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, 1997 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 1, 1998 was approximately $8,572,000. As
of March 1, 1998, there were 2,341,320 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 May 12,
1998 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, 1997 incorporated by reference into Part II hereof.
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PART I
This Annual Report on Form 10-K contains forward-looking statements as defined
by the Private Securities Litigation Reform Act of 1995. Forward-looking
statements should be read with the cautionary statements and important factors
included in this Form 10-K. (See Item 7. - Management's Discussion and Analysis
of Financial Condition and Results of Operations, Safe Harbor for
Forward-Looking Statements.) Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events or performance
and underlying assumptions and other statements which are other than statements
of historical facts. Such forward-looking statements may be identified, without
limitation, by the use of the words "anticipates," "estimates," "expects,"
"intends," "plans," "predicts," "projects," and similar expressions. The
Company's expectations, beliefs and projections are expressed in good faith and
are believed by the Company to have a reasonable basis, including without
limitation, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's expectations, beliefs or
projections will result or be achieved or accomplished.
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 employs 68 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).
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.
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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.
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. The information set forth under the caption "Year 2000 Considerations" in
Note 20 to the Corporation's Consolidated Financial Statements, which are
included in the Corporation's 1997 Annual Report to Shareholders, is
incorporated by reference herein.
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. BOCL's
capital is expected to be adequate to support assets of approximately $127
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,
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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 $205 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.
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 1427 Park Street,
three blocks from the Main Street premises. The Corporation and BOCL are
currently leasing this facility on a ten-year lease which commenced on October
1, 1997.
Employees. BOCL employs 25 full-time employees and BOC employs 26 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 has increased takeover
activity in South Carolina, the Corporation does not believe that such
legislation has had, or will have, a material impact on its competitive
position. However, no assurance of such fact may be given.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
has increased 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 former restrictions on interstate acquisitions of banks by bank
holding companies have been repealed, such that the Corporation and any other
bank holding company located in South Carolina is able to acquire a bank located
in any other state, and a bank holding company located outside South Carolina
can 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. This legislation has resulted 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 (the "SAIF) or the
Bank Insurance Fund (the "BIF") 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 8.3%; 10.6%; and 6.4%
respectively, and total risk-adjusted capital ratios of 12.1%; 14.2%; 10.6%,
respectively.
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.
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The Federal Reserve, the FDIC, the OCC and the Office of Thrift
Supervision have also issued joint rules amending the risk-based capital
guidelines to take into account concentration of credit risk and the risk of
non-traditional activities, and to incorporate a measure for exposure to market
risk. The rule relating to concentration of credit risk and risk of
non-traditional activities amends each agency's risk- based capital standards by
explicitly identifying concentration of credit risk and the risk arising from
activities that have not customarily been part of the banking business but have
been conducted as a result of developing technology and changes in financial
markets, 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 rule relating to market risk amends each agency's
risk-based- capital standards to incorporate measures for market risk to cover
all positions located in a banking institution's trading account, foreign
exchange and commodity positions. The effect of the market risk rules is that
any bank or bank holding company regulated by the Federal Reserve, the FDIC or
the OCC that has significant exposure to market risk must measure that risk
using its own internal value-at-risk model and also hold a commensurate amount
of capital. "Market risk" means the risk of loss resulting from movements in
market prices. "Value-at-risk" is an estimate of potential changes in portfolio
value based on a statistical confidence interval of changes in market prices
that occur during some time intervals. The effective date of the market risk
rules is January 1, 1997, and compliance with the rules was mandatory January 1,
1998.
The Corporation is still assessing the impact these rules would have on
the capital requirements of the Banks or the Corporation, but does not expect
the impact to be material.
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.
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.
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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 is as specified in a schedule issued by the
FDIC that specifies, at semi-annual intervals, target reserve ratios designed to
maintain 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). 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.
The FDIC has 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 CAMELS 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 CAMELS 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 1998. The FDIC may increase or decrease the new assessment
rates semiannually up to a maximum increase or decrease of 5 basis points.
The Deposit Insurance Funds Act of 1996 (the "Funds Act") authorized
the FICO to levy assessments on BIF- and SAIF-assessable deposits, and
stipulated that the BIF rate must equal one-fifth the SAIF rate through year-end
1999, or until the insurance funds are merged, whichever occurs first.
Thereafter, BIF and SAIF payers will be assessed pro rata for FICO. The FICO
assessment will be adjusted quarterly to reflect changes in the assessment bases
of the respective funds based on quarterly Call Report and Thrift Financial
Report submissions.
Other Safety and Soundness Regulations
The federal banking agencies have broad powers to take prompt
corrective action to resolve problems of insured depository institutions. If a
depository institution fails to meet regulatory capital requirements, 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.
8
<PAGE>
Current federal regulations restrict the acceptance of brokered
deposits by insured depository institutions and contain a number of consumer
banking provisions, including disclosure requirements and substantive
contractual limitations with respect to deposit accounts.
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 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.
Enforcement Policies and Actions
The OCC, the Federal Reserve and the other federal depository
institution regulators have broad enforcement powers, including the power to
impose civil money penalties 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 these enforcement
powers.
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
actual performance in meeting the community credit needs is evaluated as part of
the examination process, and also is considered in evaluating mergers,
acquisitions and applications to open a branch or facility. Both Banks received
ratings of satisfactory in their most recent evaluations.
9
<PAGE>
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.
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.
10
<PAGE>
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.
Item 3 - Legal Proceedings
Incorporated by reference to Note 2 to the Registrant's Consolidated
Financial Statements set forth in Registrant's 1997 Annual Report to
Shareholders (the "Annual Report").
On July 30, 1997, a shareholder of the Corporation, R. Phil Roof,
brought suit in the Court of Common Pleas of Richland County against eight
directors and former directors of the Corporation. These eight defendants are:
Arthur M. Swanson, Mason R. Chrisman, Charles R. Jackson, LaVonne N. Phillips,
Jerry Shearer, W. Carlyle Blakeney, R. Lee Burrows, Jr., and Joseph P. Griffith,
Jr. The complaint alleges that the defendants breached their fiduciary duties
and committed fraud by purchases and an attempt to purchase shares of the
Corporation's stock while failing to disclose proposals by third parties to
acquire the Corporation in 1992. The plaintiff asks for the recovery of actual,
special and punitive damages.
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 1997.
11
<PAGE>
PART II
Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters
Incorporated by reference to information set forth under the captions
"Stock Data and Dividends" and "Table 11 - Quarterly Financial Results" in the
Annual Report.
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 Shares Exercise
Issued Name Issued Price
------ ---- ------ -----
01/31/97 Director 702 $4.848
02/03/97 Director 784 4.848
02/03/97 Former Director 207 4.848
02/04/97 Director 372 4.848
02/05/97 Directors 991 4.848
02/10/97 Former Director 330 4.848
02/13/97 Former Director 412 4.848
02/16/97 Director 372 4.848
03/04/97 Director 454 4.848
03/10/97 Director 372 4.848
03/18/97 Former Director 372 4.848
03/21/97 Former Director 907 3.565
454 4.212
454 4.848
04/11/97 Director 454 4.848
04/15/97 Former Director 619 4.848
04/16/97 Director 660 4.848
04/19/97 Director 702 4.848
04/21/97 Former Director 412 4.848
04/21/97 Director 784 4.848
04/23/97 Director 412 4.848
04/25/97 Director 1,074 4.848
06/06/97 Director 412 10.220
11/04/97 Former Director 4,950 4.212
------
17,662
======
Item 6 - Selected Financial and Other Data
Incorporated by reference to information set forth under the caption
"Financial Summary" in 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" in 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 in
the Annual Report.
12
<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 1998 Annual Meeting of Shareholders (the "1998 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 1998 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 1998 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 12 of the 1998 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
3.1 Articles of Incorporation of the Registrant, as amended
3.2 Bylaws of the Registrant, as amended
4 Specimen Stock Certificate (incorporated by reference to
exhibits filed with the Registrant's Registration Statement
on Form S-1, File No. 33-29091)
10.1 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)
10.2 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)
10.3 Incentive Stock Option Plan (incorporated by reference to
exhibits filed with the Registrant's Registration Statement
on Form S-1, File No. 33-29091)
10.4 1995 Stock Option Plan (incorporated by reference to
exhibits filed with proxy statement relating to Registrant's
1995 Annual Meeting of Shareholders).
10.5 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)
13
<PAGE>
10.6 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)
10.7 Sub-Lease Agreement dated March 18, 1997 between Bank of
Columbia, N.A. and First Union National Bank of South
Carolina
13 Portions of 1997 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 1997
(c) Exhibits - The response to this portion of Item 14 is
submitted as a separate section of this Item.
14
<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 27th day of March, 1998.
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 27, 1998
Arthur M. Swanson (Principal Executive Officer)
/s/Harry R. Brown
- --------------------------- Chief Financial Officer March 27, 1998
Harry R. Brown & Chief Operating Officer
(Principal Financial and
Accounting Officer)
*/s/Mason R. Chrisman
Chairman of the Board March 27, 1998
- ----------------------------
Mason R. Chrisman and Director
Director March 27, 1998
- ----------------------------
W. Carlyle Blakeney, Jr.
- ---------------------------- Director March 27, 1998
R. Lee Burrows, Jr.
s/Charles R. Jackson Director March 27, 1998
- ----------------------------
Charles R. Jackson
*/s/J. Michael Kapp
Director March 27, 1998
- ----------------------------
J. Michael Kapp
Director March 27, 1998
- ----------------------------
LaVonne N. Phillips
*/s/John C. B. Smith, Jr.
Director March 27, 1998
- ----------------------------
John C. B. Smith, Jr.
*/s/Arthur P. Swanson
Director March 27, 1998
- ----------------------------
Arthur P. Swanson
/s/Harry R. Brown March 27, 1998
Harry R. Brown
* By: (Attorney in Fact
for each of the persons
indicated)
15
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Description
<S> <C> <C>
3.1 - Articles of Incorporation of the Registrant, as amended
3.2 - Bylaws of the Registrant, as amended
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)
10.1 - 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).
10.2 - 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).
10.3 - 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).
10.4 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).
10.5 - 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).
10.6 - 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).
10.7 - Sub-Lease Agreement dated March 18, 1997 between Bank of Columbia,
N.A. and First Union National Bank of South Carolina
13 Portions of 1997 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
Exhibit 3.1
John T. Campbell
Secretary of State
Filed
May 15, 1987
ARTICLES OF INCORPORATION
of
ComSouth Bankshares, Inc.
The undersigned incorporator, being more than eighteen years of age and
desiring to form a corporation under the laws of the State of South Carolina,
declares that:
1. The name of the proposed corporation is ComSouth Bankshares,
Inc.
2. The initial registered office of the corporation is 502 SCN
Building, 1401 Main Street, in the City of Columbia, County of Richland, and the
State of South Carolina; and the name of its initial registered agent at such
address is Douglas T. Yeates.
3. The period of duration of the corporation shall be perpetual. 4. The
corporation is authorized to issue 1,000,000 shares of
common stock with a par value of $1.00 per share. Holders of such shares shall
have no preemptive rights to buy or acquire from the corporation any shares of
the corporation or any options or rights to purchase such shares.
5. The total amount of authorized capital stock is $1,000,000.
6. (a) The affirmative vote of the shareholders required for
authorization of distributions from capital surplus pursuant to Section 33-9-170
of the South Carolina Business Corporation Act shall be a majority of the shares
entitled to vote under that Section.
(b) The corporation is authorized to purchase its own shares
out of unreserved and unrestricted earned surplus available therefor and/or to
the extent of unreserved and unrestricted capital surplus available therefor.
(c) The affirmative vote of the shareholders required to
approval of reduction of stated capital pursuant to Section 33-9-220 of the
South Carolina Business Corporation Act shall be a majority of the shares
entitled to vote under that Section.
(d) There shall be no right of cumulative voting in the
election of directors.
7. The number of directors constituting the initial board of directors
of the corporation is six, and the name and addresses of the persons who are to
serve as directors until the first annual meeting of shareholders or until their
successors are elected and qualify are:
Name Address
---- -------
Carl H. Almond 10 Sunturf Circle, Columbia, SC 29223
James E. Finley 1043 Buena Road, Lake Forest, IL 60045
Joel E. Gottlieb 6230 Lakeshore Drive, Columbia, SC 29206
Robert M. Hancock 35 Lakeview Circle, Columbia, SC 29223
Douglas T. Yeates 101 Rock Springs Road, Columbia, SC 29223
Donald H. Burkett 123 Lloydwood Drive, West Columbia, SC 29169
8. The general nature of the business for which the corporation is
organized is to engage in business as a one-bank holding company or as a
multi-bank holding company; to buy, sell, lease, develop and deal in real
property and personal property of every type and kind; to engage in the business
of providing services of all types; and to engage in such other lawful types of
business as the board of directors of the corporation may, from time to time,
deem advisable.
9. The name and address of each incorporator is:
Name Address
---- -------
Douglas T. Yeates Post Office Box 11671, Columbia, SC 29211
s/Douglas T. Yeates
Date: May 15, 1987 -------------------------------
Douglas T. Yeates, Incorporator
-1-
<PAGE>
STATE OF SOUTH CAROLINA )
:
COUNTY OF RICHLAND )
The undersigned, Douglas T. Yeates, does hereby certify that he is the
incorporator of ComSouth Bankshares, Inc., and is authorized to execute this
verification; that the undersigned does hereby further certify that he has read
the foregoing document, understands the meaning and purpose of the statements
therein contained and the same are true to the best of his information and
belief.
s/Douglas T. Yeates
---------------------------
Douglas T. Yeates
I, Michael Todd Smith, an attorney licensed to practice in the State of
South Carolina, certifies that the corporation, to whose Articles of
Incorporation this certificate is attached, has complied with the requirements
of Chapter 7 of the South Carolina Business Corporation Act, relating to the
organization of corporations, and that in my opinion, the corporation is
organized for a lawful purpose.
s/Michael Todd Smith
----------------------------
Michael Todd Smith
Date: May 15, 1987 Gottlieb, Smith & Boyle, P.A.
Post Office Box 51
Columbia, SC 29202
-2-
<PAGE>
John T. Campbell
Secretary of State
Filed
July 7, 1989
STATE OF SOUTH CAROLINA
SECRETARY OF STATE
ARTICLES OF AMENDMENT
Pursuant to Section 3-10-106 of the 1976 South Carolina Code, as amended,
the undersigned corporation adopts the following Articles of Amendment to its
Articles of Incorporation:
ComSouth Bankshares, Inc.
1. The name of the corporation.-----------------------------------------------
April 18, 1989 and May 25, 1989
2. On----------------------------------, the corporation adopted the following
Amendment(s) of its Articles of Incorporation:
(Type or attach the complete text of Each Amendment)
1. Text of Shareholders Amendment Attachment 1
2. Text of Director Amendment Attachment 2
3. The manner, if not set forth in the amendment, in which any exchange,
reclassification, or cancellation of issued shares provided for in the
Amendment shall be effected, is as follows: (if not applicable, insert "not
applicable" or "NA"). N/A
4. Complete either a or b, whichever is applicable.
a. [ ] Amendment(s) adopted by shareholder action. As to Attachment 1.
At the date of adoption of the amendment, the number of
outstanding shares of each voting group entitled to vote
separately on the Amendment, and the vote of such shares was:
<TABLE>
<CAPTION>
Number of Number of Number of Number of
out- Votes Shares Undisputed*
Voting standing Entitled Represented Shares Voted
Group Shares to be Cast at the meeting For Against
<S> <C> <C> <C> <C> <C>
Common Stock 659,560 659,560 553,565 553,265 300
</TABLE>
b.[x] The amendment(s) was duly adopted by the incorporators or board
of directors without shareholder approval pursuant to Section
33-6-102(d), 33-10-102 and 33-10-105 of the 1976 South Carolina
Code as amended, and shareholder action was not required.
As to Attachment 2.
5. Unless a delayed date is specified, the effective date of these Articles of
Amendments shall be the date of acceptance for filing by the Secretary of
State.
ComSouth Bankshares, Inc.
DATE: July 6, 1989 ------------------------------------
(Name of Corporation)
s/Jerry Shearer
By:-------------------------------
(Signature)
Jerry Shearer, Secretary
-----------------------------------
(Type or Print Name and Office)
*NOTE: Pursuant to Section 33-10-106(6)(i), the corporation can alternatively
state the total number of votes cast for and against the amendment by
each voting group entitled to vote separately on the amendment or the
total number of undisputed votes cast for the amendment by each voting
group together with a statement that the number cast for the amendment
by each voting group was sufficient for approval by that voting group.
-3-
<PAGE>
CORPORATE RESOLUTIONS
RESOLVED, that the Corporation issue up to 800,000 shares of preferred
stock to raise capital to acquire the Bank of Charleston, National Association
(in organization), the rights of such preferred stock to be set by the Board of
Directors at a later date; and, further
RESOLVED, that the Corporation file a Registration Statement relating to
such stock with the Securities and Exchange Commission; and, further
RESOLVED, that Douglas T. Yeates and H. Jerry Shearer, be, and hereby are,
authorized and directed to take all steps necessary and proper to prepare the
Registration Statement relating to the 800,000 shares of preferred stock and to
file such Registration Statement with the Securities and Exchange Commission;
and, further
RESOLVED, that the Corporation enter into an underwriting agreement with
Atlanta Securities and Investments, Inc. relating to sale of the 800,000 shares
of preferred stock, and that Douglas T. Yeates and H. Jerry Shearer be, and
hereby are, authorized and directed to take all steps necessary and proper to
negotiate and execute such agreement.
Whereas, at its meeting on May 25, 1989, the Board authorized issuance of
800,000 shares of preferred stock of the Corporation, the terms of which were to
be set at a later date.
Now therefore, be it resolved, that the relative rights, preferences and
limitations of the 800,000 shares of preferred stock authorized for issuance on
may 25, 1989, be, and hereby are, as follow:
(1) Designation of series: The preferred stock, the relative rights,
preferences and limitations of which are set hereby, shall be designated as
"Preferred Stock, Bank of Charleston Series."
(2) Voting rights: Each share of the Preferred Stock, Bank of Charleston
Series, shall have the same voting rights as one share of the Corporation's
common stock.
(3) Dividend rights and policy: Each share of Preferred Stock, Bank of
Charleston Series, shall be entitled to share equally in such dividends as the
Board of Directors may declare on the Preferred Stock, Bank of Charleston
Series, from sources legally available therefor. The determination and
declaration of dividends shall, however, remain within the discretion of the
Board of Directors. The Preferred Stock, Bank of Charleston Series, shall also
receive the same cash dividend per share, if any, as the common stock of the
Corporation.
(4) Distributions of common stock: The Corporation will annually for three
years make a common stock distribution of one share of its common stock for each
twenty shares of Preferred Stock, Bank of Charleston Series. Any of such stock
distributions which would otherwise result in fractional shares may be paid in
cash or scrip at the option of the president and chief financial officer of the
Corporation. The amount of stock distribution shall be subject to adjustment to
reflect the effect of stock splits or stock distributions on the common stock
subsequent to July 15, 1989, which are, in the aggregate, in excess of 5%.
(5) Liquidation: Upon liquidation of the Corporation the Preferred Stock,
Bank of Charleston Series, shall be entitled to a liquidation preference of up
to $11.00 per share as to distribution of assets.
(6) Conversion to common stock: On July 1, 1992, the preferences,
limitations and relative rights of the Preferred Stock, Bank of Charleston
Series shall be identical to those of the common stock and each share of
Preferred Stock, Bank of Charleston Series, shall thereafter be treated as one
share of common stock in all respects. No action on the part of the shareholders
or the corporation will be required to effect such conversion. In the event of a
stock split or dividend of common stock after July 15, 1989, which, in the
aggregate, exceeds 5% of the common stock, each holder of Preferred Stock, Bank
of Charleston Series, of record on July 1, 1992, shall receive such additional
shares of common stock as shall be necessary to eliminate the effect of such
splits or dividends.
-4-
<PAGE>
John T. Campbell
Secretary of State
Filed
July 18, 1989
STATE OF SOUTH CAROLINA
SECRETARY OF STATE
ARTICLES OF AMENDMENT
Pursuant to Section 3-10-106 of the 1976 South Carolina Code, as amended,
the undersigned corporation adopts the following Articles of Amendment to its
Articles of Incorporation:
ComSouth Bankshares, Inc.
1. The name of the corporation is--------------------------------------------.
April 18, 1989 and May 25, 1989
2. On -------------------------------- , the corporation adopted the following
Amendment(s) of its Articles of Incorporation:
(Type or attach the complete text of Each Amendment)
1. Text of Shareholders Amendment-Attachment 1
2. Text of Director Amendment-Attachment 2
3. The manner, if not set forth in the amendment, in which any exchange,
reclassification, or cancellation of issued shares provided for in the
Amendment shall be effected, is as follows: (if not applicable, insert "not
applicable" or "NA"). N/A
4. Complete either a or b, whichever is applicable.
a. [ ] Amendment(s) adopted by shareholder action. As to Attachment 1.
At the date of adoption of the amendment, the number of outstanding
shares of each voting group entitled to vote separately on the
Amendment, and the vote of such shares was:
<TABLE>
<CAPTION>
Number of Number of Number of Number of
out- Votes Shares Undisputed*
Voting standing Entitled Represented Shares Voted
Group Shares to be Cast at the meeting For Against
<S> <C> <C> <C> <C> <C>
Common Stock 659,560 659,560 553,565 553,265 300
</TABLE>
b. [x] The amendment(s) was duly adopted by the Incorporators or
board of directors without shareholder approval pursuant to
Sections 33-6-102(d), 33-10-102 and 33-10-105 of the 1976
South Carolina Code as amended, and shareholder action was not
required.
As to Attachment 2.
5. Unless a delayed date is specified, the effective date of these Articles of
Amendments shall be the date of acceptance for filing by the Secretary of
State.
COMSOUTH BANKSHARES, INC.
DATE: July 18, 1989 -------------------------------------------
(Name of Corporation)
s/Jerry Shearer
By:--------------------------------------
(Signature)
Jerry Shearer, Secretary
------------------------------------------
(Type or Print Name and Office)
-5-
<PAGE>
ATTACHMENT 1
RESOLVED that the Articles of Incorporation be amended to read:
The corporation is authorized to issue the following classes and number
of shares of each class of stock:
Common Stock - 50,000,000 shares
Preferred Stock - 50,000,000 shares
Special Stock - 50,000,000 shares
The relative rights, preferences and limitations of the shares of each class,
and of each series within a class, are as follows:
Common Stock - Shares of this class shall have unlimited voting rights
and shall be entitled, together with any other class having such right,
to receive the net assets of the corporation upon dissolution.
Preferred Stock - Shares of this class may be issued in separate series
and the preferences, limitations and relative rights of this class and
any series within this class shall be determined by the board of
directors before issuance of any shares of such class or series.
Special Stock - Shares of this class may be issued in separate series
and the preferences, limitations and relative rights of this class and
any series within this class shall be determined by the board of
directors before issuance of any shares of such class or series.
No class of stock of the corporation shall have par value.
-6-
<PAGE>
ATTACHMENT 2
Whereas, at its meeting on May 25, 1989, the Board authorized issuance of
800,000 shares of preferred stock of the Corporation, the terms of which were to
be set at a later date.
Now therefore, be it resolved, that the relative rights, preferences and
limitations of the 800,000 shares of preferred stock authorized for issuance on
May 25, 1989, be, and hereby are, as follow:
(7) Designation of series: The preferred stock, the relative rights,
preferences and limitations of which are set hereby, shall be designated as
"Preferred Stock, Bank of Charleston Series."
(8) Voting right: Each share of the Preferred Stock, bank of Charleston
Series, shall have the same voting rights as one share of the Corporation's
common stock.
(9) Dividend rights and policy: Each share of Preferred Stock, Bank of
Charleston Series, shall be entitled to share equally in such dividends as the
Board of Directors may declare on the Preferred Stock, Bank of Charleston
Series, from sources legally available therefor. The determination and
declaration of dividends shall, however, remain within the discretion of the
Board of Directors. The Preferred Stock, Bank of Charleston Series, shall also
receive the same cash dividend per share, if any, as the common stock of the
Corporation.
(10) Distributions of common stock: The Corporation will annually for three
years make a common stock distribution of one share of its common stock for each
twenty shares of Preferred Stock, Bank of Charleston Series. Any of such stock
distributions which would otherwise result in fractional shares may be paid in
cash or scrip at the option of the president and chief financial officer of the
Corporation. The amount of stock distribution shall be subject to adjustment to
reflect the effect of stock splits or stock distributions on the common stock
subsequent to July 15, 1989, which are, in the aggregate, in excess of 5%.
(11) Liquidation: Upon liquidation of the Corporation the Preferred Stock,
Bank of Charleston Series, shall be entitled to a liquidation preference of up
to $11.00 per share as to distribution of assets.
(12) Conversion to common stock: On July 1, 1992, the preferences,
limitations and relative rights of the Preferred Stock, Bank of Charleston
Series shall be identical to those of the common stock and each share of
Preferred Stock, Bank of Charleston Series, shall thereafter be treated as one
share of common stock in all respects. No action on the part of the shareholders
or the Corporation will be required to effect such conversion. In the event of a
stock split or dividend of common stock after July 15, 1989, which, in the
aggregate, exceeds 5% of the common stock, each holder of Preferred Stock, Bank
of Charleston Series, of record on July 1, 1992, shall receive such additional
shares of common stock as shall be necessary to eliminate the effect of such
splits or dividends.
-7-
<PAGE>
John T. Campbell
Secretary of State
Filed
October 5, 1987
STATE OF SOUTH CAROLINA
For Use By The SECRETARY OF STATE
Secretary of State
File No. 87-8052 ARTICLES OF AMENDMENT
Pursuant to Authority of Section 33-15-10 the South Carolina Code of 1976
as amended, the undersigned Corporation adopts the following Articles of
Amendment to its Articles of Incorporation:
ComSouth Bankshares, Inc.
1. The name of the corporation is -------------------------------------------.
2. The Registered Office of the Corporation is 502 SCN Building, 1401 Main
Street in the City of Columbia, County of Richland and the State of South
Carolina and the name of the Registered Agent at such address is Douglas T.
Yeates.
(Complete item 3 of 4 whichever is relevant)
3 a. The following Amendment of the Articles of Incorporation was adopted
by the shareholders of the Corporation on .
(Text of Amendment)
b. At the date of adoption of the Amendment, the total number of all
outstanding shares of the Corporation was . The total of such shares
entitled to vote, and the vote of such shares was:
Total Number of
Shares Entitled Number of Shares Voted
to vote For Against
------- --- -------
c. At the date of adoption of the Amendment, the number of outstanding
shares of each class entitled to vote as a class on the Amendment, and
the vote of such shares, was: (if inapplicable, insert "none")
Number of Shares Number of Shares Voted
Class Entitled to vote For Against
----- ---------------- --- -------
4. a. Prior to the organizational meeting the Corporation and with the
consent of the subscribers, the following Amendment was adopted by the
directors on September 17, 1987.
(Text of Amendment)
See attached resolutions
b. The number of withdrawals of subscribers, if such be the case is none.
c. The number of Directors are five and the number of voting for the
Amendment was none.
5. The manner, if not set forth in the Amendment, in which any exchange,
reclassification, or cancellation or issued shares provided for in the
Amendment shall be effected, is as follows: (if not applicable, insert "no
change").
No Change
6. The manner in which the Amendment effects a change in the amount of stated
capital, and amount of stated capital, expressed in dollars, as changed by
the Amendment, is as follows: (if not applicable, insert "no change").
$5,000,000
-8-
<PAGE>
ARTICLES OF AMENDMENT (Continued)
Date October 1, 1987 COMSOUTH BANKSHARES, INC.
-------------------------- ------------------------------------
(Name of Corporation)
Note: Any person signing this form, shall s/Douglas T. Yeates
either opposite or beneath his ---------------------------
signature, clearly and legibly state his Douglas T. Yeates
name and the capacity in which he Director
signs. Must be signed in accordance
with Section 33-1-10 of the 1976
Code, as amended.
s/Robert Hancock
---------------------------
Robert Hancock
Director
STATE OF SOUTH CAROLINA )
) ss.
COUNTY OF RICHLAND )
The undersigned Robert Hancock and Douglas T. Yeates do hereby certify that
they are the duly elected and acting Director and Director respectively, of
ComSouth Bankshares, Inc. and are authorized to execute this document; that each
of the undersigned for himself does hereby further certify that he signed and
was so authorized, has read the foregoing document, understands the meaning and
purport of the statements therein contained and the same are true to the best of
his information and belief.
Dated at Columbia, this first day of October, 1987.
s/Douglas T. Yeates
--------------------------------
Douglas T. Yeates
s/Robert Hancock
--------------------------------
Robert Hancock
-9-
<PAGE>
RESOLVED that the Articles of Incorporation be amended to increase the
number of shares of common stock, $1.00 par value, authorized to be issued to 5
million shares; and further
RESOLVED that the Articles of Incorporation be amended by adding thereto
the following provisions:
10. Quorum. One-third (1/3) of the shares entitled to vote thereat shall
constitute a quorum at a meeting of shareholders for the transaction of any
business.
11. Mergers, Consolidations, Exchanges, Sales of Assets or Dissolution.
With respect to any plan of merger, consolidation or exchange or any plan for
the sale of all, or substantially all, the property and assets, with or without
the good will, of the corporation or any resolution to dissolve the corporation,
which plan or resolution shall not have been adopted by the affirmative vote of
at least 80% of the full board of directors, such plan or resolution must be
approved by the affirmative vote of holders of 80% of the outstanding shares of
the corporation.
12. Classified Board of Directors. There shall be nine or more directors
who shall be divided into three classes, each class to be as nearly equal in
number as possible and the election and terms of directors shall be as provided
in Section 33-13-50(a) of the South Carolina Business Corporation Act.
13. Nomination of Directors. No person shall be eligible to be elected a
director of the corporation at a meeting of shareholders unless that person has
been nominated by a shareholder entitled to vote at such meeting by giving
written notice of such nomination to the secretary of the corporation at least
thirty days prior to the date of the meeting.
14. Removal of Directors. An affirmative vote of 80% of the outstanding
shares of the corporation shall be required to remove any or all of the
directors without cause.
15. Duty of Directors. When evaluating any proposed plan of merger,
consolidation, exchange or sale of all, or substantially all, of the assets of
the corporation, the board of directors shall consider the interests of the
employees of the corporation and the community or communities in which the
corporation and its subsidiaries, if any, do business in addition to the
interests of the corporation's shareholders.
16. Amendment of Articles of Incorporation. Any amendment to the Articles
of Incorporation of the corporation which amends, alters, repeals or is
inconsistent with any of the provisions numbered 2, 3, 4, 5 or 6 above shall,
unless such amendment shall have been approved by the affirmative vote of 80% of
the full board of directors, not be effective unless it is approved by the
affirmative vote of 80% of the outstanding shares of the corporation.
-10-
<PAGE>
Jim Miles
Secretary of State
Filed
October 15, 1997
STATE OF SOUTH CAROLINA
SECRETARY OF STATE
ARTICLES OF AMENDMENT
Pursuant to Section 33-10-106 of the 1976 South Carolina Code, as amended,
the undersigned corporation adopts the following Articles of Amendment to its
Articles of Incorporation:
ComSouth Bankshares, Inc.
1. The name of the corporation is -------------------------------------------.
October 2, 1997
2. On --------------------, the corporation adopted the following Amendment(s)
of its Articles of Incorporation.
RESOLVED, that pursuant to a three-for-two split of the authorized shares
of the Corporation's common stock (no par value), the total number of
authorized shares of the Corporation's common stock shall be increased from
50,000,000 shares to 75,000,000 shares (no par value).
3. The manner, if not set forth in the amendment, in which any exchange,
reclassification, or cancellation of issued shares provided for in the
Amendment shall be effected, is as follows: (if not applicable, insert "not
applicable" or "NA").
Shareholders of record on October 15, 1997 will be issued additional stock
certificates representing one additional share of the Corporation's Common
Stock for every two shares currently held.
4. Complete either a or b, whichever is applicable.
a. [ ] Amendment(s) adopted by shareholder action.
At the date of adoption of the amendment, the number of outstanding
shares of each voting group entitled to vote separately on the
Amendment, and the vote of such shares was:
<TABLE>
<CAPTION>
Number of Number of Number of Number of
out- Votes Shares Undisputed*
Voting standing Entitled Represented Shares Voted
Group Shares to be Cast at the meeting For Against
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
b. [x] x The amendment(s) was duly adopted by the Incorporators or
board of directors without shareholder approval pursuant to
Sections 33-6-102(d), 33-10-102 and 33-10-105 of the 1976
South Carolina Code as amended, and shareholder action was not
required.
5. Unless a delayed date is specified, the effective date of these Articles of
Amendments shall be the date of acceptance for filing by the Secretary of
State (See Section 33-1-230(b)) Effective October 30, 1997.
COMSOUTH BANKSHARES, INC.
DATE: October 15, 1997 -------------------------------------------
(Name of Corporation)
s/Harry R. Brown
By:--------------------------------------
(Signature)
Harry R. Brown, Chief Financial Officer
*NOTE: Pursuant to Section 33-10-106(6)(i), the corporation can
alternatively state the total number of votes cast for and
against the amendment by each voting group entitled to vote
separately on the amendment or the total number of undisputed
votes cast for the amendment by each voting group together with a
statement that the number cast for the amendment by each voting
group was sufficient for approval by that voting group.
-11-
EXHIBIT 3.2
BY-LAWS
OF
COMSOUTH BANKSHARES, INC.
(As amended through August 13, 1997)
ARTICLE I
OFFICES
Section 1. Office. ComSouth Bankshares, Inc. (hereinafter referred to as
the corporation), is a South Carolina corporation. The South Carolina office of
the corporation shall be located at 1350 Main Street, in the City of Columbia,
County of Richland, and State of South Carolina.
Section 2. Additional Offices. The corporation may also have offices and
places of business at such other places, within or without the State of South
Carolina, as the Board of Directors may from time to time determine.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. Time and Place. The annual meeting of the shareholders for the
election of directors and all special meetings of shareholders for that or for
any other purpose may be held at such time and place within or without the State
of South Carolina as shall be stated in the notice of the meeting, or in a duly
executed waiver of notice thereof.
Section 2. Annual Meeting. The annual meeting of shareholders shall be held
on the second Tuesday of May in each year, or on such other date as the Board of
Directors, in its discretion, shall choose. At each annual meeting the
shareholders shall elect a Board of Directors and transact such other business
as may properly be brought before the meeting.
Section 3. Notice of Annual Meeting. Written notice of the place, date and
hour of the annual meeting shall be given personally or by mail to each
shareholder entitled to vote thereat not less than ten (10) nor more than fifty
(50) days prior to the meeting.
Section 4. Special Meetings. Special meetings of the shareholders, for any
purpose or purposes, unless otherwise prescribed by statute or by the articles
of incorporation, may be called by the president or the chairman of the Board of
Directors or a majority of the directors and shall be called by the president or
the secretary at the request in writing of a majority of the directors, or at
the request in writing of shareholders owning at least ten percent (10%) in
amount of the shares of the corporation issued and outstanding and entitled to
vote. Such request shall state the purpose or purposes of the proposed meeting.
Section 5. Notice of Special Meeting. Written notice of a special meeting
of shareholders stating the place, date and hour of the meeting, the purpose or
purposes for which the meeting is called, and by or at whose direction it is
being issued shall be given personally or by mail to each shareholder entitled
to vote thereat not less than ten (10) nor more than fifty (50) days prior to
the meeting.
Section 6. Quorum. Except as otherwise provided by the articles of
incorporation, the holders of one-third of the shares of the corporation issued
and outstanding and entitled to vote thereat present in person or represented by
proxy shall be
1
<PAGE>
necessary to and shall constitute a quorum for the transaction of business at
all meetings of the shareholders.
If, however, such quorum shall not be present or represented at any meeting
of the shareholders, the shareholders entitled to vote thereat present in person
or represented by proxy shall have power to adjourn the meeting from time to
time, until a quorum shall be present or represented. At such adjourned meeting
at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
noticed.
Section 7. Voting. At any meeting of the shareholders every shareholder
having the right to vote shall be entitled to vote in person or by proxy. Except
as otherwise provided by law or the articles of incorporation, each shareholder
of record shall be entitled to one vote for every share of stock standing in his
name on the books of the corporation. All elections shall be determined by a
plurality vote, and, except as otherwise provided by law or the articles of
incorporation, all other matters shall be determined by vote of a majority of
the shares present or represented at such meeting and voting on such questions.
Section 8. Proxies. Every proxy must be executed in writing and dated by
the shareholder or by his attorney-in-fact. No proxy shall be valid after the
expiration of eleven (11) months from the date thereof, unless otherwise
provided in the proxy. Every proxy shall be revocable at the pleasure of the
shareholder executing it,
except in those cases where an irrevocable proxy is permitted by law and the
proxy expressly states that it is irrevocable.
Section 9. Consents. Whenever by any provision of law the vote of
shareholders at a meeting thereof is required or permitted to be taken in
connection with any corporate action, the meeting and vote of shareholders may
be dispensed with if all the shareholders who would have been entitled to vote
upon the action if such meeting were held shall consent in writing to such
corporate action being taken.
Section 10. Conduct of Meetings. (a) Meetings of shareholders shall be
presided over by the chairman of the Board of Directors or, in his absence, by
another director or executive officer designated by the Board of Directors. The
presiding officer shall determine all questions of order or procedure and his
rulings shall be final. (b) The secretary of the corporation, with the
assistance of such agents as may be designated by the secretary, shall make all
determinations of the validity of proxies presented and ballots cast. (c) In the
event that any person or group other than the Board of Directors hold proxies
for more than 10 other shareholders, any vote taken with respect to any
contested matter determined to be such by the presiding officer, shall be taken
in the following manner:
(i) Shareholders wishing to vote in person shall obtain ballots from the
secretary and cast their votes. After a period determined to be
reasonable by the presiding officer, no further voting in person shall
be permitted.
2
<PAGE>
(ii) Thereafter, persons holding proxies shall obtain a ballot from the
secretary which shall be in a form to permit the votes cast with
respect to each appointment of proxy to be identified as such and
shall fill out such ballot, and return it together with the original
appointments of proxies to the secretary. After a period determined to
be reasonable by the presiding officer, the polls shall be closed and
no further voting on the question shall be allowed.
(iii)If the number of proxies held by persons or groups other than the
Board of Directors is high, the presiding officer may, after
consultation with the secretary adjourn the meeting for up to 72
hours, to permit the counting of the votes; provided, however, that
the presiding officer may, in his discretion, permit other business,
including the casting of other votes, to be transacted, prior to any
such adjournment.
ARTICLE III
DIRECTORS
Section 1. Number; Tenure. The number of directors which shall constitute
the entire Board of Directors shall be set by the Board of Directors but shall
be not less than 9 and not more than 12. Directors shall be elected at the
annual meeting of the shareholders, except as provided in Section 3 of this
Article III, and each director shall be elected to serve until his successor has
been elected and has qualified.
Section 2. Resignation; Removal. Any director may resign at any time.
Eighty percent of the shareholders entitled to vote for the election of
directors may remove a director, with or without cause.
Section 3. Vacancies. If any vacancies occur in the Board of Directors by
reason of the death, resignation, retirement, disqualification or removal from
office of any director, all of the directors of the same class then in office,
although less than a quorum, may by majority vote choose a successor or
successors, and the directors so chosen shall hold office until the next annual
meeting of the shareholders and until their successors shall be duly elected and
qualified, unless sooner displaced; provided, however, that if in the event of
any such vacancy the directors remaining in office shall be unable, by majority
vote, to fill such vacancy within thirty (30) days of the occurrence thereof,
the president or the secretary may call a special meeting of the shareholders at
which such vacancy shall be filled. Newly created directorships may be filled
only by the shareholders at an annual or special meeting.
ARTICLE IV
MEETINGS OF THE BOARD
Section 1. Place. The Board of Directors of the corporation may hold
meetings, both regular and special, either within or without the State of South
Carolina.
Section 2. First Meeting. The first meeting of each newly elected Board of
Directors shall be held at such time and place as
3
<PAGE>
shall be fixed by the vote of the shareholders at the annual meeting, and no
notice of such meeting to the newly elected directors shall be necessary in
order to constitute the meeting, provided a quorum shall be present. In the
event of the failure of the shareholders to fix the time and place of such first
meeting of the newly elected Board of Directors, or in the event such meeting is
not held at the time and place so fixed by the shareholders, the meeting may be
held at a time and place as shall be specified in a notice given as hereinafter
provided for special meetings of the Board of Directors or as shall be specified
in a duly executed waiver of notice thereof.
Section 3. Regular Meetings. Regular meetings of the Board of Directors may
be held without notice at such time and at such place as shall from time to time
be determined by the board.
Section 4. Special Meetings. Special meetings of the Board of Directors may
be called by the Chairman of the Board, if any, or by the president on two days
notice to each director, either personally or by mail or by telegram. Special
meetings shall be called by the chairman, president or secretary in like manner
and on like notice at the written request of two directors.
Section 5. Quorum. At all meetings of the Board of Directors, a majority of
the directors then in office shall be necessary to and constitute a quorum for
the transaction of business, and the vote of a majority of the directors present
at the time of the vote if a quorum is present shall be the act of the Board of
Directors. If a quorum shall not be present at any
meeting of the Board of Directors, the directors present thereat may adjourn the
meeting from time to time until a quorum shall be present. Notice of any such
adjournment shall be given to any directors who were not present and, unless
announced at the meeting, to the other directors.
Section 6. Compensation. Directors, as such, shall not receive any stated
salary for their services, but, by resolution of the Board of Directors a fixed
fee and expenses of attendance, if any, may be allowed for attendance at each
regular or special meeting of the board (or of any committee of the board),
provided that nothing herein contained shall be construed to preclude any
director from serving the corporation in any other capacity and receiving
compensation therefor.
ARTICLE V
NOTICES
Section 1. Form; Delivery. Notices to directors and shareholders shall be
in writing and may be delivered personally or by mail or telegram. Notice by
mail shall be deemed to be given at the time when deposited in the post office
or a letter box, in a post-paid sealed wrapper, and addressed to the directors
or the shareholders at their addresses appearing on the records of the
corporation.
Section 2. Waiver. Whenever a notice is required to be given by any
statute, the certificate of incorporation or these by-laws, a waiver thereof in
writing, signed by the person or persons entitled to such notice, whether before
or after the time stated
4
<PAGE>
therein, shall be deemed equivalent to such notice. In addition, any shareholder
attending a meeting of shareholders in person or by proxy without protesting
prior to the conclusion of the meeting the lack of notice thereof to him, and
any director attending a meeting of the Board of Directors without protesting
prior to the meeting or at its commencement such lack of notice shall be
conclusively deemed to have waived notice of such meeting.
ARTICLE VI
OFFICERS
Section 1. Executive Officers. The executive officers of the corporation
shall be a President, Secretary, Treasurer and one or more Vice Presidents.
Section 2. Authority and duties. All officers, as between themselves and
the corporation, shall have such authority and perform such duties in the
management of the corporation as may be provided by these by-laws, or, to the
extent not so provided, by the Board of Directors. If the president is not a
director, the president shall attend all meetings of the Board of Directors.
Section 3. Term of Office; Removal. All officers shall be elected by the
Board of Directors and shall hold office for such term as may be prescribed by
the Board. Any officer elected or appointed by the Board may be removed with or
without cause at any time by the Board.
Section 4. Compensation. The compensation of all officers of the
corporation shall be fixed by the Board of Directors and the
compensation of agents shall either be so fixed or shall be fixed by officers
thereunto duly authorized.
Section 5. Vacancies. If an office becomes vacant for any reason, the Board
of Directors shall fill such vacancy. Any officer so appointed or elected by the
Board shall serve only until such time as the unexpired term of his predecessor
shall have expired unless re-elected or reappointed by the Board.
ARTICLE VII
SHARE CERTIFICATES
Section 1. Form; Signature. The certificates for shares of the corporation
shall be in such form as shall be determined by the Board of Directors and shall
be numbered consecutively and entered in the books of the corporation as they
are issued. Each certificate shall exhibit the registered holder's name and the
number, par value, and class of shares, and shall be signed by the president or
a vice-president and the secretary or an assistant secretary, and shall bear the
seal of the corporation or a facsimile thereof. Where any such certificate is
countersigned by a transfer agent, or registered by a registrar, the signature
of any such officer may be a facsimile signature. In case any officer who signed
or whose facsimile signature or signatures were placed on any such certificate
shall have ceased to be such officer before such certificate is issued, it may
nevertheless be issued by the corporation with the same effect as if he were
such officer at the date of issue.
Section 2. Lost Certificates. The Board of Directors may direct a new share
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the corporation alleged to have been lost or
destroyed, upon the compliance of notice, affidavit and bond requirements of S.
C. Code ss.33-9-130.
Section 3. Registration of Transfer. Upon surrender to the corporation or
any transfer agent of the corporation of a certificate for shares duly endorsed
or accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the corporation or such transfer agent to
issue a new certificate to the person entitled thereto, cancel the old
certificate and record the transaction upon its books.
5
<PAGE>
Section 4. Registered Shareholders. Except as otherwise provided by law,
the corporation shall be entitled to recognize the exclusive right of a person
registered on its books as the owner of shares to receive dividends or other
distributions, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or legal claim to or interest in such
share or shares on the part of any other person.
Section 5. Record date. For the purpose of determining the shareholders
entitled to notice of or to vote at any meeting of shareholders or any
adjournment thereof, or to express consent to or dissent from any proposal
without a meeting, or for the purpose of determining shareholders entitled to
receive payment of any
dividend or the allotment of any rights, or for the purpose of any other action
affecting the interests of shareholders, the board of Directors may fix, in
advance, a record date. Such date shall not be more than fifty (50) nor less
than ten (10) days before the date of any such meeting, and not more than fifty
(50) days prior to any other action.
In each such case, except as otherwise provided by law, only such persons
as shall be shareholders of record on the date so fixed shall be entitled to
notice of, and to vote at, such meeting and any adjournment thereof, or to
express such consent or dissent, or to receive payment of such dividend, or such
allotment of rights, or otherwise to be recognized as shareholders for the
related purpose, notwithstanding any registration of transfer of shares on the
books of the corporation after any such record date so fixed.
ARTICLE VIII
GENERAL PROVISIONS
Section 1. Annual Statement. The Board of Directors shall present at each
annual meeting, and at any special meeting of the shareholders when called for
by vote of the shareholders, a full and clear statement of the business and
condition of the corporation (including a balance sheet, profit and loss
statement and statement of surplus prepared in accordance with generally
accepted principles of accounting and certified by independent public
accountants).
Section 2. Instruments Under Seal. All deeds, bonds, mortgages, contracts,
and other instruments requiring a seal may be signed in the name of the
corporation by the president or by any other officer authorized to sign such
instrument by the Board of Directors.
Section 3. Checks, etc. All checks or demands for money and notes or other
instruments evidencing indebtedness or obligations of the corporation shall be
signed by such officer or officers or such other person or persons as the Board
of Directors may from time to time designate.
Section 4. Fiscal Year. The fiscal year of the corporation shall be fixed
by resolution of the Board of Directors and shall begin on the first day of
January and end on the last day of December in each calendar year.
Section 5. Seal. The corporate seal shall have inscribed thereon the name
of the corporation and shall be in such form as is determined by the Board of
Directors. The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or otherwise reproduced.
Section 6. Repurchase of Shares. The corporation shall not, directly or
indirectly, acquire the common stock of any shareholder who is the record or
beneficial owner of 1% or more of the corporation's outstanding shares (the
"Interested Shareholder") at a price in excess of such stock's Book Value (as
hereafter defined) unless the corporation offers to acquire, on substantially
the same terms and conditions, a percentage of the shares of common stock
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held by each other shareholder which is equivalent to the percentage of the
shares of the Interested Shareholder to be acquired. As used herein, "Book
Value" means the book value of the common stock, based upon the corporation's
balance sheet as of the end of the last fiscal quarter preceding the stock
acquisition. This section shall not, however, apply to (a) any acquisition
pursuant to the exercise of, or in settlement of, dissenter's rights; (b) any
acquisition pursuant to the order of any court or regulatory authority; or (c)
any acquisition in settlement of any claim related to the purchase of such stock
by the Interested Shareholder.
Section 7. Sale of assets. No substantial asset of the corporation shall be
sold unless the terms of such sale shall have been approved in advance by at
least two-thirds of the full Board of Directors of the corporation. For purposes
of this Section, "substantial asset" shall mean and be limited to any asset the
value of which, as reflected on the balance sheet of the corporation, exceeds
one-fourth of the total value of all assets of the corporation as reflected on
the balance sheet of the corporation.
ARTICLE IX
AMENDMENTS
Section 1. Power to Amend. The Board of Directors shall have the power to
amend, repeal or adopt by-laws at any regular or special meeting of the Board.
No such amendment, repeal or adoption of a bylaw provision shall be effective
unless it shall
have been consented to by two-thirds of the full Board of Directors. However,
any by-law adopted by the Board may be amended or repealed by vote of the
holders of shares entitled at the time to vote for the election of directors.
Section 2. Amendment Affecting Election of Directors; Notice. If any by-law
is adopted, amended or repealed by the Board, there shall be set forth in the
notice of the next meeting of shareholders for the election of directors the
by-law so adopted, amended or repealed, together with a concise statement of the
changes made. Any notice of meeting of directors or shareholders at which
by-laws are to be adopted, amended or repealed shall include notice of such
proposed action.
7
SOUTH CAROLINA SUBLEASE
RICHLAND COUNTY Re: Drive-in Bank Facility
Hampton Street and Park Street Columbia,
South Carolina
THIS SUBLEASE is made and entered into as of March 1, 1997, by and between
FIRST UNION NATIONAL BANK OF SOUTH CAROLINA, a national banking association
('1Sublessor"), and BANX OF COLUMBIA, NA., a national banking association
("Subtenant").
W I T N E S E T H:
Sublessor hereby sublets unto Subtenant and Subtenant hereby accepts, as
tenant of Sublessor and upon the terms and conditions herein set forth, all of
the property or premises located at the southwesterly corner of the intersection
of Hampton Street and Park Street, Columbia, South Carolina, which is leased by
Sublessor under that certain Ground Lease dated February 22, 1988 (the "Prime
Lease11) between Hampton Park Associates, a South Carolina general partnership
("Prime Landlord") and Sublessor, together with any and all rights and easements
appurtenant thereto, buildings and improvements located thereon, and existing
fixtures and equipment located therein (hereafter referred to as the "premises"
or "leased premises") . A copy of the Prime Lease has been delivered to
Subtenant and the Prime Lease is incorporated herein by reference.
1. SUBLEASE TERM. The term of this Sublease shall commence as of August 1, 1997,
and shall continue through September 30, 2007. However, Subtenant shall have the
right to terminate this Sublease effective as of September 30, 2002, upon giving
Sublessor written notice of such termination in advance of October 1, 2001.
Provided Subtenant is not in default under this Sublease as of the date the
notice of extension is given, Subtenant shall have the right to extend the term
of this Sublease from October 1, 2007, through September 30, 2012, upon giving
Sublessor written notice of such extension in advance of October 1, 2006, but no
sooner than October 1, 2005. The term of the Prime Lease ends February 28, 2018,
but Sublessor and Subtenant do not at this time have any agreement for the
extension of the term of this Sublease beyond September 30, 2012.
2. RENTAL. Except as provided below, the rent payable by Subtenant to Sublessor
hereunder shall be payable monthly in advance on the first day of each calendar
month, prorated as to any partial month, commencing as of the earlier of (a)
October 1, 1997, or (b) the date Subtenant opens for the conduct of business
with the public at the premises. Rent payments due from Subtenant under this
Sublease shall be payable to Sublessor, or as directed in writing by Sublessor,
as follows:
As of the execution of this Sublease, Subtenant shall pay to Sublessor
$24,000.00, representing (i) a security deposit of $2,000.00 to be held by
Sublessor as provided under this Sublease, and (ii) the prepayment of rent of
$2,000.00 per month due from October 1, 1997, through August 31, 1998. If any
rent or prorated rent is due for any period prior to October 1, 1997, Subtenant
shall pay such in advance as of the date Subtenant opens for the conduct of
business with the public at the premises. As of September 1, 1998, rent due
under this Sublease shall be payable monthly in the amount of $2,000.00 per
month through September 30, 2007.
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If Subtenant exercises its option to extend the term of this Sublease, then
rent due under this Sublease during the extended term shall be determined as
follows:
(i) As of October 1, 2007, the monthly rent due under this Sublease shall
be $2,000.00 per month p1us a percentage thereof (which in no event
shall be less than twenty percent (20%) or more than sixty percent
(60%)) equal to the percentage increase in the United States National
Consumer Price Index, for All Nationwide Urban Consumers, U.S. City
Average, All Items (1982-84 100) published by the Bureau of Labor
Statistics of the United States Department of Labor (the "CPI"; or if
such index should not be in use or if the components thereof as of the
day of the Sublease or substantially altered or revised, the index
most nearly comparable thereto shall be substituted for the specified
index) over the preceding ten (10) years ending as of the most recent
month for which such CPI statistics are available as of October 1,
2007; and
(ii) As of October 1, 2010, the monthly rent due under this Sublease shall
be the monthly amount of the rent for the term October 1, 2007,
through September 30, 2010, as determined under subsection (i) above
plus a percentage thereof (which in no event shall be less than six
percent (6%) or more than eighteen percent (18%)) equal to the
percentage increase in the CPI over the preceding three (3) year
period ending as of the most recent month for which such CPI
statistics are available as of October 1, 2010.
Sublessor shall notify as Subtenant of each such percentage change in
the CPI and the amount of the new monthly rent due as a result
thereof, and shall furnish as Subtenant a copy of Sublessor's
computations thereof.
3. POSSESSION. Sublessor shall deliver to Subtenant possession of the leased
premises as of August 1, 1997, to allow Subtenant to enter the premises to
inspect the same or to commence any renovation allowed under this Sublease at
any time after August 1, 1997.
4. UTILITIES, MAINTENANCE INSURANCE, AND TAXES. Beginning as of the commencement
date of the term of this Sublease, any and all charges or expenses relating to
utilities, maintenance, repairs, insurance, real estate taxes, services and
common area charges (if any) which may be imposed or required to be paid under
the terms of the Prime Lease shall be paid by Subtenant in full, either directly
or upon demand, when and as required to be paid in accordance with the terms of
the Prime Lease, and in such amounts as shall be prescribed or determined under
the Prime Lease. Any such charges or expenses shall be prorated between
Sublessor and Subtenant on a daily basis if they include or relate to any period
prior to the commencement date of this Sublease. Any credits or refunds due from
Prime Landlord as a result of overpayment, and any deficits or payments due to
Prime Landlord as a result of underpayment, of any such charges or expenses due
under the Prime Lease shall be prorated and adjusted between Sublessor and
Subtenant on a daily basis if they include or relate to any period prior to the
commencement date of this Sublease.
5. HAZARDOUS MATERIALS. Subtenant covenants, warrants, and agrees that Subtenant
and its officers, employees, customers, invitees and agents shall not engage in
any conduct or activity on, about, within, or as to the premises which involves
or relates to the handling, generation, sale, possession, storage, labeling,
treatment, processing, discharge, use, transportation, maintenance and/or
disposal of any substance or material classified under any federal, state or
local law as "hazardous" or as otherwise regulated by any such applicable
environmental law. Subtenant agrees to hold harmless and indemnify Sublessor and
Prime Landlord from and against any and all loss, liability, claims, damages,
costs or expenses, including attorneys' fees and remediation costs, that may be
incurred by Sublessor or Prime Landlord resulting from the breach of the
foregoing covenant.
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6. IMPROVEMENTS. Subtenant shall be responsible for all improvements and costs
incurred in upfitting and renovating the premises for Subtenant's use. Sublessor
shall cooperate with Subtenant to secure the consent of Prime Landlord, if
required, to any signage to be installed or alterations to be made by Subtenant.
Prior to making any improvements, alterations or renovations to the premises,
Subtenant agrees to submit all plans and specifications -to Sublessor for review
and approval and to Prime Landlord if such approval by Prime Landlord is
required under the Prime Lease. Such improvements, alterations or renovations
shall be done in a workman-like manner and on a timely basis, in accordance with
all permits and building codes.
Subtenant has inspected the leased premises and found them suitable for its
purposes as of the date of this Sublease, and Subtenant agrees to accept the
condition thereof as of the commencement date provided there has been no
material adverse change in the condition thereof as of the commencement date.
Sublessor shall be responsible to maintain the premises and the building,
equipment and fixtures thereon in good working order from the date hereof until
the commencement date. SUBTENANT AGREES TO ACCEPT THE LEASED PREMISES IN AS IS
CONDITION AND ACKNOWLEDGES THAT SUBLESSOR HAS MADE NO REPRESENTATIONS OR
WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE CONDITION OF THE LEASED
PREMISES INCLUDING, WITHOUT LIMITATION, NO WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR USE OR PURPOSE.
Sublessor agrees that Subtenant has the right to change the existing
signage at the oremises to signage that identifies Subtenant and its business as
the occupant of the premises, and to change the curbs and driveways on the
premises by creating a connecting driveway so that vehicles exiting from a
drive-through lane may turn left to circle the building and exit to Park Street
and by creating a new exit to Park Street at the upper end of the drive-through
canopy so that vehicles exiting from a drive-through lane may turn right and
exit to Park Street, provided such changes are permitted by the appropriate
governmental authorities and are made at Subtenant's sole expense.
7. REMOVAL OF SUBTENANT'S PROPERTY All improvements, with the exception of
Subtenant's trade fixtures, equipment and personal property, are to remain as
part of the premises after Subtenant vacates the premises. Provided that
Subtenant is not then in default, Subtenant shall have the right at any time
during the term of this Sublease to remove or replace its trade fixtures and
equipment placed or installed on the premises which may be removed without
material injury to the realty. Any damage to the leased premises or any part
thereof caused by such removal shall be repaired by Subtenant at its cost and
expense.
8. USE AND ASSIGNMENT. Subtenant shall be permitted to use the leased premises
only as drive-through branch banking facility subject, however, to zoning
ordinances, rules, regulations, laws, ordinances, statutes, and requirements of
all governmental authorities, and any board of fire insurance underwriters, and
any similar bodies having jurisdiction thereof, and such conditions,
restrictions and other encumbrances, if any, to which the leased premises may be
subject under the Prime Lease or otherwise. Subtenant shall not, without the
prior written consent of Sublessor and of Prime Landlord, use or allow to be
used said leased premises for any purpose other than that above mentioned.
Subtenant shall neither assign this Sublease (by operation of law or otherwise)
nor sublet the whole or any part of the leased premises without the prior
written consent of Sublessor and of Prime Landlord if and as required by the
Prime Lease; however, Sublessor acknowledges its consent to the assignment of
this Sublease or the subletting of the premises by Subtenant to any parent,
affiliate or subsidiary company of Subtenant or to and successor to Subtenant's
interest as a result of merger or the sale of all or substantially all of the
banking assets of Subtenant.
In no event may the leased premises be used for any illegal or improper
purposes nor snall Subtenant permit, allow or cause any act or deed to be
performed or any practice to be adopted or followed in or about the leased
premises which shall cause or be likely to cause injury or damage to any person
or the leased premises or which would constitute a nuisance. Subtenant agrees to
comply, at its sole cost and expense, with all applicable laws, ordinances,
rules, regulations, and requirements of governmental or other regulatory bodies,
commissions or agencies as to the use and operation of the leased premises.
Subtenant shall be responsible for compliance with Title III of the Americans
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Disabilities Act if and when such compliance is legally required, such as the
removal of architectural barriers to access where readily achievable and the
provision of auxiliary aides necessary to ensure effective communications with
members of the public. Subtenant will deliver to Sublessor copies of any and all
citations, orders, notices or other governmental materials or other
communications received with respect to the operation or use of Subtenant's
business at the leased premises.
9. INDEMNITY AND INSURANCE FOR SUBLESSOR. Subtenant agrees to hold harmless and
to indemnify Sublessor and Prime Landlord from and against any and all claims
arising from injury to persons, loss of life, or damage to property occurring in
or about Subtenant's leased premises and from and against any and all costs,
expenses and liabilities (including without limitation reasonable attorneys'
fees) incurred by Sublessor or Prime Landlord, in connection with any such claim
or proceeding based thereon, to the extent such injury, loss of life or damage
arises out of the negligence or willful act or failure to act of Subtenant, or
any officer, employee, agent, contractor or licensee of Subtenant, or any
visitor, guest or invitee of Subtenant.
Subtenant shall at all times during the term hereof and at its own cost and
expense, procure and continue in force all insurance required to be provided by
Sublessor under the Prime Lease and naming Prime Landlord as an insured
thereunder as required by the Prime Lease and, in addition, (i) a hazard
insurance policy in the amount of 100% of the replacement cost of the buildings
and relating improvements on the premises naming Sublessor and Prime -Landlord
as an additional insured, and (ii) a liability insurance policy naming Sublessor
and Prime Landlord as additional insured providing coverage against liability,
injury or death of any person in connection with the use, operation or condition
of the leased premises, in an amount of not less than $1,000,000 combined single
limit for bodily injury and property damage. Subtenant shall be responsible to
insure its own trade fixtures, equipment and personal property at Subtenant's
own expense. Subtenant shall deliver to the Sublessor and Prime Landlord, upon
regues Certificates of Insurance evidencing the existence and amounts of such
insurance with loss payable clause satisfactory to Sublessor and Prime Landlord.
No such policy shall be cancelable or subject to reduction of coverage or other
modification except after thirty (30) days prior written notice to Sublessor and
Prime Landlord by the insurer. Subtenant shall, within twenty (20) days prior to
the expiration of such policies, furnish Sublessor and Prime Landlord with
renewals or binders, or Sublessor or Prime Landlord may order such insurance and
charge the cost to Subtenant, which amount shall be payable by Subtenant upon
demand. Sublessor and Prime Landlord shall not be liable for any damages to the
leased premises or for any loss, damage or injury to any person or any property
of Subtenant therein or thereon occasioned by bursting, rupture, leaking or
overflow of any plumbing or other pipes (including without limitation, water,
steam and/or refrigerant lines) sprinklers, tanks, drains, drinking fountains or
wash stands, or other similar cause in, above, upon or about the leased premises
or the building in which the leased premises are located.
10. RIGHT OF ENTRY. Sublessor and Prime Landlord shall have the right to enter
the leased premises during normal business hours, .provided. that such entry
does not unreasonably interfere with the operation of Subtenant's business, to
examine the condition of the same, to take any actions or perform any duties
required of Sublessor or Prime Landlord under the Prime Lease or under this
Sublease, or to exercise or enforce its rights under this Sublease.
11. PRIME LEASE. This Sublease is made specifically subject to the terms and
provisions of the Prime Lease. Nothing herein contained is intended or shall be
construed to grant Subtenant any rights with respect to the leased premises in
excess of Sublessor's rights as lessee under the Prime Lease. During the term
hereof, Subtenant shall observe and perform all terms, covenants and conditions
of the Prime Lease which are to be observed or performed on the part of the
lessee thereunder, unless specifically stated otherwise under this Sublease.
Subtenant shall indemnify and hold Sublessor harmless from and against all
claims, damages, costs and expenses (including reasonable attorneys' fees) in
respect to the non-observance or non-performance by Subtenant of any such terms
or conditions of the Prime Lease. Further, Subtenant shall neither do nor permit
anything to the done which would cause the Prime Lease to be terminated or
forfeited by reason of any right of termination or forfeiture reserved or vested
in Prime Landlord, except for the termination of the Prime Lease by Prime
Landlord not caused by the default of Subtenant, and Subtenant shall indemnify
and hold Sublessor harmless from and against all claims, damages, costs and
expenses (including reasonable attorneys' fees) of any kind whatsoever, by
reason of any breach or default on the part of Subtenant by reason of which the
Prime Lease may be terminated or forfeited.
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Sublessor covenants that Subtenant shall peacefully hold and enjoy the
leased premises during the term of this Sublease for so long as the Subtenant
perrorms its agreements hereunder and so long as the Prime Lease is not
terminated by reason of matters or events outside of Sublessor' 5 control.
Sublessor shall hold harmless and indemnify Subtenant from and against any and
all claims, damages or loss, including reasonable attorneys' fees, arising from
Sublessor's failure to observe any terms or perform any of its obligations under
the Prime Lease, other than those obligations under the Prime Lease that are to
be performed by Subtenant as provided under this Sublease.
Sublessor shall give to Subtenant, and Subtenant shall give to Sublessor, a
copy of any notice received from Prime Landlord relating to the Prime Lease, and
in the event the party who has the responsibility under this Sublease to cure
such default under the Prime Lease fails to do so, the other party shall have
the right, but not the obligation, to cure such default and to seek
reimbursement from the defaulting party for any and all costs and expenses,
including reasonable attorneys' fees, incurred in curing such default.
Sublessor agrees to cooperate and respond reasonably as to any request from
Subtenant for assistance in dealing with Prime Landlord to secure for Subtenant
the enjoyment and realization of any and all of the rights and privileges of
Sublessor under the Prime Lease to which Subtenant may be entitled under this
Sublease.
12. EVENTS OF DEFAULT. As used in the Sublease, the term "Event of Default"
shall mean any of the following:
A. Subtenant's failure to make payment of rent or other sum required
hereunder, which failure shall continue uncured for five (5) days after its due
date or written notice from Sublessor, as applicable, written notice thereof
from Sublessor being required to-be given only two (2) times during any twelve
(12) month period;
B. Subtenant's failure to keep, perform or observe any other term, covenant
or condition hereof, which failure shall continue uncured for ten (10) days
after written notice from Sublessor (specifying such failure), or if such
failure by its nature cannot be cured within ten (10) days, if Subtenant shall
not have commenced the cure within ten (10) days after such notice, and
thereafter diligently and continuously prosecuted it to completion;
C. Subtenant makes a transfer in fraud of its creditors or makes an
assignment for the benefit of its creditors;
D. A receiver, trustee or custodian is appointed for all or substantially
all of Subtenant's assets, or for Subtenant's leasehold interest hereunder;
E. Subtenant's personal property used in connection with the leased
premises is taken on execution or similar process; or
F. Subtenant's failure to discharge or bond, within twenty (20) days after
the filing thereof, any mechanics or materialman's lien filed against the leased
premises as a result of any work performed at the leased premises contracted for
by Subtenant.
13. SUBLESSOR'S REMEDIES UPON DEFAULT. Upon the happening of an Event of
Default, Sublessor, at its option and at any time thereafter, may:
A. If Sublessor shall so elect, and without any obligation to do so, cause
such Event of Default to be remedied in such manner and by such means as
Sublessor may deem proper, and the cost and expense thereof paid or incurred by
Sublessor, including reasonable attorneys' fees, if any, together with interest
thereon to the date of payment, shall constitute additional rent hereunder, and
the same shall be due and payable by Subtenant upon demand; or
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B. Terminate Subtenant's right to possession of the leased premises without
terminating this Sublease and require Subtenant to vacate the leased premises,
without prejudice to other remedies; and in such event, Sublessor shall use
reasonable efforts to re-let the premises upon such terms as Sublessor shall
determine in mitigation of its damages, but Subtenant shall continue to be
liable to Sublessor hereunder for all rental and other charges payable hereunder
for the remainder of the term of this Sublease (with such rental to be offset by
any rental received by Sublessor upon the re-letting of the premises) and for
all damages resulting from such default, including costs to clean, renovate,
re-lease, re-upfit or alter the premises for rental to other parties; or
C. Terminate this Sublease and require Subtenant to vacate the leased
premises, and exercise any other remedies available to Sublessor by law, in
equity, or otherwise and sue for all damages resulting from such default
including costs to clean, renovate, release, re-upfit or alter the premises for
rental to other parties.
14. SURRENDER. At the expiration of the tenancy hereby created, Subtenant shall
surrender the leased premises in the same condition that the leased premises
were in upon delivery of possession thereof under this Sublease, reasonable wear
and tear, loss or damage by casualty, and permitted alterations excepted, shall
at -its expense clean-up said leased premises, and shall surrender all keys for
the leased premises to Sublessor. Subtenant shall, at such time, remove all its
personal property, equipment and trade fixtures and shall repair any damage to
the leased premises caused thereby, and any or all such property not so removed
shall, at Sublessor's option, become the exclusive property of Sublessor or be
disposed of by Sublessor without further notice to or demand upon Subtenant.
If Subtenant holds over in possession of the leased premises after the
termination of this Sublease, however such termination may be brought about,
Subtenant shall pay rent for the entire holdover period at double the monthly
rental as provided herein, and shall pay all damages incurred by Sublessor and
all reasonable attorneys' fees and expenses incurred by Sublessor in enforcing
Sublessor's rights hereunder if Sublessor must enforce such rights. No holding
over by Subtenant after the termination of this Sublease shall operate to extend
this Sublease other than as a tenancy at will.
Termination at the expiration of this term shall be without the necessity
of any notice from either Sublessor or Subtenant and Subtenant hereby waives
notice to vacate the premises and agrees that Sublessor shall be entitled to the
benefit of all provisions of law respecting the summary recqvery of possession
of premises from a tenant holding over to the same extent as if statutory notice
had been given.
15. NOTICES. Any notice, communication, request or other document required under
this Sublease to be given to Sublessor or Subtenant, shall be effective when
personally served, or if mailed, when !deposited for delivery as certified or
registered mail, return-receipt requested, to the following addresses:
If to Sublessor: FIRST UNION NATIONAL BANK OF SOUTH CAROLINA
Corporate Real Estate Division
1420 Two First Union Plaza
Charlotte, North Carolina 28288-0340
Attention: Property Management
If to Subtenant: BANK OF COLUMBIA, N.A.
Attention: Harry Brown
P.O. Box 11671
Columbia, South Carolina 29211-1671
Either party may, from time to time, change the address at which such
written notices, communications, requests or other documents or demands are to
be mailed, by giving the other party written notice of such changed address.
16. SUBORDINATION AND ENCUMBRANCE. This Sublease shall not be subordinated by
Subtenant to or pledged as collateral for any financing by Subtenant, and
Subtenant shall not encumber the -premises or its leasehold interest under this
Sublease.
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17. MISCELLANEOUS. ThIs Sublease may be executed in several counterparts, each
of which shall be deemed an original and such counterparts shall constitute but
one and the same instrument. This Sublease shall be binding upon and inure to
the benefit of the parties and their respective heirs, legal representatives,
successors and permitted assigns. It is hereby understood and agreed that the
relationship of the parties hereto is strictly that of sublessor and sublessee
of the leased premises, and Sublessor has no ownershlD in the Subtenant's
business and this Sublease shall not be construed as a joint venture or
partnership, and Subtenant is not and shall not be deemed to be an agent or
representative of Sublessor. This Sublease shall be governed by and construed in
accordance with the laws of South Carolina.
18. BROKERS. Sublessor shall be responsible for payment of the real estate
commission due the real estate brokers engaged by Sublessor and Subtenant in
connection with the subleasing of the premises, being CB Commercial Real Estate
Group, Inc. and DDMS Real Estate, Inc., respectively, under the terms of their
separate agreement(s) regarding such commissions. ExceDt for the commissions due
such brokers, the parties represent each to the other that there have been no
other brokers involved in this transaction and that no other commissions are due
and owing to any other person or entity.
19. ENTIRE AGREEMENT This Sublease, including the applicable terms and
conditions of the Prime Lease, contains the entire agreement between the parties
hereto in connection with the matters set forth herein and all prior or
contemporaneous oral or written agreements regarding the same shall have no
force or effect. This Sublease may not be modified or amended except by a
written agreement signed by the parties hereto. If any provision of this
Sublease (or portion thereof) shall prove to be ineffective or invalid, such
ineffectiveness or invalidity shall not affect any of the other provisions (or
portions thereof) of this Sublease.
20. CASUALTY OR CONDEMNATION. In the event a material portion of the premises is
taken by reason of condemnation and Subtenant, in its reasonable discretion,
determines that the remaining portion of the premises is not suitable for the
conduct of its business, then Subtenant may terminate this Sublease by giving
notice of termination to Sublessor within thirty (30) days after the effective
date of the taking by condemnation. If, however, Subtenant determines that the
remaining portion of the premises would be suitable for the conduct of
Subtenant's business, then this Sublease shall continue, but the amount of
rental shall be reduced in proportion to the reduced useability of the remaining
portion of the premises. Subtenant shall not be entitled to receive condemnation
proceeds relating to any such taking of the premises or any portion thereof.
This Sublease shall not be terminated in the event of any casualty to the
premises and no such casualty shall result in any abatement in the rent due
under this Sublease.
If the facts and circumstances shall exist and occur that would give
Sublessor the right to elect to terminate the Prime Lease by reason of
condemnation of the premises or damage thereto, if and as provided under the
Prime Lease, then the following provisions shall be applicable:
(a) If as a result of the forgoing Subtenant desires to terminate this
Sublease, then Sublessor agrees that it will either terminate the
Prime Lease and this Sublease or terminate just this Sublease (thereby
retaining unto Sublessor its rights under the Prime Lease for its own
purposes) ; and
(b) If by reason of the foregoing Subtenant does not want to terminate
this Sublease, Sublessor shall still have the right to terminate the
Prime Lease and/or this Sublease, but Sublessor agrees not to elect to
so terminate the Prime Lease and/or this Sublease provided (i)
Subtenant pays any costs and fees required in connection with the
repair, restoration or reconstruction of any improvements on the
premises that would not be covered by the terms of the Prime Lease and
(ii) Subtenant agrees to pay any rental or other fees that Sublessor
would otherwise remain responsible to pay under the Prime Lease for
the remainder of the term of this Sublease.
7
<PAGE>
21. SECURITY DEPOSIT Upon the execution of this Sublease, Subtenant shall
deposit with Sublessor the sum of $2,000.00 to be held by Sublessor as security
for the performance by Subtenant of the terms and conditions of this Sublease.
Sublessor shall be entitled to use, apply or retain all or any part of this
security deposit to the extent required to cure any default by Subtenant, for
any rent due and owing Sublessor at the expiration of this Sublease, or for any
sums which Sublessor is required to expend to restore the premises to the same
condition the premises were in at the commencement of this Sublease, ordinary
wear and tear, loss or damage by casualty, and permitted alterations excepted.
In the event Subtenant shall fully comply with the terms of this Sublease,
Sublessor shall return the security deposit, or the remaining portion thereof,
without interest, to Subtenant within thirty (30) days after the expiration and
termination of this Sublease.
22. CONTINGENCY. If Sublessor is unable to secure an acceptable agreement from
Prime Landlord, to the extent required under the Prime Lease, consenting to this
Sublease on or before April 15, 1997, then Sublessor shall have the right to
terminate this Sublease by giving notice to Subtenant of the failure of
Sublessor to secure such agreement from Prime Landlord, and effective as of the
giving of such notice, this Sublease shall be terminated and shall be of no
further force or effect, and any security deposit or prepaid rent shall be
returned to Subtenant.
If Subtenant is unable to secure approvals from all bank regulatory
agencies and authorities required for the relocation of Subtenant's branch bank
operation to the leased premises within sixty (60) days after the date of this
Sublease, then Subtenant shall have the right to terminate this Sublease by
giving notice to Sublessor of the failure of Subtenant to secure such approvals,
and effective as of the giving of such notice, this Sublease shall be terminated
and shall be of no further force or effect, and any security deposit or prepaid
rent shall be returned to Subtenant.
IN WITNESS WHEREOF, Sublessor and Subtenant have caused this Sublease to be
duly executed and their respective seals to be duly affixed effective as of the
day and year first above written.
[SIGNATURES OMITTED]
PORTIONS OF REGISTRANT'S ANNUAL REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED DECEMBER 31, 1997 INCORPORATED BY
REFERENCE INTO THE FORM 10-K
BUSINESS OF THE CORPORATION
General
ComSouth Bankshares, Inc. (the "Corporation") is a multi-bank holding company
incorporated on May 15, 1987, pursuant to the laws of the State of South
Carolina. Subsidiaries of the Corporation are Bank of Columbia, NA ("BOCL"),
which opened for business on July 12, 1988, and Bank of Charleston, NA ("BOC"),
which opened for business on April 12, 1990. 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 Banks also offer individual
retirement 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. Commercial loans 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, Dorchester, and Berkeley Counties for BOC. BOCL serves its customers
from its main office at 1350 Main Street and drive-in facility at 1427 Park
Street in Columbia, South Carolina. BOC serves its customers from its main
office and drive-in facility at 276 East Bay Street, Charleston, South Carolina.
The principal executive offices of the Corporation are located at 1136
Washington Street, Suite 200, Columbia, South Carolina 29201.
1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
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.
TABLE 1 - FINANCIAL SUMMARY
Summary of Operations
<TABLE>
<CAPTION>
(thousands, except per share data)
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Interest income ......................................... $ 14,593 $ 11,276 $ 9,234 $ 6,786 $ 6,537
Interest expense ........................................ 6,580 4,924 4,125 2,570 2,690
--------- --------- --------- --------- ---------
Net interest income ..................................... 8,013 6,352 5,109 4,216 3,847
Provision for loan losses ............................... 334 110 195 75 135
--------- --------- --------- --------- ---------
Net interest income after provision
for loan losses ....................................... 7,679 6,242 4,914 4,141 3,712
Noninterest income ...................................... 1,995 1,646 1,469 771 690
Noninterest expense ..................................... 6,059 5,131 4,576 3,927 3,836
--------- --------- --------- --------- ---------
Income before income taxes .............................. 3,615 2,757 1,807 985 566
Applicable income (taxes) benefit ....................... (1,361) (929) (426) 62 (43)
--------- --------- --------- --------- ---------
Net income .............................................. $ 2,254 $ 1,828 $ 1,381 $ 1,047 $ 523
========= ========= ========= ========= =========
Earnings per share - Basic (1) .......................... $ .98 $ .80 $ .61 $ .47 $ .23
Earnings per share - Diluted (1) ........................ $ .91 $ .77 $ .60 $ .47 $ .23
Book value at year-end per common share ................ $ 6.91 $ 5.93 $ 5.19 $ 4.46 $ 4.08
Selected year-end assets and liabilities
Total assets ............................................ $ 205,572 $ 164,634 $ 133,423 $ 96,920 $ 95,008
Interest-earning assets ................................. 192,517 151,635 119,429 89,179 87,105
Investment securities ................................... 43,026 34,106 22,135 21,878 23,323
Loans (net) ............................................. 142,671 113,879 91,024 67,301 59,883
Deposits ................................................ 182,673 145,408 117,763 82,908 82,898
Noninterest-bearing deposits ............................ 41,284 35,678 24,654 13,392 11,430
Interest-bearing deposits ............................... 141,389 109,730 93,109 69,516 71,468
Interest-bearing liabilities ............................ 5,615 4,659 2,193 3,422 2,513
Stockholders' equity .................................... 16,016 13,641 11,879 10,104 9,238
Ratios (average)
Loans to deposits ....................................... 80.89% 82.55% 80.62% 71.87% 73.58%
Return on assets ........................................ 1.24% 1.30% 1.22% 1.13% 0.58%
Return on interest-earning assets ....................... 1.31% 1.37% 1.30% 1.20% 0.62%
Return on stockholders' equity .......................... 15.19% 14.54% 12.74% 11.12% 5.68%
Net interest income to interest-earning assets .......... 4.66% 4.78% 4.81% 4.84% 4.53%
Net charge-offs (recoveries) to loans ................... .26% 0.09% 0.01% (0.11%) 0.66%
Stockholders' equity to assets .......................... 8.17% 8.94% 9.55% 10.13% 10.21%
Stockholders' equity to deposits ........................ 9.32% 10.16% 10.94% 11.69% 11.60%
Risk-based capital ratio ................................ 12.10% 13.30% 13.43% 16.23% 15.27%
Tier 1 leverage ratio ................................... 10.90% 11.90% 12.17% 14.96% 14.00%
</TABLE>
(1) See Note 1 to consolidated financial statements regarding earnings per share
calculation.
2
<PAGE>
RESULTS OF OPERATIONS
The Corporation recorded net income of $2,254,000 or $.91 per diluted share at
year end 1997, an increase of 23% over the $1,828,000 or $.77 per diluted share
reported for 1996. The economy in both markets serviced by each bank has been
favorable over the past several years and has generated a need for businesses to
borrow to fund expansion and growth. As a result, loans outstanding grew by 25%
to $144,500,000 during 1997, which was the primary reason for the improved
earnings over the prior year.
The Corporation had total revenues of $16,588,000, $12,922,000 and $10,703,000
for the three years ending 1997, 1996 and 1995, respectively. Total expenses for
the same periods were $14,334,000, $11,094,000 and $9,322,000.
Summarized in Table 2 is an analysis of the composition of the Corporation's
revenues and expenses for 1997, 1996 and 1995.
TABLE 2 - REVENUE AND EXPENSES
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
Amount % Amount % Amount %
------ - ------ - ------ -
Revenues
<S> <C> <C> <C> <C> <C> <C>
Interest on loans ................................ $11,945,201 72.0% $ 9,454,242 73.2% $ 7,723,855 72.2%
Interest and dividends on investment securities .. 2,520,380 15.2% 1,674,717 13.0% 1,361,008 12.7%
Interest on temporary investments ................ 127,606 .8% 147,320 1.1% 148,778 1.4%
Noninterest income ............................... 1,995,115 12.0% 1,646,054 12.7% 1,469,342 13.7%
----------- ----- ----------- ----- ----------- -----
Total revenues ................................... $16,588,302 100.0% $12,922,333 100.0% $10,702,983 100.0%
=========== ===== =========== ===== =========== =====
Expenses
Interest on deposits ............................. $ 6,263,216 43.7% $ 4,756,452 42.9% $ 4,008,427 43.0%
Interest on note payable and
securities sold under agreements
to repurchase .................................. 317,278 2.2% 167,104 1.5% 116,136 1.2%
Provision for loan losses ........................ 334,000 2.3% 110,000 1.0% 195,000 2.1%
Salaries and employee benefits ................... 3,090,304 21.6% 2,661,977 24.0% 2,481,335 26.6%
Occupancy expenses ............................... 448,647 3.1% 433,592 3.9% 429,183 4.6%
Furniture and equipment .......................... 474,652 3.3% 406,767 3.6% 341,966 3.7%
Advertising and marketing ........................ 161,966 1.1% 89,358 0.8% 78,643 0.8%
Other ............................................ 1,883,592 13.2% 1,539,418 13.9% 1,244,695 13.4%
Taxes ............................................ 1,360,424 9.5% 929,239 8.4% 426,127 4.6%
----------- ----- ----------- ----- ----------- -----
Total expenses ................................... $14,334,079 100.0% $11,093,907 100.0% $ 9,321,512 100.0%
=========== ===== =========== ===== =========== =====
</TABLE>
3
<PAGE>
Interest on loans was responsible for most of the change in revenues in each of
the last three years. Increased volume was the major factor for the growth in
loan interest income as the yield realized on loans declined from 1995 to 1996,
but remained relatively stable from 1996 to 1997. Interest income generated by
investment securities also increased over the same three year period as a result
of asset growth and improved yields earned on the portfolio each year.
Noninterest income also increased over the three year period with the majority
of these increases being derived from the "Business Manager" product. This
product provides immediate cash flows 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. Fees derived from this
product increased by $200,000 from 1995 to 1996 and $195,000 from 1996 to 1997.
Management's emphasis on the attraction of core deposit relationships to provide
the funding source for its loans growth continued to provide additional revenue
from deposit fees charged to service these accounts. Fees derived from deposit
service charges increased by $113,000 from 1995 to 1996 and $145,000 from 1996
to 1997. The increase in deposit fee income over the three year period, though
impacted somewhat by a modest increase by BOCL in deposit fees during the third
quarter of 1996, was principally the result of growth in the number of deposit
accounts.
The increase in interest paid on deposits for the period from 1995 to 1996 was
entirely due to growth in deposit accounts as rates paid on deposits declined.
The increase in interest paid for deposits in the 1996 to 1997 period resulted
from both growth and rate changes as rates paid on interest-bearing deposits
increased by 13 basis points during the period. The increase in interest in the
note payable category each year is the result of a borrowing during 1996 of
$1,200,000 by the Corporation and an additional advance of $250,000 on the same
note in 1997. Proceeds from these borrowings were used to support funding needs
at the Corporate level for legal fees and general operating expenses. An
increase in charged-off loans during 1997, coupled with a maturing loan
portfolio and strong loan growth over the past two years resulted in a
management decision to increase the contribution to the provision for loan
losses during 1997. Salaries and employee benefits increased a modest 7% from
1995 to 1996 principally due to annual merit increases, however in 1997
management realized the need to increase staffing to better serve its customer
base and to promote continued growth in the Corporation. As a result, salary and
employee benefits increased by 16% in 1997 over 1996. The increase in furniture
and equipment expense is the direct result of the increased staffing over the
three year period. Advertising and marketing expenses increased over the three
year period as a result of increased business and promotional materials to
develop cross selling opportunities. In addition, charitable contributions
increased by $25,000 during 1997 to support various local community projects in
both service areas.
Other expenses increased by $295,000 from 1995 to 1996 and by $344,000 from 1996
to 1997. Legal fees accounted for the major portion of these increases as legal
fees were $170,000 higher in 1996 than 1995 and $150,000 higher in 1997 than
1996. During 1995, 1996 and 1997, the Corporation advanced legal defense
expenses for 8 present and former directors of the Corporation named as
defendants in 16 suits brought by stockholders including several former
directors of the Corporation or the Banks and the wife of the former President
of the Corporation, one of which was asserted to be a class action status. In
1997, the trial judge granted summary judgment to all of the defendants in the
suit which had been brought as a class action and the plaintiff indicated that
he would appeal. Because it appeared that the Corporation would be obligated to
indemnify the individual defendants for their legal expenses and the Corporation
was advised by counsel that the posture of the 16 cases was such that further
legal proceedings, and thus legal expenses, could be substantial, the
Corporation agreed to participate in a settlement of the 16 cases pursuant to
which the Corporation paid $250,000 to the plaintiffs and released its claims
for reimbursement and future coverage against its directors' and officers'
liability insurance carrier. The $250,000 was accrued as a legal expense in the
fourth quarter of 1997 although the settlement did not become final until court
approval of the settlement and dismissal of the suits occurred in the first
quarter of 1998. In 1997, another shareholder represented by different counsel
brought a suit against the same 8 former and present directors based on
essentially the same facts. The Corporation has advanced the legal expenses for
the defendants in that suit although the Corporation is not named as a defendant
4
<PAGE>
in that suit. Defense of the suit is not covered by insurance and the
Corporation expects to have to pay the expense of defending the suit. The amount
of such expense cannot be reasonably estimated. Accordingly, the Corporation has
not set up a reserve to cover the expense but will accrue the expense as it
occurs. Supplies and printing expenses increased by $25,000 from 1995 to 1996
and $22,000 from 1996 to 1997 and postage and freight increased by $25,000 from
1995 to 1996 and $18,000 from 1996 to 1997. These increases were primarily due
to the growth in assets and deposits. Directors fees increased by $9,000 in 1996
over 1995 and $43,000 in 1997 from 1996 as a result of changes made to the fee
structure in 1996, coupled with the addition of several new directors in BOCL
and increased attendance in board and committee meetings. Temporary employment
services increased by $18,000 from 1995 to 1996, but remained relatively stable
from 1996 to 1997 as additional support was needed to support the growth each
year until permanent staffing could be hired. Consulting fees declined by
$24,000 from 1995 to 1996 due to a reduction in fees related to the development
and implementation of a local area network (LAN) in BOCL during the last quarter
of 1995. Consulting fees for 1997 were up $14,000 over 1996 due to additional
programming needs to assess the potential problems related to the year 2000.
Training expenses increased by $22,000 in 1996 over 1995 and declined by only
$4,000 from 1996 to 1997 as each Bank continued to strengthen banking skills for
there staff through various banking schools and seminars. An additional $21,000
in expense was incurred by the Corporation during 1997 as a result of its 3 for
2 stock split in October 1997. Listing fees for the newly issued stock
certificates with the American Stock Exchange (AMEX) were $17,000, while
processing fees by the transfer agent to issue the new certificates were $4,000.
The increase in tax expenses for each year is primarily due to the increase in
pretax income for each year.
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 1997, 1996 and 1995, net interest income totaled $8,013,000,
$6,353,000 and $5,109,000, respectively. The increase in net interest income for
all three years was principally due to the growth in loans outstanding for each
year as loans outstanding increased by approximately 25% in 1997 and 1996 over
the preceding year.
The average yield on earning assets for 1997, 1996 and 1995 was 8.48%, 8.48% and
8.69%, the average rate paid on interest bearing liabilities was 4.85%, 4.72%
and 4.84%, and the annualized net yield on average earning assets (net interest
income divided by average earning assets) was 4.66%, 4.78% and 4.81%,
respectively.
The change in rates paid on interest bearing liabilities from 1996 to 1997 was
the result of competitive pricing in both markets served by the Banks and the
need for each Bank to attract higher priced funds to support loan growth and an
increase in the federal funds rate during the first quarter of the year. The
change in yields and rates of the 1995 to 1996 period were primarily due to
several prime rate changes, which occurred at various times during the period.
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 negative earnings impact as a result of increased
competition, or rate changes. However, the reduction in the net interest margin
in 1997 is the result of higher rates paid on deposits due to competition for
deposits to support the strong loan growth.
Table 3 shows the yields and costs on average balances for the periods
discussed.
5
<PAGE>
TABLE 3 - COMPARATIVE AVERAGE BALANCE SHEETS - YIELD AND COSTS (Average balances
for years ended December 31, in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
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>
Loans(1) $128,892 $11,945 9.27% $102,207 $9,454 9.25% $79,881 $7,724 9.67%
Investment securities (taxable) 40,747 2,520 6.18% 28,064 1,675 5.97% 23,902 1,361 5.69%
Federal funds sold 2,443 128 5.24% 2,757 147 5.33% 2,532 149 5.88%
------- ------ ---- ------- ------ ---- ------- ----- ----
Total interest-earning assets 172,082 14,593 8.48% 133,028 11,276 8.48% 106,315 9,234 8.69%
------- ------ ---- ------- ------ ---- ------- ----- ----
Noninterest earning assets
Cash and due from banks 7,639 6,263 5,763
Premises and equipment 1,421 1,419 1,321
Other, less allowance for loan
losses 554 46 64
-------- -------- --------
Total noninterest earning assets 9,614 7,728 7,148
-------- -------- --------
Total assets $181,696 $140,756 $113,463
======== ======== ========
Interest-bearing liabilities:
Interest-bearing deposits
NOW, money market and savings $64,907 $2,649 4.08% $54,257 $2,139 3.94% $41,363 $1,653 4.00%
Time deposits 64,589 3,614 5.60% 46,848 2,618 5.59% 41,329 2,356 5.70%
------- ------ ---- ------- ------ ---- ------- ----- ----
Total interest-bearing deposits 129,496 6,263 4.84% 101,105 4,757 4.71% 82,692 4,009 4.85%
Short-term borrowings 4,411 196 4.44% 2,017 88 4.36% 1,915 83 4.33%
Note payable and US Treasury
tax and loan accounts 1,738 121 6.96% 1,183 79 6.68% 641 33 5.15%
------- ------ ---- ------- ------ ---- ------- ----- ----
Total interest-bearing liabilities 135,645 6,580 4.85% 104,305 4,924 4.72% 85,248 4,125 4.84%
------- ------ ---- ------- ------ ---- ------- ----- ----
Noninterest-bearing liabilities
Demand deposits 29,848 22,706 16,387
Other liabilities 1,358 1,167 985
-------- -------- --------
166,851 128,178 102,620
Stockholders' equity 14,845 12,578 10,843
-------- -------- --------
Total liabilities and
stockholders' equity $181,696 $140,756 $113,463
======== ======== ========
Net interest income $8,013 $6,352 $5,109
====== ====== ======
Margin analysis
Interest income/earning assets 8.48% 8.48% 8.69%
Interest expense/earning assets 3.82% 3.70% 3.88%
----- ----- -----
Net interest income/earning assets(2) 4.66% 4.78% 4.81%
===== ===== =====
</TABLE>
(1) Nonaccrual loan balances have been excluded.
(2) Net interest income divided by total interest earning assets.
Table 4 analyzes changes in net interest income resulting from changes in volume
and rates in the periods discussed.
6
<PAGE>
TABLE 4 - VOLUME AND RATE VARIANCE ANALYSIS
(Tax equivalent basis)
<TABLE>
<CAPTION>
1997 Compared to 1996 1996 Compared to 1995
--------------------- ---------------------
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 ........................................ $2,470,533 $ 20,426 $ 2,490,959 $2,066,082 $(335,695) $1,730,387
Investment securities(2) ..................... 786,551 59,112 845,663 247,140 66,569 313,709
Federal funds sold and securities
purchased under agreement to resell ........ (17,133) (2,581) (19,714) 8,925 (10,383) (1,458)
---------- ---------- ----------- ---------- --------- ----------
Total interest-earning assets ................ 3,239,951 76,957 3,316,908 2,322,147 (279,509) 2,042,638
---------- ---------- ----------- ---------- --------- ----------
Interest expense:
NOW, money market and savings ................ 434,053 75,878 509,931 511,219 (24,992) 486,227
Time deposits ................................ 992,148 4,685 996,833 307,037 (45,239) 261,798
Federal funds purchased and securities
sold under agreements to repurchase ........ 106,406 1,620 108,026 4,380 568 4,948
Note payable and US Treasury tax
and loan accounts .......................... 38,815 3,334 42,149 36,350 9,669 46,019
---------- ---------- ----------- ---------- --------- ----------
Total interest-bearing liabilities ........... 1,571,422 85,517 1,656,939 858,986 (59,994) 798,992
---------- ---------- ----------- ---------- --------- ----------
Net interest income .......................... $1,668,529 ($ 8,560) $ 1,659,969 $1,463,161 ($219,515) $1,243,646
========== ========== =========== ========== ========= ==========
</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.
7
<PAGE>
Table 5 sets forth the Corporation's interest sensitivity position as of
December 31, 1997 by showing the amount of interest-earning assets and
interest-bearing liabilities that reprice in the periods shown.
TABLE 5 - INTEREST SENSITIVITY GAP ANALYSIS
<TABLE>
<CAPTION>
(December 31, 1997 balances in thousands)
Total One
0 to 3 4 to 6 7 to 12 Within through Over five
Months Months Months One Year Five Years Years Total
------ ------ ------ -------- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Federal funds sold $ 6,820 $ 6,820 $ 6,820
Investment securities 9,490 $ 5,152 14,642 $27,102 $ 1,282 43,026
Loans receivable (1) 69,937 $ 4,288 12,269 86,494 51,741 6,154 144,389
-------- ------- ------- -------- ------- ------- --------
86,247 4,288 17,421 107,956 78,843 7,436 194,235
-------- ------- ------- -------- ------- ------- --------
Interest-bearing liabilities
Deposits
NOW, money market and savings 70,905 70,905 70,905
Time deposits 34,988 10,984 16,451 62,423 8,062 70,485
Securities sold under agreements
to repurchase 3,096 3,096 3,096
US Treasury tax and loan accounts 1,330 1,330 1,330
Note payable 81 81 161 323 866 1,189
-------- ------- ------- -------- ------- ------- --------
110,400 11,065 16,612 138,077 8,928 0 147,005
-------- ------- ------- -------- ------- ------- --------
Interest-sensitive gap $(24,153) $(6,777) $ $809 $(30,121) $69,915 $ 7,436 $ 47,230
======== ======= ======= ======== ======= ======= ========
Cumulative interest-sensitivity gap $(30,121) $39,794 $47,230
======== ======= =======
Ratios of interest-earnings assets to
interest-bearing liabilities 78.2% 883.1%
======== =======
Cumulative gap to total interest -earning assets (15.5%) 20.5% 24.3%
======== ======= ======
(1) Excludes nonaccrual loans.
</TABLE>
At December 31, 1997 approximately 55% of the Corporation's interest earning
assets will reprice within one year, compared to 94% of interest bearing
liabilities. The 15.5% or $30,121,000 negative interest-sensitivity gap position
at December 31, 1997 is slightly higher than management prefers, however not at
a level high enough that management would expect to create a material impact on
earnings if rates were to change. 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 22% and 23% of total earning assets in 1997 and 1996, respectively.
Note 4 to the accompanying consolidated financial statements presents the book
value of investment securities by category as of December 31, 1997 and 1996. 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.
8
<PAGE>
Management reviews the investment securities portfolio and classifies securities
as either held-to-maturity or available-for-sale. Securities which the
Corporation has the positive intent and ability to hold to maturity are
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 6 - ANALYSIS OF INVESTMENT SECURITIES
<TABLE>
<CAPTION>
December 31 (thousands)
1997 1996 1995
---- ---- ----
Weighted
Average
Taxable
Amortized Fair Equivalent Amortized Fair Amortized Fair
Value Value Yield (1) Value Value Value Value
----- ----- --------- ----- ----- ----- -----
Held-to-Maturity
US Treasuries
<S> <C> <C> <C> <C> <C> <C> <C>
Within one year $ 4,434 $ 4,435 5.36% $ 1,504 $ 1,500 $ 1,494 $ 1,493
One to five years 8,350 8,390 5.99% 6,778 6,753 2,545 2,532
------- ------- ---- ------- ------- ------- -------
Total 12,784 12,825 5.77% 8,282 8,253 4,039 4,025
------- ------- ---- ------- ------- ------- -------
US Government Agencies
Within one year 1,700 1,706 6.28% 41 43 3,300 3,290
One to five years 3,933 3,940 6.46% 4,570 4,551 1,757 1,778
Five to ten years 25 27 7.94% 107 111 90 96
After ten years 56 60 8.93% 72 77 134 144
------- ------- ---- ------- ------- ------- -------
Total 5,714 5,733 6.44% 4,790 4,782 5,281 5,308
------- ------- ---- ------- ------- ------- -------
Total Held-to-Maturity $18,498 $18,558 5.98% $13,072 $13,035 $9,320 $9,333
======= ======= ---- ======= ======= ====== ======
Available-for-Sale
US Treasuries
Within one year $5,704 $5,708 6.06% $1,249 $1,257 $1,500 $1,508
One to five years 2,614 2,633 5.92% 7,131 7,150 3,290 3,339
------- ------- ---- ------- ------- ------- -------
Total 8,318 8,341 6.02% 8,380 8,407 4,790 4,847
------- ------- ---- ------- ------- ------- -------
US Government Agencies
Within one year 2,800 2,799 5.72% 1,000 1,003
One to five years 12,185 12,187 6.32% 10,974 10,908 7,262 7,348
------- ------- ---- ------- ------- ------- -------
Total 14,985 14,986 6.20% 11,974 11,911 7,262 7,348
------- ------- ---- ------- ------- ------- -------
Other Securities
After ten years (2) 1,201 1,201 6.91% 716 716 620 620
------- ------- ---- ------- ------- ------- -------
Total 1,201 1,201 6.91% 716 716 620 620
------- ------- ---- ------- ------- ------- -------
Total Available-for-Sale $24,504 $24,528 6.18% $21,070 $21,034 $12,672 $12,815
======= ======= ==== ======= ======= ======= =======
Average Maturity in Years of Total
Investment Securities (3) 1.64
=======
</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 1997 only.
(3) Federal Reserve Bank Stock and FHLB Stock are excluded from the calculation
of average maturity in years.
9
<PAGE>
LOANS AND ALLOWANCE FOR LOAN LOSSES
At December 31, 1997, total loans outstanding increased by 25% to $144 million
over the $116 million reported for year end 1996. The strong loan demand
experienced by both Banks in 1996 continued throughout 1997 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, 1997 and 1996.
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, 1997 and 1996,
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 distribution of the loan portfolio among loan categories at
December 31 and the maturity or repricing distribution of selected loan
categories at December 31, 1997.
TABLE 7 - LOAN RECEIVABLES AND SELECTED LOAN MATURITIES AND INTEREST RATE
SENSITIVITY
<TABLE>
<CAPTION>
Loans were composed of the following:
December 31,
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Commercial ............................... $134,160,877 $106,816,552 $ 84,216,406 $ 59,564,663 $ 50,226,133
Real estate-mortgage ..................... 3,278,376 3,642,852 4,658,041 5,797,527 6,740,922
Mortgage loans held for resale ........... 799,200
Consumer and other ....................... 6,949,247 4,995,419 3,867,409 3,005,902 2,964,538
Nonaccrual ............................... 87,989 226,582 66,739 526,500 602,786
------------ ------------ ------------ ------------ ------------
Total .................................... $144,476,489 $115,681,405 $ 92,808,595 $ 68,894,592 $ 61,333,579
============ ============ ============ ============ ============
<CAPTION>
Loan maturities and interest rate sensitivity
(December 31, 1997 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 ................................................... $82,778 $46,397 $4,986 $134,161
Real Estate - Mortgage ....................................... 2,487 153 639 3,279
Consumer and other ........................................... 1,229 5,191 529 6,949
------- ------- ------ --------
Total ...................................................... $86,494 $51,741 $6,154 $144,389
======= ======= ====== ========
Total of loans above with :
Predetermined interest rates ................................. 20,256 51,699 5,772 77,727
Adjustable interest rates .................................... 66,238 42 382 66,662
------- ------- ------ --------
Total ...................................................... $86,494 $51,741 $6,154 $144,389
======= ======= ====== ========
</TABLE>
(1) Excludes nonaccrual loans totaling $87,879.
10
<PAGE>
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 1997
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.
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, 1997, the consolidated allowance for loan losses was $1,806,000
or 1.25% of total loans as compared to $1,802,000 or 1.56% at December 31, 1996.
The decline in the percentage of the allowance to total loans is largely due to
the 25% increase in loans outstanding during 1997 and several charge-offs
recorded during the year. Management's evaluation of the allowance at year-end
1997 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 $331,000 for 1997, $92,000 for 1996 and $4,000 for
1995. The increase in charge-offs in 1997 is primarily due to the loss of a
specific loan. 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 $334,000 for 1997 and $110,000 for 1996. The
increase is the provision in 1997 over 1996 was the result of increased
contributions to support the strong loan growth as well as to compensate for the
impact on the reserve due to the increase in loan losses for the year.
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 was sufficient to provide an adequate allowance for the loan
portfolio at December 31, 1997.
Table 8 includes the activity in the allowance for loan losses at December 31
and 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.
11
<PAGE>
TABLE 8 - ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
Activity in the allowance for loan losses was as follows:
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year ........ $ 1,802,402 $ 1,784,508 $ 1,593,771 $ 1,450,776 $ 1,698,327
Provision for loan losses ........... 334,000 110,000 195,000 75,000 135,000
Loans charged off:
Commercial ....................... (321,642) (96,977) (46,704) (43,565) (488,282)
Real estate-mortgage ............. 0 0 0 (142) (103,513)
Consumer and other ............... (34,097) (28,954) (47,167) (53,393) (94,842)
----------- ----------- ----------- ----------- -----------
Total ......................... (355,739) (125,931) (93,871) (97,100) (686,637)
----------- ----------- ----------- ----------- -----------
Recoveries:
Commercial ....................... 20,931 28,272 85,738 135,955 159,920
Real estate-mortgage ............. 0 0 0 550 97,390
Consumer and other ............... 4,266 5,553 3,870 28,590 46,776
----------- ----------- ----------- ----------- -----------
Total ......................... 25,197 33,825 89,608 165,095 304,086
----------- ----------- ----------- ----------- -----------
Balance at end of year .............. $ 1,805,860 $ 1,802,402 $ 1,784,508 $ 1,593,771 $ 1,450,776
=========== =========== =========== =========== ===========
<CAPTION>
Allocation of allowance for loan losses to loan categories:
(December 31, 1997 balances in thousands)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Amount Percent* Amount Percent Amount Percent Amount Percent Amount Percent
------ -------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $1,402 93% $1,348 93% $1,249 91% $1,184 85% $974 83%
Real Estate -
Mortgage 150 2% 194 3% 273 5% 225 9% 193 12%
Consumer and
other 100 5% 101 4% 89 4% 66 6% 67 5%
Unallocated 154 159 174 119 217
------ --- ------ --- ------ --- ------ --- ------ ---
Total $1,806 100% $1,802 100% $1,785 100% $1,594 100% $1,451 100%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
</TABLE>
*Percent of Loans in each category to Total Loans.
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, 1997, $88,000 of loans were on nonaccrual status as compared to
$227,000 at December 31, 1996. The decrease in nonaccrual loans was primarily
due to one of the loans being paid out on an SBA guarantee and another loan
being charged off. Interest income of $11,530, $4,132 and $57,370 was recognized
during 1997, 1996 and 1995, 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, 1997, 1996 and 1995, interest income
of $6,722, $7,779 and $9,798 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 on the sale of OREO
property in 1995.
12
<PAGE>
TABLE 9 - PROBLEM ASSETS
(Balance at December 31)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Nonaccrual loans ........................................ $ 87,989 $ 226,582 $ 66,739 $ 526,500 $ 602,786
Loans past due ninety days or more ...................... 77,673 125,512 15,853 28,703 8,000
Troubled debt restructuring ............................. 0 0 0 0 0
Other real estate owned ................................. 0 0 172,500 191,100 474,996
---------- ---------- ---------- ---------- ----------
$ 165,662 $ 352,094 $ 255,092 $ 746,303 $1,085,782
========== ========== ========== ========== ==========
Nonperforming assets to total loans
and other real estate owned ........................... .11% .30% .27% 1.08% 1.78%
========== ========== ========== ========== ==========
</TABLE>
All accruing loans 90 days of more past due were in the process of collection at
each year end. At December 31, 1997, total classified loans, which include
nonaccrual and accruing loans 90 days past due, were $3,736,000 or 2.6% of total
loans, compared to $2,831,000 or 2.5% 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
December 31, 1997. 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 1997 were $159.3 million, compared to $123.8 million the
prior year, an increase of $35.5 million or 28.7%.
The total average deposits for the years ended December 31, 1997 and 1996, are
summarized below.
TABLE 10 - AVERAGE DEPOSITS
(Average balances in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Average Average Average Average Average Average
Balance Cost Balance Cost Balance Cost
------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing deposits $ 29,848 $ 22,706 $16,387
Interest bearing transaction accounts 24,781 2.87% 23,717 2.78% 20,234 2.89%
Savings 40,126 4.83% 30,540 4.85% 21,128 5.05%
Time 64,590 5.60% 46,848 5.59% 41,329 5.70%
-------- -------- -------
Total average deposits $159,345 $123,811 $99,078
======== ======== =======
</TABLE>
At December 31, 1997, the Corporation had $34,363,250 in certificates of deposit
of $100,000 or more. Of those accounts, maturities are as follows:
MATURITY
Less than three months $22,313,212
Over 3 through 6 months 4,367,533
Over 6 through 12 months 6,192,505
Over 1 year through 5 years 1,490,000
-----------
Total $34,363,250
===========
13
<PAGE>
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, 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 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, 1997 and 1996, liquid assets of approximately $59.2 million and
$47.2 million, respectively, were available to meet demands for deposit
withdrawals, undisbursed amounts on lines of credit ("loan commitments") of
$22,043,000 and $21,396,000 and letters of credit totaling $3,327,000 and
$1,689,000, respectively. The amount of liquid assets available on December 31,
1997 includes cash and cash equivalents of $16,150,000, a increase of $3,050,000
over the December 31, 1996 amount of $13,100,000. This increase in cash and cash
equivalents is attributable to short-term deposits made during the last week of
the year which were invested in federal funds sold.
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 $182.7 million at December 31, 1997, compared to
$145.4 million at December 31, 1996. Of the total deposit base of the
Corporation at December 31, 1997, approximately $34.4 million, or 18.8%,
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.
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, 1997, total
loans outstanding were approximately $144 million, as compared to $116 million
at December 31, 1996.
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, 1997, the Tier 1 capital ratio for BOCL was 9.4% and the total capital ratio
was 10.6%, while BOC had a Tier 1 ratio of 13.0% and a total capital ratio of
14.2%.
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 10.9% and its total capital ratio was
12.1% at December 31, 1997. These ratios are well within guidelines established
by the Corporation's primary regulator. See Note 14 to the consolidated
financial statements for further discussion concerning capital ratios.
14
<PAGE>
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
The Boards 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, and
recorded a 3 for 2 stock split in the form of a fifty percent (50%) stock
dividend on October 30, 1997 for shareholders of record as of October 15, 1997.
Prior to March 21, 1996, there had been only 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
adjusted for the 10% dividend and the 3 for 2 split was $6.25 per share. Closing
price at December 31, 1997 was $23.00 per share. The average monthly market
trading volume for 1997 was 20,400 shares. There were approximately 600 holders
of record of the Corporation's Common Stock (no par value) as of December 31,
1997.
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 national 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.
YEAR 2000 COMPLIANCE
Because the Corporation is heavily dependent upon computers, failure of the
computer systems, or the computer systems of other entities to which the
Corporation's computers are linked or on which they are dependent, to operate
properly after December 31, 1999, could have a material adverse effect on the
Corporation. Although management has prepared a plan for addressing year 2000
issues and believes that its computer systems will not experience any
significant problems with the changeover to the year 2000, it has not yet tested
its systems for year 2000 compliance. Furthermore, the Corporation has not
received confirmation from all of the other entities with which its systems are
linked or upon which its systems are dependent that such entities do not expect
to encounter problems. In addition, computer problems experienced by the
customers of the Banks and others could cause economic disruptions that would
affect business. Therefore, there can be no assurance that the Corporation will
not experience year 2000 problems, or that such problems, if experienced, will
not have a material adverse effect on the Corporation.
FOURTH QUARTER EARNINGS
Net income for the fourth quarter of 1997 was $610,000 or $.25 per diluted
share, compared to $574,000 or $.24 per diluted share earned in the same quarter
of 1996. Strong loan demand during 1997 was the major factor contributing to
this increase in income as interest income was $900,000 higher for the fourth
quarter of 1997 over 1996. Noninterest income improved by $49,000 between the
two periods as fees provided by the "Business Manager" product increased by
$20,000 and fees derived from deposit services, due to the growth of deposit
accounts, increased by $20,000. The remainder of the increase in noninterest
income is due to fees from origination of mortgage loans which were sold during
15
<PAGE>
the year. Mortgage loan origination activity increased during 1997 as rates
remained relatively low, generating new home purchases and refinancing activity.
Noninterest expense increased by $376,000 in the fourth quarter of 1997 over the
same quarter of 1996. Salary and employee benefit expenses increased by $170,000
between the two periods as additional staffing was needed during the year to
support growth and future production. Legal fees increased by $75,000 over the
same period of 1996. The additional staffing needed to support the growth
resulted in increased expenses for occupancy, furniture, fixtures and equipment
in the amount of $25,000. Advertising and marketing expenses increased by
$25,000 due to production of materials to support emphasis on cross selling
opportunities. Supplies and postage increased by $20,000 over the two periods as
a result of the increased growth in loans and deposits during the year. Other
expenses also increased between the two periods by approximately $15,000. This
increase was primarily due to expenses related to the 3-for-2 stock split in
October as additional listing fees paid to the AMEX for listing of the shares
issued in connection with the split were approximately $17,000 and processing
expenses paid to the Corporation's transfer agent in connection with issuance of
the additional stock certificates were approximately $4,000.
Income tax expenses increased by $59,000 as a result of pretax income being
$95,000 higher in the fourth quarter of 1997 over the same period of 1996 and
income tax expenses being reduced by $38,000 in the fourth quarter of 1996 as a
result of an adjustment to the deferred tax asset valuation allowance.
Table 11 summarizes the financial results and selected average balances by
quarter for 1997 and 1996.
TABLE 11 - QUARTERLY FINANCIAL RESULTS (dollar amounts in thousands, except per
share amounts)
<TABLE>
<CAPTION>
1997 Quarter Ended 1996 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 ..................... $ 3,958 $ 3,803 $ 3,590 $ 3,242 $ 3,052 $ 2,866 $2,747 $ 2,611
Interest expense .................... 1,781 1,716 1,578 1,505 1,351 1,233 1,169 1,171
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income ................. 2,177 2,087 2,012 1,737 1,701 1,633 1,578 1,440
Provision for loan losses ........... 114 115 90 15 60 0 40 10
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income after
provision
for loan losses ................... 2,063 1,972 1,922 1,722 1,641 1,633 1,538 1,430
Noninterest income .................. 491 496 526 482 442 401 411 392
Noninterest expense ................. 1,583 1,507 1,601 1,368 1,207 1,370 1,284 1,270
-------- -------- -------- -------- -------- -------- -------- --------
Net income before income taxes ...... 971 961 847 836 876 664 665 552
Current income taxes ................ (361) (362) (322) (316) (302) (218) (251) (158)
-------- -------- -------- -------- -------- -------- -------- --------
Net income .......................... $ 610 $ 599 $ 525 $ 520 $ 574 $ 446 $ 414 $ 394
======== ======== ======== ======== ======== ======== ======== ========
Net income per share-basic .......... $ .26 $ .26 $ .23 $ .23 $ .25 $ .20 $ .18 $ .17
======== ======== ======== ======== ======== ======== ======== ========
Net income per share-diluted ........ $ .25 $ .24 $ .21 $ .21 $ .24 $ .19 $ .17 $ .17
======== ======== ======== ======== ======== ======== ======== ========
Quarterly average balances
Assets .............................. $181,696 $177,159 $172,317 $166,211 $152,750 $141,559 $137,284 $131,227
Earning assets ...................... 172,082 167,605 162,776 157,037 144,696 133,904 129,404 124,435
Investment securities ............... 43,190 41,964 41,207 39,052 33,298 29,357 31,042 29,567
Loans ............................... 128,893 125,641 121,569 117,985 111,398 104,547 98,362 94,868
Deposits ............................ 159,345 154,899 150,362 145,185 134,534 124,018 121,738 114,838
Stockholders' equity ................ 14,845 14,539 14,250 14,002 13,267 12,624 12,195 12,117
Common stock data (dollar per share)
Market price range:
High .............................. $ 23.50 $ 24.88 $ 20.63 $ 15.88 $ 15.25 $ 13.12 $ 14.50 $ 12.37
Low ............................... $ 16.75 $ 19.63 $ 15.13 $ 14.50 $ 12.50 $ 11.62 $ 12.37 $ 10.00
Average ........................... $ 22.84 $ 22.83 $ 17.64 $ 15.30 $ 13.80 $ 12.30 $ 13.51 $ 11.54
Close ............................. $ 23.00 $ 23.75 $ 19.63 $ 15.50 $ 14.62 $ 13.12 $ 12.39 $ 12.25
</TABLE>
16
<PAGE>
<TABLE>
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, 1997 and 1996, and
the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1997. 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.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Corporation and
its subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
J. W. Hunt and Company, LLP
Columbia, South Carolina
January 31, 1998
<PAGE>
COMSOUTH BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
ASSETS
<S> <C> <C>
Cash and due from banks ............................................................... $ 9,332,658 $ 9,441,553
Federal funds sold ................................................................... 6,820,000 3,650,000
------------- -------------
Total cash and cash equivalents ..................................................... 16,152,658 13,091,553
Investment securities:
Held-to-maturity, at amortized cost (fair value of $18,558,395
in 1997 and $13,035,431 in 1996) ................................................... 18,498,356 13,071,927
Available-for-sale, at fair value (amortized cost of $24,504,127 in
1997 and $21,070,548 in 1996) ..................................................... 24,527,758 21,034,568
Loans receivable:
(less allowance for loan losses 1997 - $1,805,860;
1996 - $1,802,402) ................................................................. 142,670,629 113,879,003
Accrued interest receivable ........................................................... 1,643,676 1,343,298
Premises and equipment, net ........................................................... 1,311,260 1,489,159
Other assets .......................................................................... 767,201 724,956
------------- -------------
Total Assets .......................................................................... $ 205,571,538 $ 164,634,464
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits
Noninterest bearing demand .......................................................... 41,283,341 35,677,721
NOW, money market and savings ....................................................... 70,904,709 56,290,307
Time deposits of $100,000 or more ................................................... 34,363,250 26,984,224
Time deposits less than $100,000 .................................................... 33,235,474 23,442,953
Other time deposits ................................................................. 2,885,885 3,012,613
------------- -------------
Total deposits ........................................................................ 182,672,659 145,407,818
Federal funds purchased and securities sold under
agreements to repurchase ............................................................ 3,096,166 2,674,394
Note payable .......................................................................... 1,189,167 1,200,000
U.S. Treasury tax and loan accounts ................................................... 1,330,114 784,106
Accrued interest ...................................................................... 625,948 446,225
Other liabilities ..................................................................... 641,912 481,099
------------- -------------
Total Liabilities ..................................................................... 189,555,966 150,993,642
------------- -------------
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 - 2,317,600 in 1997 and 2,299,138 in 1996) .............................. 13,699,539 13,616,273
Retained earnings ..................................................................... 2,300,437 48,296
Unrealized gain (loss) on investment securities available-for-
sale, net of applicable deferred income taxes ....................................... 15,596 (23,747)
------------- -------------
Total Stockholders' Equity ............................................................ 16,015,572 13,640,822
------------- -------------
Commitments and contingencies
(Notes 2, 12, and 20) ............................................................... ------------- -------------
Total Liabilities and Stockholders' Equity ............................................ $ 205,571,538 $ 164,634,464
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE>
COMSOUTH BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
------------ ------------ ------------
Interest income:
<S> <C> <C> <C>
Interest and fees on loans ....................................... $ 11,945,201 $ 9,454,242 $ 7,723,855
Investment securities ............................................ 2,429,235 1,633,488 1,326,097
Federal funds sold ............................................... 127,606 147,320 148,778
Dividends ........................................................ 91,145 41,229 34,911
------------ ------------ ------------
Total interest income .......................................... 14,593,187 11,276,279 9,233,641
------------ ------------ ------------
Interest expense:
Deposits ......................................................... 6,263,216 4,756,452 4,008,427
Federal funds purchased and securities sold
under agreements to repurchase ................................. 195,757 87,731 82,783
U.S. Treasury tax and loan accounts .............................. 31,425 33,459 33,120
Note payable ..................................................... 90,096 45,913 233
------------ ------------ ------------
Total interest expense ......................................... 6,580,494 4,923,555 4,124,563
------------ ------------ ------------
Net interest income .............................................. 8,012,693 6,352,724 5,109,078
Provision for loan losses ........................................ 334,000 110,000 195,000
------------ ------------ ------------
Net interest income after provision for loan losses .............. 7,678,693 6,242,724 4,914,078
------------ ------------ ------------
Noninterest income:
Lending operations and services .................................. 1,223,621 1,013,470 957,418
Service charges on deposit accounts .............................. 689,840 555,723 442,397
Other ............................................................ 81,654 76,861 69,527
------------ ------------ ------------
1,995,115 1,646,054 1,469,342
------------ ------------ ------------
Noninterest expenses:
Salaries and employee benefits ................................... 3,090,304 2,661,977 2,481,335
Occupancy expenses ............................................... 448,647 433,593 429,183
Furniture and equipment .......................................... 474,652 406,767 341,966
Advertising and marketing ........................................ 161,966 89,358 78,643
Other ............................................................ 1,883,592 1,539,418 1,244,695
------------ ------------ ------------
6,059,161 5,131,113 4,575,822
------------ ------------ ------------
Income before provision for income taxes ......................... 3,614,647 2,757,665 1,807,598
Provision for income taxes ....................................... (1,360,424) (929,239) (426,127)
------------ ------------ ------------
Net income ....................................................... $ 2,254,223 $ 1,828,426 $ 1,381,471
============ ============ ============
Basic earnings per common share:
Weighted average shares outstanding ............................ 2,311,098 2,287,562 2,260,369
Net income per weighted average number
of shares outstanding ....................................... $ 0.98 $ .80 $ .61
============ ============ ============
Diluted earnings per common share:
Weighted average shares outstanding ............................ 2,464,833 2,387,573 2,299,470
Net income per weighted average number
of shares outstanding ....................................... $ 0.91 $ .77 $ .60
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE>
COMSOUTH BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Retained Unrealized
Earnings Gain (loss) on Total
Common Stock (Accumulated Investment Stockholders'
Shares (1) Amount Deficit) Securities Equity
---------- ------ -------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ............... 2,052,582 $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 ................... 25,868 118,386 118,386
Net income 1,381,471 1,381,471
--------- ----------- ---------- ------- -----------
Balance at December 31, 1995 ............... 2,078,450 11,829,807 (45,414) 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)
6.4% stock dividend 207,900 1,732,500 (1,732,500)
Cash in lieu of fractional shares .......... (2,216) (2,216)
Issuance of common shares .................. 12,788 53,966 53,966
Net income ................................. 1,828,426 1,828,426
--------- ----------- ---------- ------- -----------
Balance at December 31, 1996 ............... 2,299,138 13,616,273 48,296 (23,747) 13,640,822
Change in unrealized gain on investment
securities available-for-sale, net of
applicable deferred income taxes ......... 39,343 39,343
Cash in lieu of fractional shares .......... (2,082) (2,082)
Issuance of common shares .................. 18,462 83,266 83,266
Net income ................................. 2,254,223 2,254,223
--------- ----------- ---------- ------- -----------
Balance at December 31, 1997 ............... 2,317,600 $13,699,539 $2,300,437 $15,596 $16,015,572
========= =========== ========== ======= ===========
</TABLE>
(1) Adjusted for a three-for-two stock split in 1997.
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
COMSOUTH BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
------------ ------------ ------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income ............................................................. $ 2,254,223 $ 1,828,426 $ 1,381,471
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization .......................................... 381,752 330,309 288,565
Provision for loan losses .............................................. 334,000 110,000 195,000
Deferred tax expense (benefit) ......................................... 49,622 (113,137) (200,000)
Amortization of premium and accretion of
discount on investment securities .................................... (36,657) 9,932 17,726
Gross amount of loans originated for resale ............................ (1,800,900)
Proceeds from loans sold ............................................... 1,800,900
Increase in accrued interest receivable ................................ (300,378) (238,393) (304,492)
(Increase) decrease in other assets .................................... (54,478) 21,381 43,489
Increase (decrease) in interest payable ................................ 179,723 (130,949) 340,014
Increase (decrease) in other liabilities ............................... 103,155 (480,222) 713,520
------------ ------------ ------------
Cash provided by operating activities .................................. 2,910,962 1,337,347 2,475,293
------------ ------------ ------------
Cash flows from investing activities:
Purchases of investment securities held-to-maturity .................... (6,963,543) (8,623,337) (493,906)
Purchases of investment securities available-for-sale .................. (7,686,525) (11,174,538) (11,556,551)
Maturities of investment securities held-to-maturity ................... 1,576,718 4,862,449 7,273,578
Maturities of investment securities available-for-sale ................. 4,250,000 2,774,700 4,919,100
Net increase of loans .................................................. (30,734,022) (21,891,265) (22,740,893)
Gross amount of loans serviced for others .............................. 4,299,242 4,233,697 4,464,426
Remittances on loans serviced for others ............................... (2,690,846) (5,307,348) (5,641,798)
Purchases of premises and equipment .................................... (203,853) (531,910) (308,190)
Proceeds from sale of other real estate owned .......................... 8,063
------------ ------------ ------------
Cash used for investing activities ..................................... (38,152,829) (35,657,552) (24,076,171)
------------ ------------ ------------
Cash flows from financing activities:
Net increase in deposits ............................................... 37,264,841 27,645,028 34,854,381
Increase (maturities of) in federal funds purchased
and securities sold under agreements to repurchase .................... 421,772 919,482 (1,190,837)
(Repayment) proceeds of note payable ................................... (10,833) 1,200,000 (125,000)
Increase in U.S. treasury tax and loan accounts ........................ 546,008 345,620 86,928
Proceeds from issuance of common stock ................................. 83,266 53,966 118,386
Cash in lieu of fractional shares ...................................... (2,082) (2,216)
------------ ------------ ------------
Cash provided by financing activities .................................. 38,302,972 30,161,880 33,743,858
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents ....................... 3,061,105 (4,158,325) 12,142,980
------------ ------------ ------------
Cash and cash equivalents at beginning of year ......................... 13,091,553 17,249,878 5,106,898
------------ ------------ ------------
Cash and cash equivalents at end of year ............................... $ 16,152,658 $ 13,091,553 $ 17,249,878
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest ................................................. $ 6,400,771 $ 5,054,504 $ 3,784,548
Cash paid for taxes .................................................... $ 1,398,336 $ 1,575,933 $ 107,995
Noncash adjustments to report investment securities
available-for-sale at fair value:
Investment securities available-for-sale ............................... $ 23,631 $ (35,980) $ 143,553
Other (liabilities) assets ............................................. (8,035) 12,233 (48,808)
------------ ------------ ------------
Unrealized gain (loss) on investment securities available-
for-sale, net of applicable deferred income taxes .................... $ 15,596 $ (23,747) $ 94,745
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
COMSOUTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997, 1996 and 1995
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. The Banks' primary source of revenue is providing loans to
customers, who are predominately small and middle-market businesses and
individuals.
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 in
consolidation.
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 unpaid principal balances adjusted for any charge-offs and the
allowance for loan losses.
Nonaccrual Loans: Commercial loans are placed on nonaccrual at the time the loan
is 90 days delinquent unless the credit is well secured and in process of
collection. Residential real estate loans are typically placed on nonaccrual at
the time the loan is 120 days delinquent. Credit card loans, other unsecured
personal credit lines and certain consumer finance loans are typically
charged-off at 120 days delinquent. In all cases, loans must be placed on
nonaccrual or charged-off at an earlier date if collection of principal or
interest is considered doubtful.
21
<PAGE>
All interest accrued but not collected for loans that are placed on nonaccrual
or charged off is reversed against interest income. The interest on these loans
is accounted for on the cash basis or cost recovery method, until qualifying for
return to accrual. Loans are returned to accrual status when all the principal
and interest amounts contractually due are reasonably assured of repayment
within a reasonable time frame and when the borrower has demonstrated payment
performance of cash or cash equivalents for a minimum of six months. Allowance
for Loan Losses: The allowance for loan losses is established through provisions
for loan losses charged against income. Portions of loans deemed to be
uncollectible are charged against the allowance for losses, and subsequent
recoveries, if any, are credited to the allowance.
The allowance for loan losses related to impaired loans that are identified for
evaluation is based on discounted cash flows using the loan's initial effective
interest rate or the fair value, less selling costs, of the collateral for
collateral dependent loans. By the time a loan becomes probable of foreclosure
it has been charged down to fair value, less estimated cost to sell.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb estimated probable inherent loan losses. Management's
periodic evaluation of the adequacy of the allowance is based on the Banks' past
loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay (including the timing
of future payments), the estimated value of any underlying collateral,
composition of the loan portfolio, current economic conditions, and other
relevant factors. This evaluation is inherently subjective as it requires
material estimates that are susceptible to significant change including the
amounts and timing of future cash flows expected to be received on impaired
loans.
Foreclosed Assets: Foreclosed assets, which are recorded in other assets,
include properties, acquired through foreclosure or in full or partial
satisfaction of the related loan. Foreclosed assets initially are recorded at
the lower of fair value, net of estimated selling costs, or costs, at the date
of foreclosure. After foreclosure, valuations are periodically performed by
management and the assets are carried at the lower of cost or fair value, less
estimated costs to sell. Revenue and expenses from operations and changes in the
valuation allowance are included in other expenses.
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities: In June 1996, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" (FASB No.
125), which provides new accounting and reporting standards for sales,
securitizations, and servicing of receivables and other financial assets and
extinguishments of liabilities.
FASB No. 125 is effective for transactions occurring after December 31, 1996,
except those provisions relating to repurchase agreements, securities lending
and other similar transactions and pledged collateral, which were delayed until
after December 31, 1997 by FASB No. 127, "Deferral of the Effective Date of
Certain Provisions of FASB No. 125, an amendment of FASB Statement No. 125." The
adoption of FASB No. 125 in 1997 did not have a material impact on the
Corporation's financial position or results of operation. The adoption of FASB
No. 127 in 1998 is not expected to have a material impact on the Corporation's
financial position or results of operations.
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.
Advertising and Marketing Expenses: The Corporation expenses the costs of
advertising and marketing as incurred.
22
<PAGE>
Stock-Based Compensation: The Corporation applies 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 grant over the amount an employee must pay to acquire the stock.
Compensation cost for stock awards and appreciation rights is recorded based on
the market price at the end of the period. The compensation cost relating to
performance-based awards was $28,296 during 1997. There were no compensation
costs related to performance-based awards for 1996 or 1995. At December 31,
1997, deferred compensation related to director and management awards was
$28,296. There were no deferred compensation for 1996. In October 1995,
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FASB No. 123), was issued and encourages, but does not require,
adoption of a fair value method of accounting for employee stock-based
compensation plans. As permitted by FASB No. 123, the Corporation has elected to
disclose the pro forma net income and net income per share as if the fair value
method had been applied in measuring compensation cost.
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 $47,200, $42,800 and $25,300 to the Plan in 1997,1996 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.
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 current incremental
borrowing rates for similar types of borrowing arrangements.
23
<PAGE>
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.
Reclassification: Certain amounts in the prior year consolidated financial
statements have been reclassified to conform with the manner of presentation in
1997.
Earnings Per Share: Basic earnings per common share are calculated on the basis
of the weighted average number of shares outstanding during the year. Diluted
earnings per share includes stock options granted but not exercised. On October
30, 1997, a three-for-two stock split in the form of a stock dividend was
authorized, payable to stockholders of record on October 15, 1997. A total of
770,816 shares were issued in connection with the split. All common share and
per share amounts in these financial statements have been restated to reflect
the split where appropriate.
NOTE 2 - STOCKHOLDER LEGAL ACTION
In the last quarter of 1997, the Corporation agreed in principle to a settlement
of 16 lawsuits brought by stockholders against the Corporation and 8 former and
present directors of the Corporation. The Corporation agreed to pay $250,000 in
the settlement. Although the settlement was subject to judicial approval which
was not obtained until the first quarter of 1998, the Corporation accrued the
$250,000 in the fourth quarter of 1997.
Another stockholder suit involving the same facts but which does not name the
Corporation as a defendant is still pending against the same 8 former and
present directors of the Corporation. Based on rulings in the suits which were
settled, it appears that the Corporation will be obligated to indemnify the
defendants for their legal expenses and it is accruing those expenses as
incurred. The Corporation and the Banks are defendants in other legal
proceedings in the ordinary course of business. Based on consultation with legal
counsel, management is of the opinion that the outcome of pending and threatened
litigation will not have a material effect on the Corporation's consolidated
financial statements.
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, 1997 and 1996 was met by vault cash held in the two banks.
At December 31, 1997, the two banks had due from bank balances in excess of
federally insured limits of approximately $1,347,000.
24
<PAGE>
NOTE 4 - INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities
held-to-maturity at December 31, 1997 and 1996, are presented below:
<TABLE>
<CAPTION>
1997 1996
---- ----
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Unrelaized Amortized Unrealized Unrealized Unrelaized
Cost Gains Losses Value Cost Gains Losses Value
----------- --------- --------- ----------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities . $12,784,336 $ 52,951 $ 12,547 $12,824,740 $ 8,281,749 $ 13,405 $ 41,624 $ 8,253,530
U.S. Government Agencies . 5,569,883 11,831 5,581,714 4,570,256 4,350 23,535 4,551,071
Mortgage-Backed Securities 144,137 7,804 151,941 219,922 10,908 230,830
----------- --------- ---------- ----------- ----------- ----------- ---------- -----------
Total .................. $18,498,356 $ 72,586 $ 12,547 $18,558,395 $13,071,927 $ 28,663 $ 65,159 $13,035,431
=========== ========= ========== =========== =========== =========== ========== ===========
</TABLE>
The amortized cost and estimated fair value of investment securities
available-for-sale at December 31, 1997 and 1996, are presented below:
<TABLE>
<CAPTION>
1997 1996
---- ----
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Unrelaized Amortized Unrealized Unrealized Unrelaized
Cost Gains Losses Value Cost Gains Losses Value
----------- --------- --------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities $ 8,318,299 $ 35,379 $ 12,804 $ 8,340,874 $ 8,380,065 $ 51,442 $ 24,328 $ 8,407,179
U.S. Government Agencies 14,985,028 25,167 24,111 14,986,084 11,974,333 5,323 68,417 11,911,239
Other .................. 1,200,800 1,200,800 716,150 716,150
----------- --------- --------- ----------- ----------- ---------- ----------- -----------
Total ................ $24,504,127 $ 60,546 $ 36,915 $24,527,758 $21,070,548 $ 56,765 $ 92,745 $21,034,568
=========== ========= ========= =========== =========== ========== =========== ============
</TABLE>
The amortized cost and estimated fair value of investment securities
held-to-maturity at December 31, 1997, based on their contractual maturities,
are shown below:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
----------- -----------
<S> <C> <C>
Due in one year or less ............................................. $6,134,509 $6,140,826
Due after one year through five years ............................... 12,282,389 12,330,319
Due after five years through ten years .............................. 25,550 26,850
Due after ten years ................................................. 55,908 60,400
----------- -----------
$18,498,356 $18,558,395
=========== ===========
</TABLE>
The mortgage-backed securities held at December 31, 1997 mature generally
between one and eleven years. The actual lives of these securities may be
shorter as a result of prepayments.
25
<PAGE>
The amortized cost and estimated fair value of investment securities
available-for-sale at December 31, 1997, based on their contractual maturities,
are shown below:
Estimated
Amortized Fair
Cost Value
---- -----
Due in one year or less ..................... $8,504,327 $8,506,925
Due after one year through five years ....... 14,799,000 14,820,033
Due after ten years ......................... 1,200,800 1,200,800
--------- ---------
$24,504,127 $24,527,758
=========== ===========
Securities with book values of $28,592,077 and $21,009,597 at December 31, 1997
and 1996, respectively, were pledged to secure public deposits and for other
purposes as required by law.
There were no sales of securities during 1997, 1996 or 1995.
NOTE 5 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Loans were composed of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
------------ ------------
<S> <C> <C>
Commercial .......................... $134,160,877 $106,816,552
Real estate-mortgage ................ 3,278,376 3,642,852
Mortgage loans held for resale ......
Consumer and other .................. 6,949,247 4,995,419
Nonaccrual .......................... 87,989 226,582
------------ ------------
Total ............................. $144,476,489 $115,681,405
============ ============
</TABLE>
At December 31, 1997, the total loan portfolio included adjustable rate loans
totaling approximately $66 million and fixed rate loans totaling approximately
$78 million. Overdrawn demand deposits totaling approximately $449,000 and
$294,000 have been reclassified as loan balances at December 31, 1997 and 1996,
respectively.
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year ............. $ 1,802,402 $ 1,784,508 $ 1,593,771
Provision for loan losses ................ 334,000 110,000 195,000
Loans charged off:
Commercial ............................. (321,642) (96,977) (46,704)
Real estate-mortgage ................... 0 0 0
Consumer and other ..................... (34,097) (28,954) (47,167)
----------- ----------- -----------
Total ................................. (355,739) (125,931) (93,871)
----------- ----------- -----------
Recoveries:
Commercial ............................. 20,931 28,272 85,738
Real estate-mortgage ................... 0 0 0
Consumer and other ..................... 4,266 5,553 3,870
----------- ----------- -----------
Total .................................. 25,197 33,825 89,608
----------- ----------- -----------
Balance at end of year ................... $ 1,805,860 $ 1,802,402 $ 1,784,508
=========== =========== ===========
</TABLE>
26
<PAGE>
Impairment of loans having recorded investments of $520,479 at December 31,
1997, and $396,481 at December 31, 1996, has been recognized in conformity with
FASB Statement 114, as amended by FASB Statement 118. The average recorded
investment in impaired loans during 1997 and 1996 was $458,480 and $231,610,
respectively. The total allowance for loan losses related to these loans was
$77,522 and $82,172 on December 31, 1997 and 1996, respectively. Interest income
on impaired loans of $13,554, $25,871 and $8,208 was recognized for cash
payments received in 1997, 1996 and 1995, respectively. Interest income of
$11,530, $4,132 and $57,370 was recognized during 1997, 1996 and 1995,
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, 1997, 1996 and 1995, interest income of $6,722, $7,779 and
$9,798 would have been recognized in the respective periods if those loans had
performed under the original terms.
Commercial loans include investments of $1,056,888 and $3,247,629 in
participating interests of loans originated by other financial institutions as
of December 31, 1997 and 1996, respectively.
Commercial loans exclude loans serviced for others of $8,537,258 and $10,132,951
as of December 31, 1997 and 1996, respectively. Real estate mortgage loans
exclude loans serviced for others of $838,596 and $851,299 as of December 31,
1997 and 1996, 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 $4,552,869 and $4,150,181 at December 31, 1997 and 1996,
respectively. During 1997, $3,802,060 of new loans were made to related parties
and repayments totaled $3,399,371. Additionally, unfunded commitments to extend
credit to directors and officers totaled $1,329,472 for 1997 and $1,022,962 for
1996, and standby letters of credit totaled $208,000 and $35,000 at December 31,
1997 and 1996.
NOTE 7 - PREMISES AND EQUIPMENT
Premises and equipment included the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
----------- -----------
<S> <C> <C>
Leasehold improvements ....................................................... $ 1,290,738 $ 1,233,911
Equipment and furnishings .................................................... 1,825,508 1,678,482
----------- -----------
3,116,246 2,912,393
Less accumulated depreciation and amortization ............................... (1,804,986) (1,423,234)
----------- -----------
Total premises and equipment, net .......................................... $ 1,311,260 $ 1,489,159
=========== ===========
</TABLE>
Depreciation and amortization expenses for 1997, 1996 and 1995 totaled $381,752,
$329,901, and $281,034, respectively.
27
<PAGE>
NOTE 8 - DEPOSITS
The aggregate amount of short-term jumbo CDs, each with minimum denomination of
$100,000, was approximately $34,363,000 and $26,984,000 at December 31, 1997 and
1996, respectively.
At December 31, 1997, the scheduled maturities of CDs were as follows:
1998 .................. $62,422,521
1999 .................. 5,931,188
2000 .................. 1,427,525
2001 .................. 703,375
-----------
$70,484,609
===========
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 was subsequently
converted to a term loan and matures December 2001 with interest payments due
quarterly. BOC's common stock serves as collateral. Borrowings during 1997 and
1996 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Interest rate at year-end .............................. 8.00% 7.75%
Maximum amount outstanding at any month-end ............ $1,200,000 $1,200,000
Average amount outstanding during the year ............. $1,108,767 $777,778
Weighted average interest rate during the year ......... 8.10% 7.75%
</TABLE>
During 1997, the Corporation established a $250,000 term loan with the financial
institution noted in the preceding paragraph. This loan matures September 30,
2000. Interest is variable at the lender's prime rate minus one-half percent
(8.0% average rate for 1997 and at December 31, 1997) with repayment of $20,833
plus accrued interest due quarterly beginning December 31, 1997. The loan is
cross-collateralized with the line-of-credit noted above.
The line-of-credit agreement and the term loan agreement contain certain
covenants. The principal financial covenants require the Corporation to maintain
the allowance for loan losses in an amount of 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 foreclosed assets to loans
receivable plus foreclosed assets 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, 1997. 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 1997 three-for-two
stock split and the 10% stock dividend paid in December 1996.
At December 31, 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.
NOTE 10 - FEDERAL HOME LOAN BANK ADVANCES
The Banks are members of the Federal Home Loan Bank and as such, have access to
borrowings. The Banks use the borrowings to meet short-term liquidity needs and
generally repay the advances and variable interest within one day. Collateral
for the borrowings are blanket liens on the Banks' one to four family
residential loans. All borrowings were repaid at December 31, 1997. The average
interest rate on such borrowings was 6.50% for 1997.
28
<PAGE>
NOTE 11 - 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:
1997 1996
---------- ----------
Average balance during the year $3,346,634 $1,342,644
Average interest rate during the year 4.00% 3.73%
Maximum month-end balance during the year $3,806,376 $2,674,394
NOTE 12 - COMMITMENTS
The Corporation leases its office facilities and certain equipment under various
operating leases. Original lease terms typically range from one to ten years and
normally have options that permit renewals for additional periods.
The aggregate future minimum lease payments under all noncancellable leases at
December 31, 1997 were as follows:
1998 .............. $382,592
1999 .............. 378,590
2000 .............. 99,116
2001 .............. 99,116
2002 .............. 85,979
Thereafter ........... 114,000
----------
$1,159,393
==========
Total rental expenses under the above leases for 1997, 1996 and 1995 were
approximately $355,000, $262,000 and $274,000, respectively.
NOTE 13 - STOCK OPTIONS
The Corporation has reserved 75,900 shares of common stock for issuance to key
employees under an Incentive Stock Option Plan (the "Qualified Option Plan") and
75,900 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 165,000 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 options to
purchase 40 shares of 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.
29
<PAGE>
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
Exercised during 1992 ......................................... (2,000)
Exercised during 1995 ......................................... (16,500)
Expired during 1995 ........................................... (4,300)
Adjusted for 10% stock dividend during 1996 ................... 2,053
Adjusted for 3 for 2 split in 1997 ............................ 11,289
------
December 31, 1997 ............................................. 33,867 $3.56-$5.27 01/24/00
====== =========== ========
Non-Qualified Plan
January 1, 1991 ............................................... 18,875
Granted during 1991 ........................................... 23,525
Exercised during 1992 ......................................... (2,100)
Expired during 1994 ........................................... (500)
Exercised during 1995 ......................................... (700)
Adjusted for 10% stock dividend during 1996 ................... 3,923
Exercised during 1996 ......................................... (8,580)
Adjusted for 3 for 2 split in 1997 ............................ 17,628
Exercised during 1997 ......................................... (17,662)
--------
December 31, 1997 ............................................. 34,409 $3.56-$5.27 12/31/00
====== =========== ========
1995 Non-Qualified Plan
Granted during 1995 ........................................... 40,000
Adjusted for 10% stock dividend during 1996 ................... 4,000
Granted during 1996 ........................................... 6,746
Adjusted for 3 for 2 split in 1997 ............................ 25,397
Granted during 1997 ........................................... 56,888
------
December 31, 1997 ............................................. 133,031 $5.15-$15.91 04/28/07
======= ============ ========
</TABLE>
Since all options granted during 1997, 1996 and 1995, other than those granted
to Messrs. Barnwell and Swanson discussed below, 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.
As an inducement to the President of BOCL to enter into an employment agreement
in January 1992, the Corporation granted total stock options for 36,668 shares
of stock at a purchase price of $2.42 per share. The President of BOCL's rights
in these options fully vested in January 1995.
In recognition of their outstanding performance since the inception of the Bank
of Charleston and as an inducement for their continued employment, Messrs.
Arthur P. Swanson, CEO and President and John P. Barnwell, Executive Vice
President, Bank of Charleston, NA were each granted options to purchase 18,000
shares of common stock at a price of $.67 per share. These options are to vest
on a pro rata basis over a five year period with one fifth of the total vesting
each year, beginning October 10, 1998. Expiration of these options will be in
five year increments beginning with each vesting date. Since these options were
granted at a price less than fair market value, the Corporation expensed
approximately $28,000 in additional compensation expenses during 1997 and plans
to expense approximately $9,200 per month for the remaining vesting period. In
the event of a change of control of the Corporation, any unvested options will
vest immediately.
30
<PAGE>
The fair value of stock-based compensation was estimated at date of grant using
a Black-Scholes option pricing model with the following weighted-average
assumptions for 1997: risk-free interest rate of 6.43%; dividend yield of 0.00%;
volatility factor of the expected market price of the Corporation's common stock
of .17; a weighted-average expected life of the option of 5.7 years and an
assumed annual forfeiture rate of 0%. The Corporation's pro forma information is
presented below:
1997
----
As Reported Pro Forma
----------- ---------
Net income ................................ $2,254,223 $2,229,079
Basic net income per common share ......... 0.98 0.97
Diluted net income per common share ....... 0.91 0.90
All options above have been adjusted to reflect the 10% stock dividend declared
in 1996 and the 3 for 2 split in October of 1997.
NOTE 14 - 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,
1997, approximately $2,902,000 and $3,613,000 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 Banks' 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.
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, 1997, that BOCL and
BOC meet all capital adequacy requirements to which they are subject.
As of September 30, 1997, the most recent notifications 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.
31
<PAGE>
<TABLE>
<CAPTION>
Minimum Required
Minimum Required To Be Well Capitalized
For Capital Under Prompt Corrective
(Dollars in thousands) Actual Adequacy Purposes Actual Provisions
------------------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 1997
Tier 1 Capital (to Average Assets)
<S> <C> <C> <C> <C> <C> <C>
Consolidated ................................... $16,000 8.3% $7,857 4.0% $9,822 5.0%
BOC ............................................ 10,243 10.6% 3,865 4.0% 4,832 5.0%
BOCL ........................................... 6,363 6.4% 3,965 4.0% 4,956 5.0%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated ................................... $16,000 10.9% $5,869 4.0% $8,803 6.0%
BOC ............................................ 10,243 13.0% 3,145 4.0% 4,718 6.0%
BOCL ........................................... 6,363 9.4% 2,718 4.0% 4,076 6.0%
Total Capital (to Risk Weighted Assets):
Consolidated ................................... $17,806 12.1% $11,737 8.0% $14,671 10.0%
BOC ............................................ 11,194 14.2% 6,290 8.0% 7,863 10.0%
BOCL ........................................... 7,212 10.6% 5,436 8.0% 6,794 10.0%
As of December 31, 1996
Tier 1 Capital (to Average Assets):
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>
NOTE 15 - OTHER NONINTEREST EXPENSES
Components of other noninterest expenses were as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Legal, accounting, regulatory and insurance ...................... $ 796,481 $ 649,977 $ 481,428
Supplies and printing ............................................ 172,526 150,749 125,914
Postage and freight .............................................. 138,387 120,621 95,385
Loan servicing ................................................... 90,555 85,630 78,154
Outside services ................................................. 81,236 61,503 52,364
Directors' Fees .................................................. 80,199 36,720 28,140
Dues and subscriptions ........................................... 68,061 70,683 78,538
Training and other employee expenses ............................. 65,759 69,685 47,214
Consulting ....................................................... 65,646 51,274 75,377
Telephone ........................................................ 60,614 56,843 58,217
Losses other than bad debt ....................................... 55,549 34,393 15,112
Temporary employment services .................................... 42,784 44,593 27,035
Data communications .............................................. 40,567 33,481 23,700
Travel-nonofficers ............................................... 26,509 21,610 17,538
Losses-OREO ...................................................... 23,309
Amortization - organization expense .............................. 7,530
Other ............................................................ 98,719 28,347 33,049
---------- ---------- ----------
$1,883,592 $1,539,418 $1,244,695
========== ========== ==========
</TABLE>
32
<PAGE>
NOTE 16 - INCOME TAXES
The Corporation files consolidated federal income tax returns on a calendar-year
basis.
The components of consolidated provision for income taxes were as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1997 1996 1995
----------- ----------- -----------
Taxes currently payable:
<S> <C> <C> <C>
Federal .......................................... $ 1,095,262 $ 903,042 $ 552,598
State ............................................ 215,540 139,334 73,529
----------- ----------- -----------
1,310,802 1,042,376 626,127
----------- ----------- -----------
Deferred income taxes:
Federal .......................................... 49,622 (113,137) (200,000)
----------- ----------- -----------
$ 1,360,424 $ 929,239 $ 426,127
=========== =========== ===========
</TABLE>
The Corporation reported its fifth consecutive profitable year as of December
31, 1997, and prior federal tax net operating loss carryforwards were fully
utilized in 1996. As a result of these changes in circumstances, management
reconsidered its prior policy of fully reserving net deferred tax assets
concluding that it was "more likely than not" that approximately $140,000 and
$200,000 of deferred tax assets would be realized in 1996 and 1995. The decrease
in the valuation allowance was due to the realization of loss carryforwards as
reflected in the provision for income taxes.
At December 31, 1997, the Corporation had net operating loss (NOL) carryforwards
for state income tax purposes of approximately $3.5 million available to offset
future state taxable income. The NOL carryforwards expire in the years 2003
through 2012. The valuation allowance at December 31, 1997 represents
management's estimate of the allowance for the state net operating loss
carryforward deferred tax asset.
Deferred tax assets and (liabilities) and related valuation allowance at
December 31, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
--------- ---------
<S> <C> <C>
Allowance for loan losses ........................................................ $ 439,789 $ 497,145
State tax net operating loss carryforward ........................................ 177,257 127,194
Excess tax over book depreciation ................................................ 67,917 82,522
Accrued liabilities .............................................................. 29,068
Unrealized loss on securities available-for-sale ................................. 12,233
--------- ---------
Gross deferred tax asset ......................................................... 714,031 719,094
--------- ---------
Accretion of discounts on bonds .................................................. (20,953) (1,381)
Unrealized gain on securities available-for-sale ................................. (8,035)
--------- ---------
Gross deferred tax liability ..................................................... (28,988) (1,381)
--------- ---------
Net deferred tax asset before valuation allowance ................................ 685,043 717,713
Less valuation allowance ......................................................... (157,220) (120,000)
--------- ---------
Net deferred tax asset ........................................................... $ 527,823 $ 597,713
========= =========
</TABLE>
33
<PAGE>
Total provision for income taxes is different than if it were computed by
applying the federal tax rate due to the following:
<TABLE>
<CAPTION>
For the Year ended December 31, Percentage of Pre-tax income
1997 1996 1995 1997 1996 1995
----------- ----------- ----------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Tax expense at statutory rate ...................... $ 1,228,980 $ 937,606 $ 614,583 34.0 34.0 34.0
Change in deferred tax asset valuation allowance ... 37,220 (140,624) (200,000) 1.0 (5.1) (11.1)
State tax, net of federal benefit .................. 107,355 74,036 48,529 3.0 2.7 2.7
Alternative minimum tax expenses ................... (13,000) (1.0)
Nondeductible expenses ............................. (26,856) 46,471 12,622 (.7) 1.7 1.0
Other, net ......................................... 13,725 11,750 (36,607) .4 .4 (2.0)
----------- ----------- ----------- ----- ----- -----
$ 1,360,424 $ 929,239 $ 426,127 37.7 33.7 23.6
=========== =========== =========== ===== ===== =====
</TABLE>
NOTE 17 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION
Condensed financial data for ComSouth Bankshares, Inc. (parent only) was as
follows:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
----------- -----------
Balance Sheet Data
<S> <C> <C>
Cash and short-term investments .............................................. $ 61,415 $ 235,042
Investments in subsidiaries, at equity ....................................... 16,621,175 14,032,798
Other assets ................................................................. 713,276 721,916
----------- -----------
Total assets ............................................................... $17,395,866 $14,989,756
=========== ===========
Note payable ................................................................. $ 1,189,167 $ 1,200,000
Other liabilities ............................................................ 191,127 148,934
Stockholders' equity ......................................................... 16,015,572 13,640,822
----------- -----------
Total liabilities and stockholders' equity ................................. $17,395,866 $14,989,756
=========== ===========
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1997 1996 1995
----------- ----------- -----------
Results of Operations Data
Revenues:
<S> <C> <C> <C>
Management fees ............................................................ $ 1,019,265 $ 971,336 $ 878,193
Other ...................................................................... 40 3,743 1,184
----------- ----------- -----------
1,019,305 975,079 879,377
----------- ----------- -----------
Expenses:
Salaries and employee benefits ............................................. 752,165 640,763 579,079
Interest expense ........................................................... 90,096 45,912 233
Other expense .............................................................. 771,054 854,900 489,155
----------- ----------- -----------
1,613,315 1,541,575 1,068,467
----------- ----------- -----------
Income (loss) before equity in undistributed income of subsidiaries .......... (594,010) (566,496) (189,090)
Equity in undistributed income of subsidiaries ............................... 2,848,233 2,394,922 1,570,561
----------- ----------- -----------
Net income ................................................................... $ 2,254,223 $ 1,828,426 $ 1,381,471
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
Cash Flow Data
Cash flows from operating activities:
<S> <C> <C> <C>
Net income ..................................................... $ 2,254,223 $ 1,828,426 $ 1,381,471
Adjustments to reconcile net income to net cash
used for operating activities:
Equity in income of subsidiaries ................................. (2,848,233) (2,394,922) (1,570,561)
Depreciation and amortization .................................... 47,064 38,794 34,110
Increase in other assets ......................................... (7,854) (216,916) (174,641)
Increase (decrease) in other liabilities ......................... 42,193 (279,740) 292,822
----------- ----------- -----------
Cash used for operating activities: .............................. (512,607) (1,024,358) (36,799)
----------- ----------- -----------
Cash flow from investing activities:
Purchases of premises and equipment .............................. (30,570) (41,321) (71,263)
----------- ----------- -----------
Cash used for investing activities ............................... (30,570) (41,321) (71,263)
----------- ----------- -----------
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
Cash from financing activities:
<S> <C> <C> <C>
(Repayments) net proceeds of note payable .......................... (10,833) 1,200,000 (125,000)
Proceeds from issuance of common stock .............................. 83,266 53,966 118,386
Cash in lieu of fractional shares ................................... (2,083) (2,216)
Dividends received from subsidiaries ................................ 299,200
----------- ----------- -----------
Cash provided by (used for) financing activities .................... 369,550 1,251,750 (6,614)
----------- ----------- -----------
(Decrease) increase in cash and cash equivalents .................... (173,627) 186,071 (114,676)
Cash and cash equivalents at beginning of year ...................... 235,042 48,971 163,647
----------- ----------- -----------
Cash and cash equivalents at end of year ............................ $ 61,415 $ 235,042 $ 48,971
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest .............................................. $ 90,096 $ 45,912 $ 223
</TABLE>
NOTE 18 - 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 guarantees are
primarily issued to support private borrowing arrangements. Most guarantees
expire by December 1998. 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.
36
<PAGE>
The estimated fair values of the Corporation's consolidated financial
instruments were as follows at:
(balances in thousands)
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
Financial Assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents .................................... $ 16,153 $ 16,153 $ 13,092 $ 13,092
Investment securities ........................................ 43,026 43,086 34,106 34,070
Loans receivable ............................................. 142,671 147,563 113,879 117,308
-------- -------- -------- --------
Total Financial Assets: .................................. $201,850 $206,802 $161,077 $164,470
======== ======== ======== ========
Financial Liabilities:
Deposits ..................................................... 182,673 182,878 145,408 145,509
Federal funds purchased and securities sold
under agreements to repurchase ............................. 3,096 3,096 2,674 2,674
Note payable ................................................. 1,189 1,189 1,200 1,200
U.S. Treasury tax and loan accounts .......................... 1,330 1,330 784 784
-------- -------- -------- --------
Total Financial Liabilities: .............................. $188,288 $188,493 $150,066 $150,167
======== ======== ======== ========
Off-balance-sheet financial instruments:
Commitments to extend credit ................................. 22,044 22,044 21,396 21,396
Standby letters of credit .................................... 3,327 3,327 1,689 1,689
</TABLE>
NOTE 19 - SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK
Most of BOCL's and BOC's business activity is with customers located within the
Columbia, SC and Charleston, SC metropolitan areas, respectively. Although BOCL
and BOC have diversified loan portfolios, a substantial portion of their
debtor's ability to honor their contracts is dependent 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 20 - CONTINGENCIES
Litigation
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.
Year 2000 Considerations
Many existing computer programs use only two digits to identify a year in the
date datum field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If uncorrected, many computer
applications could fail or create erroneous results by or at the Year 2000. The
Year 2000 issue affects virtually all companies and organizations.
37
<PAGE>
Because the Corporation is heavily dependent upon computers, failure of the
computer systems, or the computer systems of other entities to which the
Corporation's computers are linked or on which they are dependent, to operate
properly after December 31, 1999, could have a material adverse effect on the
Corporation. Although management has prepared a plan for addressing year 2000
issues and believes that its computer systems will not experience any
significant problems with the changeover to the year 2000, it has not yet tested
its systems for year 2000 compliance. Furthermore, the Corporation has not
received confirmation from all of the other entities with which its systems are
linked or upon which its systems are dependent that such entities do not expect
to encounter problems. In addition, computer problems experienced by the
customers of the Banks and others could cause economic disruptions that would
affect business. Therefore, there can be no assurance that the Corporation will
not experience year 2000 problems, or that such problems, if experienced, will
not have a material adverse effect on the Corporation. No special provision has
been made by the Corporation for expenses related to the year 2000 problem,
however, management has incorporated into it's 1998 budget certain expenses
which will potentially be incurred as a result of the year 2000 problem.
38
POWER OF ATTORNEY
KNOW 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,
1997, 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, on
the dates set forth below.
/s/Mason R. Chrisman - March 18, 1998
/s/J. Michael Kapp - March 19, 1998
/s/John C. B. Smith, Jr. - March 19, 1998
/s/Arthur P. Swanson - March 18, 1998
/s/Charles R. Jackson - March 25, 1998
/s/Arthur M. Swanson - March 18, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet at December 31, 1997 and the Consolidated Statement
of Operations for the Year Ended December 31, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,332,658
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,820,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 24,527,758
<INVESTMENTS-CARRYING> 18,498,356
<INVESTMENTS-MARKET> 18,558,395
<LOANS> 144,476,489
<ALLOWANCE> 1,805,860
<TOTAL-ASSETS> 205,571,538
<DEPOSITS> 182,672,659
<SHORT-TERM> 4,426,280
<LIABILITIES-OTHER> 1,267,860
<LONG-TERM> 1,189,167
0
0
<COMMON> 13,699,539
<OTHER-SE> 2,316,033
<TOTAL-LIABILITIES-AND-EQUITY> 205,571,538
<INTEREST-LOAN> 11,945,201
<INTEREST-INVEST> 2,520,380
<INTEREST-OTHER> 127,606
<INTEREST-TOTAL> 14,593,187
<INTEREST-DEPOSIT> 6,263,216
<INTEREST-EXPENSE> 6,580,494
<INTEREST-INCOME-NET> 8,012,693
<LOAN-LOSSES> 334,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,059,161
<INCOME-PRETAX> 3,614,647
<INCOME-PRE-EXTRAORDINARY> 2,254,223
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,254,223
<EPS-PRIMARY> .98
<EPS-DILUTED> .91
<YIELD-ACTUAL> 4.66
<LOANS-NON> 87,989
<LOANS-PAST> 77,673
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,802,402
<CHARGE-OFFS> 355,739
<RECOVERIES> 25,197
<ALLOWANCE-CLOSE> 1,805,860
<ALLOWANCE-DOMESTIC> 1,652,329
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 153,531
</TABLE>
