITIVITY
(December 31, 1995 balances in thousands)
<TABLE>
<CAPTION>
One One to Over
Year Five Five
or less Years Years Total
Types of loans:
<S> <C> <C> <C> <C>
Commercial $59,183 $22,241 $2,792 $84,216
Consumer 1,471 1,797 600 3,868
Real Estate - Mortgage 4,197 315 146 4,658
------- ------- ------ -------
Total $64,851 $24,353 $3,538 $92,742(1)
======= ======= ====== =======
Total of loans above with:
Predetermined interest rates $12,819 $24,157 $3,498 $40,474
Adjustable interest rates 52,032 196 40 52,268
------- ------- ------ -------
Total $64,851 $24,353 $3,538 $92,742
======= ======= ====== =======
</TABLE>
(1) Excludes nonaccrual loans totalling $66,739.
Because extending credit involves a certain degree of risk-taking, management
has established loan and credit policies designed to control both the types and
amounts of risk assumed and to minimize losses. Such policies include
limitations on loan-to-collateral values for various types of collateral,
requirements for appraisals of real estate collateral, problem loan management
practices, collection procedures, and nonaccrual and charge-off guidelines. In
addition, both BOCL and BOC maintain a loan classification system to monitor
exposure to potential loan losses. Management believes that the December 1995
allowance levels at both BOCL and BOC are sufficient to absorb expected
charge-offs and provide adequately for the inherent losses that exist in the
loan portfolio, assuming more or less normal conditions exist.
20
<PAGE>
Management continues to closely monitor the levels of nonperforming and
potential problem loans to address any weaknesses in credits and to enhance the
amount of ultimate collection or recovery of problem loans. Should increases in
the overall level of nonperforming and potential problem loans accelerate from
current trends, management will adjust the methodology for determining the
allowance for loan losses to increase the provision and allowance for loan
losses.
The allowance for loan losses is increased by direct charges to operations.
Among other factors, management considers the state of the economy, industry
trends, conditions affecting individual borrowers and regulatory concerns in
determining whether the amount of the allowance for loan losses is sufficient.
Losses on loans are charged against the allowance in the period in which
management determines that such loans have become uncollectible. Recoveries of
previously charged-off loans are credited to the allowance. At December 31,
1995, the consolidated allowance for loan losses was $1,785,000 or 1.92% of
total loans as compared to $1,594,000 or 2.31% of total loans at December 31,
1994. The Corporation recorded net charge-offs of $4,000 for 1995, net
recoveries of $68,000 for 1994 and net charge-offs of $383,000 for 1993.
Additional data covering net charge-offs/recoveries, ratios of net charge-
offs/recoveries to average loans, and other charges to operations is provided in
Note 5 to the consolidated financial statements as well as Table 1.
The provision for loan losses for the year ended December 31, 1995 was $195,000,
an increase of $120,000 over the 1994 provision of $75,000. The reason for this
increase in the provision for loan losses was due to the strong growth in the
loan portfolio.
Table 8 includes an allocation of the allowance for loan losses to loan
categories. Although the allowance is primarily general in character and
available to absorb expected losses regardless of loan category, the allocation
is provided to offer an indication of the relative risk characteristics of the
indicated categories of the loan portfolio.
Effective January 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for the Impairment of a
Loan" ("SFAS 114") and Statement of Financial Accounting Standards No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosure" ("SFAS 118"). These statements require creditors to account for
impaired loans, except for those collateral dependent loans that are accounted
for at fair value or at the lower of cost or fair value, at the present value of
the expected future cash flows discounted at the loan's effective interest rate.
Specific reserves are being maintained on impaired loans in accordance with SFAS
114 and SFAS 118. The Corporation has no loans classified as impaired during
1995. The adoption of these accounting standards has not had a material effect
on the financial position and results of operations of the Corporation. See Note
1 to the consolidated financial statements for further details.
<TABLE>
TABLE 8 - ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(December 31 balances)
<CAPTION>
1995 1994 1993
---- ---- ----
Percent Percent Percent
of Loans of Loans of Loans
in each in each in each
category category category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Commercial $1,248,740 90.8% $1,184,343 85.3% $ 973,492 82.7%
Real Estate - Mortgage 272,919 5.0% 224,774 8.5% 193,194 12.4%
Consumer and other 89,366 4.2% 65,478 6.2% 67,170 4.9%
Unallocated 173,483 119,176 216,920
---------- ----- ---------- ----- ---------- -----
Total $1,784,508 100.0% $1,593,771 100.0% $1,450,776 100.0%
========== ===== ========== ===== ========== =====
</TABLE>
21
<PAGE>
Problem Assets
When a loan becomes 90 days past due as to interest or principal or serious
doubt exists as to collectibility, the accrual of income is discontinued unless
the loan is well secured and in process of collection. Previously accrued
interest on loans transferred to nonaccrual status is reversed against current
earnings and any subsequent interest is recognized on the cash basis. Problem
assets include nonaccrual loans, restructured loans and foreclosed properties.
At December 31, 1995, $67,000 of loans were on a nonaccrual status as compared
to $526,500 at December 31, 1994. Interest income of $57,370 and $50,332 was
recognized during 1995 and 1994, respectively, for loans either returned to
accrual status from nonaccrual or paid in full from nonaccrual status. No
interest income was recognized during 1993 on nonaccrual loans. For those loans
classified as nonaccrual as of December 31, 1995, 1994 and 1993, interest income
of $9,798, $69,764 and $53,697 would have been recognized in the respective
period if those loans had performed under the original terms. The Corporation
realized a gain of approximately $8,100 and $18,000 on the sale of Other Real
Estate Owned ("OREO") property in 1995 and 1994, respectively. There were no
gains or losses recognized during 1993 related to property write-downs or sales
of OREO. <TABLE>
TABLE 9 - PROBLEM ASSETS
(Balance at December 31)
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Nonaccrual Loans $ 66,739 $ 526,500 $ 602,786 $311,000 $ 68,000
Loans past due ninety days or more 15,853 28,703 8,000 468,000 0
Trouble debt restructuring 0 0 0 0 0
Other real estate owned 172,500 191,100 474,996 40,000 224,100
-------- -------- ---------- -------- --------
$255,092 $746,303 $1,085,782 $819,000 $292,100
======== ======== ========== ======== ========
Nonperforming assets to total loans
and other real estate owned 0.27% 1.08% 1.78% 1.29% 0.48%
======= ======= ========= ======= =======
</TABLE>
All accruing loans 90 days or more past due were in the process of collection at
each year end. At December 31, 1995, total classified loans were $2,262,000 or
2.4% of total loans, compared to $2,958,000 or 4.3% at December 31, 1994. While
it is difficult to determine the impact of these potential problem loans, the
future impact is not expected to be material as an estimate of the potential
impact has been considered in determining the amount of the allowance for loan
losses at December 31, 1995.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future obligations through
liquidation or maturity of existing assets or the acquisition of additional
liabilities. The Corporation's primary source of liquidity is funds derived from
the deposit-gathering operations of the Corporation's two subsidiary banks, BOCL
and BOC, with additional funds provided from maturing loans and investment
securities, sales of temporary investments, or sales of investment securities
classified as available-for-sale. These funds are primarily used to pay interest
on deposits and to fund deposit outflows. Any remaining funds are utilized for
investments and to fund loan commitments and disbursements, to repay debt, and
to fund operating expense. Negative funds positions are dealt with by a
combination of actions including borrowings from other banks or rediscounting
qualifying loans with the Federal Reserve Bank. At December 31, 1995, BOCL had
approximately $8.9 million while BOC had approximately $9.5 million in standby
credit available to them from other financial institutions. Management believes
that a sufficient liquidity balance is maintained through the operation of its
asset and liability management program. Additionally, the standby credit
facilities provide adequate protection in the event of negative cash flows.
22
<PAGE>
At December 31, 1995 and 1994, liquid assets of approximately $39.4 million and
$27.0 million, respectively, were available to meet demands for deposit
withdrawals, undisbursed amounts on lines of credit ("loan commitments") of
$18,148,000 and $13,882,000 and letters of credit totaling $1,775,000 and
$1,437,000, respectively. The amount of liquid assets available on December 31,
1995 includes cash and cash equivalents of $17,250,000, an increase of
$12,143,000 over the December 31, 1994 amount of $5,107,000. This increase in
cash and cash equivalents is attributable to the strong deposit growth realized
during 1995.
Reliance is being placed upon continued deposit growth as the principal source
of funds. Management is committed to pay competitive market rates for deposits.
Deposits were approximately $117.8 million at December 31, 1995, compared to
$82.9 million at December 31, 1994. Of the total deposit base of the Corporation
at December 31, 1995, approximately $18.8 million,or 16%, consisted of
Certificates of Deposit in amounts of $100,000 and higher ("Jumbo
Certificates"). These Jumbo Certificates are issued to local customers and none
are brokered deposits.
While most of the large time deposits are acquired from customers with standing
relationships with the Banks, it is a common industry practice not to consider
these types of deposits as core deposits because their retention can be expected
to be heavily influenced by rates offered, and they therefore have the
characteristics of shorter-term purchased funds. Certificates of deposit
$100,000 and over involve the maintenance of an appropriate matching of maturity
distribution and a diversification of sources to achieve an appropriate level of
liquidity. Management believes that the Corporation's liquidity position is
relatively strong and is adequate to meet the withdrawal demand of these Jumbo
Certificates.
One of the principal uses of funds is to meet loan demand at BOCL and BOC. As
mentioned in the loan sections of this discussion, at December 31, 1995, total
loans outstanding were approximately $92.8 million, as compared to $68.9 million
at December 31, 1994.
The Comptroller of the Currency ("OCC"), the Bank's primary regulator requires
national banks to maintain a Tier 1 (primarily stockholder's equity) risk-based
capital ratio of 4.0% and a total risk-based capital ratio of 8.0%. At December
31, 1995, the Tier 1 capital ratio for BOCL was 9.9% and the total capital ratio
was 11.2%, while BOC had a Tier 1 ratio of 13.9% and a total capital ratio of
15.1%.
The Corporation's primary regulator, the Board of Governors of the Federal
Reserve Board (the "Board") has issued guidelines requiring a minimum risk based
capital ratio of 8.0%, of which at least 4.0% must consist of Tier 1 capital.
The Corporation's Tier 1 capital ratio was approximately 12.2% and its total
capital ratio was approximately 13.4% at December 31, 1995. These ratios are
well within guidelines established by the Corporation's primary regulator.
Impact of Inflation and Changing Prices
The financial statements and related data presented have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation.
The impact of inflation is reflected in the increased cost of the Corporation's
operations. Since the primary assets and liabilities of the Corporation are
monetary in nature, to the extent that inflation impacts interest rates, it will
impact the net income of the Corporation.
Stock Data and Dividends
There has been only a limited trading market for the Corporation's stock since
inception. Since the completion of the Corporation's two common stock offerings
in 1987 and 1988 and its Bank of Charleston Series Preferred Stock offering in
1990, management has knowledge of only limited stock transactions. The Preferred
Stock was converted to common stock in 1992. During 1995, management was aware
of limited transactions in its common stock with
23
<PAGE>
the majority of the transactions occurring at approximately $8.50 per share.
Because there is no established market for the Corporation's common stock, these
transactions may not be representative of all transactions, may not be arm's
length transactions, and are not necessarily indicative, therefore, of prices at
which shares of the Corporation's stock could be bought or sold. On March 21,
1996, the Corporation listed its common stock on the American Stock Exchange
under the ticker symbol CSB.
As of March 15, 1996, there were approximately 600 record holders of the
Corporation's common stock.
The Board of Directors of the Corporation, BOCL and BOC intend to follow a
policy of retaining earnings to provide funds to operate and expand the business
of the corporation. Consequently, the Corporation has not declared or
distributed any cash dividends to its shareholders.
The future dividend policy of the Corporation is subject to the discretion of
the Board of Directors and will depend upon a number of factors including future
earnings, financial condition, cash needs, and general business conditions. The
Corporation's initial ability to distribute cash dividends will depend entirely
on the Banks' ability to distribute dividends to the Corporation. All Banks must
comply with the requirements of the National Bank Act and may have to obtain the
approval of the OCC before paying any dividend. The Banks may not declare or pay
a dividend if the effect of the payment would cause the minimum capital of the
Banks to be reduced below the minimum capital requirements imposed by the OCC.
Fourth Quarter Earnings
Net income for the fourth quarter of 1995 was $426,000 or $.31 per share, up
$102,000 or 31% from the $324,000 or $.24 per share earned for the same period
of 1994. This increase in earnings is primarily the result of higher interest
income due to the strong loan growth realized by both banks; average loans
outstanding grew by 36% or $23.7 million between the two periods. The
improvement in the non-interest income category was due to an increase in
deposit fee income as a result of the acquisition of transaction deposit
accounts during the period, the implementation of the Business Manager Program,
which has previously been discussed and mortgage loan origination fees due to
expanded services offered in the mortgage lending function.
Table 10 summarizes the financial results and selected average balances by
quarter for 1995 and 1994.
24
<PAGE>
<TABLE>
TABLE 10 - QUARTERLY FINANCIAL RESULTS
<CAPTION>
1995 Quarter ended 1994 Quarter ended
------------------ ------------------
Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31
------- -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Summary Income
Statement
Interest income $ 2,571,056 $ 2,444,550 $ 2,211,822 $ 2,006,213 $ 1,824,659 $ 1,739,224 $ 1,632,916 $ 1,589,257
Interest expense 1,158,991 1,121,589 1,021,258 822,725 678,968 643,654 624,055 623,106
------------ ------------ ------------ ------------ ----------- ----------- ----------- -----------
Net interest income 1,412,065 1,322,961 1,190,564 1,183,488 1,145,691 1,095,570 1,008,861 966,151
Provision for loan losses 90,000 65,000 30,000 10,000 50,000 25,000 0 0
------------ ------------ ------------ ------------ ----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 1,322,065 1,257,961 1,160,564 1,173,488 1,095,691 1,070,570 1,008,861 966,151
Noninterest income 424,341 433,680 340,711 270,610 224,000 205,876 174,226 166,598
Noninterest expense 1,227,237 1,104,785 1,164,971 1,078,829 1,041,563 970,520 1,001,692 913,192
------------ ------------ ------------ ------------ ----------- ----------- ----------- -----------
Net income before
income taxes 519,169 586,856 336,304 365,269 278,128 305,926 181,395 219,557
Current income tax
(expense) benefit (93,340) (271,670) (20,727) (40,390) 45,600 40,964 (12,666) (12,156)
------------ ------------ ------------ ------------ ----------- ----------- ----------- -----------
Net income $ 425,829 $ 315,186 $ 315,577 $ 324,879 $ 323,728 $ 346,890 $ 168,729 $ 207,401
============ ============ ============ ============ =========== =========== =========== ===========
Net income per
common share $ 0.31 $ 0.23 $ 0.23 $ 0.24 $ 0.24 $ 0.25 $ 0.12 $ 0.15
============ ============ ============ ============ =========== =========== =========== ===========
Selected Average Balances
Assets $128,809,830 $118,029,630 $109,564,352 $100,180,644 $93,577,738 $93,625,708 $95,567,183 $93,819,267
Earning assets 118,658,508 111,240,972 102,629,944 93,376,535 87,828,788 87,290,092 87,958,086 87,203,405
Investment securities 27,329,081 24,500,565 21,801,428 21,917,870 21,962,192 21,932,565 22,723,448 24,006,710
Loans 88,951,954 83,816,488 76,813,011 70,667,943 65,214,096 63,404,536 62,036,708 61,645,473
Deposits 110,804,300 103,829,414 95,916,366 85,462,389 79,799,739 80,407,545 81,048,166 80,922,195
Stockholders' equity 11,409,050 11,027,613 10,594,504 10,143,204 9,872,694 9,592,700 9,480,336 9,228,474
</TABLE>
Change in Independent Auditors
On February 21, 1995, the management of the Corporation, after receiving
approval of members of the Corporation's Audit Committee and Board of Directors,
informed its independent accountants, Price Waterhouse LLP (the "Prior
Accountants"), that such accounting firm would not be retained for the fiscal
year ending December 31, 1995. On January 26, 1995, the Board of Directors,
after receiving proposals from other accounting firms, formally elected to
engage J. W. Hunt and Company, LLP to serve as independent accountants for the
year ending December 31, 1995. Prior to their engagement on February 21, 1995,
the firm of J. W. Hunt and Company, LLP was not consulted by the Corporation for
any financial or accounting matters.
In connection with the audit of the Corporation's consolidated financial
statements for the year ended December 31, 1994, and any subsequent interim
period preceding the dismissal of the Prior Accountants and the engagement of
the new accountants, there were no disagreements with the Prior Accountants on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of the Prior Accountants would have caused them to make
reference in connection with their report to the subject matter of the
disagreements.
The audit report of the Prior Accountants on the Corporation's consolidated
financial statements for the year ended December 31, 1994 was unqualified. There
have not been any adverse, disclaimer or modified opinions issued by the Prior
Accountants, except as to inclusion of an "emphasis of a matter" paragraph
included in their reports addressing uncertainties related to a Formal Agreement
entered into with the Comptroller of the Currency
25
<PAGE>
with respect to their 1992 and 1993 report, the filing of a notice of intent to
effect a change in the composition of the Board of Directors with respect to
their 1992 report, and the filing of a shareholder lawsuit against certain
members of the Board of Directors with respect to their 1993 report.
The Board of Directors, upon the recommendation of the Audit Committee, has
appointed J. W. Hunt and Company, LLP, independent certified public accountants,
as independent auditors for the Corporation and its subsidiaries for the current
fiscal year ending December 31, 1996, subject to ratification by the
shareholders. J. W. Hunt and Company, LLP has advised the Corporation that
neither the firm nor any of its partners has any direct or indirect material
interest in the Corporation and its subsidiaries except as auditors and
independent certified public accountants of the Corporation and its
subsidiaries.
Item 8 - Financial Statements and Supplementary Data
Index to Financial Statements
Financial Statements
Report of Independent Accountants.......................................27
Report of Predecessor Accountants.......................................28
Consolidated Balance Sheets at December 31, 1995 and 1994...............29
Consolidated Statements of Operations for the three years ended
December 31, 1995...................................................30
Consolidated Statements of Changes in Stockholders' Equity
for the three years ended December 31, 1995.........................31
Consolidated Statements of Cash Flows for the three years ended
December 31, 1995...................................................32
Notes to Consolidated Financial Statements..............................33
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
26
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of ComSouth Bankshares, Inc.
We have audited the consolidated balance sheet of ComSouth Bankshares, Inc. (the
"Corporation") and its subsidiaries as of December 31, 1995, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audit. The consolidated
financial statements of the Corporation and its subsidiaries as of December 31,
1994 and 1993, were audited by other auditors whose report dated March 3, 1995,
expressed an unqualified opinion on those statements and included an explanatory
paragraph that referred to Notes 1 and 14 to the consolidated financial
statements describing the Corporation's change in the methods of accounting for
income taxes during 1993 and certain investments in debt and equity securities
in 1994.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1995 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Corporation and its subsidiaries as of December 31, 1995 and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
J. W. Hunt and Company, LLP
Columbia, South Carolina
January 31, 1996
27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of ComSouth Bankshares, Inc.
In our opinion, the consolidated balance sheet and the related consolidated
statements of inome, of cash flows and of changes in stockholders' equity as of
and for each of the two years in the period ended December 31, 1994 (appearing
on pages 28 through 31 of the ComSouth Bankshares Inc. and its subsidiaries 1995
Annual Report to Shareholders and in this Form 10-K Annual Report) present
fairly, in all material respects, the financial position, results of operations
and cash flows of ComSouth Bankshares, Inc. and its subsidiaries as of and for
each of the two years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above. We have not
audited the consolidated financial statements of ComSouth Bankshares, Inc. for
any period subsequent to December 31, 1994.
As discussed in Notes 1 and 13 to the consolidated financial
statements, the Corporation changed its methods of accounting for income taxes
during 1993 and certain investments in debt and equity securities in 1994.
Price Waterhouse LLP
Columbia, South Carolina
March 3, 1995
28
<PAGE>
<TABLE>
<CAPTION>
COMSOUTH BANKSHARES, INC.
CONSOLIDATED BALANCE
SHEETS
December 31,
-------------------------------
1995 1994
----- -----
<S> <C> <C>
Cash and due from banks $ 10,979,878 $ 5,106,898
Federal funds sold 6,270,000
------------ -----------
Total cash and cash equivalents 17,249,878 5,106,898
Investment securities:
Held to maturity, at amortized cost
(fair value of $9,333,599 in 1995
and $15,530,301 in 1994) 9,319,839 16,110,175
Available-for-sale, at fair value
(amortized cost of $12,671,841 in 1995
and $6,041,455 in 1994) 12,815,394 5,767,879
Loans
(less allowance for loan losses
1995 - $1,784,508; 1994 - $1,593,771) 91,024,087 67,300,821
Premises and equipment, net 1,287,558 1,260,403
Accrued interest receivable 1,104,905 800,413
Other assets 620,967 573,064
------------ -----------
Total Assets $133,422,628 $96,919,653
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest bearing demand 24,246,101 13,392,536
NOW, money market and savings 49,321,293 38,835,216
Time deposits of $100,000 or more 18,785,241 12,552,279
Time deposits less than $100,000 23,255,643 16,477,232
Other time 2,154,512 1,651,146
------------ -----------
Total deposits 117,762,790 82,908,409
Federal funds purchased and securities sold under
agreements to repurchase 1,754,912 2,945,749
Note payable 125,000
U.S. Treasury tax and loan accounts 438,486 351,558
Other liabilities 1,587,302 484,961
------------ -----------
Total Liabilities 121,543,490 86,815,677
------------ -----------
Stockholders' Equity:
Preferred stock
(no par value, 50,000,000 shares authorized;
no shares issued or outstanding)
Special stock
(no par value, 50,000,000 shares authorized;
no shares issued or outstanding)
Common stock
(no par value, 50,000,000 shares authorized;
shares issued and outstanding - 1,385,701 in
1995 and 1,368,456 in 1994) 11,830,145 11,711,421
Accumulated deficit (45,752) (1,426,885)
Unrealized gain (loss) on investment
securities available-for-sale, net of applicable
deferred income taxes 94,745 (180,560)
------------ -----------
Total Stockholders' Equity 11,879,138 10,103,976
------------ -----------
Commitments and contingencies
(Notes 2, 9, and 16)
------------ -----------
Total Liabilities and Stockholders' Equity $133,422,628 $96,919,653
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE>
<TABLE>
<CAPTION>
COMSOUTH BANKSHARES, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
Interest income:
<S> <C> <C> <C>
Interest and fees on loans $ 7,723,855 $ 5,503,179 $5,064,730
Investment securities 1,361,008 1,209,414 1,381,471
Federal funds sold 148,778 73,463 90,663
----------- ----------- ----------
Total Interest income 9,233,641 6,786,056 6,536,864
----------- ----------- ----------
Interest expense:
Interest on deposits 4,008,427 2,475,804 2,630,196
Federal funds purchased and securities sold
under agreements to repurchase 82,783 64,862 28,578
U.S. Treasury tax and loan accounts 33,120 20,124 15,977
Note payable 233 8,993 14,980
----------- ----------- ----------
Total Interest expense 4,124,563 2,569,783 2,689,731
Net interest income 5,109,078 4,216,273 3,847,133
Provision for loan losses 195,000 75,000 135,000
----------- ----------- ----------
Net interest income after provision for loan losses 4,914,078 4,141,273 3,712,133
----------- ----------- ----------
Noninterest income:
Lending operations and services 957,418 320,921 307,057
Service charges on deposit accounts 442,397 360,436 319,088
Gain on sale of real estate owned 8,063 17,551
Gain on sale of mortgage loans 24,309 18,173
Gain on sale of securities 2,867
Other 61,464 47,483 42,437
----------- ----------- ----------
1,469,342 770,700 689,622
----------- ----------- ----------
Noninterest expense:
Salaries and employee benefits 2,481,335 2,053,878 1,939,723
Occupancy expenses 429,183 384,133 391,211
Furniture and equipment expenses 341,966 281,216 241,955
Advertising and marketing 78,643 83,735 51,067
Other 1,244,695 1,124,005 1,211,657
----------- ----------- ----------
4,575,822 3,926,967 3,835,613
----------- ----------- ----------
Income before provision for income taxes 1,807,598 985,006 566,142
Income tax (expense) benefit (426,127) 61,742 (43,525)
----------- ----------- ----------
Net income $ 1,381,471 $ 1,046,748 $ 522,617
=========== =========== ==========
Earnings per common share:
Net income per weighted average number of
common shares outstanding $ 1.00 $ 0.76 $ 0.38
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
30
<PAGE>
<TABLE>
COMSOUTH BANKSHARES, INC
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
Unrealized
Gain (loss) on Total
Common Stock Accumulated Investment Stockholders'
Shares Amount Deficit Securities Equity
------ ------ ------- ---------- ------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992 1,368,456 $11,711,421 ($2,996,250) $ 8,715,171
Net income 522,617 522,617
--------- ----------- ----------- --------- -----------
Balance at December 31, 1993 1,368,456 11,711,421 (2,473,633) 9,237,788
Unrealized loss on investment securities
available-for-sale, net of applicable
deferred income taxes at January 1, 1994 ($17,371) (17,371)
Net income 1,046,748 1,046,748
Change in unrealized loss on investment
securities available-for-sale, net of
applicable deferred income taxes (163,189) (163,189)
--------- ----------- ----------- --------- -----------
(180,560) 10,103,976
Round adjustment 45 338 (338)
Change in unrealized gain on investment
securities available-for-sale, net of
deferred income taxes 275,305 275,305
Issuance of common stock 17,200 118,386 118,386
Net Income 1,381,471 1,381,471
--------- ----------- ----------- --------- -----------
Balance at December 31, 1995 1,385,701 $11,830,145 ($45,752) $ 94,745 $11,879,138
========= =========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
31
<PAGE>
<TABLE>
<CAPTION>
COMSOUTH BANKSHARES, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 1,381,471 $1,046,748 $ 522,617
Adjustments to reconcile net income to cash provided by (used for)
operating activities:
Depreciation and amortization 288,565 240,620 220,573
Provision for loan losses 195,000 75,000 135,000
Gain on sale of investment securities (2,867)
Deferred tax benefit (200,000) (113,000)
Amortization of premium and accretion of
discount on investment securities 17,726 30,467 28,847
Gain on sales of mortgage loans (24,309) (18,173)
Gross amount of loans originated for resale (1,749,050) (4,902,925)
Proceeds from loans originated for resale 1,773,359 4,121,898
(Increase) decrease in interest receivable (304,492) (49,771) 136,882
Decrease (increase) in other assets 43,489 263,450 (445,548)
Increase (decrease) in interest payable 340,014 31,534 (125,659)
Increase (decrease) in other liabilities 713,520 94,319 (148,044)
----------- ---------- -------------
Cash provided by (used for) operating activities 2,475,293 1,619,367 (477,399)
----------- ---------- -------------
Cash flows from investing activities:
Purchases of investment securities, held-to-maturity (493,906) (1,504,219) (11,105,163)
Purchases of investment securities, available-for-sale (11,556,551) (2,780,729)
Maturities of investment securities, held-to-maturity 7,273,578 1,921,698 8,017,942
Maturities of investment securities, available-for-sale 4,919,100 3,503,800
Proceeds from sale of investment securities 1,507,500
Net (increase) decrease in loans (23,918,265) (7,493,018) 2,395,314
Purchases of premises and equipment (308,190) (299,524) (144,618)
Proceeds from sale of other real estate owned 8,063 17,551
----------- ---------- -----------
Cash (used for) provided by investing activities (24,076,171) (6,634,441) 670,975
----------- ---------- -----------
Cash flows from financing activities:
Net increase (decrease) in deposits 34,854,381 10,063 (188,835)
(Maturities of) increase in federal funds purchased (1,190,837) 1,500,288 1,028,867
and securities sold under agreement to repurchase
Payment of note payable (125,000) (125,000)
Increase (decrease) in U.S. treasury, tax and loan 86,928 (590,523) (118,394)
accounts
Proceeds from issuance of common stock 118,386
----------- ---------- -----------
Cash provided by financing activities 33,743,858 919,828 596,638
----------- ---------- -----------
Increase (decrease) in cash and cash equivalent 12,142,980 (4,095,246) 790,214
Cash and cash equivalents at beginning of year 5,106,898 9,202,144 8,411,930
----------- ---------- -----------
Cash and cash equivalents at end of year $17,249,878 $5,106,898 $9,202,144
=========== ========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest $3,784,548 $2,538,249 $2,815,389
Cash paid for taxes $107,995 $33,000 $42,000
Supplemental schedule of noncash investing and
financing activities:
Loans transferred to other real estate owned $0 $0 $434,997
Noncash adjustments to report investment securities, available-for-sale at fair
value:
Investment securities, available-for-sale $143,553 ($273,576)
Other (liabilities) assets (48,808) 93,016
Unrealized gain (loss) on investment securities,
available-for-sale, net of applicable deferred
income taxes $94,745 ($180,560)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - ComSouth Bankshares, Inc. (the "Corporation") commenced
organizational activities on January 1, 1987, and was chartered on May 15, 1987,
as a South Carolina corporation. The Corporation was formed to become a bank
holding company and its wholly-owned subsidiaries, Bank of Columbia, N.A.
("BOCL") and Bank of Charleston, N.A. ("BOC") opened for business in Columbia,
South Carolina on July 12, 1988, and in Charleston, South Carolina, on April 12,
1990, respectively. BOCL and BOC provide general banking services in the State
of South Carolina.
Organization Costs - Organization costs were deferred and were amortized using
the straight-line method over five years. Organization costs were fully
amortized at December 31, 1995.
Principles of Consolidation - The accompanying consolidated financial statements
include the accounts of the Corporation and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Statements of Cash Flows - For purposes of reporting cash flows, cash and cash
equivalents include cash and federal funds sold. Generally, federal funds are
sold for one-day periods.
Investment Securities - The subsidiaries adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115"), on January 1, 1994. Management has reviewed the
investment securities portfolio and classified securities as either
held-to-maturity or available-for-sale. In determining such classification,
securities that the subsidiaries have both the positive intent and ability to
hold to maturity are classified as held-to-maturity and are carried at cost,
adjusted for amortization of premiums and accretion of discounts using methods
approximating the interest method. All other securities are classified as
available-for-sale and are carried at estimated fair value with unrealized gains
and losses included in stockholders' equity on an after tax basis. Gains or
losses on sales of investments are reported as a component of noninterest income
using the specific identification method.
Prior to the adoption of SFAS 115, investment securities were carried at cost
adjusted for amortization of premium and accretion of discount.
Mortgage Loans Held for Resale - Mortgage loans held for resale are valued at
the lower of aggregate cost or market value. At December 31, 1993, the
Corporation had $799,200, with a fair value of $799,200, in mortgage loans held
for resale. There were no mortgage loans held for resale at December 31, 1995
and 1994.
Loans - Loans are reported at their principal amount outstanding. Interest is
recognized over the term of the loan on the loan balance outstanding. When a
loan becomes 90 days past due as to interest or principal or serious doubt
exists as to collectibility, the accrual of interest is discontinued unless the
loan is well secured and in process of collection. Previously accrued interest
on loans transferred to nonaccrual status is reversed against current earnings
and any subsequent interest is recognized on the cash basis.
Allowance for Loan Losses - The provision for loan losses charged to operating
expense is based on management's evaluation of various factors influencing the
collectibility of loans and is intended to maintain an allowance for loan
33
<PAGE>
losses at an amount estimated to be adequate to cover inherent losses
related to loans outstanding. Factors considered by management in determining
the amount of an adequate allowance include past loan loss experience, loan
portfolio composition, and current and anticipated economic conditions including
effects on industries and specific borrowers.
Effective January 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for the Impairment of a
Loan" ("SFAS 114"), and Statement of Financial Accounting Standards No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosure" ("SFAS 118"). These statements require creditors to account for
impaired loans, except for those collateral dependent loans that are accounted
for at fair value or at the lower of cost or fair value, at the present value of
the expected future cash flows discounted at the loan's effective interest rate.
The Corporation does not apply SFAS 114 to "large groups of smaller balance
homogeneous loans that are collectively evaluated for impairment." These groups
include the Corporation's consumer loan portfolio, overdraft protection loans,
residential mortgage loans, and home equity loans. The major category of loans
to which SFAS 114 is applied are commercial loans.
The Corporation determines when loans become impaired through its normal loan
administration and review functions. Loans that are on the Corporation's
classified loan report are potentially impaired loans. Management considers a
loan to be impaired when, based on current information and events, it is
probable that the Corporation will be unable to collect all principal and
interest amounts due according to the contractual terms of the agreement.
Nonaccrual loans that fall under the provisions of SFAS 114 and 118 are
evaluated for impairment. A nonaccrual loan may not be considered impaired if it
is expected that the delay in payment is minimal. As a matter of general policy,
the Corporation considers a minimal delay to be within 90 days of when the loan
was placed in nonaccrual status. A loan is not impaired during a period of delay
if the Corporation expects to collect all the amounts due, including interest
due at the contractual interest rate, for the period of the delay.
As a matter of general policy, the Corporation either commences foreclosure
proceedings or charges off an impaired loan within 90 days of placing a loan in
such status. As of December 31, 1995, the Corporation had no impaired loans.
In accordance with SFAS 114, historical information has not been restated to
reflect the application of this accounting standard. Management does not believe
that SFAS 114 has a material effect on the comparability of any credit risk
measures previously disclosed.
The accrual of interest on impaired loans is discontinued when, in the opinion
of management, the borrower may be unable to meet payments as they become due.
When interest accrual is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent that cash payments
are received. However, if ultimate repayment of principal is not expected, all
payments received will be applied to principal.
The adoption of these accounting standards has not had a material effect on the
financial position and results of operations of the Corporation.
Premises and Equipment - Premises and equipment are stated at cost less
accumulated depreciation. Additions and major replacements or betterments of
premises and equipment are capitalized. Maintenance, repairs and minor
improvements are expensed as incurred.
Depreciation of premises and equipment and amortization of leasehold
improvements are computed using the straight-line method over the estimated
useful lives (generally three to fifteen years) of the assets or, if shorter,
the lease term for leasehold improvements.
34
<PAGE>
Other Real Estate Owned (OREO) - Real estate acquired by foreclosure is
initially recorded at estimated fair value less estimated disposal costs and are
included in other assets. As of December 31, 1995 and 1994, the Corporation had
$172,500 and $191,000, respectively, recorded as OREO property. Gains or losses
on sales of other real estate owned, writedowns resulting from periodic
evaluation of the fair market values of other real estate owned and costs of
maintaining and operating other real estate owned are charged to other operating
expense. The Corporation realized net gains of $8,063, $17,551 and $0 recorded
as other income from the sale of OREO property for the years 1995, 1994, and
1993, respectively. No expenses were recognized for the years presented.
Loan Fees - Statement of Financial Accounting Standards No. 91, "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases" ("SFAS 91"), became effective for annual
financial statements for fiscal years beginning after January 1, 1986. SFAS 91
requires that net nonrefundable fees and direct costs of loan originations, if
material, be deferred and amortized over the lives of the underlying loans as an
adjustment to interest income. The Corporation has elected not to implement SFAS
91 since the net effect of implementation would not have a material effect on
the Corporation's financial position or results of operations.
Advertising and Marketing Expenses - The Corporation expenses the costs of
advertising and marketing as incurred.
Stock-Based Compensation - Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), encourages, but does not
require companies to record compensation cost for stock- based employee
compensation plans at fair value. The Corporation has chosen to continue to
account for stock-based compensation using the intrinsic value method prescribed
in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Corporation's stock at the date of the grant over the amount an employee
must pay to acquire the stock. Compensation cost for stock appreciation rights
and performance equity units is recorded annually based on the quoted market
price of the Corporation's stock at the end of the period.
Retirement Plan - The Corporation established a contribution 401-K plan during
1995 covering substantially all employees. Plan participants may contribute
annually up to 12% of their compensation. Additionally, the Corporation may make
profit sharing contributions to the Plan annually. The Corporation's
contributions to the Plan are determined annually by the Board of Directors. The
Corporation contributed approximately $25,300 to the Plan in 1995.
Income Taxes - The Corporation and its subsidiaries are subject to federal and
state income taxes. (See Note 13).
Reclassification - Certain amounts in the prior year consolidated financial
statements have been reclassified to conform with the manner of presentation in
1995.
Earnings Per Share - For purposes of calculating earnings per share, outstanding
stock options have been excluded from the per share calculations because the
effect of exercising the options is either anti-dilutive or does not result in
material dilution of net income per share in any year presented.
NOTE 2 - STOCKHOLDER LEGAL ACTION
On January 24, 1994, a former director of the Corporation and Bank of Columbia,
who is a current stockholder of the Corporation brought suit in the Court of
Common Pleas of Richland County against the Corporation and eight of its
directors and former directors alleging that the defendant directors had
breached their fiduciary duties in not pursuing proposals by third parties to
acquire the Corporation in 1992. The Corporation is named as a defendant because
the plaintiff asserts that the suit is, in part, a derivative action, which is a
claim brought by a stockholder
35
<PAGE>
that belongs to the Corporation against officers and directors of the
Corporation. The Corporation has answered the complaint. Management believes
that the suit is without merit and is vigorously defending the suit.
NOTE 3 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
BOCL and BOC are required to maintain average reserve balances with the Federal
Reserve, or in vault cash. The average daily reserve balance requirement for
December 31, 1995 was met by vault cash held in the two banks.
At December 31, 1995, the two banks had due from bank balances in excess of
federally insured limits in the amount of $7,025,273.
NOTE 4 - INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities
held-to-maturity at December 31, 1995 and 1994, are presented below:
<TABLE>
<CAPTION>
1995 1994
---- ----
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
---- ----- ------ ----- ---- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Treasury Securities $ 4,038,970 $ 4,001 $17,651 $4,025,320 $ 5,059,394 $300,081 $ 4,759,313
U. S. Government Agencies 4,999,809 20,196 9,649 5,010,356 10,698,166 $ 844 281,641 10,417,369
Mortgage-backed Securities 281,060 16,863 297,923 352,615 2,198 1,194 353,619
----------- ------- ------- ---------- ----------- ------ -------- -----------
Total $ 9,319,839 $41,060 $27,300 $9,333,599 $16,110,175 $3,042 $582,916 $15,530,301
=========== ======= ======= ========== =========== ====== ======== ===========
</TABLE>
The amortized cost and estimated fair value of investment securities
available-for-sale at December 31, 1995 and 1994, are presented below:
<TABLE>
<CAPTION>
1995 1994
---- ----
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
---- ----- ------ ----- ---- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Treasury Securities $ 4,789,945 $ 66,013 $8,258 $ 4,847,700 $3,789,375 $182,406 $ 3,606,969
U. S. Government Agencies 7,262,046 85,798 7,347,844 1,800,180 91,170 1,709,010
Other 619,850 619,850 451,900 451,900
----------- -------- ------ ----------- ---------- ------ -------- ----------
Total $12,671,841 $151,811 $8,258 $12,815,394 $6,041,455 $273,576 $5,767,879
=========== ======== ====== =========== ========== ====== ======== ==========
</TABLE>
The amortized cost and estimated fair value of investment securities
held-to-maturity at December 31, 1995, based on their contractual maturities,
are shown below:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
------------ ----------
<S> <C> <C>
Due in one year or less $4,794,125 $4,782,900
Due after one year through five years 4,301,184 4,311,122
Due after five years through ten years 90,489 95,801
Due after ten years 134,041 143,776
------------ ----------
$9,319,839 $9,333,599
============ ==========
</TABLE>
The mortgage-backed securities held at December 31, 1995, mature generally
between one and twelve years. The actual lives of these securities may be
shorter as a result of prepayments.
36
<PAGE>
The amortized cost and estimated fair value of investment securities
available-for-sale at December 31, 1995, based on their contractual maturities,
are shown below:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
------------ ------------
<S> <C> <C>
Due in one year or less $ 1,499,829 $ 1,508,400
Due after one year through five years 10,552,162 10,687,144
Due after ten years 619,850 619,850
----------- -----------
$12,671,841 $12,815,394
=========== ===========
</TABLE>
Securities with book values of $15,784,928 and $14,709,428 at December 31, 1995
and 1994, respectively, were pledged to secure public deposits and for other
purposes as required by law.
There were no sales of securities during 1995 or 1994. Proceeds from sales of
investment securities during 1993 were $1,507,500 and resulted in a realized
gain of $2,867.
NOTE 5 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans were composed of the following:
<TABLE>
<CAPTION>
December 31,
------------
1995 1994
---- ----
<S> <C> <C>
Commercial $84,216,406 $59,564,663
Real estate-mortgage 4,658,041 5,797,527
Consumer and other 3,867,409 3,005,902
Nonaccrual 66,739 526,500
----------- -----------
Total $92,808,595 $68,894,592
=========== ===========
</TABLE>
At December 31, 1995, the total loan portfolio included adjustable rate loans
totaling approximately $52 million and fixed rate loans totaling approximately
$41 million.
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $1,593,771 $1,450,776 $1,698,327
Provision for loan losses 195,000 75,000 135,000
Loan charged off:
Commercial (46,704) (43,565) (488,282)
Real estate - mortgage 0 (142) (103,513)
Consumer and other (47,167) (53,393) (94,842)
---------- ---------- ----------
Total (93,871) (97,100) (686,637)
---------- ---------- ----------
Recoveries:
Commercial 85,738 135,955 159,920
Real estate - mortgage 0 550 97,390
Consumer and other 3,870 28,590 46,776
---------- ---------- ----------
Total 89,608 165,095 304,086
---------- ---------- ----------
Balance at end of year $1,784,508 $1,593,771 $1,450,776
========== ========== ==========
</TABLE>
37
<PAGE>
Interest income of $57,370 and $50,932 was recognized during 1995 and 1994,
respectively, for loans either returned to accrual status or paid in full from
nonaccrual status. No interest income was recognized during 1993 on nonaccrual
loans. For those loans classified as nonaccrual as of December 31, 1995, 1994,
and 1993, interest income of $9,798, $69,784, and $53,697 would have been
recognized in the respective period if those loans had performed under the
original terms. No loans were classified as impaired during 1995.
Commercial loans include investments of $9,213,386 and $2,060,916 in
participating interests of loans originated by other financial institutions as
of December 31, 1995 and 1994, respectively.
Commercial loans exclude loans serviced for others of $9,048,406 and $7,860,477
as of December 31, 1995 and 1994, respectively. Real estate mortgage loans
exclude loans serviced for others of $862,193 and $872,750 as of December 31,
1995 and 1994, respectively, Servicing loans for others generally consists of
collecting payments, maintaining escrow accounts and disbursing payments to
investors. Loan servicing income is recorded on the accrual basis and includes
servicing fees from investors and certain charges collected from borrowers, such
as late payment fees.
NOTE 6 - TRANSACTIONS WITH RELATED PARTIES
Directors and officers of the Corporation and its subsidiaries are customers of
and borrow from the subsidiaries in the ordinary course of business. All of
these loans were made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time in comparable transactions with
unrelated third parties, and did not involve more than a normal risk of
collectibility.
Directors and principal officers' direct and indirect indebtedness to the
subsidiaries aggregated $5,024,908 and $4,644,825 at December 31, 1995 and 1994,
respectively. During 1995, $2,867,041 of new loans were made to related parties
and repayments totaled $2,486,958. Additionally, unfunded commitments to extend
credit to directors and officers totaled $1,027,789 for 1995 and $708,279 for
1994, and standby letters of credit totaled $35,000 at December 31, 1995 and
1994.
NOTE 7 - PREMISES AND EQUIPMENT
Premises and equipment included the following:
<TABLE>
<CAPTION>
December 31,
------------
1995 1994
---- ----
<S> <C> <C>
Leasehold improvements $ 1,084,820 $1,032,445
Equipment and furnishings 1,324,175 1,072,997
----------- ----------
2,408,995 2,105,442
Less accumulated depreciation and amortization (1,121,437) (845,039)
----------- ----------
Total $ 1,287,558 $1,260,403
=========== ==========
</TABLE>
Depreciation and amortization expenses for 1995, 1994 and 1993 totaled $281,034,
$210,503. and $178,794, respectively.
NOTE 8 - NOTE PAYABLE
At December 31, 1994, the Corporation had an outstanding balance of $125,000 on
a $350,000 revolving line of credit with a financial institution. Interest was
variable at the lender's prime rate (8.50% at December 31, 1994).
The line of credit was fully paid in January 1995.
38
<PAGE>
During 1995, the corporation established a $500,000 revolving line of credit
with another financial institution. The line of credit expires August 15, 1996.
Interest is variable at the lender's prime rate. The line of credit is
collateralized by 200,000 shares of BOCL's common stock. There were no
borrowings under the line of credit during 1995.
The line of credit agreement contains covenants. The principal financial
covenants require the Corporation to maintain a nonperforming asset ratio of
less than or equal to three percent of total consolidated assets, to maintain a
capital ratio of not less than seven percent, to maintain a debt coverage ratio
equal to 100 percent and requires that each of the subsidiary banks record a
return on average total assets of at least .85%. The Corporation was in
compliance with the covenants at December 31, 1995.
At December 31, 1995, BOCL had approximately $8.9 million and BOC had
approximately $9.5 million in standby credit available from other banks for
short-term borrowings.
NOTE 9 - COMMITMENTS
The corporation leases its office facilities under various operating leases.
Original lease terms typically range from one to five years and normally have
options that permit renewals for additional periods.
The aggregate future minimum lease payments under all noncancellable leases at
December 31, 1995 were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1996 $266,804
1997 253,064
1998 182,364
1999 178,364
--------
$880,596
========
</TABLE>
Total rental expense under the above leases for 1995, 1994 and 1993 was
approximately $274,000, $257,000 and $266,000, respectively.
NOTE 10 - STOCK OPTIONS
The Corporation has reserved 46,000 shares of common stock for issuance to key
employees under an Incentive Stock Option Plan (the "Qualified Option Plan") and
46,000 shares of common stock for issuance to key employees, officers, and
directors under a nonqualified stock option plan (the "Non-Qualified Plan").
During 1995, the Corporation reserved 100,000 shares of common stock for
issuance to employees under a nonqualified stock option plan (the "1995
Non-Qualified Plan"). Additionally, as part of the 1995 Non-Qualified Plan, each
non-employee director of the Corporation will receive 25 options to purchase
common stock for each board of directors meeting attended. The options are
exercisable after six months from date of the grant and expire at the earlier of
termination of director status or ten years after the date of grant. The option
price will be at fair market value at the date of grant. No options were granted
in 1995 under this section of the 1995 Non-Qualified Plan as the options are not
considered granted until March 1996.
39
<PAGE>
The following table summarizes activity of each plan:
<TABLE>
<CAPTION>
Options
Price Per Expiration
Options Shares Dates
------- ------ -----
Qualified Plan
<S> <C> <C> <C>
January 1, 1991 43,325 $5.88-$8.70 07/23/00
Exercised during 1992 (2,000) $6.50
Exercised during 1995 (16,500) $5.88-$8.70
Expired during 1995 (4,300) $5.88-$8.70
------- ----------- --------
December 31, 1995 20,525 $5.88-$8.70 07/23/00
====== =========== ========
Non-Qualified Plan
January 1, 1991 18,875 $5.88-$8.70 12/31/00
Granted during 1991 23,525 $6.95 12/31/96
Exercised during 1992 (800) $5.88
Exercised during 1992 (1,300) $6.95
Expired during 1994 (500) $6.95
Expired during 1995 (700) $5.88
------ ----------- ---------
December 31, 1995 39,100 $5.88-$8.70
====== =========== =========
1995 Non-Qualified Plan
Granted during 1995 40,000 $8.50 12/01/00
====== ===== ========
</TABLE>
No options were granted during 1992, 1993 or 1994. Since all options granted
during 1991 and 1995, in management's option, were issued at exercise prices
equal to or greater than the market value of the common stock at the time of
grant, compensation expense related to the grant of these options is not being
recognized.
As an inducement to the President of BOCL to enter into an employment agreement
in January 1992, the Corporation granted total stock options for 22,222 shares
of stock at a purchase price of $4.00 per share. The President of BOCL's rights
in these options vested as follows:
<TABLE>
<CAPTION>
Number of
Vesting Date Shares
------------ ------
<S> <C> <C>
January 1993 7,407
January 1994 7,407
January 1995 7,408
</TABLE>
The Corporation expensed $8,800 and $44,000 during 1994 and 1993, respectively,
since the options were granted at a price estimated by management to be below
fair market value. No expenses were recorded in 1995 for these options.
NOTE 11 - REGULATORY REQUIREMENTS
National banks are subject to certain restrictions regarding their ability to
transfer funds to the Corporation in the form of cash dividends, loans or
advances. The approval of the Office of the Comptroller of the Currency (OCC) is
required to pay dividends in excess of each Bank's net profits for the current
year plus retained net profits (net profits less dividends paid) for the
preceding two years, less any required transfers to surplus. As of December 31,
40
<PAGE>
1995, approximately $749,000 and $2,255,000 of Bank of Columbia's and Bank of
Charleston's retained earnings, respectively, were available for distribution to
the Corporation as dividends without prior regulatory approval.
Under Federal Reserve regulation, the Banks are also limited as to the amount
they may lend to the corporation unless such loans are collateralized by
specified obligations. Since the assets of the Corporation do not qualify as
assets which may be pledged as collateral to its subsidiary banks, the
Corporation is not eligible to obtain loans from its bank subsidiaries.
Current federal regulations require that a bank maintain a Tier 1 ratio of
risk-based capital to assets of 4.00% and a total risk-based capital ratio of
8.00%. As of December 31, 1995 BOCL had a Tier 1 capital ratio of 9.95% and a
total risk-based capital ratio of 11.21%, while BOC had a Tier 1 capital ratio
of 13.86% and a total risk-based capital ratio of 15.12%.
NOTE 12 - OTHER NONINTEREST EXPENSE
Components of other noninterest expense were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Legal, accounting, regulatory and insurance $ 481,428 $ 523,156 $ 561,862
Supplies and printing 125,914 125,660 125,657
Postage and freight 95,385 69,230 60,447
Dues and subscriptions 78,538 45,028 59,068
Loan servicing 78,154 55,327 68,551
Consulting 75,377 33,670 46,320
Telephone 58,217 51,136 52,677
Outside services 52,364 45,863 46,346
Training and other employee expense 47,214 42,354 48,193
Directors' fees 28,140 15,510 15,760
Temporary employment service 27,035 2,103 80
Data communications 23,700 20,639 16,163
Travel - nonofficer 17,538 19,295 13,515
Losses - other than bad debt 15,112 3,270 30,247
Amortization - organization expense 7,530 30,118 41,778
Other 33,049 41,646 24,993
---------- ---------- ----------
$1,244,695 $1,124,005 $1,211,657
========== ========== ==========
</TABLE>
41
<PAGE>
NOTE 13 - INCOME TAXES
The components of consolidated income tax expense (benefit) were as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
Taxes currently payable:
<S> <C> <C> <C>
Federal $552,598 $ 13,000
State 73,529 38,258 $43,525
-------- -------- -------
626,127 51,258 43,525
-------- -------- -------
Deferred income taxes:
Federal (200,000) (113,000)
-------- -------- -------
$426,127 ($61,742) $43,525
======== ======== =======
</TABLE>
The Corporation adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"), effective January 1, 1993. SFAS
109's method of accounting for income taxes is an asset and liability approach.
The asset and liability approach requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of assets and
liabilities. A valuation allowance is required for net deferred tax assets when
it is "more likely than not" that such net deferred tax assets will not be fully
realized.
The Corporation reported its third consecutive profitable year as of December
31, 1995, and prior federal tax net operating loss carryforwards were utilized
in 1995, 1994 and 1993. As a result of these changes in circumstances,
management reconsidered its prior policy of fully reserving net deferred tax
assets concluding that as of December 31, 1995 and 1994, it is "more likely than
not" that approximately $200,000 and $113,000, respectively, of deferred tax
assets will be realized. To the extent that the Corporation generates future
taxable earnings on a consistent basis, management would reassess the valuation
allowance and release appropriate amounts to earnings. The decrease in the
valuation allowance was due to the realization of loss carryforwards which are
reflected in the 1995 and 1994 income tax expense (benefit).
Deferred tax assets and (liabilities) and related valuation allowances arising
in accordance with SFAS 109 at December 31, 1995 and 1994, were as follows:
<TABLE>
<CAPTION>
December 31,
------------
1995 1994
---- ----
<S> <C> <C>
Allowance for loan losses $467,986 $406,569
Federal tax net operating loss carryforward 116,754
State tax net operating loss carryforward 95,302 78,313
Excess tax over book depreciation 88,727 71,021
Unrealized loss on available-for-sale securities - SFAS 115 93,016
Alternative minimum tax credit 13,000
Other 428
-------- --------
652,015 779,101
-------- --------
Accretion of discounts on bonds (17,864) (46,671)
Adjustment from accrual to cash basis for tax reporting (34,737) (65,790)
Unrealized gain on available-for-sale securities - SFAS 115 (48,808)
-------- --------
Gross deferred tax liability (101,409) (112,461)
-------- --------
Net deferred tax asset before valuation allowance 550,606 666,640
Less valuation allowance (260,624) (460,624)
-------- --------
Net deferred tax asset $289,982 $206,016
======== ========
</TABLE>
42
<PAGE>
Total income tax expense (benefit) is different than if it were computed by
applying the federal tax rate due to the following:
<TABLE>
<CAPTION>
Percentage of
For the Year Ended December 31, Pre-tax income
1995 1994 1993 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Tax expense at statutory rate $614,583 $334,902 $192,488 34.0 34.0 34.0
Net operating loss carryforwards (324,746) (179,026) (33.0) (31.6)
Release of deferred tax asset
valuation allowance (200,000) (113,000) (11.1) (11.5)
State tax, net of federal benefit 48,529 25,250 28,727 2.7 2.6 5.1
Alternative minimum tax expenses (13,000) 13,000 (1.0) 1.3
Nondeductible expenses 12,622 1.0
Other, net (36,607) 2,852 1,336 (2.0) 0.3 0.2
-------- -------- ------- ---- --- ---
$426,127 ($61,742) $43,525 23.6 (6.3) 7.7
======== ======== ======= ==== ==== ===
</TABLE>
At December 31, 1995 the Corporation had net operating loss carryforwards for
state income tax purposes of approximately $1.9 million available to offset
future state taxable income.
NOTE 14 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION
Condensed financial data for ComSouth Bankshares, Inc. (parent only) was as
follows:
<TABLE>
<CAPTION>
December 31,
------------
1995 1994
---- ----
Balance Sheet Data
<S> <C> <C>
Cash and short-term investments $ 48,971 $ 163,647
Investments in subsidiaries, at equity 11,756,369 9,817,487
Other assets 502,472 290,678
----------- -----------
Total assets $12,307,812 $10,271,812
=========== ===========
Note payable $125,000
Other liabilities $ 428,674 135,852
Stockholders' equity 11,879,138 10,010,960
----------- -----------
Total liabilities and stockholders' equity $12,307,812 $10,271,812
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Results of Operations Data
Revenues:
Management fees $ 878,193 $ 844,770 $774,107
Research fees 1,184 2,309
Interest income 53
---------- ---------- --------
879,377 847,079 774,160
---------- ---------- --------
Expenses:
Interest expense 233 8,993 14,980
Other expenses 1,068,234 615,130 726,458
---------- ---------- --------
1,068,467 624,123 741,438
---------- ---------- --------
Income (loss) before equity in undistributed income
of subsidiaries (189,090) 222,956 32,722
Equity in undistributed income of subsidiaries 1,570,561 823,792 489,895
---------- ---------- --------
Net income $1,381,471 $1,046,748 $522,617
========== ========== ========
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1995 1994 1995
---- ---- ----
<S> <C> <C> <C>
Cash Flow Data
Cash flows from operating activities:
Net income $1,381,471 $1,046,748 $522,617
Adjustments to reconcile net income to net cash
(used for) provided by operating activities:
Equity in income of subsidiaries (1,570,561) (823,792) (489,895)
Depreciation and amortization 34,110 18,592 20,174
Increase in other assets (174,641) (120,654) (34,902)
Increase in other liabilities 292,822 64,791 48,708
--------- --------- --------
Cash (used for) provided by operating activities (36,799) 185,685 66,702
--------- --------- --------
Cash flow from investing activities:
Purchase of premises and equipment (71,263) (42,070) (23,686)
--------- -------- --------
Cash used for investing activities (71,263) (42,070) (23,686)
--------- -------- --------
Cash from financing activities:
Net payments of note payable (125,000) (125,000)
Proceeds from issuance of common stock 118,386
--------- -------- --------
Cash used for financing activities (6,614) 0 (125,000)
--------- -------- --------
Decrease (increase) in cash and cash equivalents (114,676) 143,615 (81,984)
Cash and cash equivalents at beginning of year 163,647 20,032 102,016
--------- -------- --------
Cash and cash equivalents at end of year $ 48,971 $163,647 $ 20,032
========= ======== ========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 233 $ 8,993 $ 14,980
</TABLE>
NOTE 15 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
BOCL and BOC are parties to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of their customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
statement of financial position. The contractual amounts of those instruments
reflect the extent of involvement the subsidiaries have in particular classes of
financial instruments.
BOCL's and BOC's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amounts of those
instruments. The subsidiaries use the same credit policies in making commitments
and conditional obligations as they do for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. At December 31, 1995 and 1994, BOCL's and BOC's total
commitments to extend credit were approximately $18,148,000 and $13,882,000,
respectively, including related party amounts (see Note 6). BOCL and BOC
evaluate each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by BOCL and BOC upon extension of
credit, is based on management's credit evaluation of the counter party.
Collateral held varies but may include accounts receivable, inventory, property,
plant, and equipment, and income-producing commercial properties.
44
<PAGE>
Standby letters of credit are conditional commitments issued by BOCL and BOC to
guarantee the performance of a customer to a third party and totaled
approximately $1,775,000 and $1,437,000 at December 31, 1995 and 1994,
respectively. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
Collateral held varies but may include accounts receivable, inventory,
equipment, marketable securities, and property. Since most of the letters of
credit are expected to expire without being drawn upon, they do not necessarily
represent future cash requirements.
In October, 1994, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 119, "Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments' ("SFAS 119"), effective for
fiscal years beginning after December 15, 1995. This statement amends existing
requirements of SFAS No. 105, "Disclosure of Information about Financial
Instruments with Off-Balance Sheet Risk and Financial Instruments with
Concentrations of Credit Risk" to require disaggregation information about
financial instruments with off-balance-sheet risk of accounting loss by class,
business activity, risk, or other category that is consistent with the entity's
management of those instruments. As of December 31, 1995, the Corporation holds
derivative financial instruments in the amount of $281,060 which have been
reported on the balance sheet. Such on-balance sheet instruments are
specifically excluded from the scope of SFAS 119.
Most of BOCL's and BOC's business activity is with customers located within the
Columbia and Charleston metropolitan areas, respectively. Although BOCL and BOC
have diversified loan portfolios, a substantial portion of their debtors'
ability to honor their contracts is dependent upon the economies of Columbia and
Charleston and the surrounding areas.
NOTE 16 - CONTINGENCIES
In addition to the matter discussed in Note 2, BOCL and BOC are parties to and
defendants in other litigation arising from their normal banking activities. In
the opinion of management, the ultimate resolution of these matters will not
have a material effect on the Corporation's financial position or results of
operations.
NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
INVESTMENT SECURITIES:
For securities held as investments, fair value equals quoted market price, if
available. If a quoted price is not available, fair value is estimated using
quoted market prices for similar securities.
LOAN RECEIVABLES:
The fair value of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
DEPOSIT LIABILITIES:
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the reporting date. The fair value
of fixed-maturity certificates of deposit is estimated using the rates currently
offered for deposits of similar remaining maturities.
45
<PAGE>
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT, AND FINANCIAL
GUARANTEES WRITTEN:
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair value of
guarantees and letters of credit is based on fees currently charged for similar
agreements or on the estimated costs to terminate them or otherwise settle the
obligations with the counterparties at the reporting date.
The estimated fair value of the Corporation's consolidated financial instruments
at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
(balances in thousands)
CARRYING FAIR
AMOUNT VALUE
Financial assets:
<S> <C> <C>
Cash and cash equivalents $ 17,250 $ 17,250
Investment securities 22,135 22,148
Loans:
Loans 92,809 95,753
Less, allowance for loan losses (1,785) (1,785)
-------- -------
Net loans 91,024 93,968
Financial liabilities:
Deposits 117,763 118,016
Federal funds purchased and securities
sold under agreements to repurchase 1,755 1,755
Unrecognized financial instruments:
Commitments to extend credit 1,775 1,775
Standby letters of credit 18,148 18,735
</TABLE>
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On February 21, 1995, the management of the Corporation, after
receiving approval of members of the Corporation's Audit Committee and Board of
Directors, informed its independent accountants, Price Waterhouse LLP (the
"Prior Accountants"), that such accounting firm would not be retained for the
fiscal year ending December 31, 1995. On January 26, 1995, the Board of
Directors, after receiving proposals from other accounting firms, formally
elected to engage J. W. Hunt and Company, LLP to serve as independent
accountants for the year ending December 31, 1995. Prior to their engagement on
February 21, 1995, the firm of J. W. Hunt and Company, LLP was not consulted by
the Corporation for any financial or accounting matters.
In connection with the audit of the Corporation's consolidated
financial statements for the year ended December 31, 1994, and any subsequent
interim period preceding the dismissal of the Prior Accountants and the
engagement of the new accountants, there were no disagreements with the Prior
Accountants on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements if not
resolved to the satisfaction of the Prior Accountants would have caused them to
make reference in connection with their report to the subject matter of the
disagreements.
46
<PAGE>
The audit report of the Prior Accountants on the Corporation's
consolidated financial statements for the year ended December 31, 1994 was
unqualified. There have not been any adverse, disclaimer or modified opinions
issued by the Prior Accountants, except as to inclusion of an "emphasis of a
matter" paragraph included in their reports addressing uncertainties related to
a Formal Agreement entered into with the Comptroller of the Currency with
respect to their 1992 and 1993 report, the filing of a notice of intent to
effect a change in the composition of the Board of Directors with respect to
their 1992 report, and the filing of a shareholder lawsuit against certain
members of the Board of Directors with respect to their 1993 report.
The Board of Directors, upon the recommendation of the Audit Committee,
has appointed J. W. Hunt and Company, LLP, independent certified public
accountants, as independent auditors for the Corporation and its subsidiaries
for the current fiscal year ending December 31, 1996, subject to ratification by
the shareholders. J. W. Hunt and Company, LLP has advised the Corporation that
neither the firm nor any of its partners has any direct or indirect material
interest in the Corporation and its subsidiaries except as auditors and
independent certified public accountants of the Corporation and its
subsidiaries.
PART III
Item 10 - Directors and Executive Officers of the Registrant
The information required by this item is set forth under "Election of Directors"
on pages 4 through 7 of the Registrant's Proxy Statement filed in connection
with the 1996 Annual Meeting of Shareholders (the "1996 Proxy Statement"), which
information is incorporated herein by reference.
Item 11 - Executive Compensation
The information required by this item is set forth under "Executive Officers" on
pages 7 through 11 of the 1996 Proxy Statement, which information is
incorporated herein by reference.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The information required by this item is set forth under "Security Ownership . .
Management" on pages 3 and 4 of the Proxy Statement, which information is
incorporated herein by reference.
Item 13 - Certain Relationships and Related Transactions
The information required by this item is set forth under "Certain Relationships
and Related Transactions" on page 11 of the 1996 Proxy Statement, which
information is incorporated herein by reference.
Part IV
Item 14 - Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a) Financial Statements and Exhibits
1. See item 8 for a listing of all financial statements and
supplementary data.
2. Financial Statement Schedules are included in the
consolidated financial statements referenced in Item 14(a)1
above.
3. Exhibits
47
<PAGE>
3(a) Articles of Incorporation of the Registrant (incorporated by
reference to exhibits filed with the Registrant's
Registration Statement on Form S-1, File No. 33- 29091)
3(b) Bylaws of the Registrant (incorporated by reference to
exhibits filed with the Registrant's Annual Report on Form
10-K for the Year Ended December 31, 1993, File No. 0-19045)
10(a)Lease Agreement dated May 15, 1987 (incorporated by
reference to exhibits filed with the Registrant's
Registration Statement on Form S-1, File No. 33-29091)
10(d)Lease Agreement dated May 19, 1987 (incorporated by
reference to exhibits filed with Registrant's Registration
Statement on Form S-1, File No. 33-29091)
10(e)Incentive Stock Option Plan (incorporated by reference to
exhibits filed with the Registrant's Registration Statement
on Form S-1, File No. 33-29091)
10(f)1995 Stock Option Plan (incorporated by reference to
exhibits filed with proxy statement relating to Registrant's
1995 Annual Meeting of Shareholders).
10(g)Employment Agreement between Registrant and Arthur M.
Swanson (incorporated by reference to exhibits filed with
the Registrant's Registration Statement on Form S-1, File
No. 33-29091)
10(h)Employment Agreement between Bank of Columbia, NA. and
Michael Kapp (incorporated by reference to exhibits filed
with the Registrant's Annual Report on Form 10-K for the
Year Ended December 31, 1993, File No. 0-19045)
10(i)Lease Agreement dated November 10, 1994 (incorporated by
reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the Year Ended December 31, 1994,
File No. 0-19045)
21 List of Subsidiaries (incorporated by reference to exhibits
filed with the Registrant's Annual Report on Form 10-K for
the Year Ended December 31, 1993, File No. 0-19045)
24 Power of Attorney
27 Financial Data Schedule
(b) No current Reports on Form 8-K were filed during the fourth
quarter of 1995
(c) Exhibits - The response to this portion of Item 14 is
submitted as a separate section of this Item.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Columbia,
State of South Carolina, on the 22nd day of March, 1996.
COMSOUTH BANKSHARES, INC.
/s/Arthur M. Swanson
By:----------------------------------
Arthur M. Swanson
President and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Titles Date
/s/Arthur M. Swanson
- ---------------------------- President and Director March 22, 1996
Arthur M. Swanson (Principal Executive Officer)
/s/Harry R. Brown
- --------------------------- Chief Financial Officer March 22, 1996
Harry R. Brown & Chief Operating Officer
(Principal Financial and
Accounting Officer)
/s/Mason R. Chrisman
* Chairman of the Board March 22, 1996
- ----------------------------
Mason R. Chrisman and Director
/s/W. Carlyle Blakeney, Jr.
* Director March 22, 1996
- ----------------------------
W. Carlyle Blakeney, Jr.
/s/R. Lee Burrows, Jr.
*
- ---------------------------- Director March 22, 1996
R. Lee Burrows, Jr.
/s/Charles R. Jackson
* Director March 22, 1996
- ----------------------------
Charles R. Jackson
/s/J. Michael Kapp
* Director March 22, 1996
- ----------------------------
J. Michael Kapp
/s/LaVonne N. Phillips
* Director March 22, 1996
- ----------------------------
LaVonne N. Phillips
49
<PAGE>
/s/John C. B. Smith, Jr.
* Director March 22, 1996
- ----------------------------
John C. B. Smith, Jr.
/s/Arthur P. Swanson
* Director March 22, 1996
- ----------------------------
Arthur P. Swanson
/s/Harry R. Brown
Harry R. Brown
* By: (Attorney in Fact
for each of the persons
indicated)
50
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Description
<S> <C> <C>
3(a) - Articles of Incorporation of the Registrant (incorporated by reference to Previously Filed
exhibits filed with the Registrant's Registration Statement on Form S-1,
File No. 33-29029).
3(b) - Bylaws of the Registrant (incorporated by reference to exhibits Previously Filed
filed with Previously Filed the Registrant's Annual Report on Form
10-K for the Year Ended December 31, 1993, File No. 0-19045).
10(a) - Lease Agreement dated May 15, 1987 (incorporated by reference to Previously Filed
exhibits filed with the Registrant's Registration Statement on Form S-1,
File No. 33-29091).
10(b) - Lease Agreement dated May 17, 1987 (incorporated by reference to Previously Filed
exhibits filed with the Registrant's Registration Statement on Form S-1,
File No. 33-29091).
10(e) - Incentive Stock Option Plan (incorporated by reference to exhibits filed Previously Filed
with the Registrant's Registration Statement on Form S-1, File No. 3-
29091).
10(f) 1995 Stock Option Plan (incorporated by reference to exhibits filed Previously Filed
with Previously Filed proxy statement relating to Registrant's 1995
Annual Meeting of Shareholders).
10(g) - Employment agreement between Registrant and Arthur M. Swanson Previously Filed
(incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1, File No. 33-29091).
10 (h) - Employment agreement between Bank of Columbia, N.A., and J. Michael Previously Filed
Kapp (incorporated by reference to exhibits filed with the Registrant's
Annual Report on Form 10-K for the Year Ended December 31, 1993,
File No. 0-19045).
10(i) - Lease Agreement dated November 10, 1994 (incorporated by reference to Previously Filed
exhibits filed with the Registrant's Annual Report on Form 10-K for the
Year Ended December 31, 1994, File No. 0-19045).
21 List of Subsidiaries (incorporated by reference to exhibits filed with the Previously Filed
Registrant's Annual Report on Form 10-K for the Year Ended December
31, 1993, File No. 0-19045).
24 Power of Attorney Attached
27 Financial Data Schedule Attached
</TABLE>
51
<PAGE>
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned, an officer and/or
director of COMSOUTH BANKSHARES, INC., a South Carolina corporation (hereinafter
referred to as the "Company"), does hereby constitute and appoint Harry R. Brown
and Arthur M. Swanson, respectively, and each of them severally, with full power
of substitution, his true and lawful attorneys and agents (each to execute any
and all instruments which said attorneys and agents or any of them may deem
necessary or advisable to enable the Company to comply with the Securities
Exchange Act of 1934, as amended (the "Act"), and any rules, regulations and
requirements of the Securities and Exchange Commission (the "Commission") in
respect thereof, in connection with the filing under the Act of the Company's
Annual Report on Form 10-K for the Company's fiscal year ended December 31,
1995, including all amendments thereto (the "Form 10-K"), and including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign for and on behalf of the undersigned the name of the
undersigned as officer and/or director of the Company to the Form 10-K filed
with the Commission and to any instrument or document filed as a part of, as an
exhibit to, or in connection with said Form 10-K; and the undersigned does
hereby ratify and confirm as his own act and deed all that said attorneys and
agents, and each of them, shall do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents, this 1st
day of February, 1996.
/s/W. Carlyle Blakeney, Jr.
/s/R. Lee Burrows, Jr.
/s/Mason R. Chrisman
/s/Charles R. Jackson
/s/J. Michael Kapp
/s/LaVonne N. Phillips
/s/John C. B. Smith, Jr.
/s/Arthur P. Swanson
52
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Financial Condition at December 31, 1995 and the
Consolidated Statement of Income for the Year Ended December 31, 1995 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 10,979,878
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,270,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 12,815,394
<INVESTMENTS-CARRYING> 9,319,839
<INVESTMENTS-MARKET> 9,333,599
<LOANS> 92,808,595
<ALLOWANCE> 1,784,508
<TOTAL-ASSETS> 133,422,628
<DEPOSITS> 117,762,790
<SHORT-TERM> 2,193,398
<LIABILITIES-OTHER> 1,587,302
<LONG-TERM> 0
0
0
<COMMON> 11,830,145
<OTHER-SE> 48,993
<TOTAL-LIABILITIES-AND-EQUITY> 133,422,628
<INTEREST-LOAN> 7,723,855
<INTEREST-INVEST> 1,361,008
<INTEREST-OTHER> 148,778
<INTEREST-TOTAL> 9,233,641
<INTEREST-DEPOSIT> 4,008,427
<INTEREST-EXPENSE> 4,124,563
<INTEREST-INCOME-NET> 5,109,078
<LOAN-LOSSES> 195,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,575,822
<INCOME-PRETAX> 1,807,598
<INCOME-PRE-EXTRAORDINARY> 1,807,598
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,381,471
<EPS-PRIMARY> 1.00
<EPS-DILUTED> 1.00
<YIELD-ACTUAL> 4.81
<LOANS-NON> 66,739
<LOANS-PAST> 15,853
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,593,771
<CHARGE-OFFS> 93,871
<RECOVERIES> 89,608
<ALLOWANCE-CLOSE> 1,784,508
<ALLOWANCE-DOMESTIC> 1,611,025
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 173,483
</TABLE>
