UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transaction period from ____________________ to _______________________
Commission file number: 0-19045
COMSOUTH BANKSHARES, INC.
(Exact name or registrant as specified in its charter)
South Carolina 57-0853342
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1136 Washington Street, Suite 200
Columbia, South Carolina 29201
(Address of principal executive offices)
(Zip Code)
(803) 343-2144
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports, and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of April 30, 1998:
Common Stock, No Par Value 2,341,320
Class Number of Shares
<PAGE>
COMSOUTH BANKSHARES, INC.
INDEX
PART I. Financial Information
<TABLE>
<CAPTION>
Item 1. Financial Statements
Page No.
Consolidated Balance Sheets -
<S> <C>
March 31, 1998 (unaudited) and December 31, 1997 .......................................... 3
Consolidated Statements of Operations for the Three months ended March 31,
1998 and March 31, 997 (unaudited)......................................................... 4
Consolidated Statements of Changes in Stockholders' Equity for the Three
months ended March 31, 1998 and March 31, 1997
(unaudited)................................................................................ 5
Consolidated Statements of Cash Flows for the Three months ended March 31,
1998 and March 31, 1997 (unaudited)....................................................... 6
Notes to Consolidated Financial Statements .......................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ..................................................................... 9
PART II. Other Information
Item 1. Legal Proceedings ..............................................................................13
Item 6. Exhibits and Reports on Form 8-K ...............................................................13
Signature ...............................................................................................13
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COMSOUTH BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
(Unaudited)
ASSETS
<S> <C> <C>
Cash and due from banks ........................................................ $ 11,036,269 $ 9,332,658
Federal funds sold ............................................................. 17,685,000 6,820,000
------------ ------------
Total cash and cash equivalents ............................................. 28,721,269 16,152,658
Investment securities:
Held-to-maturity, at amortized cost (fair value of
$13,372,158 in 1998 and $18,558,395 in 1997) ................................ 13,302,858 18,498,356
Available-for-sale, at fair value (amortized cost of
$24,852,379 in 1998 and $24,504,127 in 1997) ................................ 24,869,820 24,527,758
Loans receivable:
(less allowance for loan losses 1998 - $1,838,844;
1997 - $1,805,860) .......................................................... 146,946,488 142,670,629
Accrued interest receivable .................................................... 1,645,462 1,643,676
Premises and equipment ......................................................... 1,248,514 1,311,260
Other assets ................................................................... 641,016 767,201
------------ ------------
Total Assets ................................................................... $217,375,427 $205,571,538
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits
Noninterest bearing demand .................................................. 35,537,006 41,283,341
NOW, money market and savings ............................................... 79,443,925 70,904,709
Time deposits of $100,000 or more ........................................... 36,979,405 34,363,250
Time deposits less than $100,000 ............................................ 37,269,934 33,235,474
Other time deposits ......................................................... 3,402,866 2,885,885
------------ ------------
Total deposits ................................................................. 192,633,136 182,672,659
Federal funds purchased and securities sold under
agreements to repurchase .................................................... 3,670,070 3,096,166
Notes payable .................................................................. 2,108,333 1,189,167
U.S. Treasury tax and loan accounts ............................................ 728,058 1,330,114
Accrued interest ............................................................... 608,580 625,948
Other liabilities .............................................................. 815,391 641,912
------------ ------------
Total Liabilities .............................................................. 200,563,568 189,555,966
------------ ------------
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 - 2,341,320 in 1998 and
2,317,600 in 1997) ......................................................... 13,824,539 13,699,539
Retained earnings .............................................................. 2,975,809 2,300,437
Accumulated other comprehensive income ......................................... 11,511 15,596
------------ ------------
Total Stockholders' Equity ..................................................... 16,811,859 16,015,572
------------ ------------
Total Liabilities and Stockholders' Equity ..................................... $217,375,427 $205,571,538
============ ============
</TABLE>
3
<PAGE>
COMSOUTH BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATION
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended March 31,
1998 1997
---- ----
Interest income:
<S> <C> <C>
Interest and fees on loans ................................................... $ 3,323,350 $ 2,653,768
Investment securities ........................................................ 625,315 539,516
Federal funds sold ........................................................... 99,523 48,215
----------- -----------
Total interest income ..................................................... 4,048,188 3,241,499
----------- -----------
Interest expense:
Deposits ..................................................................... 1,827,176 1,427,395
Federal funds purchased and securities sold under
agreements to repurchase .................................................. 53,510 44,775
U.S. Treasury tax and loan accounts .......................................... 8,944 9,768
Notes payable ................................................................ 23,924 23,250
----------- -----------
Total interest expense .................................................... 1,913,554 1,505,188
----------- -----------
Net interest income .......................................................... 2,134,634 1,736,311
Provision for loan losses .................................................... 210,000 15,000
----------- -----------
Net interest income after provision
for loan losses ........................................................... 1,924,634 1,721,311
Noninterest income:
Lending operations and services .............................................. 404,496 296,547
Service charges on deposit accounts .......................................... 184,892 163,265
Other ........................................................................ 35,969 22,643
----------- -----------
Total noninterest income ................................................. 625,357 482,455
----------- -----------
Noninterest expense:
Salaries and employee benefits ............................................... 908,700 725,732
Occupancy expenses ........................................................... 119,790 107,638
Furniture and equipment ...................................................... 107,633 109,574
Advertising and marketing .................................................... 30,488 24,058
Other ........................................................................ 389,879 400,654
----------- -----------
Total noninterest expense ................................................. 1,556,490 1,367,656
----------- -----------
Income before provision for income taxes ..................................... 993,501 836,110
Provision for income taxes ................................................... (318,129) (315,950)
----------- -----------
Net income ................................................................... $ 675,372 $ 520,160
=========== ===========
Basic earnings per common share:
Weighted average shares outstanding ....................................... 2,341,320 2,304,465
Net income per weighted average number
of shares outstanding .................................................. $ .29 $ .23
=========== ===========
Diluted earnings per common share:
Weighted average shares outstanding ....................................... 2,469,695 2,419,271
Net income per weighted average number
of shares outstanding ................................................. $ .27 $ .21
=========== ===========
</TABLE>
4
<PAGE>
COMSOUTH BANKSHARES,INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Three Months Ended March 31, 1998 and March 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Common Retained Comprehensive Stockholders'
Shares Stock Earnings Income (Loss) Equity
------ ----- -------- ------------- ------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 ......... 2,299,138 $13,616,273 $ 48,296 $(23,747) $13,640,822
Comprehensive income:
Net income 520,160 520,160
Other comprehensive income,
net of tax -
Unrealized loss on securities (74,067) (74,067)
-----------
Comprehensive income 446,093
-----------
Issuance of common stock ............. 6,112 28,175 28,175
--------- ----------- ---------- -------- -----------
Balance at March 31, 1997 ............ 2,305,250 $13,644,448 $ 568,456 $(97,814) $14,115,090
========= =========== ========== ========= ===========
Balance at December 31, 1997 ......... 2,317,600 $13,699,539 $2,300,437 $15,596 $16,015,572
Comprehensive income:
Net income ......................... 675,372 675,372
Other comprehensive income,
net of tax -
Unrealized loss on securities ... (4,085) (4,085)
-----------
Comprehensive income ................. 671,287
-----------
Issuance of common stock ............. 23,720 125,000 125,000
--------- ----------- ---------- ------- -----------
Balance at March 31, 1998 ............ 2,341,320 $13,824,539 $2,975,809 $11,511 $16,811,859
========= =========== ========== ======= ===========
</TABLE>
5
<PAGE>
COMSOUTH BANKSHARES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended March 31,
1998 1997
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income ....................................................................... $ 675,372 $ 520,160
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization .................................................... 88,101 72,765
Provision for loan losses ........................................................ 210,000 15,000
Amortization of premium and accretion of discount
on investment securities ..................................................... (18,364) 3,844
(Increase) decrease in interest receivable ....................................... (1,786) 49,765
Decrease in other assets ......................................................... 126,185 50,819
(Decrease) increase in interest payable .......................................... (17,368) 49,025
Increase in other liabilities .................................................... 175,584 308,315
------------ ------------
Cash provided by operating activities ............................................ 1,237,724 1,069,693
------------ ------------
Cash flows from investing activities:
Purchase of investments, held-to-maturity ........................................ 0 (3,281,875)
Purchase of investments, available-for-sale ...................................... (7,849,328) (1,364,500)
Maturities of investments, held-to-maturity ...................................... 5,214,938 5,530
Maturities of investments, available-for-sale .................................... 7,500,000 0
Net increase in loans ............................................................ (4,940,193) (4,352,990)
Gross amount of loans serviced for others ........................................ 1,554,136 375,168
Remittances on loans serviced for others ......................................... (841,147) (709,871)
Purchase of premises and equipment ............................................... (25,355) (64,101)
------------ ------------
Cash used for investing activities ............................................... 613,051 (9,392,639)
------------ ------------
Cash flows from financing activities:
Net increase in deposits ......................................................... 9,960,477 7,403,419
Increase in federal funds purchased and securities
sold under agreements to repurchase .......................................... 573,903 190,626
Proceeds (repayment) of note payable ............................................. 919,167 (60,000)
(Decrease) increase in U.S. Treasury, tax and loan accounts ...................... (602,056) 436,991
Proceeds from issuance of common stock ........................................... 125,000 28,175
------------ ------------
Cash provided by financing activities ............................................ 10,976,491 7,999,211
------------ ------------
Increase (decrease) in cash and cash equivalents ................................. 12,827,266 (323,735)
Cash and cash equivalents at beginning of period ................................. 16,152,658 13,091,553
------------ ------------
Cash and cash equivalents at end of period ....................................... $ 28,979,924 $ 12,767,818
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest ........................................................... $ 1,930,922 $ 1,456,163
Cash paid for taxes .............................................................. $ 1,800 $ 57,952
Noncash adjustments to report investment securities,
available-for-sale at fair value:
Investment securities, available-for-sale ........................................ $ 17,441 $ (148,202)
Other (liabilities) assets ....................................................... (5,930) 50,388
Unrealized gain (loss) on investment securities, available-
for-sale, net of applicable deferred income taxes ............................. $ 11,511 $ (97,814)
</TABLE>
6
<PAGE>
COMSOUTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The unaudited interim financial statements reflect all adjustments which are, in
the opinion of management, necessary for the fair presentation of the
consolidated statements of operations and of cash flows for the interim periods
presented. Such adjustments are of a normal recurring nature. The interim
financial statements, including related notes, should be read in conjunction
with the financial statements for the year ended December 31, 1997, appearing in
the Corporation's 1997 Annual Report and included in the Corporation's Form 10-K
Annual Report for the year ended December 31, 1997. The unaudited results of
operations for the three month period ended March 31, 1998 may not necessarily
be indicative of the results for the year that will end December 31, 1998.
NOTE 1 - LOAN COMMITMENTS
At March 31, 1998, standby letters of credit of $2,181,000 and undisbursed
amounts of lines of credit of $25,224,000 were outstanding.
NOTE 2 - NOTES 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. Interest is variable at the lender's prime rate minus one-half
percent (8.0% at March 31, 1998). 550,000 shares of Bank of Charleston's ("BOC")
common stock serve as collateral. At March 31, 1998, the Corporation had an
outstanding balance of $900,000 on this loan. A quarterly payment of $60,000 was
made during March 1998.
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% at March 31, 1998) with repayments of $20,833 plus accrued interest due
quarterly. The loan is cross-collateralized with the loan noted above. At March
31, 1998, the Corporation had an outstanding balance of $208,333 on this loan. A
quarterly payment of $20,833 was made during March 1998.
On March 19, 1998, the Corporation established a $1,000,000 term loan with the
financial institution previously mentioned. This loan matures March 26, 2001.
Interest is variable at the lender's prime rate minus one-half percent (8.0% at
March 31, 1998) with repayments of interest only quarterly for the first year,
followed by four quarterly principal payments of $50,000 plus accrued interest,
followed by four quarterly principal payments of $200,000 plus accrued interest.
This loan is cross-collateralized with the existing term loans. At March 31,
1998, the Corporation had an outstanding balance of $1,000,000 on this loan; no
quarterly payments were due or made during the quarter ending March 31, 1998.
The line of credit agreement and the term loan agreements contain certain
covenants. The principal financial covenants require the Corporation to maintain
the allowance for loan losses at a minimum of 100% of non-performing assets;
tangible equity to total assets at least equal to 8% for BOC and at least equal
to 6% for Bank of Columbia ("BOCL"); non-performing loans plus 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 full
compliance with all of the covenants at quarter end. 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 March 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.
7
<PAGE>
NOTE 4 - ALLOWANCE FOR CREDIT LOSSES
The Corporation adopted SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosure" on January 1, 1995. These standards 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
the standards has not had a material impact on the Corporation's financial
position or results of operations. Currently, the Banks have $430,000 in loans
classified as impaired loans.
When a loan becomes 90 days past due as to interest or principal or serious
doubt exists as to collectibility, the accrual of income is discontinued unless
the loan is well secured and in the process of collection. Previously accrued
interest on loans transferred to nonaccrual status is reversed against current
earnings and any subsequent interest is recognized on the cash basis. Problem
assets include nonaccrual loans, restructured loans and foreclosed properties.
At March 31, 1998, $183,000 of loans was on nonaccrual status as compared to
$88,000 at December 31, 1997. No previous nonaccrual loans have been returned to
active status during 1998; therefore, no interest income has been recognized on
these loans. Interest income of $4,132 was recognized during 1997 for loans
previously recorded as nonaccrual. For those loans classified as nonaccrual as
of March 31, 1998 and December 31, 1997, interest income of $4,527 and $6,722
would have been recognized in the respective periods if those loans had
performed under the original terms.
All accruing loans 90 days or more past due were in the process of collection at
each period end. At March 31, 1998, total classified loans were $3,392,000 or
2.3% of total loans, compared to $3,736,000 or 2.6% at December 31, 1997. 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 March 31, 1998. Other than the loans previously discussed, management
is not aware of any possible credit problems of borrowers, which cause
management to have serious doubts about the ability of the borrowers to comply
with present loan repayment terms.
Management continuously monitors business and geographic concentrations of its
loan portfolio and believes that the loan portfolio is adequately diversified.
There were no significant concentrations in any industry or with any individual
borrower for the periods presented.
PROBLEM ASSETS
March 31, 1998 December 31, 1997
-------------- -----------------
Nonaccrual loans ......................... $182,721 $ 87,989
Loans past due ninety days or more ....... 72,507 77,673
Troubled debt restructuring .............. 0 0
Other real estate owned .................. 0 0
-------- --------
Total .............................. $255,228 $165,662
======== ========
Nonperforming assets to total loans
and other real estate owned ........... .17% .11%
======== ========
8
<PAGE>
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows:
March 31, 1998 December 31, 1997
-------------- -----------------
Balance at beginning of period ........ $ 1,805,860 $ 1,802,402
Provision for loan losses ............. 210,000 334,000
Loans charged-off:
Commercial ......................... (175,468) (321,642)
Real estate-mortgage ............... 0 0
Consumer and other ................. (1,819) (34,097)
----------- -----------
Total .......................... (177,287) (355,739)
----------- -----------
Recoveries:
Commercial .......................... 200 20,931
Real estate-mortgage ................ 0 0
Consumer and other .................. 71 4,266
----------- -----------
Total ........................... 271 25,197
----------- -----------
Balance at end of period .............. $ 1,838,844 $ 1,805,860
=========== ===========
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 March 1998
allowance levels at both BOCL and BOC are sufficient to absorb expected
charge-offs and provides adequately for the inherent losses that exist in the
loan portfolio, assuming more or less normal conditions exist.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature, are
intended to be, and are hereby identified as, `forward looking statements' for
purposes of the safe harbor provided by Section 21E of the Securities Exchange
Act of 1934, as amended. The Corporation cautions readers that forward looking
statements, including without limitation, those relating to the Corporation's
future business prospects, revenues, working capital, liquidity, capital needs,
interest costs, and income, are subject to certain risks and uncertainties that
could cause actual results to differ materially from those indicated in the
forward looking statements, due to several important factors herein identified,
among others, and other risks and factors identified from time to time in the
Corporation's reports filed with the Securities and Exchange Commission.
GENERAL
ComSouth Bankshares, Inc. (the "Corporation") is a registered bank holding
company incorporated on May 15, 1987 pursuant to the laws of the State of South
Carolina. It presently conducts its business through its two bank subsidiaries
(the "Banks"), Bank of Columbia, NA and Bank of Charleston, NA. On March 21,
1996, the Corporation listed its common stock on the American Stock Exchange
under the ticker symbol CSB.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability to meet current and future obligations through
liquidation or maturity of existing assets or the acquisition of additional
liabilities. The Corporation's primary source of liquidity is funds derived from
the deposit gathering operations of the Corporation's two subsidiary banks - BOC
and BOCL, with additional funds provided from maturing loans and investment
securities, sales of temporary investments, or sales of investment securities
classified as available-for-sale. These funds are used to pay interest on
deposits and to fund deposit outflows. Any remaining funds are utilized for
9
<PAGE>
investments and to fund loan commitments and disbursements, to repay debt, and
to fund operating expenses. Negative funds positions may be dealt with by a
combination of actions including borrowing from other banks or rediscounting
qualifying loans with the Federal Reserve Bank. At March 31, 1998, BOCL had
approximately $11.0 million while BOC had approximately $10.1 million in standby
credit available to them from other financial institutions. Management believes
that a sufficient liquidity balance is maintained through the operations of its
asset and liability management program. Additionally, the standby credit
facilities provide adequate protection in the event of negative cash flows.
At March 31, 1998 and December 31, 1997, liquid assets of approximately $67.2
million and $59.2 million, respectively, were available to meet demands for
deposit withdrawals, undisbursed amounts on lines of credit ("loan commitments")
of $25,224,000 and $22,043,000, respectively, and letters of credit totaling
$2,181,000 and $3,327,000, respectively. The amount of liquid assets available
at March 31, 1998 includes cash and cash equivalents of $29,000,000, an increase
of $12,900,000 from the December 31, 1997 amount of $16,100,000. This increase
in cash and cash equivalents is primarily attributable to investment securities
which were either called or matured during the last week of the quarter and were
reinvested 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 $192.6 million at March 31, 1998, compared to $182.7
million at December 31, 1997. Of the total deposit base of the Corporation at
March 31, 1998, approximately $40.0 million, or 20.8%, 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. At
March 31, 1998, total loans outstanding were approximately $148.5 million, as
compared to $144.5 million at December 31, 1997. During the first three months
of 1998, both Banks have experienced good loan growth. The economic picture in
the markets serviced by both Banks continues to be good.
Both BOCL and BOC maintain a loan classification system to monitor exposure to
potential loan losses. Management of the Banks reviews the adequacy of the
allowance for loan losses each quarter to identify problem loans in connection
with its assessment of the overall quality of the respective loan portfolios. At
March 31, 1998, the allowance for loan losses at BOCL and BOC was approximately
$883,000 and $956,000, respectively. At December 31, 1997, the allowance for
loan losses at BOCL and BOC was approximately $855,000 and $951, 000,
respectively.
The Comptroller of the Currency ("OCC"), the Banks' primary regulator requires
national banks to maintain a Tier 1 (primarily stockholders' equity) risk-based
capital ratio of 4.0% and a total risk-based capital ratio of 8.0%. At March 31,
1998, the Tier I capital ratio for BOCL was 10.5% and the total capital ratio
was 11.7%, while BOC had a Tier I ratio of 12.9% and a total capital ratio of
14.0%.
The Corporation's primary regulator, the Board of Governors of the Federal
Reserve System (the "Board"), has issued guidelines requiring a minimum risk
based capital ratio of 8.0%, of which at least 4.0% must consist of Tier I
capital. The Corporation's Tier I capital ratio was 11.1% and its total capital
ratio was 12.3% at March 31, 1998. These ratios are well within guidelines
established by the Corporation's primary regulator.
10
<PAGE>
RATE SENSITIVITY
In order to address volatility in interest rates, the Corporation maintains an
interest sensitivity management program, the objective of which is to maintain
reasonably stable growth in net interest income despite changes in market
interest rates. The Interest Rate Sensitivity Gap ("GAP") is defined as the
excess of interest sensitive assets over interest sensitive liabilities that
mature or reprice within specified time frames. The GAP is a measure of the
Corporation's risk of significant changes in net income at any point in time.
Adjustable rate loans, short term loans and temporary investments represent the
majority of the Corporation's interest sensitive assets. Money market deposit
accounts, NOW accounts, savings accounts and certificates of deposit with
maturities of less than one year represent the majority of interest sensitive
liabilities.
In addition to gap analysis, management utilizes simulation modeling techniques
to project potential earnings impact due to rate changes. Based on the
combination of the gap analysis and simulation modeling, management believes
that any reasonably expected rate change would not have a material impact on
earnings.
RESULTS OF OPERATIONS
For the first three months of 1998, the Corporation had net earnings of $675,000
or $.27 per diluted share, an increase of 30% over the $520,000 or $.21 per
diluted share for the same period of 1997. The economy in the market 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, resulting in
sustained loan growth throughout 1997 and into the first quarter of 1998. The
improved earnings over the prior period are the direct result of this loan
growth.
The Corporation had total revenues of $4,673,000 and $3,724,000 and total
expenses of $3,998,000 and $3,204,000 for the three months ended March 31, 1998
and 1997, respectively. Summarized below is an analysis of the composition of
revenues and expenses for the three month periods ended March 31, 1998 and 1997.
Three Months Ended March 31,
1998 1997
---- ----
Interest on loans .................. $3,323,000 71.1% $2,654,000 71.3%
Interest on investment securities .. 625,000 13.4% 540,000 14.5%
Interest on temporary investments .. 100,000 2.1% 48,000 1.3%
Non-interest income ................ 625,000 13.4% 482,000 12.9%
---------- ----- --------- -----
Total Revenues ..................... $4,673,000 100.0% $3,724,000 100.0%
========== ===== ========== =====
The increase in interest on loans is entirely due to the change in volume as
rates earned on loans were the same for the two periods reported. The increase
in interest earned on investment securities was mostly due to a slight
improvement realized in the yield between the two periods as the Federal Reserve
implemented a 25 basis point increase in the federal funds rate in March 1997,
which eventually increased rates paid on investment securities. Increased
outstandings in the temporary investment category resulted in the improved
earnings over the prior period. Noninterest income improved by $143,000 between
the two periods, primarily due to a $20,000 improvement in fees derived from
deposit services as a result of growth in deposit accounts and a $118,000
improvement in fees derived from mortgage loan origination fees as mortgage
rates remained favorable between the two periods, creating increased activity in
mortgage loan refinancing.
11
<PAGE>
Operating Expenses for the three months ended March 31, 1998 and 1997 were as
shown in the following table:
Three Months Ended March 31,
1998 1997
---- ----
Interest on deposits ............... $1,827,000 45.7% $1,427,000 44.5%
Interest on note payable and
securities sold under agreements
to repurchase ................... 86,000 2.2% 78,000 2.4%
Provision for loan losses .......... 210,000 5.3% 15,000 .5%
Salaries and employee benefits ..... 909,000 22.7% 726,000 22.7%
Occupancy expenses ................. 120,000 3.0% 108,000 3.4%
Furniture and equipment expenses ... 108,000 2.7% 109,000 3.4%
Legal and regulatory ............... 121,000 3.0% 139,000 4.3%
Printing and supplies .............. 49,000 1.2% 42,000 1.3%
Advertising and marketing .......... 30,000 .8% 24,000 .7%
Other .............................. 220,000 5.5% 220,000 6.9%
Taxes .............................. 318,000 7.9% 316,000 9.9%
---------- ----- ---------- -----
Total Operating Expenses ........... $3,998,000 100.0% $3,204,000 100.0%
========== ===== ========== =====
The change in interest paid on deposits is principally due to the strong growth
in deposits as rates paid on deposits remained basically the same for the two
periods. The significant change in the loan loss provision for the two periods
is due to additional reserves needed to support the $28 million increase in
loans outstanding, management's recognition that a significant portion of the
portfolio is beginning to mature, and the charge-off of a sizable credit in the
fourth quarter of 1997 and another in the first quarter of 1998. Additionally,
the Corporation has begun to estimate and accrue for potential credit risk as a
result of the year 2000 problem. The increase in salaries and employee benefits
is primarily due to increased staffing needed to support the strong loan and
deposit growth. The change in legal and regulatory expenses is due to reduced
legal expenses as a result of the settlement of a significant portion of the
pending litigation during the first quarter of 1998.
NET INTEREST INCOME
Net interest income represents the difference between interest earned on assets
and the interest paid on liabilities. It traditionally constitutes the largest
source of a financial institution's earnings.
Net interest income for the three months ended March 31, 1998 and 1997 was
$2,135,000 and $1,736,000, respectively. The average yield on earning assets was
8.1% and 8.3%, the average rate paid on interest bearing liabilities was 4.7%
and 4.7%, and the annualized net interest margin was 4.3% and 4.4% for the three
months ended March 31, 1998 and 1997, respectively.
SUBSEQUENT EVENT
On April 14, 1998, the Corporation entered into an Agreement and Plan of Merger
with Anchor Financial Corporation ("Anchor"), that provides for the merger of
the Corporation into Anchor and the exchange of the Corporation's common stock
for shares of Anchor common stock. Consummation of the transaction is subject to
regulatory approvals and approval of the Corporation's shareholders. If all
required approvals are obtained, the transaction is expected to close in the
third quarter of 1998.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Incorporated by reference to Item 3 of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8 - K
(a) Exhibit 27, Financial Data Schedule.
(b) A Form 8-K was filed on April 22, 1998 and contained
reportable items concerning an Agreement and Plan of Merger
by and between Registrant and Anchor Financial Corporation.
No financial statements were filed with the Form 8-K.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMSOUTH BANKSHARES, INC.
(Registrant)
Date: 5-13-98 s/Harry R. Brown
By:----------------------------
(Harry R. Brown)
Chief Financial Officer,
Chief Operating Officer,
Secretary and Treasurer
13
<PAGE>
EXHIBIT INDEX
Exhibit 27
Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet at March 31, 1998 (unaudited) and the Consolidated
Statement of Operation for the Three Months Ended March 31, 1998 (unaudited) and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 11,294,924
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 17,685,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 24,869,820
<INVESTMENTS-CARRYING> 13,302,858
<INVESTMENTS-MARKET> 13,372,158
<LOANS> 148,526,677
<ALLOWANCE> 1,838,844
<TOTAL-ASSETS> 217,375,427
<DEPOSITS> 192,633,136
<SHORT-TERM> 4,398,128
<LIABILITIES-OTHER> 1,423,971
<LONG-TERM> 2,108,333
0
0
<COMMON> 13,824,539
<OTHER-SE> 2,987,320
<TOTAL-LIABILITIES-AND-EQUITY> 217,375,427
<INTEREST-LOAN> 3,323,350
<INTEREST-INVEST> 625,315
<INTEREST-OTHER> 99,523
<INTEREST-TOTAL> 4,048,188
<INTEREST-DEPOSIT> 1,827,176
<INTEREST-EXPENSE> 1,913,554
<INTEREST-INCOME-NET> 2,134,634
<LOAN-LOSSES> 210,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,556,490
<INCOME-PRETAX> 993,501
<INCOME-PRE-EXTRAORDINARY> 675,372
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 675,372
<EPS-PRIMARY> .29
<EPS-DILUTED> .27
<YIELD-ACTUAL> 4.30
<LOANS-NON> 182,721
<LOANS-PAST> 72,507
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,805,860
<CHARGE-OFFS> 177,287
<RECOVERIES> 271
<ALLOWANCE-CLOSE> 1,838,844
<ALLOWANCE-DOMESTIC> 1,680,956
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 157,888
</TABLE>
