UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transaction period from ____________________ to _______________________
Commission file number: 0-19045
COMSOUTH BANKSHARES, INC.
(Exact name or registrant as specified in its charter)
South Carolina 57-0853342
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1136 Washington Street, Suite 200
Columbia, South Carolina 29201
(Address of principal executive offices)
(Zip Code)
(803) 343-2144
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports, and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of October 31, 1997:
Common Stock, No Par Value 2,312,650
Class Number of Shares
<PAGE>
COMSOUTH BANKSHARES, INC.
INDEX
PART I. Financial Information
Item 1. Financial Statements Page No.
Consolidated Balance Sheets -
September 30, 1997 (unaudited) and December 31, 1996 .......... 3
Consolidated Statements of Operations for the Three
months and Nine months ended September 30, 1997 and
September 30, 1996 ............................................ 4
Consolidated Statements of Cash Flows for the Nine months
ended September 30, 1997 and September 30, 1996 ............... 5
Notes to Consolidated Financial Statements .......................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............. 9
PART II. Other Information
Item 1. Legal Proceedings ............................................ 13
Item 2. Changes in Securities......................................... 13
Item 6. Exhibits and Reports on Form 8-K ............................. 14
Signature ............................................................. 15
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COMSOUTH BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
(Unaudited)
ASSETS
<S> <C> <C>
Cash and due from banks ........................................................... $ 9,700,621 $ 9,441,553
Federal funds sold ................................................................ 510,000 3,650,000
------------- -------------
Total cash and cash equivalents ................................................ 10,210,621 13,091,553
Investment securities:
Held-to-maturity, at amortized cost (fair value of
$18,539,385 in 1997 and $13,035,431 in 1996) ................................... 18,503,080 13,071,927
Available-for-sale, at fair value (amortized cost of
$22,750,882 in 1997 and $21,070,548 in 1996) ................................... 22,791,578 21,034,568
Loans receivable:
(less allowance for loan losses: 1997 - $1,951,857;
1996 - $1,802,402) ............................................................. 134,079,496 113,879,003
Premises and equipment ............................................................ 1,340,239 1,489,159
Accrued interest receivable ....................................................... 1,525,101 1,343,298
Other assets ...................................................................... 673,965 724,956
------------- -------------
Total Assets ...................................................................... $ 189,124,080 $ 164,634,464
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits
Noninterest bearing demand ..................................................... 33,334,393 35,677,721
NOW, money market and savings .................................................. 68,946,673 56,290,307
Time deposits of $100,000 or more .............................................. 30,009,874 26,984,224
Time deposits less than $100,000 ............................................... 30,205,516 23,442,953
Other time deposits ............................................................ 2,997,686 3,012,613
------------- -------------
Total deposits .................................................................... 165,494,142 145,407,818
Federal funds purchased and securities sold under
agreements to repurchase ....................................................... 4,802,486 2,674,394
U.S. Treasury tax and loan accounts ............................................... 1,167,360 784,106
Note payable ...................................................................... 1,020,000 1,200,000
Accrued interest .................................................................. 492,153 446,225
Other liabilities ................................................................. 749,831 481,099
------------- -------------
Total Liabilities ................................................................. 173,725,972 150,993,642
------------- -------------
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 - 1,541,080 in 1997 and
1,532,826 in 1996) ............................................................ 13,679,027 13,616,611
Retained earnings ................................................................. 1,692,222 47,958
Unrealized gain (loss) on investment securities available-
for-sale, net of applicable deferred income taxes ............................. 26,859 (23,747)
------------- -------------
Total Stockholders' Equity ........................................................ 15,398,108 13,640,822
------------- -------------
Total Liabilities and Stockholders' Equity ........................................ $ 189,124,080 $ 164,634,464
============= =============
</TABLE>
3
<PAGE>
COMSOUTH BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATION
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
Interest income:
<S> <C> <C> <C> <C>
Interest and fees on loans ......................... $ 3,133,120 $ 2,419,860 $ 8,696,417 $ 6,897,456
Investment securities .............................. 658,073 433,217 1,853,673 1,228,740
Federal funds sold ................................. 12,176 13,148 84,652 98,023
------------ ------------ ------------ ------------
Total interest income ........................... 3,803,369 2,866,225 10,634,742 8,224,219
------------ ------------ ------------ ------------
Interest expense:
Deposits ........................................... 1,628,509 1,179,283 4,552,140 3,458,379
Federal funds purchased and
securities sold under agreements
to repurchase ................................... 57,545 30,566 156,143 62,308
U.S. Treasury tax and loan accounts ................ 7,968 8,339 22,584 24,819
Note payable ....................................... 22,107 14,467 68,465 27,119
------------ ------------ ------------ ------------
Total interest expense .......................... 1,716,129 1,232,655 4,799,332 3,572,625
------------ ------------ ------------ ------------
Net interest income ................................ 2,087,240 1,633,570 5,835,410 4,651,594
Provision for loan losses .......................... 115,000 0 220,000 50,000
------------ ------------ ------------ ------------
Net interest income after provision
for loan losses ................................. 1,972,240 1,633,570 5,615,410 4,601,594
Noninterest income:
Lending operations and services .................... 301,559 243,106 935,747 749,618
Service charges on deposit accounts ................ 173,995 138,056 508,281 394,010
Other .............................................. 19,985 19,884 60,556 60,686
------------ ------------ ------------ ------------
Total noninterest income ....................... 495,539 401,046 1,504,584 1,204,314
------------ ------------ ------------ ------------
Noninterest expense:
Salaries and employee benefits ..................... 776,151 659,361 2,259,615 1,998,789
Occupancy expenses ................................. 111,742 109,230 326,969 326,222
Furniture and equipment ............................ 118,587 110,282 356,139 298,760
Advertising and marketing .......................... 57,546 23,192 114,446 67,959
Other .............................................. 442,925 468,310 1,418,777 1,232,598
------------ ------------ ------------ ------------
Total noninterest expense ....................... 1,506,951 1,370,375 4,475,946 3,924,328
------------ ------------ ------------ ------------
Income before provision for
income taxes .................................... 960,828 664,241 2,644,048 1,881,580
Income tax expense ................................. (361,716) (217,807) (999,784) (627,209)
------------ ------------ ------------ ------------
Net income ......................................... $ 599,112 $ 446,434 $ 1,644,264 $ 1,254,371
============ ============ ============ ============
Earnings per share:
On common and common
equivalents .................................. $ .37 $ .32 $ 1.02 $ .79
============ ============ ============ ============
On a fully diluted basis ........................ $ .37 $ .32 $ 1.01 $ .79
============ ============ ============ ============
</TABLE>
4
<PAGE>
COMSOUTH BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months ended September 30
1997 1996
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income ......................................................................... $ 1,644,264 $ 1,254,371
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization ...................................................... 282,258 237,696
Provision for loan losses .......................................................... 220,000 50,000
Deferred tax benefit ............................................................... (75,000)
Amortization of premium and accretion of discount
on investment securities ....................................................... (6,078) 6,368
(Increase) decrease in interest receivable ........................................ (181,803) 84,297
Decrease in other assets ........................................................... 38,758 172,874
Increase (decrease) in interest payable ............................................ 45,928 (107,441)
Increase (decrease) in other liabilities ........................................... 254,895 (540,230)
------------ ------------
Cash provided by operating activities .............................................. 2,298,222 1,082,935
------------ ------------
Cash flows from investing activities:
Purchase of investments, held-to-maturity .......................................... (6,963,544) (1,499,400)
Purchase of investments, available-for-sale ........................................ (4,931,625) (11,174,538)
Maturities of investments, held-to-maturity ........................................ 1,539,761 4,353,109
Maturities of investments, available-for-sale ...................................... 3,250,000 2,500,000
Net increase in loans .............................................................. (20,420,493) (15,276,794)
Purchase of premises and equipment ................................................. (133,338) (506,462)
------------ ------------
Cash used for investing activities ................................................. (27,659,239) (21,604,085)
------------ ------------
Cash flows from financing activities:
Net increase in deposits ........................................................... 20,086,324 10,070,697
Increase in federal funds purchased and securities
sold under agreements to repurchase ............................................ 2,128,092 673,249
(Repayment ) proceeds of note payable .............................................. (180,000) 900,000
Increase in U.S. Treasury, tax and loan accounts ................................... 383,253 769,400
Proceeds from issuance of common stock ............................................. 62,416 5,316
------------ ------------
Cash provided by financing activities .............................................. 22,480,085 12,418,662
------------ ------------
Decrease in cash and cash equivalents .............................................. (2,880,932) (8,102,488)
Cash and cash equivalents at beginning of period ................................... 13,091,553 17,249,878
------------ ------------
Cash and cash equivalents at end of period ......................................... $ 10,210,621 $ 9,147,390
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest ............................................................. $ 4,753,404 $ 3,680,066
Cash paid for taxes ................................................................ $ 1,090,223 $ 1,244,155
Noncash adjustments to report investment securities,
available-for-sale at fair value:
Investment securities, available-for-sale .......................................... $ 40,696 $ (192,703)
Other assets ....................................................................... 13,837 65,387
Unrealized gain (loss) on investment securities, available-for-
sale, net of applicable deferred income taxes ................................... $ 26,859 $ (127,316)
</TABLE>
5
<PAGE>
COMSOUTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The unaudited interim financial statements reflect all adjustments which are, in
the opinion of management, necessary for the fair presentation of the
consolidated statements of operations and of cash flows for the interim periods
presented. Such adjustments are of a normal recurring nature. The interim
financial statements, including related notes, should be read in conjunction
with the financial statements for the year ended December 31, 1996, appearing in
the Corporation's 1996 Annual Report and included in the Corporation's Form 10-K
Annual Report for the year ended December 31, 1996. The unaudited results of
operations for the nine month period ended September 30, 1997 may not be
indicative of the results for the year that will end December 31, 1997.
NOTE 1 - LOAN COMMITMENTS
At September 30, 1997, standby letters of credit of $3,212,000 and undisbursed
amounts on lines of credit of $23,137,000 were outstanding.
NOTE 2 - NOTES PAYABLE
During 1996, the Corporation established a $1,200,000 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 (8.0% at
September 30, 1997) with interest payments due quarterly. The line of credit is
collateralized by 550,000 shares of Bank of Charleston's ("BOC") common stock.
At September 30, 1997, the Corporation had an outstanding balance of $1,020,000
on this line of credit; quarterly payments of $60,000 were made during March,
June and September 1997.
The line of credit agreement contains certain covenants. The principal financial
covenants require the Corporation to maintain the allowance for loan losses at a
minimum of 100% of non-performing assets; tangible equity to total assets at
least equal to 8% for BOC and at least equal to 6% for Bank of Columbia
("BOCL"); non-performing 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 is also restricted from paying any dividends unless approved
by the lender. The Corporation was in full compliance with all of the covenants
at quarter end.
At September 30, 1997, BOCL had approximately $11.0 million and BOC had
approximately $10.1 million in standby credit available from other banks for
short-term borrowings.
6
<PAGE>
NOTE 3 - STOCK OPTIONS
On April 29,1997, 6,425 options were granted to non-employee directors at an
exercise price of $15.33 per share. The average high/low price for ComSouth
Bankshares, Inc. Common Stock for the 30 days prior to the measurement date,
April 29,1997 was $15.33. The board granted 3,500 options to certain employees
on January 28, 1997 at an option price of $15.125 with an expiration date of
January 27, 2002. The closing price for the stock was $15.125 on January 28,
1997. The board granted 2,000 options to certain employees on April 29, 1997.
These options were granted with an option price of $15.875, which was the
closing price of the stock on April 29, 1997, and an expiration date of April
28, 2002. The board granted 2,000 options to an employee on October 2, 1997 at
an option price of $23.87 which was the average high/low price for the 30 day
period prior to October 2, 1997. These options expire on October 1, 2002. The
board also on October 10, 1997 granted Messrs. A. P. Swanson, CEO and President,
and John P. Barnwell, EVP/Administration, for the Bank of Charleston, 12,000
options each at a purchase price of $1.00 per share. These options were granted
as compensation for services provided to the Corporation by these individuals
since BOC's inception and as an incentive for these individuals to remain with
BOC. The options vest pro rata over a five year period, with continued
employment being a condition of vesting. However, in the event of a change in
control, all options will vest immediately. The expiration date for these
options will be five years from each vesting date with the first vesting date
being October 9, 1998. Since the options were granted at a price less than fair
market value, the Corporation will record a pre-tax compensation expense of
approximately $9,500 per month for the 60 month period beginning October 1997. A
total of 8,479 options were exercised during the period January 1, 1997 to
September 30, 1997 at an average exercise price of $7.36 per share.
NOTE 4 - COMMON STOCK
The Corporation effected a 3-for-2 stock split payable in the form of a 50
percent stock dividend on October 30, 1997 to shareholders of record October 15,
1997.
NOTE 5 - ALLOWANCE FOR CREDIT LOSSES
The Corporation adopted SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosure" on January 1, 1995. These standards address
the accounting for certain loans when it is probable that all amounts due
pursuant to the contractual terms of the loan will not be collected.
Individually identified impaired loans are measured based on the present value
of payments expected to be received, using the historical effective loan rate as
the discount rate. Loans that are to be foreclosed or that are solely dependent
on the collateral for repayment may alternatively be measured based on the fair
value of the collateral for such loans or on observable market prices. If the
recorded investment in the loan exceeds the measure of fair value, a valuation
allowance is established as a component of the allowance for credit losses.
Currently, the Banks have $42,000 in loans classified as impaired loans.
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 September 30, 1997, $109,000 of loans were on nonaccrual status as compared
to $227,000 at December 31, 1996. Interest income of $16,500 and $4,132 was
recognized during 1997 and 1996 for loans previously recorded as nonaccrual. For
those loans classified as nonaccrual as of September 30, 1997 and December 31,
1996, interest income of $5,589 and $7,779 would have been recognized in the
respective periods if those loans had performed under the original terms.
All accruing loans 90 days or more past due were in the process of collection at
each period end. At September 30, 1997, total classified loans were $1,151,000
or .85% of total loans, compared to $2,831,000 or 2.4% at December 31, 1996.
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 September 30, 1997. Other than the loans previously discussed,
management is not aware of any possible credit problems of borrowers which cause
management to have serious doubts about the ability of the borrower to comply
with present loan repayment terms.
7
<PAGE>
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 for the periods presented.
PROBLEM ASSETS
September 30, 1997 December 31, 1996
------------------ -----------------
Nonaccrual loans ....................... $109,238 $226,582
Loans past due ninety days or more ..... 26,906 125,512
Troubled debt restructuring ............ 0 0
Other real estate owned ................ 0 0
-------- --------
Total ................................ $136,144 $352,094
======== ========
Nonperforming assets to total loans
and other real estate owned .......... .10% .30%
======== ========
NOTE 6 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows:
September 30, 1997 December 31, 1996
------------------ -----------------
Balance at beginning of year ....... $ 1,802,402 $ 1,784,508
Provision for loan losses .......... 220,000 110,000
Loans charged off:
Commercial ....................... (68,695) (96,977)
Real estate-mortgage ............. 0 0
Consumer and other ............... (26,637) (28,954)
----------- -----------
Total .......................... (95,332) (125,931)
----------- -----------
Recoveries:
Commercial ....................... 20,931 28,272
Real estate-mortgage ............. 0 0
Consumer and other ............... 3,856 5,553
----------- -----------
Total ......................... 24,787 33,825
----------- -----------
Balance at end of period ........... $ 1,951,857 $ 1,802,402
=========== ===========
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.
Management closely monitors the level 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 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. In addition,
both BOCL and BOC maintain a loan classification system to monitor exposure to
potential loan losses. Management believes that the 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.
8
<PAGE>
ITEM 2. 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.
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, NA ("BOCL") and Bank of Charleston, NA
("BOC").On March 21, 1996, the Corporation listed its common stock on the
American Stock Exchange under the ticker symbol CSB.
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 - BOC
and BOCL, 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 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 expenses. Negative funds positions may be dealt with by a
combination of actions including borrowing from other banks or rediscounting
qualifying loans with the Federal Reserve Bank. At September 30, 1997, BOCL had
approximately $11.0 million while BOC had approximately $10.1 million in standby
credit available to them from other financial institutions. Management believes
that a sufficient liquidity balance is maintained through the operations of its
asset and liability management program. Additionally, the standby credit
facilities provide adequate protection in the event of negative cash flows.
At September 30, 1997 and December 31, 1996, liquid assets of approximately
$51.5 million and $47.2 million, respectively, were available to meet demands
for deposit withdrawals, undisbursed amounts on lines of credit ("loan
commitments") of $23,137,000 and $21,396,000,respectively, and letters of credit
totaling $3,212,000 and $1,689,000, respectively. The amount of liquid assets
available at September 30, 1997 includes cash and cash equivalents of
$10,200,000, a decrease of $2,900,000 from the December 31, 1997 amount of
$13,100,000. This decrease in cash and cash equivalents is attributable to
management's decision to improve earnings by reducing investments in short-term
federal funds in favor of increasing investments 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 $165.5 million at September 30, 1997, compared to
$145.4 million at December 31, 1996. Of the total deposit base of the
Corporation at September 30, 1997, approximately $32.4 million, or 19.6%,
consisted of Certificates of Deposits in amounts of $100,000 and higher ("Jumbo
Certificates").
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.
9
<PAGE>
One of the principal uses of funds is to meet loan demand at BOCL and BOC. At
September 30, 1997, total loans outstanding were approximately $136.0 million,
as compared to $115.7 million at December 31, 1996. During the first nine months
of 1997, both Banks have experienced strong loan growth. The economic picture in
the markets serviced by both Banks continues to be good.
Both BOCL and BOC maintain a loan classification system to monitor exposure to
potential loan losses. Management of the Banks reviews the adequacy of the
allowance each quarter to identify problem loans in connection with its
assessment of the overall quality of the respective loan portfolios. At
September 30, 1997, the allowance for loan losses at BOCL and BOC was
approximately $1,011,000 and $941,000, respectively. At December 31, 1996, the
allowance for loan losses at BOCL and BOC was approximately $971,000 and $831,
000, respectively. The Comptroller of the Currency ("OCC"), the Banks' 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 September 30, 1997, the Tier I capital ratio for BOCL was 9.6% and the
total capital ratio was 10.9%, while BOC had a Tier I ratio of 13.4% and a total
capital ratio of 14.7%.
The Corporation's primary regulator, the Board of Governors of the Federal
Reserve System (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 I
capital. The Corporation's Tier I capital ratio was 11.2% and its total capital
ratio was 12.5% at September 30, 1997. These ratios are well within guidelines
established by the Corporation's primary regulator.
RATE SENSITIVITY
In order to address volatility in interest rates, the Corporation maintains an
interest sensitivity management program, the objective of which is to maintain
reasonably stable growth in net interest income despite changes in market
interest rates. The Interest Rate Sensitivity Gap ("GAP") is defined as the
excess of interest sensitive assets over interest sensitive liabilities that
mature or reprice within specified time frames. The GAP is a measure of the
Corporation's risk of significant changes in net income at any point in time.
Adjustable rate loans, short term loans and temporary investments represent the
majority of the Corporation's interest sensitive assets. Money market deposit
accounts, NOW accounts, savings accounts and certificates of deposit with
maturities of less than one year represent the majority of interest sensitive
liabilities.
In addition to gap analysis, management utilizes simulation modeling techniques
to project the potential earnings impact due to rate changes. Based on the
combination of the gap analysis and simulation modeling, management believes
that any reasonably expected rate change would not have a material impact on
earnings.
RESULTS OF OPERATIONS
For the first nine months of 1997, the Corporation is reporting net earnings of
$1,644,000 or $1.01 per fully diluted share, compared to $1,254,000 or $.79 per
share for the same period of 1996.
For the first nine months of 1997 loans outstanding grew by 17.4%. Deposit
growth of 13.9% or $20,285,000 was used to fund the loan growth for the first
nine months of 1997. Although the strong loan growth created pressure on
management to gather deposits, the Banks continued to concentrate on the
acquisition of core deposits to support the growth.
The Corporation had total revenues of $12,140,000 and $9,428,000 and total
expenses of $10,496,000 and $8,174,000 for the nine months ended September 30,
1997 and 1996, respectively. Summarized below is an analysis of the composition
of revenues and expenses for the nine month periods ended September 30, 1997 and
1996.
10
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1997 1996
---- ----
<S> <C> <C> <C> <C>
Interest on loans ................................ $ 8,696,000 71.6% $ 6,897,000 73.2%
Interest on investment securities ................ 1,854,000 15.3% 1,229,000 13.0%
Interest on temporary investments ................ 85,000 .7% 98,000 1.0%
Non-interest income .............................. 1,505,000 12.4% 1,204,000 12.8%
----------- ----- ----------- -----
Total Revenues ................................... $12,140,000 100.0% $ 9,428,000 100.0%
=========== ===== =========== =====
</TABLE>
Increased revenues provided by interest on loans is the result of strong loan
growth realized by both banks during the first nine months of 1997. Most of this
loan growth occurred during the second and third quarters, which caused a
decline in this category's percentage to total revenues as a major portion of
the deposit growth in the first quarter of the year was invested in investment
securities. In addition, funds which typically were held in temporary
investments for the purpose of supporting loan growth were also invested in
investment securities. As can be seen by the above table, the decline in revenue
ratios provided by interest on loans and temporary investments has been offset
by an increase in the investment securities category.
Income derived from the Business Manager product was a major factor contributing
to the growth in non-interest income as fees generated from this product
increased by approximately $180,000 over the same nine month period of 1996.
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.
In addition, fees derived from deposit services increased by approximately
$115,000 over the same nine month period last year as a result of the deposit
growth realized between the two periods and a pricing change on fees by the Bank
of Columbia.
Operating Expenses for the nine months periods ended September 30, 1997 and 1996
were as shown in the following table:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1997 1996
---- ----
<S> <C> <C> <C> <C>
Interest on deposits ............................. $ 4,552,000 43.4% $ 3,458,000 42.3%
Interest on note payable and
securities sold under agreements
to repurchase ................................. 248,000 2.4% 114,000 1.4%
Provision for loan losses ........................ 220,000 2.1% 50,000 .6%
Salaries and employee benefits ................... 2,260,000 21.5% 1,999,000 24.5%
Occupancy expenses ............................... 327,000 3.1% 326,000 4.0%
Furniture and equipment expenses ................. 356,000 3.4% 299,000 3.7%
Legal and regulatory ............................. 622,000 5.9% 551,000 6.7%
Printing and supplies ............................ 126,000 1.2% 124,000 1.5%
Advertising and marketing ........................ 114,000 1.1% 68,000 .8%
Other ............................................ 671,000 6.4% 558,000 6.8%
Taxes ............................................ 1,000,000 9.5% 627,000 7.7%
----------- ----- ----------- -----
Total Operating Expenses ......................... $10,496,000 100.0% $ 8,174,000 100.0%
=========== ===== =========== =====
</TABLE>
11
<PAGE>
The increase in interest paid on deposits is the result of an increase of $20
million in deposits between the two periods. In addition, rates paid on deposits
have increased slightly due to the need to attract funds to support the strong
loan growth between the periods. The increase in interest paid on notes payable
and securities sold under agreements to repurchase is due to a $1,200,000 note
with another financial institution. The interest impact during the third quarter
of 1996 was less as the note was not fully drawn until the fourth quarter of
1996. Loans outstanding have increased by 25 percent since the third quarter of
1996. As a result of this growth, coupled with the lack of maturity in a
significant portion of the portfolio and a 15 percent increase in annualized net
losses for 1997 over 1996, management felt that additional contributions to the
loan loss provision was prudent. The increase in salaries and employee benefits
is due to additional staffing to support the loan and deposit growth. Legal and
regulatory expenses increased as a result of increased activity in pending
litigation. The relocation during the third quarter of 1997 of BOCL's drive-in
branch was the primary cause for the increase in advertising and marketing
expenses. Other expenses increased by $113,000 between the two periods as
director fees increased by $30,000 due to a fee increase in January 1997,
consulting fees increased by $22,000 due to programming expenses related to the
year 2000 project, postage and freight expense increased by $15,000 related to
loan and deposit growth and outside services increased by $15,000 due to
increased ATM fees and correspondent fees.
The increase in tax expenses in 1997 is primarily the result of improved
earnings during the year. In addition, the company reduced its tax expenses
during 1996 by $75,000 as a result of an adjustment to its deferred tax asset
valuation allowance.
NET INTEREST INCOME
Net interest income represents the difference between interest earned on assets
and the interest paid on liabilities. It traditionally constitutes the largest
source of a financial institution's earnings.
Net interest income for the nine months ended September 30, 1997 and 1996 was
$5,835,000 and $4,652,000, respectively. The average yield on earning assets was
8.5% and 8.6%, the average rate paid on interest bearing liabilities was 4.8%
and 4.6%, and the annualized net interest margin was 4.7% and 4.8% for the nine
months ended September 30, 1997 and 1996, respectively.
THIRD QUARTER EARNINGS
Earnings for the third quarter of 1997 were $599,000 or $.37 per fully diluted
share, up 34 percent over the $446,000 or $.28 per share reported for the third
quarter of 1996. Net interest income showed an increase of approximately
$453,000 between the two periods. This increase is the result of an increase in
loan volume during the period as the Corporation realized some tightening of the
net interest margin due to paying a slightly higher rate to attract deposits to
support the loan growth.
Total non-interest income increased by $95,000 between the two quarters as fees
generated by the Business Manager program increased by $36,000 and deposit
service fees increased by $40,000 over the same period last year. The increased
fees from the Business Manager program were the result of increased sales
efforts for the product, and the increase in fees derived from deposit services
resulted from the deposit growth realized between the two periods and an
increase in fees for deposit services by BOCL between the two periods. In
addition, mortgage loan fees increased by $12,000 between the two periods as
mortgage rates have remained relatively low supporting increased productivity.
Total non-interest expenses increased by $280,000 for the third quarter of 1997,
compared to the same quarter in 1996. Federal income tax expense increased by
$144,000 due to improved earnings for the third quarter of 1997. Other factors
contributing to the increase of non-interest expenses were salaries and employee
benefits which increased by $117,000 due to additional staff needed to support
the loan and deposit growth. Consulting fees increased by $20,000 due to
programming fees related to the year 2000 project, director fees increased by
$10,000 due to an increase in director fees in January 1997, advertising and
marketing expenses increased by $35,000 primarily due to the relocation of the
drive-in branch for BOCL during the third quarter of 1997. These increased
expenses were partially offset by a reduction in other expenses of $48,000 due
to a loss of $25,000 on a counterfeit check and a loss of $23,000 on the sale of
OREO during the third quarter of 1996.
12
<PAGE>
ACCOUNTING AND REPORTING MATTERS
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." SFAS No.
128 simplifies the current computation of earnings per share and makes the
United States standards for the computation more compatible with international
earnings per share standards. The Statement requires dual presentation of
earnings per share for all entities with complex capital structures. It also
replaces the presentation of primary earnings per share with a presentation of
basic earnings per share. The Statement is effective for the Corporation for the
year ended December 31, 1997. The Corporation does not anticipate that adoption
of this statement will have a material effect on its financial statements.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the Corporation's Forms 10-Q for the quarters
ended March 31, 1997 and June 30, 1997.
ITEM 2c. CHANGES IN SECURITIES
During 1997, 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.
Date Class of Shares Exercise
Issued Purchasers Issued Price
- ------ ----------- ------ -----
01/31/97 Director 468 $7.272
02/03/97 Directors 523 7.272
02/03/97 Former Director 138 7.272
02/04/97 Director 248 7.272
02/05/97 Directors 661 7.272
02/10/97 Former Director 220 7.272
02/13/97 Former Director 275 7.272
02/16/97 Director 248 7.272
03/04/97 Director 303 7.272
03/10/97 Director 248 7.272
03/18/97 Former Director 248 7.272
03/21/97 Former Director 605 5.345
303 6.318
303 7.272
04/11/97 Directors 303 7.272
04/15/97 Former Director 413 7.272
04/16/97 Directors 440 7.272
04/19/97 Director 468 7.272
04/21/97 Former Director 275 7.272
04/21/97 Directors 523 7.272
04/23/97 Director 275 7.272
04/25/97 Director 716 7.272
06/06/97 Director 275 15.33
---
8,479
13
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8 - K
(a) Exhibit 27, Financial Data Schedule.
(b) No reports on Form 8-K have been filed during the quarter. However,
a Form 8-K was filed on October 15, 1997.
14
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
COMSOUTH BANKSHARES, INC.
(Registrant)
Date: November 10, 1997 By:s/Harry R. Brown
---------------------------
(Harry R. Brown)
Chief Financial Officer,
Chief Operating Officer,
Secretary and Treasurer
15
<PAGE>
EXHIBIT INDEX
Exhibit 27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet at September 30, 1997 (unaudited) and the
Consolidated Statement of Operation for the Nine Months Ended September 30, 1997
(unaudited) and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 9,700,621
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 510,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 22,791,578
<INVESTMENTS-CARRYING> 18,503,080
<INVESTMENTS-MARKET> 18,539,385
<LOANS> 136,031,353
<ALLOWANCE> 1,951,857
<TOTAL-ASSETS> 189,124,080
<DEPOSITS> 165,494,142
<SHORT-TERM> 5,969,846
<LIABILITIES-OTHER> 1,241,984
<LONG-TERM> 1,020,000
0
0
<COMMON> 13,679,027
<OTHER-SE> 1,719,081
<TOTAL-LIABILITIES-AND-EQUITY> 189,124,080
<INTEREST-LOAN> 8,696,417
<INTEREST-INVEST> 1,853,673
<INTEREST-OTHER> 84,652
<INTEREST-TOTAL> 10,634,742
<INTEREST-DEPOSIT> 4,552,140
<INTEREST-EXPENSE> 4,799,332
<INTEREST-INCOME-NET> 5,835,410
<LOAN-LOSSES> 220,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,475,946
<INCOME-PRETAX> 2,644,048
<INCOME-PRE-EXTRAORDINARY> 1,644,264
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,644,264
<EPS-PRIMARY> 1.02
<EPS-DILUTED> 1.01
<YIELD-ACTUAL> 4.70
<LOANS-NON> 109,238
<LOANS-PAST> 26,906
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,802,402
<CHARGE-OFFS> 95,332
<RECOVERIES> 24,787
<ALLOWANCE-CLOSE> 1,951,857
<ALLOWANCE-DOMESTIC> 1,778,536
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 173,321
</TABLE>
