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, 1996 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 14, 1997 was approximately $4,774,000. As
of March 14, 1997, there were 1,534,726 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 29,
1997 Annual Meeting of stockholders incorporated by reference into Part III
hereof.
(2) Portions of the Registrant's Annual Report to Shareholders for the year
ended December 31, 1996 incorporated by reference into Part II hereof.
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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 58 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.
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Data Processing. During 1994 and early 1995, the Corporation upgraded its data
processing equipment to an IBM AS 400 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 flexibility and capacity of this
equipment is expected to be sufficient to service the current 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 six
of the larger commercial banks in the Columbia Metropolitan Statistical Area
("CMSA") are affiliated with regional banking groups. Approximately thirty
financial institutions are represented in the CMSA, including banks, savings
institutions and credit unions. Six of the larger commercial banks in the
Charleston area are also affiliated with regional banking groups. Approximately
twenty-three 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
$103 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 $158 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.
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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
9,300 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. During 1996, the lease was amended to add
an additional 2,700 square feet of space on the street and second floors. An
option to renew for a third five-year period was also included in the amendment.
BOCL exercised the first five-year option period during 1996.
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 20 full-time employees and BOC employs 24 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 Company 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.
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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 Company 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. 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 has 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
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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. South Carolina law was amended, effective July 1, 1996, to
permit such interstate branching but not de novo branching by an out-of-state
bank. 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.
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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, 1996, the
Corporation, BOC and BOCL had leverage ratios of 9.3%; 11.0%; and 7.4%
respectively, and total risk-adjusted capital ratios of 12.8%; 14.8%; 10.8%,
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.
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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 December 11, 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. 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, 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 are set at 0.00% for the first half of 1997. The FDIC may increase
or decrease the new assessment rates semiannually up to a maximum increase or
decrease of 5 basis points.
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 1991 Banking
Law. 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.
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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."
The 1991 Banking Law 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 the 1991 Banking Law, 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.
The 1991 Banking Law 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 a joint policy statement that provides
bankers guidance on sound practices for managing interest rate risk. The policy
statement identifies the key elements of sound interest rate risk management and
describes prudent principles and practices for each element, emphasizing the
importance of adequate oversight by a bank's board of directors and senior
management and of a comprehensive risk management process. The policy statement
also outlines the critical factors that will affect the agencies' evaluation of
a bank's interest rate risk when making a determination of capital adequacy. In
adopting the policy statement, the agencies have asserted their intention to
continue to place significant emphasis on the level of a bank's interest rate
risk exposure and the quality of its risk management process when evaluating a
bank's capital adequacy.
The Federal Reserve, the FDIC, the Office of the Comptroller of the
Currency 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.
The 1991 Banking Law 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.
The 1991 Banking Law 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 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 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
Incorporated by reference to Note 2 to Consolidated Financial
Statements on page 24 of the Registrant's 1996 Annual Report to Shareholders
(the "Annual Report").
Item 4 - Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth
quarter of 1996.
PART II
Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters
Incorporated by reference to information set forth under the caption
"Stock Data and Dividends" on page 15 of the Annual Report.
During 1996, the Registrant issued shares of its common stock to the
following persons upon exercise of options issued pursuant to the Registrant's
Incentive Stock Option Plan. The securities were issued pursuant to the
exemption from registration provided by Section 4(2) of the Securities Act of
1933 because the issuance did not involve a public offering by the issuer.
<TABLE>
<CAPTION>
Date Shares Exercise
Issued Name Issued Price
------ ---- ------ -----
<C> <C> <C> <C>
05/01/96 William Harley 440 $ 5.35
248 6.30
192 7.29
10/17/96 Maurisa B. Hudson 1,100 6.32
12/03/96 Floyd J. Blackmon 1,100 6.32
12/09/06 John P. Barnwell 1,100 6.32
12/12/96 Carmel R. Dodds 550 6.32
12/18/96 Arthur P. Swanson 1,100 6.32
12/30/96 Neida Hendrix 550 6.32
12/31/96 H. Jerry Shearer 2,200 6.32
- -- -- -- -----
8,580
=====
</TABLE>
Item 6 - Selected Financial and Other Data
Incorporated by reference to information set forth under the caption
"Financial Summary" on page 5 of the Annual Report.
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operation.
Incorporated by reference to information set forth under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 5 through 17 of the Annual Report.
Item 8 - Financial Statements and Supplemental Data
Incorporated by reference to the Registrant's Consolidated Financial
Statements and Notes thereto and Report of Independent Accountants set forth on
pages 18 through 35 of the Annual Report.
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Incorporated by reference to information set forth under the caption
"Changes in Independent Auditors" on page 17 of the Annual Report.
11
<PAGE>
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 1997 Annual Meeting of Shareholders (the "1997 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 1997 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 of
Certain Beneficial Owners and Management" on pages 2 through 4 of the 1997 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 1997 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
12
<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)
4 Specimen Stock Certificate (incorporated by reference to
exhibits filed with the Registrant's Registration Statement
on Form S-1, File No. 33-29091)
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)
13 Portions of 1996 Annual Report to Shareholders
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 1996
(c) Exhibits - The response to this portion of Item 14 is
submitted as a separate section of this Item.
13
<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 26th day of March, 1997.
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 26, 1997
Arthur M. Swanson (Principal Executive Officer)
/s/Harry R. Brown
- --------------------------- Chief Financial Officer March 26, 1997
Harry R. Brown & Chief Operating Officer
(Principal Financial and
Accounting Officer)
*/s/Mason R. Chrisman
Chairman of the Board March 26, 1997
- ----------------------------
Mason R. Chrisman and Director
*/s/W. Carlyle Blakeney, Jr.
Director March 26, 1997
- ----------------------------
W. Carlyle Blakeney, Jr.
*/s/R. Lee Burrows, Jr.
- ---------------------------- Director March 26, 1997
R. Lee Burrows, Jr.
*/s/Charles R. Jackson
Director March 26, 1997
- ----------------------------
Charles R. Jackson
*/s/J. Michael Kapp
Director March 26, 1997
- ----------------------------
J. Michael Kapp
*/s/LaVonne N. Phillips
Director March 26, 1997
- ----------------------------
LaVonne N. Phillips
14
<PAGE>
*/s/John C. B. Smith, Jr.
Director March 26, 1997
- ----------------------------
John C. B. Smith, Jr.
*/s/Arthur P. Swanson
Director March 26, 1997
- ----------------------------
Arthur P. Swanson
/s/Harry R. Brown March 26, 1997
Harry R. Brown
* By: (Attorney in Fact
for each of the persons
indicated)
15
<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).
4 Specimen Stock Certificate (incorporated by reference to exhibits Previously Filed
filed with the Registrant's Registration Statement on Form S-1, File
No. 33-29091)
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).
13 Portions of 1996 Annual Report to Shareholders Attached
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>
16
PORTIONS OF REGISTRANT'S 1996 ANNUAL REPORT TO SHAREHOLDERS
INCORPORATED BY REFERENCE IN FORM 10-K.
(Information set forth on page 3 of Registrant's Annual Report to Shareholders)
3-YEAR FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Net income .................................... $ 1,828,426 $ 1,381,471 $ 1,046,748
Book value (year-end) per common share ........ 8.90 7.79 6.70
Total assets .................................. 164,634,464 133,422,628 96,919,653
Loans (net) ................................... 113,879,003 91,024,087 67,300,821
Deposits ...................................... 145,407,818 117,762,790 82,908,409
Stockholders' equity .......................... 13,640,822 11,879,138 10,103,976
Return on assets .............................. 1.30% 1.22% 1.13%
Return on stockholders' equity ................ 14.54% 12.74% 11.12%
</TABLE>
(Information set forth on pages 5 through 17 of Registrant's Annual Report to
Shareholders)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature, are
intended to be, and are hereby identified as, `forward looking statements' for
purposes of the safe harbor provided by Section 21E of the Securities Exchange
Act of 1934, as amended. The Corporation cautions readers that forward looking
statements, including without limitation, those relating to the Corporation's
future business prospects, revenues, working capital, liquidity, capital needs,
interest costs, and income, are subject to certain risks and uncertainties that
could cause actual results to differ materially from those indicated in the
forward looking statements, due to several important factors herein identified,
among others, and other risks and factors identified from time to time in the
Corporation's reports filed with the Securities and Exchange Commission.
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.
17
<PAGE>
<TABLE>
TABLE 1 - FINANCIAL SUMMARY
Summary of Operations
<CAPTION>
(thousands, except per share data)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest income ....................................... $ 11,276 $ 9,234 $ 6,786 $ 6,537 $ 7,392
Interest expense ...................................... 4,924 4,125 2,570 2,690 3,562
--------- --------- -------- -------- --------
Net interest income ................................... 6,352 5,109 4,216 3,847 3,830
Provision for loan losses ............................. 110 195 75 135 1,548
--------- --------- -------- -------- --------
Net interest income after provision
for loan losses ..................................... 6,242 4,914 4,141 3,712 2,282
Noninterest income .................................... 1,646 1,469 771 690 1,083
Noninterest expense ................................... 5,131 4,576 3,927 3,836 3,991
--------- --------- -------- -------- --------
Income before income taxes ............................ 2,757 1,807 985 566 (626)
Applicable income (taxes) benefit ..................... (929) (426) 62 (43) (33)
--------- --------- -------- -------- --------
Net income (loss) ..................................... $ 1,828 $ 1,381 $ 1,047 $ 523 $ (659)
========= ========= ======== ======== ========
Earnings (loss) per share - primary (1) ............... $ 1.16 $ .91 $ .70 $ .35 $ (.44)
Earnings (loss) per share - fully diluted (1) ......... $ 1.15 $ .91 $ .70 $ .35 $ (.44)
Book value (year-end) per common share ............... $ 8.90 $ 7.79 $ 6.70 $ 6.13 $ 5.78
Selected year-end assets and liabilities
Total assets .......................................... $ 164,634 $ 133,423 $ 96,920 $ 95,008 $ 94,162
Interest-earning assets ............................... 151,635 119,429 89,179 87,105 86,698
Investment securities ................................. 34,106 22,135 21,878 23,323 21,769
Loans (net) ........................................... 113,879 91,024 67,301 59,883 61,614
Deposits .............................................. 145,408 117,763 82,908 82,898 83,087
Noninterest-bearing deposits .......................... 35,678 24,654 13,392 11,430 10,823
Interest-bearing deposits ............................. 109,730 93,109 69,516 71,468 72,264
Interest-bearing liabilities .......................... 4,659 2,193 3,422 2,513 1,727
Stockholders' equity .................................. 13,641 11,879 10,104 9,238 8,715
Ratios (average)
Loans to deposits ..................................... 82.55% 80.62% 71.87% 73.58% 79.28%
Return on assets ...................................... 1.30% 1.22% 1.13% 0.58% (0.69%)
Return on interest-earning assets ..................... 1.37% 1.30% 1.20% 0.62% (0.74%)
Return on stockholders' equity ........................ 14.54% 12.74% 11.12% 5.68% (7.03%)
Net interest income to interest-earning assets ........ 4.78% 4.81% 4.84% 4.53% 4.27%
Net charge-offs (recoveries) to loans ................. 0.09% 0.01% (0.11%) 0.66% 0.74%
Stockholders' equity to assets ........................ 8.94% 9.55% 10.13% 10.21% 9.84%
Stockholders' equity to deposits ...................... 10.16% 10.94% 11.69% 11.60% 11.36%
Risk-based capital ratio .............................. 13.30% 13.43% 16.23% 15.27% 14.20%
Tier 1 leverage ratio ................................. 11.90% 12.17% 14.96% 14.00% 13.00%
</TABLE>
(1) See Note 1 to consolidated financial statements regarding earnings per share
calculation.
RESULTS OF OPERATIONS
The Corporation realized record earnings for the year ended December 31, 1996.
Net income increased by 32% to $1,828,000 or $1.15 per fully diluted share over
the $1,381,000 or $.91 per share earned in 1995. The economy in both markets
served by the banks was relatively strong. As a result, the high loan demand
experienced by both banks during the fourth quarter of 1995 continued throughout
1996, resulting in an increase in interest income from loans. The increase in
loans outstanding was the major reason for the improved earnings as the net
interest margin remained fairly stable during the two years. The Corporation
showed only a modest increase in noninterest income over the prior year as
management decided to consolidate and downsize the mortgage lending function
during the year, resulting in a decrease of approximately $140,000 in fees from
the program. Management believed that the time dedicated to the administration
of the mortgage lending function would be more effectively used if focused
toward the development of the traditional lending and deposit gathering
activities.
18
<PAGE>
The Corporation had total revenues of $12,922,000, $10,703,000 and $7,557,000
for the three years ending 1996, 1995 and 1994, respectively. Total expenses for
the same periods were $11,094,000, $9,322,000 and $6,510,000.
The increase in revenue provided by interest on loans in 1996 over 1995 is
primarily the result of the strong loan growth realized by both banks during
1996. The growth in revenue related to investment securities is due to a steady
growth of deposits during the year. Funds provided by this deposit growth were
used to support the loan growth and increase the investment portfolio.
Noninterest income increased over the prior year as both banks were successful
in the promotion of the "Business Manager" product, increasing fee income from
the product by $200,000 over 1995. This product provides immediate cash flow to
small businesses through the purchase by the Banks of such businesses'
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. Deposit fee income increased by approximately
$113,000 over 1995 as a result of the strong growth in deposit relationships
during the year, coupled with a change in service charges during the third
quarter by BOCL. As previously mentioned noninterest income was partially
impacted by approximately $140,000 in reduced fees due to management's decision
to downsize the mortgage lending function. Based on the results noted from the
increase in loan production, increased deposit activity and the increase in fees
generated by the Business Manager product, the decision appears to have had
merit.
The increase in interest paid on deposits is almost entirely due to the 23%
growth in deposits over the prior year, as rates paid during the two periods
were relatively stable and the mix in the deposit structure remained basically
the same for both periods. The increase in interest on the note payable category
is the result of a borrowing of $1,200,000 during the year by the Corporation to
accommodate funding requirements during the year. The decrease in expenses
related to the provision for loan losses was the result of continued focus on
strict credit underwriting standards and the effectiveness of a sound credit
review function. Salaries and employee benefits expense increased by a modest 7%
over the prior year and was primarily due to merit increases. However, some
additional staffing was required during the year to support the growth in
deposits and loans. Furniture and equipment expenses increased during the year
primarily as a result of an expansion of BOCL, which increased its square
footage by a third more than its original size. Purchases of new furniture and
equipment were made to correspond with the expansion of the facilities.
Additionally, BOCL installed a local area network (LAN) during 1996 to better
serve and support its banking activities and customers.
Other expenses increased by approximately $295,000 over 1995. Legal expenses
related to increased activity during the year concerning pending lawsuits
accounted for $170,000 of this increase. See Note 2 - Stockholder Legal Action
for further details of this pending suit. Supplies and printing expenses
increased by $25,000 and postage and freight increased by $25,000. The increased
expenses in both of these categories were the result of the strong growth
realized in loans and deposits. Training expenses increased by $22,000 as the
banks continued to strengthen the skills of their staffs through attendance in
various banking schools and seminars. In addition, training was provided to the
staff of BOCL to support the implementation of the LAN which was previously
discussed. Directors' fees increased by $9,000 during the year due to fees paid
to corporate directors for their services. These fees were only paid for the
last quarter of 1995.
In addition to the other normal operating expenses discussed above the
Corporation recorded a loss of $25,000 on a counterfeit check and $23,000 on the
sale of other real estate owned (OREO) during the year.
Income tax expenses for 1996 increased by approximately $503,000 over 1995. The
1995 tax expense was reduced as a result of the utilization of $13,000 in tax
credits related to an alternative minimum tax expense in the prior year and a
reduction in the deferred tax asset valuation allowance of $200,000. The
Corporation did continue to reduce its deferred tax asset valuation allowance in
1996 as a result of continued profits and the belief that the deferred tax
assets would more likely than not be realized through future earnings. The
reduction in the valuation allowance for 1996, however, was only $120,000 as
compared to the $200,000 for 1995. The remainder of the difference in income tax
expense is due to the improvement in pretax income. See Note 15 to the
consolidated financial statements for further details concerning income tax
expenses for 1996, 1995 and 1994.
19
<PAGE>
Summarized in Table 2 is an analysis of the composition of the Corporation's
revenues and expenses for 1996, 1995 and 1994.
<TABLE>
TABLE 2 - REVENUE AND EXPENSES
<CAPTION>
Year ended December 31,
-----------------------
1996 1995 1994
Amount % Amount % Amount %
------ ----- ------ ------ ------ ------
Revenues
<S> <C> <C> <C> <C> <C> <C>
Interest on loans ............................... $ 9,454,242 73.2% $ 7,723,855 72.2% $ 5,503,179 72.8%
Interest on investment securities ............... 1,674,717 13.0% 1,361,008 12.7% 1,209,414 16.0%
Interest on temporary investments ............... 147,320 1.1% 148,778 1.4% 73,463 1.0%
Noninterest income .............................. 1,646,054 12.7% 1,469,342 13.7% 770,700 10.2%
----------- ----- ----------- ----- ----------- -----
Total revenues .................................. $12,922,333 100.0% $10,702,983 100.0% $ 7,556,756 100.0%
=========== ===== =========== ===== =========== =====
Expenses
Interest on deposits ............................ $ 4,756,452 42.9% $ 4,008,427 43.0% $ 2,475,804 38.0%
Interest on note payable and
securities sold under agreements
to repurchase ................................. 167,104 1.5% 116,136 1.2% 93,979 1.4%
Provision for loan losses ....................... 110,000 1.0% 195,000 2.1% 75,000 1.2%
Salaries and employee benefits .................. 2,661,977 24.0% 2,481,335 26.6% 2,053,878 31.6%
Occupancy expenses .............................. 433,592 3.9% 429,183 4.6% 384,133 5.9%
Furniture and equipment ......................... 406,767 3.6% 341,966 3.7% 281,216 4.3%
Advertising and marketing ....................... 89,358 0.8% 78,643 0.8% 83,735 1.3%
Other ........................................... 1,539,418 13.9% 1,244,695 13.4% 1,124,005 17.3%
Taxes ........................................... 929,239 8.4% 426,127 4.6% (61,742) (1.0%)
----------- ----- ----------- ----- ----------- -----
Total expenses .................................. $11,093,907 100.0% $ 9,321,512 100.0% $ 6,510,008 100.0%
=========== ===== =========== ===== =========== =====
</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 1996, 1995 and 1994, net interest income totaled $6,353,000,
$5,109,000 and $4,216,000, respectively. The increase in net interest income in
1996 from 1995 as well as 1995 from 1994 was principally due to the growth in
loans outstanding for each year as loans outstanding increased by 25% or
$22,900,000 in 1996 over 1995 and 35% or $23,900,000 in 1995 over 1994.
The average yield on earning assets for 1996, 1995 and 1994 was 8.48%, 8.69% and
7.79%, the average rate paid on interest bearing liabilities was 4.72%, 4.84%
and 3.65%, and the annualized net yield on average earning assets (net interest
income divided by average earning assets) was 4.78%, 4.81% and 4.84%,
respectively.
The change in yields on earning assets and rates paid on interest bearing
liabilities from 1995 to 1996 was the result of competitive pricing in both
markets served by the banks. The change in yields and rates of the 1994 to 1995
period was primarily due to several prime rate changes, which occurred
periodically during 1994. Even though rates paid on interest bearing liabilities
are not generally tied to the prime lending rate, changes in the prime lending
rate have traditionally impacted the market rate for such liabilities.
Management continues to focus its efforts on minimizing any earnings impact as a
result of increased competition, or rate changes. These efforts appear to have
been successful due to the relatively stable net interest margin during the
three year period. 20
<PAGE>
Table 3 shows the yields and costs on average balances for the periods
discussed.
<TABLE>
TABLE 3 - COMPARATIVE AVERAGE BALANCE SHEETS - YIELD AND COSTS
<CAPTION>
(Average balances for years ended December 31, in thousands)
1996 1995 1994
---- ---- ----
Average Revenues/ Yield Average Revenues/ Yield Average Revenues/ Yield
Balance expense Rate Balance expense Rate Balance expense Rate
-------- -------- ---- -------- ------ ---- -------- -------- ----
Interest earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans1 .............................. $102,207 $ 9,454 9.25% $ 79,881 $7,724 9.67% $ 62,568 $ 5,503 8.79%
Investment securities (taxable) ..... 28,064 1,675 5.97% 23,902 1,361 5.69% 22,648 1,209 5.34%
Federal funds sold .................. 2,757 147 5.33% 2,532 149 5.88% 1,842 74 4.00%
-------- ------- ---- -------- ------ ---- -------- -------- ----
Total interest-earning assets ....... 133,028 11,276 8.48% 106,315 9,234 8.69% 87,058 6,786 7.79%
-------- ------- ---- -------- ------ ---- -------- -------- ----
Noninterest earning assets
Cash and due from banks ............. 6,263 5,763 4,543
Premises and equipment .............. 1,419 1,321 1,178
Other, less allowance for loan losses 46 64 197
-------- -------- --------
Total noninterest earning assets .... 7,728 7,148 5,918
-------- -------- --------
Total assets ........................ $140,756 $113,463 $ 92,976
======== ======== ========
Interest-bearing liabilities:
Interest-bearing deposits
NOW, money market and savings ..... $ 54,257 $ 2,139 3.94% $ 41,363 $1,653 4.00% $ 33,699 $ 1,078 3.20%
Time deposits ..................... 46,848 2,618 5.59% 41,329 2,356 5.70% 34,314 1,398 4.07%
-------- ------- ---- -------- ------ ---- -------- -------- ----
Total interest-bearing deposits ..... 101,105 4,757 4.71% 82,692 4,009 4.85% 68,013 2,476 3.64%
Short-term borrowings ............... 2,017 88 4.36% 1,915 83 4.33% 1,856 65 3.50%
Note payable and US Treasury tax
and loan accounts ................ 1,183 79 6.68% 641 33 5.15% 622 29 4.66%
-------- ------- ---- -------- ------ ---- -------- -------- ----
Total interest-bearing liabilities .. 104,305 4,924 4.72% 85,248 4,125 4.84% 70,491 2,570 3.65%
Noninterest-bearing liabilities
Demand deposits ..................... 22,706 16,387 12,535
Other liabilities ................... 1,167 985 536
-------- -------- --------
128,178 102,620 83,562
Stockholders' equity ................ 12,578 10,843 9,414
-------- -------- --------
Total liabilities and stockholders'
equity ............................ $140,756 $113,463 $ 92,976
======== ======== ========
Net interest income ................. $ 6,352 $5,109 $ 4,216
======= ====== ========
Margin analysis
Interest income/earning assets ...... 8.48% 8.69% 7.79%
Interest expense/earning assets ..... 3.70% 3.88% 2.95%
---- ---- ----
Net interest income/earning assets2.. 4.78% 4.81% 4.84%
==== ==== ====
</TABLE>
- --------
1 Nonaccrual loan balances have been excluded.
2 Net interest income divided by total interest earning assets.
21
<PAGE>
Table 4 analyzes changes in net interest income resulting from changes in volume
and rates in the periods discussed.
<TABLE>
TABLE 4 - VOLUME AND RATE VARIANCE ANALYSIS
<CAPTION>
(Tax equivalent basis)
1996 Compared to 1995 1995 Compared to 1994
--------------------- ---------------------
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 ........................................ $2,066,082 ($335,695) $ 1,730,387 $1,671,059 $ 549,617 $2,220,676
Investment securities(2) ..................... 247,140 66,569 313,709 71,825 79,769 151,594
Federal funds sold and securities
purchased under agreement to resell ........ 8,925 (10,383) (1,458) 40,640 34,675 75,315
---------- --------- ----------- ---------- --------- ----------
Total interest-earning assets ................ 2,322,147 (279,509) 2,042,638 1,783,524 664,061 2,447,585
---------- --------- ----------- ---------- --------- ----------
Interest expense:
NOW, money market and savings ................ 511,219 (24,992) 486,227 305,910 269,001 574,911
Time deposits ................................ 307,037 (45,239) 261,798 399,270 558,442 957,712
Federal funds purchased and securities
sold under agreements to repurchase ........ 4,380 568 4,948 2,568 15,353 17,921
Note payable and US Treasury tax
and loan accounts .......................... 36,350 9,669 46,019 1,012 3,224 4,236
---------- --------- ----------- ---------- --------- ----------
Total interest-bearing liabilities ........... 858,986 (59,994) 798,992 708,760 846,020 1,554,780
---------- --------- ----------- ---------- --------- ----------
Net interest income .......................... $1,463,161 ($219,515) $ 1,243,646 $1,074,764 ($181,959) $ 892,805
========== ========= =========== ========== ========= ==========
</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 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 in which the
rate environment is unstable. Management constantly reviews interest rate risk
exposure through its Asset/Liability Management function using such techniques
as GAP Analysis and simulation modeling. Additionally, management gathers and
analyzes information concerning local and national market conditions which may
affect the rate environment. The results of the review of interest rate risk and
expected changes in the rate environment are then used to make timely and
reasonable changes to the balance sheet composition to reduce the potential
earnings impact.
22
<PAGE>
Table 5 sets forth the Corporation's interest sensitivity position as of
December 31, 1996 by showing the amount of interest-earning assets and
interest-bearing liabilities that reprice in the periods shown.
<TABLE>
TABLE 5 - INTEREST SENSITIVITY GAP ANALYSIS
<CAPTION>
(December 31, 1996 balances in thousands)
One
One year through Over five
or less five years years Total
------- ---------- ----- -----
Interest-earning assets
<S> <C> <C> <C> <C>
Investment securities ........................ $ 3,806 $29,405 $ 895 $ 34,106
Loans receivable (1) ......................... 76,715 34,986 3,754 115,455
--------- ------- -------- --------
80,521 64,391 4,649 149,561
--------- ------- -------- --------
Interest-bearing liabilities
Deposits
NOW, money market and savings ............. 56,290 56,290
Time deposits ............................. 49,412 4,028 53,440
Securities sold under agreements to repurchase 2,674 2,674
US Treasury tax and loan accounts ............ 784 784
Note payable ................................. 240 960 1,200
--------- ------- -------- --------
109,400 4,988 0 114,388
--------- ------- -------- --------
Interest-sensitive gap ......................... $ (28,879) $59,403 $ 4,649 $ 35,173
========= ======= ======== ========
Cumulative interest-sensitivity gap ............ $ (28,879) $30,524 $ 35,173
========= ======= ========
Ratios of interest-earnings assets to
interest-bearing liabilities ................. 73.6% 1,290.9%
===== =======
Cumulative gap to total interest-earning assets (19.3%) 20.4% 23.5%
===== ======= ========
</TABLE>
(1) Excludes nonaccrual loans.
At December 31, 1996 approximately 54% of the Corporation's interest earning
assets will reprice within one year, compared to 95% of interest bearing
liabilities. The 19% or $28,879,000 interest-sensitivity gap position at
December 31, 1996 is higher than management prefers, however not at a level high
enough to create a material impact on earnings if rates were to change
unexpectedly. This negative gap position is partially due to management's
decision to classify all NOW, money market and saving deposits within the one
year category when in fact a significant portion of these deposits are core
deposits which may or may not be sensitive to rate changes. Management believes
that paying the current market rates required to attract longer term time
deposits to reduce the negative gap position is not warranted. Management is
aware of its gap position and has developed specific strategies to maintain the
gap position at a reasonable level.
INVESTMENT SECURITIES
Investment securities represent the second largest component of earning assets,
comprising 23% and 19% of total earning assets in 1996 and 1995, respectively.
Note 4 to the accompanying consolidated financial statements presents the book
value of investment securities by category as of December 31, 1996 and 1995. 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.
23
<PAGE>
The Corporation adopted SFAS No. 115 "Accounting for Certain Investments 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
US Treasuries
<S> <C> <C> <C> <C>
Within one year ................ $ 1,500,000 $ 1,504,189 $ 1,500,390 4.96%
One to five years .............. 6,750,000 6,777,560 6,753,140 5.91%
----------- ----------- ----------- ----
Total ........................ 8,250,000 8,281,749 8,253,530 5.74%
----------- ----------- ----------- ----
US Government Agencies
Within one year ................ 41,449 41,374 42,614 8.83%
One to five years .............. 4,575,000 4,570,256 4,551,071 6.32%
Five to ten years .............. 108,880 106,701 111,486 8.45%
After ten years ................ 72,344 71,847 76,730 8.85%
----------- ----------- ----------- ----
Total ........................ 4,797,673 4,790,178 4,781,901 6.43%
----------- ----------- ----------- ----
Total Held-to-Maturity ........... $13,047,673 $13,071,927 $13,035,431 5.99%
=========== =========== =========== ====
Available-for-Sale
US Treasuries
Within one year ................ $ 1,250,000 $ 1,249,493 $ 1,257,425 6.56%
One to five years .............. 7,100,000 7,130,572 7,149,754 6.09%
----------- ----------- ----------- ----
Total ........................ 8,350,000 8,380,065 8,407,179 6.16%
----------- ----------- ----------- ----
US Government Agencies
Within one year ................ 1,000,000 1,000,057 1,003,440 6.17%
One to five years .............. 11,000,000 10,974,276 10,907,799 6.07%
----------- ----------- ----------- ----
Total ........................ 12,000,000 11,974,333 11,911,239 6.08%
----------- ----------- ----------- ----
Other Securities
After ten years (2) ............ 716,150 716,150 716,150 6.72%
-- ----------- ----------- ----------- ----
Total ........................ 716,150 716,150 716,150 6.72%
----------- ----------- ----------- ----
Total Available-for-Sale ......... $21,066,150 $21,070,548 $21,034,568 6.13%
=========== =========== =========== ====
Average Maturity in Years of Total
Investment Securities .......... 2.42
===========
</TABLE>
(1) Computed using a federal tax rate of 34%.
(2) Includes Federal Reserve Bank stock and Federal Home Loan Bank (FHLB)
stock. These stocks are excluded from the calculation of average maturity
in years. Dividends are paid at variable rates. The weighted average
taxable equivalent yield for these securities is for the year 1996 only.
24
<PAGE>
LOANS AND ALLOWANCE FOR LOAN LOSSES
At December 31, 1996, total loans outstanding increased by 25% to $115.7 million
over the $92.8 million reported for year end 1995. The strong loan demand
experienced by both banks in 1995 continued throughout 1996 as the economies in
both markets serviced by the banks remained good. In addition, management of the
banks continued their efforts to service the needs of their respective markets
and improve each bank's market share within their communities.
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, 1996 and 1995. See Note 5 to the
consolidated financial statements for a description of the distribution of the
loan portfolio among various types of loans.
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, 1996 and 1995,
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, 1996.
<TABLE>
TABLE 7 - SELECTED LOAN MATURITIES AND INTEREST RATE SENSITIVITY
<CAPTION>
(December 31, 1996 balances in thousands)
One One to Over
Year or less Five Years Five Years Total(1)
------------ ---------- ---------- --------
Types of loans:
<S> <C> <C> <C> <C>
Commercial .......................................... $72,422 $31,415 $ 2,980 $106,817
Real Estate - Mortgage .............................. 2,642 742 259 3,643
Consumer and other .................................. 1,651 2,829 515 4,995
------- ------- ------- --------
Total ............................................. $76,715 $34,986 $ 3,754 $115,455
======= ======= ======= ========
Total of loans above with :
Predetermined interest rates ........................ 20,162 34,408 3,714 58,284
Adjustable interest rates ........................... 56,553 578 40 57,171
------- ------- ------- --------
Total ............................................. $76,715 $34,986 $ 3,754 $115,455
======= ======= ======= ========
</TABLE>
(1) Excludes nonaccrual loans totaling $226,582.
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 1996
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.
25
<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, 1996, the consolidated allowance for loan losses was $1,802,000
or 1.56% of total loans as compared to $1,785,000 or 1.92% at December 31, 1995.
The decline in the percentage of the allowance to total loans is primarily due
to the 25% increase in loans outstanding during 1996. Management's evaluation of
the allowance at year-end 1996 indicated that it provided an adequate level of
protection against inherent losses even with the strong growth realized during
the year. The Corporation recorded net charge-offs of $92,000 for 1996, $4,000
for 1995 and net recoveries of $68,000 for 1994. Additional data covering 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 was $110,000 for 1996, compared to $195,000 for
the year ended December 31, 1995. Management's emphasis on sound credit
underwriting standards and its continuous evaluation of its credit rating system
and credit review function, indicated that this provision, though reduced from
the prior year, was sufficient to provide an adequate allowance for the loan
portfolio at December 31, 1996.
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 maintained on impaired loans in accordance with SFAS 114
and SFAS 118, when required. The adoption of these accounting standards has not
had a material effect on the financial position and results of operations of the
Corporation. See Notes 1 and 5 to the consolidated financial statements for
further details.
<TABLE>
TABLE 8 - ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<CAPTION>
(December 31 balances)
1996 1995 1994
---- ---- ----
Percent of Percent of Percent of
Loans in each Loans in each Loans in each
category to category to category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Commercial ......................... $1,347,794 92.5% $1,248,740 90.8% $1,184,343 85.3%
Real Estate - Mortgage ............. 193,845 3.2% 272,919 5.0% 224,774 8.5%
Consumer and other ................. 101,364 4.3% 89,366 4.2% 65,478 6.2%
Unallocated ........................ 159,399 173,483 119,176
---------- ----- ---------- ----- ---------- -----
Total .............................. $1,802,402 100.0% $1,784,508 100.0% $1,593,771 100.0%
========== ===== ========== ===== ========== =====
</TABLE>
26
<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 the 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, 1996, $227,000 of loans were on nonaccrual status as compared to
$67,000 at December 31, 1995. The increase in nonaccrual loans was primarily due
to two borrowers filing bankruptcy during the year. One of the loans is SBA
guaranteed and the bank expects to be paid during the first quarter of 1997 for
the $70,000 balance on the loan. Interest income of $4,132, $57,370 and $50,332
was recognized during 1996, 1995 and 1994, respectively, for loans either
returned to accrual status from nonaccrual or paid in full from nonaccrual
status. For those loans classified as nonaccrual as of December 31, 1996, 1995
and 1994, interest income of $7,779, $9,798 and $69,764 would have been
recognized in the respective periods if those loans had performed under the
original terms. The Corporation realized a loss of approximately $23,000 on the
sale of Other Real Estate Owned ("OREO") property in 1996 and a gain of
approximately $8,100 and $18,000 on the sale of OREO property in 1995 and 1994,
respectively.
<TABLE>
TABLE 9 - PROBLEM ASSETS
<CAPTION>
(Balance at December 31)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Nonaccrual loans ............................... $226,582 $ 66,739 $ 526,500 $ 602,786 $311,000
Loans past due ninety days or more ............. 125,512 15,853 28,703 8,000 468,000
Troubled debt restructuring .................... 0 0 0 0 0
Other real estate owned ........................ 0 172,500 191,100 474,996 40,000
-------- -------- ---------- ---------- --------
$352,094 $255,092 $ 746,303 $1,085,782 $819,000
======== ======== ========== ========== ========
Nonperforming assets to total loans
and other real estate owned .................. .30% .27% 1.08% 1.78% 1.29%
======== ======== ========== ========== ========
</TABLE>
All accruing loans 90 days of more past due were in the process of collection at
each year end. At December 31, 1996, total classified loans were $2,831,000 or
2.5% of total loans, compared to $2,262,000 or 2.4% at December 31, 1995. 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, 1996. Other than the loans previously discussed,
management is not aware of any possible credit problems of borrowers which
causes management to have serious doubts about the ability of the borrower to
comply with present loan repayment terms.
AVERAGE DEPOSITS
Average deposits in 1996 were $123.8 million, compared to $99.1 million the
prior year, an increase of $24.7 million or 24.9%.
The total average deposits for the years ended December 31, 1996 and 1995, are
summarized below.
<TABLE>
TABLE 10 - AVERAGE DEPOSITS
<CAPTION>
Average Average Average Average
Balance Cost Balance Cost
------- ---- ------- ----
<S> <C> <C> <C> <C>
Noninterest bearing deposit ........................ $ 22,705,526 $16,386,568
Interest bearing transaction accounts .............. 23,717,307 2.78% 20,234,224 2.89%
Savings ............................................ 30,540,009 4.85% 21,128,180 5.05%
Time ............................................... 46,847,931 5.59% 41,329,391 5.70%
------------ -----------
Total average deposits ............................. $123,810,773 $99,078,363
============ ===========
</TABLE>
27
<PAGE>
At December 31, 1996, the Corporation had $26,984,224 in certificates of deposit
of $100,000 or more. Of those accounts, maturities are as follows:
MATURITY
Less than three months ....................... $14,905,296
Over 3 through 6 months ...................... 5,852,912
Over 6 through 12 months ..................... 5,036,888
Over 1 year through 5 years .................. 1,189,128
-----------
Total ........................................ $26,984,224
===========
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, 1996, 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.
At December 31, 1996 and 1995, liquid assets of approximately $47.2 million and
$39.4 million, respectively, were available to meet demands for deposit
withdrawals, undisbursed amounts on lines of credit ("loan commitments") of
$21,396,000 and $18,148,000 and letters of credit totaling $1,689,000 and
$1,775,000, respectively. The amount of liquid assets available on December 31,
1996 includes cash and cash equivalents of $13,100,000, a decrease of $4,150,000
over the December 31, 1995 amount of $17,250,000. This decrease in cash and cash
equivalents is attributable to management's decision to improve earnings by
investing short-term federal funds in investment securities.
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 $145.4 million at December 31, 1996, compared to
$117.8 million at December 31, 1995. Of the total deposit base of the
Corporation at December 31, 1996, approximately $26.9 million, or 18.6%,
consisted of Certificates of Deposits 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 of
$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, 1996, total
loans outstanding were approximately $115.7 million, as compared to $92.8
million at December 31, 1995.
The Comptroller of the Currency ("OCC"), the Bank's primary regulator requires
national banks to maintain a Tier 1 (primarily stockholders' equity) risk-based
capital ratio of 4.0% and a total risk-based capital ratio of 8.0%. At December
31, 1996, the Tier 1 capital ratio for BOCL was 10.0% and the total capital
ratio was 11.2%, while BOC had a Tier 1 ratio of 13.8% and a total capital ratio
of 15.0%.
28
<PAGE>
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 11.9% and its total capital ratio was
13.3% at December 31, 1996. These ratios are well within guidelines established
by the Corporation's primary regulator. See Note 13 to the consolidated
financial statements for further discussion concerning capital ratios.
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
Prior to March 21, 1996, there had been only a limited trading in the
Corporation's stock since there was no established market for the stock. The
Corporation's stock was listed on the American Stock Exchange (AMEX) on March
21, 1996 under the ticker symbol of CSB. The initial sale price of the stock was
$10.00 per share with a closing price of $14.62 per share at December 31, 1996.
The average monthly trading volume for the period March through December of 1996
was 31,800 shares. There were approximately 600 holders of record of the
Corporation's Common Stock (no par value) as of December 31, 1996.
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. However, the Corporation's
Board of Directors did declare and pay a ten percent (10%) stock dividend on
December 2, 1996 for stockholders of record as of November 15, 1996.
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 ability to distribute cash dividends depends 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.
Additionally, the Corporation is subject to loan covenants that prohibit
payments of dividends without prior approval of the lender.
FOURTH QUARTER EARNINGS
Net income for the fourth quarter of 1996 was $574,000 or $.36 per fully diluted
share, an increase of 35% over the $426,000 or $.31 per share earned for the
same quarter of 1995. This increase in earnings is almost entirely the result of
an increase of 25% in average loans outstanding between the two periods. The
modest increase in noninterest income was due to an increase in service charges
on deposit accounts of $46,000, principally due to a rate increase implemented
by BOCL during the third quarter of 1996, and an increase in fees derived from
the Business Manager product of $60,000 due to increased efforts by both banks
to gain additional market share. The increase in fees derived from service
charges on deposits and the Business Manager product were partially offset by a
reduction of $82,000 in fees from mortgage loan fees as BOCL decided to
consolidate and downsize the function during the second quarter of 1996.
Noninterest expenses declined between the two quarters by approximately $20,000.
29
<PAGE>
This reduction in expenses from 1995 to 1996 was principally due to reduced
legal fees of $40,000 related to the pending lawsuit by a former director and
current stockholder as the activity in the lawsuit was much greater in the
fourth quarter of 1995 and the first three quarters of 1996. The activity
lessened during the fourth quarter of 1996. In addition, dues and subscriptions
declined by $24,000 from the prior year due to a special assessment for club
membership during the fourth quarter of 1995. These reductions were partially
offset by increased expenses in the furniture, fixtures and equipment category,
due to the expansion of facilities in BOCL and the installation of the LAN
system at BOCL, which has previously been discussed.
Income tax expense increased by approximately $210,000 as the Corporation
reduced its net deferred tax valuation allowance by $200,000 during the fourth
quarter of 1995, compared to $38,137 for the fourth quarter of 1996. The
increase in pretax income during the fourth quarter of 1996 over 1995 was
responsible for the remainder of the increase in tax expense.
Table 11 summarizes the financial results and selected average balances by
quarter for 1996 and 1995.
<TABLE>
TABLE 11 - QUARTERLY FINANCIAL RESULTS
<CAPTION>
(dollar amounts in thousands, except per share amounts)
1996 Quarter Ended 1995 Quarter Ended
Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31
-------- -------- -------- -------- -------- -------- -------- --------
Consolidated Income
Statement
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income .................... $ 3,052 $ 2,866 $ 2,747 $ 2,611 $ 2,571 $ 2,445 $ 2,212 $ 2,006
Interest expense ................... 1,351 1,233 1,169 1,171 1,159 1,122 1,021 823
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income ................ 1,701 1,633 1,578 1,440 1,412 1,323 1,191 1,183
Provision for loan losses .......... 60 0 40 10 90 65 30 10
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income after
provision for loan losses ........ 1,641 1,633 1,538 1,430 1,322 1,258 1,161 1,173
Noninterest income ................. 442 401 411 392 424 434 341 271
Noninterest expense ................ 1,207 1,370 1,284 1,270 1,227 1,105 1,165 1,079
-------- -------- -------- -------- -------- -------- -------- --------
Net income before income taxes ..... 876 664 665 552 519 587 337 365
Current income taxes ............... (302) (218) (251) (158) (93) (272) (21) (40)
-------- -------- -------- -------- -------- -------- -------- --------
Net income ......................... $ 574 $ 446 $ 414 $ 394 $ 426 $ 315 $ 316 $ 325
======== ======== ======== ======== ======== ======== ======== ========
Net income per share-primary ....... $ .37 $ .28 $ .26 $ .25 $ .28 $ .21 $ .21 $ .21
======== ======== ======== ======== ======== ======== ======== ========
Net income per share-fully diluted $ .36 $ .28 $ .26 $ .25 $ .28 $ .21 $ .21 $ .21
======== ======== ======== ======== ======== ======== ======== ========
Quarterly average balances
Assets ............................. $152,750 $141,559 $137,284 $131,227 $128,810 $118,030 $109,564 $100,181
Earning assets ..................... 144,696 133,904 129,404 124,435 118,659 111,241 102,630 93,377
Investment securities .............. 33,298 29,357 31,042 29,567 27,329 24,501 21,801 21,918
Loans .............................. 111,398 104,547 98,362 94,868 88,952 83,816 76,813 70,668
Deposits ........................... 134,534 124,018 121,738 114,838 110,804 103,829 95,916 85,462
Stockholders' equity ............... 13,267 12,624 12,195 12,117 11,409 11,028 10,595 10,143
Common stock data (dollar per
share)
Market price range:
High ............................. $ 15.25 $ 13.12 $ 14.50 $ 12.37
Low .............................. $ 12.50 $ 11.62 $ 12.37 $ 10.00
Average .......................... $ 13.80 $ 12.30 $ 13.51 $ 11.54
Close ............................ $ 14.62 $ 13.12 $ 12.39 $ 12.25
</TABLE>
During 1995, management is aware of only a limited number of trades. With the
majority of such trades occurring at $8.50 per share. These trades may not
represent arms-length transactions.
30
<PAGE>
CHANGE IN INDEPENDENT AUDITORS
On February 21, 1995, the management of the Corporation, after receiving the
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. J.W. Hunt and Company, LLP was also engaged
by the Board of Directors to serve an independent accountants for the year
ending December 31, 1996. The engagement was ratified by the stockholders at its
annual meeting on April 30, 1996.
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.
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, 1997, subject to ratification by the
stockholders. 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.
31
<PAGE>
(Information set forth on pages 18 through 35 of the Registrant's Annual Report
to Shareholders)
<TABLE>
<CAPTION>
J. W. HUNT AND COMPANY, LLP
Certified Public Accountants
<S> <C> <C>
William R. Hunt, CPA Middleburg Office Park
John C. Creech, Jr., CPA Members 1607 St. Julian Place
Anne H. Ross, CPA American Institute of Post Office Box 265
William F. Quattlebaum, CPA Certified Public Accountants Columbia, SC 29202-0265
Susan R. Bernard, CPA Private Companies and SEC Practice Sections 803-254-8196
Fax 803-256-1254
____________ Members of CPA Associates with Associated Offices in
J. W. Hunt, CPA (1907-1987) Principal US and International Cities
</TABLE>
To the Board of Directors and Stockholders
of ComSouth Bankshares, Inc.
We have audited the consolidated balance sheets of ComSouth Bankshares, Inc.
(the "Corporation") and its subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the years in the two-year period ended
December 31, 1996. 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 audits. The consolidated
financial statements of the Corporation and its subsidiaries as of December 31,
1994, 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 Note 1 to the consolidated financial statements describing the
Corporation's change in the method of accounting for certain investments in debt
and equity securities in 1994.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1996 and 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
two-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
J. W. Hunt and Company, LLP
Columbia, South Carolina
January 31, 1997
32
<PAGE>
March 3, 1995
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
32A
<PAGE>
COMSOUTH BANKSHARES, INC.
<TABLE>
CONSOLIDATED BALANCE SHEET
<CAPTION>
December 31,
1996 1995
---- ----
ASSETS
<S> <C> <C>
Cash and due from banks .............................................................. $ 9,441,553 $ 10,979,878
Federal funds sold .................................................................. 3,650,000 6,270,000
------------- -------------
Total cash and cash equivalents .................................................... 13,091,553 17,249,878
Investment securities:
Held-to-maturity, at amortized cost (fair value of $13,035,431
in 1996 and $9,333,599 in 1995) ................................................... 13,071,927 9,319,839
Available-for-sale, at fair value (amortized cost of $21,070,548 in
1996 and $12,671,841 in 1995) .................................................... 21,034,568 12,815,394
Loans receivable:
(less allowance for loan losses 1996 - $1,802,402;
1995 - $1,784,508) ................................................................ 113,879,003 91,024,087
Premises and equipment, net .......................................................... 1,489,159 1,287,558
Accrued interest receivable .......................................................... 1,343,298 1,104,905
Other assets ......................................................................... 724,956 620,967
------------- -------------
Total Assets ......................................................................... $ 164,634,464 $ 133,422,628
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits
Noninterest bearing demand ......................................................... 35,677,721 24,653,831
NOW, money market and savings ...................................................... 56,290,307 49,321,293
Time deposits of $100,000 or more .................................................. 26,984,224 18,377,511
Time deposits less than $100,000 ................................................... 23,442,953 23,255,643
Other time deposits ................................................................ 3,012,613 2,154,512
------------- -------------
Total deposits ....................................................................... 145,407,818 117,762,790
Federal funds purchased and securities sold under
agreement to repurchase ............................................................ 2,674,394 1,754,912
Note payable ......................................................................... 1,200,000
0
U.S. Treasury tax and loan accounts .................................................. 784,106 438,486
Accrued interest ..................................................................... 446,225 577,174
Other liabilities .................................................................... 481,099 1,010,128
------------- -------------
Total Liabilities .................................................................... 150,993,642 121,543,490
------------- -------------
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 - 1,532,826 in 1996 and 1,385,701 in 1995) ............................. 13,616,611 11,830,145
Retained earnings (accumulated deficit) .............................................. 47,958 (45,752)
Unrealized gain (loss) on investment securities available-for-
sale, net of applicable deferred income taxes ...................................... (23,747) 94,745
------------- -------------
Total Stockholders' Equity ........................................................... 13,640,822 11,879,138
------------- -------------
Commitments and contingencies
(Notes 2, 11, and 19) .............................................................. ------------- -------------
Total Liabilities and Stockholders' Equity ........................................... $ 164,634,464 $ 133,422,628
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE>
COMSOUTH BANKSHARES, INC.
<TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS
<CAPTION>
Year ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
Interest income:
<S> <C> <C> <C>
Interest and fees on loans ........................................... $ 9,454,242 $ 7,723,855 $5,503,179
Investment securities ................................................ 1,674,717 1,361,008 1,209,414
Federal funds sold ................................................... 147,320 148,778 73,463
------------ ----------- ----------
Total interest income .............................................. 11,276,279 9,233,641 6,786,056
------------ ----------- ----------
Interest expense:
Deposits ............................................................. 4,756,452 4,008,427 2,475,804
Federal funds purchased and securities sold
under agreements to repurchase ..................................... 87,731 82,783 64,862
U.S. Treasury tax and loan accounts .................................. 33,459 33,120 20,124
Note payable ......................................................... 45,913 233 8,993
------------ ----------- ----------
Total interest expense ............................................. 4,923,555 4,124,563 2,569,783
------------ ----------- ----------
Net interest income .................................................. 6,352,724 5,109,078 4,216,273
Provision for loan loss .............................................. 110,000 195,000 75,000
------------ ----------- ----------
Net interest income after provision for loan losses .................. 6,242,724 4,914,078 4,141,273
------------ ----------- ----------
Noninterest income:
Lending operations and services ...................................... 1,013,470 957,418 320,921
Service charges on deposit accounts .................................. 555,723 442,397 360,436
Gain on sale of mortgage loans ....................................... 24,309
Other ................................................................ 76,861 69,527 65,034
------------ ----------- ----------
1,646,054 1,469,342 770,700
------------ ----------- ----------
Noninterest expenses:
Salaries and employee benefits ....................................... 2,661,977 2,481,335 2,053,878
Occupancy expenses ................................................... 433,593 429,183 384,133
Furniture and equipment .............................................. 406,767 341,966 281,216
Advertising and marketing ............................................ 89,358 78,643 83,735
Other ................................................................ 1,539,418 1,244,695 1,124,005
------------ ----------- ----------
5,131,113 4,575,822 3,926,967
------------ ----------- ----------
Income before provision for income taxes ............................. 2,757,665 1,807,598 985,006
Income tax (expense) benefit ......................................... (929,239) (426,127) 61,742
------------ ----------- ----------
Net income ........................................................... $ 1,828,426 $ 1,381,471 $1,046,748
============ =========== ==========
Earnings per share:
On common and common equivalents ................................... $ 1.16 $ 0.91 $ 0.70
============ =========== ==========
On a fully diluted basis ........................................... $ 1.15 $ 0.91 $ 0.70
============ =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE>
COMSOUTH BANKSHARES, INC.
<TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
Years Ended December 31, 1996, 1995 and 1994
Retained Unrealized
Earnings Gain (loss) on Total
Common Stock (Accumulated Investment Stockholders'
Shares Amount Deficit) Securities Equity
--------- ------------ --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
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)
--------- ------------ ----------- ----------- -----------
Balance at December 31, 1994 .................... 1,368,456 11,711,421 (1,426,885) (180,560) 10,103,976
Change in unrealized gain on investment
securities available-for-sale, net of
applicable deferred income taxes .............. 275,305 275,305
Issuance of common stock ........................ 17,245 118,724 118,386
Net income ...................................... 1,381,133 1,381,471
--------- ------------ ----------- ------------ ------------
Balance at December 31, 1995 .................... 1,385,701 11,830,145 (45,752) 94,745 11,879,138
Change in unrealized loss on investment
securities available-for-sale, net of
applicable deferred income taxes .............. (118,492) (118,492)
10% stock dividend .............................. 138,600 1,732,500 (1,732,500)
Cash in lieu of fractional shares (2,216) (2,216)
Issuance of common shares ....................... 8,525 53,966 53,966
Net income ...................................... 1,828,426 1,828,426
--------- ------------ ----------- ------------ ------------
Balance at December 31, 1996 .................... 1,532,826 $ 13,616,611 $ 47,958 $ (23,747) $ 13,640,822
========= ============ =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE>
COMSOUTH BANKSHARES, INC.
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
Year ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net income .............................................................. $ 1,828,426 $ 1,381,471 $ 1,046,748
Adjustments to reconcile net income to cash
provided by (used for) operating activities:
Depreciation and amortization ........................................... 330,309 288,565 240,620
Provision for loan losses ............................................... 110,000 195,000 75,000
Deferred tax benefit .................................................... (113,137) (200,000) (113,000)
Amortization of premium and accretion of
discount on investment securities ..................................... 9,932 17,726 30,467
Gain on sales of mortgage loans ......................................... (24,309)
Gross amount of loans originated for resale ............................. (1,749,050)
Proceeds from loans sold ................................................ 1,773,359
Increase in accrued interest receivable ................................. (238,393) (304,492) (49,771)
Decrease in other assets ................................................ 21,381 43,489 263,450
(Decrease) increase in interest payable ................................. (130,949) 340,014 31,534
(Decrease) increase in other liabilities (480,222) 713,520 94,319
------------ ------------ -----------
Cash provided by operating activities ................................... 1,337,347 2,475,293 1,619,367
------------ ------------ -----------
Cash flows from investing activities:
Purchases of investment securities, held-to-maturity .................... (8,623,337) (493,906) (1,504,219)
Purchases of investment securities, available-for-sale .................. (11,174,538) (11,556,551) (2,780,729)
Maturities of investment securities, held-to-maturity ................... 4,862,449 7,273,578 1,921,698
Maturities of investment securities, available-for-sale ................. 2,774,700 4,919,100 3,503,800
Net increase of loans ................................................... (21,891,265) (22,740,893) (5,624,009)
Net collections and remittances on loans serviced for others ............ (1,073,651) (1,177,372) (1,869,009)
Purchases of premises and equipment ..................................... (531,910) (308,190) (299,524)
Proceeds from sale of other real estate owned ........................... 8,063 17,551
------------ ------------ -----------
Cash used for investing activities ...................................... (35,657,552) (24,076,171) (6,634,441)
------------ ------------ -----------
Cash flows from financing activities:
Net increase in deposits ................................................ 27,645,028 34,854,381 10,063
(Maturities of) increase in federal funds purchased
and securities sold under agreement to repurchase ...................... 919,482 (1,190,837) 1,500,288
Proceeds (repayment) of note payable .................................... 1,200,000 (125,000)
Increase (decrease) in U.S. treasury, tax and loan accounts ........... 345,620 86,928 (590,523)
Proceeds from issuance of common stock .................................. 53,966 118,386
Cash in lieu of fractional shares ....................................... (2,216)
------------ ------------ -----------
Cash provided by financing activities ................................... 30,161,880 33,743,858 919,828
------------ ------------ -----------
Increase (decrease) in cash and cash equivalents ........................ (4,158,325) 12,142,980 (4,095,246)
------------ ------------ -----------
Cash and cash equivalents at beginning of year .......................... 17,249,878 5,106,898 9,202,144
------------ ------------ -----------
Cash and cash equivalents at end of year ................................ $ 13,091,553 $ 17,249,878 $ 5,106,898
============ ============ ===========
Supplemental disclosure of cash flow information:
Cash paid for interest .................................................. $ 5,054,504 $ 3,784,548 $ 2,538,249
Cash paid for taxes ..................................................... $ 1,575,933 $ 107,995 $ 33,000
Noncash adjustments to report investment securities,
available-for-sale at fair value:
Investment securities, available-for-sale ............................... $ (35,980) $ 143,553 $ (273,576)
Other (liabilities) assets .............................................. 12,233 (48,808) 93,016
Unrealized gain (loss) on investment securities, available-
for-sale, net of applicable deferred income taxes ..................... $ (23,747) $ 94,745 $ (180,560)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
36
<PAGE>
COMSOUTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 1996, 1995
and 1994
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, NA ("BOCL")
and Bank of Charleston, NA ("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.
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.
Consolidated 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 Held-to-Maturity: Investment securities which the Bank has
the positive intent and ability to hold to maturity are reported at cost,
adjusted for premiums and discounts that are recognized in interest income using
methods approximating the interest method over the period to maturity.
Investment Securities Available-for-Sale: Investment securities
available-for-sale consist of securities not classified as securities
held-to-maturity.
Unrealized holding gains and losses, net of tax, on securities
available-for-sale are reported as a net amount in a separate component of
stockholders' equity until realized.
Gains and losses on the sale of securities available-for-sale are determined
using the specific-identification method.
Declines in the fair value of individual securities held-to-maturity and
available-for-sale below their cost that are other than temporary would result
in write-downs of the individual securities to their fair value. The related
write-downs would be included in earnings as realized losses. The Corporation
has not had any such write-downs.
Premiums and discounts are recognized in interest income using methods
approximating the interest method over the period to maturity.
Loans Receivable: Loans receivable that management has the intent and ability to
hold for the foreseeable future or until maturity or pay-off are reported at
their outstanding principal balances adjusted for any charge-offs and the
allowance for loan losses.
37
<PAGE>
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed.
The allowance for loan losses is increased by charges to income and decreased by
charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral,
and current economic conditions.
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.
Other Real Estate Owned ("OREO"): Real estate properties acquired through, or in
lieu of, loan foreclosures are initially recorded at estimated fair value less
estimated disposal costs and are included in other assets. As of December 31,
1996 and 1995, the Corporation had $0 and $172,500, 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 noninterest income (expense). The Corporation realized net
gains (loss) of $(23,309), $8,063 and $17,551 recorded as other noninterest
income (expense) from the sale of OREO property for the years 1996, 1995 and
1994, respectively. No expenses were recognized for the years presented.
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 employees
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.
Retirement Plan: The Corporation established a 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 $42,800 and $25,300 to the Plan in 1996 and 1995, respectively.
Income Taxes: Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes. The provision for income taxes of each
subsidiary is recorded as if each subsidiary filed a separate return.
Financial Instruments: In the ordinary course of business, the Corporation has
entered into off-balance-sheet financial instruments consisting of commitments
to extend credit, commitments under credit card arrangements, commercial letters
of credit, and standby letters of credit. Such financial instruments are
recorded in the consolidated financial statements when they are funded or
related fees are incurred or received.
38
<PAGE>
Fair Values of Financial Instruments:
Cash and Cash Equivalents: The carrying amounts of cash and cash
equivalents approximate their fair value.
Investment Securities Available-for-Sale and Held-to-Maturity: Fair
values for securities are based on quoted market prices.
Loans Receivable: For variable-rate loans that reprice frequently and
have no significant change in credit risk, fair values are based on
carrying values. Fair values for certain mortgage loans (for example,
one-to-four family residential) and other consumer loans are based on
quoted market prices of similar loans sold, adjusted for differences
in loan characteristics. Fair value for commercial real estate and
commercial loans are estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Fair values for impaired
loans are estimated using discounted cash flow analyses or underlying
collateral values, where applicable.
Deposit Liabilities: The fair values disclosed for demand deposits
are, by definition, equal to the amount payable on demand at the
reporting date (that is, their carrying amounts). The carrying amounts
of variable-rate, fixed-term money-market accounts and certificates of
deposit (CDs) approximate their fair values at the reporting date.
Fair values for fixed-rate CDs are estimated using a discounted cash
flow calculation that applies interest rates currently being offered
on certificates to a schedule of aggregated expected monthly
maturities on time deposits.
Short-term Borrowings: The carrying amounts of federal funds purchased
and securities sold under agreements to repurchase approximate their
fair values. Fair values of other short-term borrowings are estimated
using discounted cash flow analyses based on the Bank's current
incremental borrowing rates for similar types of borrowing
arrangements.
Accrued interest: The carrying amounts of accrued interest approximate
their fair values.
Off-Balance-Sheet instruments: Fair values for off-balance-sheet
lending commitments are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standings.
39
<PAGE>
Reclassification: Certain amounts in the prior year consolidated financial
statements have been reclassified to conform with the manner of presentation in
1996.
Earnings Per Share: As of December 31, 1996, earnings per common share and
common equivalent share were computed by dividing net income by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the year. The number of common shares was increased by the
number of shares issuable on the exercise of stock options when the market price
of the common stock exceeded the exercise price of the options. This increase in
the number of common shares was reduced by the number of common shares that are
assumed to have been purchased with the proceeds from the exercise of the
options; those purchases were assumed to have been made at the average price of
common stock during the year. Earnings per share assuming full dilution was
determined in the same manner as earnings per common share and common equivalent
share except that the year-end stock price was used. Earnings per share amounts
for all periods presented reflect the 10% stock dividend granted in 1996.
As of December 31, 1995 and 1994, the computation of the weighted average number
of shares outstanding for both common and common equivalent shares, assuming
full dilution, exclude the effect of outstanding stock options because the
options were either antidilutive or did not result in material dilution of net
income per share in 1995 and 1994.
NOTE 2 - STOCKHOLDER LEGAL ACTION
On October 8, 1996, the judge handling the stockholder litigation by the former
director of the Corporation and Bank of Columbia against the Corporation and
eight of its present and former directors ruled that the plaintiff could not
maintain the suit as a class action or as a derivative suit. Only the individual
claims of the named plaintiff will be covered by the suit. Those claims will
continue to be vigorously defended. Plaintiff has appealed this ruling.
On or about November 5, 1996, through February 24, 1997, twelve other
stockholders or former stockholders of the Corporation instituted nearly
identical suits against the Corporation and the same directors and former
directors of the Corporation who are defendants in the suit referenced above.
The suits were instituted in the Court of Common Pleas for Richland County,
South Carolina and make essentially the same allegations as the above lawsuit
and seek damages on account of the alleged activities of the defendant
directors. The plaintiffs do not seek to recover any damages from the
Corporation but the Corporation may, nevertheless, incur significant expenses to
indemnify the defendant directors pursuant to applicable law.
In addition to incurring legal expenses for representation of the Corporation,
the Corporation has advanced legal expenses for the individual defendants in
such lawsuits in the amounts of $191,047 and $118,108 for 1996 and 1995,
respectively. Such advances have been expensed as other expenses.
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, 1996 and 1995 was met by vault cash held in the two banks.
At December 31, 1996, the two banks had due from bank balances in excess of
federally insured limits of approximately $1,249,000.
40
<PAGE>
NOTE 4 - INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities
held-to-maturity at December 31, 1996 and 1995, are presented below:
<TABLE>
<CAPTION>
1996 1995
---- ----
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 ............. $ 8,281,749 $13,405 $41,624 $ 8,253,530 $4,038,970 $ 4,001 $17,651 $4,025,320
U.S. Government Agencies ............. 4,570,256 4,350 23,535 4,551,071 4,999,809 20,196 9,649 5,010,356
Mortgage-Backed Securities ........... 219,922 10,908 230,830 281,060 16,863 297,923
----------- ------- ------- ----------- ---------- ------- ------- ----------
Total .............................. $13,071,927 $28,663 $65,159 $13,035,431 $9,319,839 $41,060 $27,300 $9,333,599
=========== ======= ======= =========== ========== ======= ======= ==========
</TABLE>
The amortized cost and estimated fair value of investment securities
available-for-sale at December 31, 1996 and 1995, are presented below:
<TABLE>
<CAPTION>
1996 1995
---- ----
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 ....... $ 8,380,065 $51,442 $24,328 $ 8,407,179 $ 4,789,945 $ 66,013 $ 8,258 $ 4,847,700
U.S. Government Agencies ....... 11,974,333 5,323 68,417 11,911,239 7,262,046 85,798 7,347,844
Other .......................... 716,150 716,150 619,850 619,850
----------- ------- ------- ----------- ----------- -------- ---------- -----------
Total ........................ $21,070,548 $56,765 $92,745 $21,034,568 $12,671,841 $151,811 $ 8,258 $12,815,394
=========== ======= ======= =========== =========== ======== ========== ===========
</TABLE>
The amortized cost and estimated fair value of investment securities
held-to-maturity at December 31, 1996, based on their contractual maturities,
are shown below:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Due in one year or less ................................................. $ 1,545,562 $ 1,543,004
Due after one year through five years ................................... 11,347,816 11,304,211
Due after five years through ten years .................................. 106,702 111,486
Due after ten years ..................................................... 71,847 76,730
----------- -----------
$13,071,927 $13,035,431
=========== ===========
</TABLE>
The mortgage-backed securities held at December 31, 1996 mature generally
between one and twelve years. The actual lives of these securities may be
shorter as a result of prepayments.
The amortized cost and estimated fair value of investment securities
available-for-sale at December 31, 1996, based on their contractual maturities,
are shown below:
41
<PAGE>
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Due in one year or less ................................................. $ 2,249,550 $ 2,260,865
Due after one year through five years ................................... 18,104,848 18,057,553
Due after ten years ..................................................... 716,150 716,150
----------- -----------
$21,070,548 $21,034,568
=========== ===========
</TABLE>
Securities with book values of $21,009,587 and $15,784,928 at December 31, 1996
and 1995, respectively, were pledged to secure public deposits and for other
purposes as required by law.
There were no sales of securities during 1996, 1995 or 1994.
NOTE 5 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Loans were composed of the following:
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
Commercial ..................................................................... $106,816,552 $84,216,406
Real estate-mortgage ........................................................... 3,642,852 4,658,041
Consumer and other ............................................................. 4,995,419 3,867,409
Nonaccrual ..................................................................... 226,582 66,739
------------ -----------
Total $115,681,405 $92,808,595
============ ===========
</TABLE>
At December 31, 1996, the total loan portfolio included adjustable rate loans
totaling approximately $58 million and fixed rate loans totaling approximately
$58 million.
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year ............................ $ 1,784,508 $ 1,593,771 $ 1,450,776
Provision for loan losses ............................... 110,000 195,000 75,000
Loans charged off:
Commercial ............................................ (96,977) (46,704) (43,565)
Real estate-mortgage .................................. 0 0 (142)
Consumer and other .................................... (28,954) (47,167) (53,393)
----------- ----------- -----------
Total ................................................ (125,931) (93,871) (97,100)
----------- ----------- -----------
Recoveries:
Commercial ............................................ 28,272 85,738 135,955
Real estate-mortgage .................................. 0 0 550
Consumer and other .................................... 5,553 3,870 28,590
----------- ----------- -----------
Total ................................................. 33,825 89,608 165,095
----------- ----------- -----------
Balance at end of year .................................. $ 1,802,402 $ 1,784,508 $ 1,593,771
=========== =========== ===========
</TABLE>
42
<PAGE>
Impairment of loans having recorded investments of $396,481 at December 31, 1996
and $66,739 at December 31, 1995 has been recognized in conformity with FASB
Statement 114, as amended by FASB Statement 118. The average recorded investment
in impaired loans during 1996 and 1995 was $231,610 and $296,620, respectively.
The total allowance for loan losses related to these loans was $82,172 and
$12,148 on December 31, 1996 and 1995, respectively. Interest income on impaired
loans of $25,871 and $8,208 was recognized for cash payments received in 1996
and 1995, respectively.
Interest income of $4,132, $57,370 and $50,932 was recognized during 1996, 1995
and 1994, respectively, for loans either returned to accrual status from
nonaccrual or paid in full from nonaccrual status. For those loans classified as
nonaccrual as of December 31, 1996, 1995 and 1994, interest income of $7,779,
$9,798 and $69,784 would have been recognized in the respective periods if those
loans had performed under the original terms.
Commercial loans include investments of $3,247,629 and $3,213,386 in
participating interests of loans originated by other financial institutions as
of December 31, 1996 and 1995, respectively.
Commercial loans exclude loans serviced for others of $10,132,951 and $9,048,406
as of December 31, 1996 and 1995, respectively. Real estate mortgage loans
exclude loans serviced for others of $851,299 and $862,193 as of December 31,
1996 and 1995, 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 banks 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 $4,150,181 and $5,024,908 at December 31, 1996 and 1995,
respectively. During 1996, $2,769,989 of new loans were made to related parties
and repayments totaled $3,644,716. Additionally, unfunded commitments to extend
credit to directors and officers totaled $1,022,962 for 1996 and $1,027,789 for
1995, and standby letters of credit totaled $35,000 at December 31, 1996 and
1995.
NOTE 7 - PREMISES AND EQUIPMENT
Premises and equipment included the following:
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
Leasehold improvements ....................................................... $ 1,233,911 $ 1,084,820
Equipment and furnishings .................................................... 1,678,482 1,324,175
----------- -----------
2,912,393 2,408,995
Less accumulated depreciation and amortization ............................... (1,423,234) (1,121,437)
----------- -----------
Total premises and equipment, net .......................................... $ 1,489,159 $ 1,287,558
=========== ===========
</TABLE>
43
<PAGE>
Depreciation and amortization expenses for 1996, 1995 and 1994 totaled $329,901,
$281,034, and $210,503, respectively.
NOTE 8 - DEPOSITS
The aggregate amount of short-term jumbo CDs, each with minimum denomination of
$100,000, was approximately $26,984,000 and $18,378,000 at December 31, 1996 and
1995, respectively.
At December 31, 1996, the scheduled maturities of CDs were as follows:
1997 ................................... $49,411,864
1998 ................................... 1,978,272
1999 ................................... 527,016
2000 ................................... 1,522,638
2001 and thereafter .................... 0
-----------
$53,439,790
===========
NOTE 9 - NOTE PAYABLE
During 1996, the Corporation established a $1,200,000 revolving line of credit
with another financial institution. The line of credit expires December 31,
2001. Interest is variable at the lender's prime rate minus one-half percent
(7.75% average rate for 1996 and at December 31, 1996) with interest payments
due quarterly beginning March 1997. The line of credit is collateralized by
550,000 shares of BOC's common stock. At December 31, 1996, the Corporation had
an outstanding balance of $1,200,000 on this line of credit. The average
borrowing on this line of credit during 1996 was $777,778.
The line of credit agreement contains certain covenants. The principal financial
covenants require the Corporation to maintain the allowance for loan losses at
least 100% of non-performing assets; tangible equity to total assets at least
equal to 8% for BOC and at least equal to 6% for BOCL; nonperforming loans plus
OREO to loans receivable plus OREO at a ratio no greater than 1.80%; and
maintain a return on average assets of at least 1%. The Corporation was in
compliance with these covenants at December 31, 1996. The Corporation is also
restricted from paying any dividends unless approved by the lender. The
Corporation received a waiver from the lender on this restriction for the 10%
stock dividend paid December 2, 1996.
At December 31, 1996, 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 10 - OTHER BORROWED FUNDS
Federal funds purchased and securities sold under agreements to repurchase
generally mature within one to four days from the transaction date. Other
borrowed funds consist of term federal funds purchased and treasury tax and loan
deposits and generally are repaid within one to 120 days from the transaction
date.
Information concerning securities sold under agreements to repurchase is
summarized as follows:
1996 1995
---- ----
Average balance during the year ................ $1,342,644 $1,250,671
Average interest rate during the year .......... 3.73% 3.42%
Maximum month-end balance during the year ...... $2,674,394 $2,169,497
44
<PAGE>
NOTE 11 - 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, 1996 were as follows:
1997 ................. $253,064
1998 ................. 182,364
1999 ................. 178,362
--------
$613,790
========
Total rental expenses under the above leases for 1996, 1995 and 1994 were
approximately $262,000, $274,000 and $257,000, respectively.
NOTE 12 - STOCK OPTIONS
The Corporation has reserved 50,600 shares of common stock for issuance to key
employees under an Incentive Stock Option Plan (the "Qualified Option Plan") and
50,600 shares of common stock for issuance to key employees, officers, and
directors under a non-qualified stock option plan (the "Non-Qualified Plan").
During 1995, the Corporation reserved an additional 110,000 shares of common
stock for issuance to employees under a non-qualified 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.
The following tables summarize activity of each plan:
<TABLE>
<CAPTION>
Options
Price Per Expiration
Options Share 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
Adjusted for 10% stock dividend during 1996 .. 2,053 $5.35-$7.91
------ -----------
December 31, 1996 ............................ 22,578 $5.35-$7.91
====== ===========
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Options
Price Per Expiration
Options Share Dates
------- ----- -----
Non-Qualified Plan
<S> <C> <C> <C>
January 1, 1991 .................................... 18,875 $ 5.88-$8.70 01/24/00
Granted during 1991 ................................ 23,525 $ 6.95 12/31/00
Exercised during 1992 .............................. (800) $ 5.88
Exercised during 1992 .............................. (1,300) $ 6.95
Expired during 1994 ................................ (500) $ 6.95
Exercised during 1995 .............................. (700) $ 5.88
Adjusted for 10% stock dividend during 1996 ........ 3,923 $ 5.35-$7.91
Exercised during 1996 .............................. (8,580) $ 5.35-$7.91
------ ------------
December 31, 1996 .................................. 34,443 $ 5.35-$7.91
====== ============
1995 Non-Qualified Plan
Granted during 1995 ................................ 40,000 $ 8,50 12/01/00
Adjusted for 10% stock dividend during 1996 ........ 4,000 $ 7.73
Granted during 1996 ................................ 6,746 $ 12.27 04/30/06
------ ------------
December 31, 1996 .................................. 50,746 $7.73-$12.27
====== ============
</TABLE>
No options were granted during 1992, 1993 or 1994. Since all options granted
during 1996, 1995 and 1991, in management's opinion, 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 was not
recognized. Options granted in 1996 were to non-employee directors only. The
estimated fair value of those options would not have a material impact on the
financial statements.
As an inducement to the President of BOCL to enter into an employment agreement
in January 1992, the Corporation granted total stock options for 24,445 shares
of stock at a purchase price of $3.636 per share. The President of BOCL's rights
in these options fully vested in 1995. The Corporation expensed $8,800 during
1994, since the options were granted at a price estimated by management to be
below fair market value. No expenses were recorded in 1996 or 1995 for these
options.
The options above reflect the 10% stock dividend declared in 1996.
NOTE 13 - 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,
1996, approximately $1,880,000 and $3,519,000 of BOCL's and BOC'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.
BOCL and BOC are subject to various capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
result in initiation of certain mandatory and possible additional discretionary
actions by regulators that, if undertaken, could have a direct material effect
on the Banks' financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Banks must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Banks' capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
46
<PAGE>
Quantitative measures established by regulation to ensure capital adequacy
require the Banks to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1996, that BOCL and
BOC meet all capital adequacy requirements to which they are subject.
As of December 31, 1996, the most recent notification from the Office of the
Comptroller of the Currency categorized the Banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Banks must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table. There have been no
conditions or events since that notification that management believes have
changed the Banks' categories.
<TABLE>
<CAPTION>
Minimum Required
Minimum Required To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 1996
Tier 1 Capital (to Average Assets)
<S> <C> <C> <C> <C> <C> <C>
Consolidated ............................ $13,605 10.1% $5,377 4.0% $ 6,721 5.0%
BOC ..................................... 8,808 11.0% 3,219 4.0% 4,020 5.0%
BOCL .................................... 5,248 7.4% 2,848 4.0% 3,551 5.0%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated ............................ $13,605 11.9% $4,567 4.0% $ 6,851 6.0%
BOC ..................................... 8,808 13.8% 2,556 4.0% 3,834 6.0%
BOCL .................................... 5,248 10.0% 2,102 4.0% 3,154 6.0%
Total Capital (to Risk Weighted Assets):
Consolidated ............................ $15,137 13.3% $9,134 8.0% $11,418 10.0%
BOC ..................................... 9,607 15.0% 5,112 8.0% 6,390 10.0%
BOCL .................................... 5,909 11.2% 4,205 8.0% 5,256 10.0%
</TABLE>
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 capital ratio of 13.9% and a
total capital ratio of 15.1%.
47
<PAGE>
NOTE 14 - OTHER NONINTEREST EXPENSES
Components of other noninterest expenses were as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Legal, accounting, regulatory and insurance ...................... $ 649,977 $ 481,428 $ 523,156
Supplies and printing ............................................ 150,749 125,914 125,660
Postage and freight .............................................. 120,621 95,385 69,230
Loan servicing ................................................... 85,630 78,154 55,327
Dues and subscriptions ........................................... 70,683 78,538 45,028
Training and other employee expense .............................. 69,685 47,214 42,354
Outside services ................................................. 61,503 52,364 45,863
Telephone ........................................................ 56,843 58,217 51,136
Consulting ....................................................... 51,274 75,377 33,670
Temporary employment service ..................................... 44,593 27,035 2,103
Directors' fees .................................................. 36,720 28,140 15,510
Losses-other than bad debt ....................................... 34,393 15,112 3,270
Data communications .............................................. 33,481 23,700 20,639
Losses - OREO .................................................... 23,309 0 0
Travel ........................................................... 21,610 17,538 19,295
Amortization - organization expense .............................. 0 7,530 30,118
Other ............................................................ 28,347 33,049 41,646
---------- ---------- ----------
$1,539,418 $1,244,695 $1,124,005
========== ========== ==========
</TABLE>
NOTE 15 - INCOME TAXES
The Corporation files consolidated federal income tax returns on a calendar-year
basis.
The components of consolidated income tax expense (benefit) were as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
---- ---- ----
Taxes currently payable:
<S> <C> <C> <C>
Federal ............................ $ 903,042 $ 552,598 $ 13,000
State .............................. 139,334 73,529 38,258
----------- --------- ---------
1,042,376 626,127 51,258
----------- --------- ---------
Deferred income taxes:
Federal ............................ (113,137) (200,000) (113,000)
----------- --------- ---------
$ 929,239 $ 426,127 ($ 61,742)
=========== ========= =========
</TABLE>
The Corporation reported its fourth consecutive profitable year as of December
31, 1996, and prior federal tax net operating loss carryforwards were fully
utilized. 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, 1996, 1995 and 1994, it was "more likely than not" that
approximately $140,000, $200,000 and $113,000, respectively, of deferred tax
assets will be realized. The decrease in the valuation allowance was due to the
realization of loss carryforwards as reflected in income tax expense (benefit)
for the years presented.
At December 31, 1996, the Corporation had net operating loss (NOL) carryforwards
for state income tax purposes of approximately $2.5 million available to offset
future state taxable income. The NOL carryforwards expire in the years 2003
through 2007. The valuation allowance at December 31, 1996 represents
management's estimate of the allowance for the state net operating loss
carryforward deferred tax asset.
48
<PAGE>
Deferred tax assets and (liabilities) and related valuation allowance at
December 31, 1996 and 1995, were as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
Allowance for loan losses ..................................... $ 454,424 $ 467,986
State tax net operating loss carryforward ..................... 127,194 95,302
Excess tax over book depreciation ............................. 85,522 88,727
Unrealized loss on securities available-for-sale .............. 12,233
--------- ---------
Gross deferred tax asset ...................................... 679,373 652,015
--------- ---------
Accretion of discounts on bonds ............................... (1,381) (17,864)
Adjustment from accrual to cash basis for tax reporting ....... (34,737)
Unrealized gain on securities available-for-sale .............. (48,808)
--------- ---------
Gross deferred tax liability .................................. (1,381) (101,409)
--------- ---------
Net deferred tax asset before valuation allowance ............. 677,992 550,606
Less valuation allowance ...................................... (120,000) (260,624)
--------- ---------
Net deferred tax asset ........................................ $ 557,992 $ 289,982
========= =========
</TABLE>
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
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Tax expense at statutory rate ............................. $ 937,606 $ 614,583 $ 334,902 34.0 34.0 34.0
Net operating loss carryforwards .......................... (324,746) (33.0)
Release of deferred tax asset valuation allowance ......... (140,624) (200,000) (113,000) (5.1) (11.1) (11.5)
State tax, net of federal benefit ......................... 74,036 48,529 25,250 2.7 2.7 2.6
Alternative minimum tax expenses .......................... (13,000) 13,000 (1.0) 1.3
Nondeductible expenses .................................... 46,471 12,622 1.7 1.0
Other, net ................................................ 11,750 (36,607) 2,852 .4 (2.0) 0.3
--------- --------- --------- --- ---- ---
$ 929,239 $ 426,127 ($ 61,742) 33.7 23.6 (6.3)
========= ========= ========= ==== ==== ====
</TABLE>
NOTE 16 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION
Condensed financial data for ComSouth Bankshares, Inc. (parent only) was as
follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
Balance Sheet Data
<S> <C> <C>
Cash and short-term investments ......................................... $ 235,042 $ 48,971
Investments in subsidiaries, at equity .................................. 14,032,798 11,756,369
Other assets ............................................................ 721,916 502,472
----------- -----------
Total assets .......................................................... $14,989,756 $12,307,812
=========== ===========
Note payable ............................................................ $ 1,200,000
Other liabilities ....................................................... 148,934 $ 428,674
Stockholders' equity .................................................... 13,640,822 11,879,138
----------- -----------
Total liabilities and stockholders' equity ............................ $14,989,756 $12,307,812
=========== ===========
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
---- ---- ----
Results of Operations Data
Revenues:
<S> <C> <C> <C>
Management fees ............................................................ $ 971,336 $ 878,193 $ 844,770
Research fees .............................................................. 3,743 1,184 2,309
----------- ----------- -----------
975,079 879,377 847,079
----------- ----------- -----------
Expenses:
Interest expense ........................................................... 45,912 233 8,993
Other expense .............................................................. 1,495,663 1,068,234 615,130
----------- ----------- -----------
1,541,575 1,068,467 624,123
----------- ----------- -----------
Income(loss) before equity in undistributed income of subsidiaries ........... (566,496) (189,090) 222,956
Equity in undistributed income of subsidiaries ............................... 2,394,922 1,570,561 823,792
----------- ----------- -----------
Net income ................................................................... $ 1,828,426 $ 1,381,471 $ 1,046,748
=========== =========== ===========
1996 1995 1994
---- ---- ----
Cash Flow Data
Cash flows from operating activities:
Net income ................................................................. $ 1,828,426 $ 1,381,471 $ 1,046,748
Adjustments to reconcile net income to net cash
(used for) provided by operating activities:
Equity in income of subsidiaries ............................................. (2,394,922) (1,570,561) (823,792)
Depreciation and amortization ................................................ 38,794 34,110 18,592
Increase in other assets ..................................................... (216,916) (174,641) (120,654)
(Decrease) increase in other liabilities ..................................... (279,740) 292,822 64,791
----------- ----------- -----------
Cash (used for) provided by operating activities ............................ (1,024,358) (36,799) 185,685
----------- ----------- -----------
Cash flow from investing activities:
Purchases of premises and equipment .......................................... (41,321) (71,263) (42,070)
----------- ----------- -----------
Cash used for investing activities ........................................... (41,321) (71,263) (42,070)
----------- ----------- -----------
Cash from financing activities:
Net proceeds (repayments) of note payable .................................... 1,200,000 (125,000)
Proceeds from issuance of common stock ....................................... 53,966 118,386
Cash in lieu of fractional shares ............................................ (2,216)
----------- ----------- -----------
Cash provided by (used for) financing activities ............................. 1,251,750 (6,614) 0
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents ............................. 186,071 (114,676) 143,615
Cash and cash equivalents at beginning of year ............................... 48,971 163,647 20,032
----------- ----------- -----------
Cash and cash equivalents at end of year ..................................... $ 235,042 $ 48,971 $ 163,647
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest ....................................................... $ 45,912 $ 233 $ 8,993
</TABLE>
50
<PAGE>
NOTE 17 - FINANCIAL INSTRUMENTS
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 and
to reduce their own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and standby letters of credit.
Those instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the consolidated statements of
financial position. The contract or notional 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 instruments 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.
Unless noted otherwise, BOCL and BOC do not require collateral or other security
to support financial instruments with credit risk. 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.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not represent future cash requirements. 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.
Standby letters of credit are conditional commitments issued by BOCL and BOC to
guarantee the performance of a customer to a third party. Those guaranties are
primarily issued to support private borrowing arrangements. Most guaranties
expire by December 1997. 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.
The estimated fair values of the Corporation's consolidated financial
instruments were as follows at: (balances in thousands)
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents ...................................$ 13,092 $ 13,092 $ 17,250 $ 17,250
Investment securities ....................................... 34,106 34,070 22,135 22,148
Loans receivable ............................................ 113,879 117,308 91,024 93,968
Financial liabilities:
Deposits .................................................... 145,408 145,509 117,763 118,016
Federal funds purchased and securities sold
under agreements to repurchase ............................ 2,674 2,674 1,755 1,755
Off-balance-sheet financial instruments:
Commitments to extend credit ................................ 21,396 21,396 18,148 18,148
Standby letters of credit ................................... 1,689 1,689 1,775 1,775
</TABLE>
51
<PAGE>
NOTE 18 - SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK
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 debtor's
ability to honor their contracts is depended upon the economies of Columbia and
Charleston and the surrounding areas.
The contractual amounts of credit-related financial instruments such as
commitments to extend credit and letters of credit represent the amounts of
potential accounting loss should the contract be fully drawn upon, the customer
default, and the value of any existing collateral become worthless.
NOTE 19 - CONTINGENCIES
In addition to the matter discussed in Note 2, the Corporation and its
subsidiaries are parties to and defendants in litigation arising from 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.
52
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
____ day of March, 1997.
/s/W. Carlyle Blakeney, Jr. - March 10, 1997
/s/R. Lee Burrows, Jr. - March 17, 1997
/s/Mason R. Chrisman - March 10, 1997
/s/Charles R. Jackson - March 10, 1997
/s/J. Michael Kapp - March 10, 1997
/s/LaVonne N. Phillips - March 13, 1997
/s/John C. B. Smith, Jr. - March 13, 1997
/s/Arthur P. Swanson - March 12, 1997
53
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet at December 31, 1996 and the Consolidated Statement
of Operations for the Year Ended December 31, 1996 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 9,441,553
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,650,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 21,034,568
<INVESTMENTS-CARRYING> 13,071,927
<INVESTMENTS-MARKET> 13,035,431
<LOANS> 115,681,405
<ALLOWANCE> 1,802,402
<TOTAL-ASSETS> 164,634,464
<DEPOSITS> 145,407,818
<SHORT-TERM> 3,458,500
<LIABILITIES-OTHER> 927,324
<LONG-TERM> 1,200,000
0
0
<COMMON> 13,616,611
<OTHER-SE> 24,211
<TOTAL-LIABILITIES-AND-EQUITY> 164,634,464
<INTEREST-LOAN> 9,454,242
<INTEREST-INVEST> 1,674,717
<INTEREST-OTHER> 147,320
<INTEREST-TOTAL> 11,276,279
<INTEREST-DEPOSIT> 4,756,452
<INTEREST-EXPENSE> 4,923,555
<INTEREST-INCOME-NET> 6,352,724
<LOAN-LOSSES> 110,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,131,113
<INCOME-PRETAX> 2,757,665
<INCOME-PRE-EXTRAORDINARY> 1,828,426
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,828,426
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.15
<YIELD-ACTUAL> 4.78
<LOANS-NON> 226,582
<LOANS-PAST> 125,512
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,784,508
<CHARGE-OFFS> 125,931
<RECOVERIES> 33,825
<ALLOWANCE-CLOSE> 1,802,402
<ALLOWANCE-DOMESTIC> 1,643,003
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 159,399
</TABLE>
